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Government Covers Fannie Mae's Legal Fees of $160M

January 31, 2011 | Posted in : Coverage of Fees, Defense Fees / Costs, Legal Bills / Legal Costs

A recent New York Times story, “Mortgage Giants Leave Legal Bills to the Taxpayers” reports that since the government took over Fannie Mae and Freddie Mac in September 2008, taxpayers have spent more than $160 million defending the mortgage finance companies and their former top executives in lawsuits accusing them of fraud.  The bulk of those expenditures-$132 million-went to defend Fannie Mae and its officials in various securities suits and government investigations into accounting irregularities that occurred years before the subprime lending crisis erupted.  The legal bills show no sign of abating.  Documents released to Congress indicate that taxpayers have paid $24.2 million to law firms defending three of Fannie’s former top executives: Franklin D. Raines, its former chief executive; Timothy Howard, its former chief financial officer; and Leanne Spencer, the former controller.

It is typical for corporations to cover such legal fees unless an executive is found to be at fault.  In this case, if the former executives are found liable, the government can try to recoup the costs, but that could prove challenging.  Employment contracts and company by-laws usually protect, or indemnify, executives and directors against liabilities, including legal fees associated with defending against such lawsuits.  After the government moved to back Fannie and Freddie, the Federal Housing Agency agreed to continue paying to defend the executives, with taxpayers covering the costs.

Asked why it has not cut off funding for these mounting legal bills, Edward J. DeMarco, the acting director of the Federal Housing Finance Agency, said: “I understand the frustration regarding the advancement of certain legal fees associated with ongoing litigation involving Fannie Mae and certain former employees.  It is my responsibility to follow the applicable federal and state law.  Consequently, on the advice of counsel, I have concluded that the advancement of such fees is in the best interest of the conservatorship.”

Some of the law firms that worked for Fannie Mae/Freddie Mac include Jenner & Block, Latham & Watkins, Mayer Brown, O'Melveny & Myers, Williams & Connolly, and Zuckerman Spaeder.