A recent New York Times story, “Legal Fees Mount at Fannie and Freddie,” reports that taxpayers have advanced almost $50 million in legal payments to defend former executives of Fannie Mae and Freddie Mac in three years since the government rescued the giant mortgage companies, a regulatory analysis has found.  In that time, $37 million has gone to three former Fannie Mae executives accused of securities fraud, according to the analysis by the inspector general of the Federal Housing Finance Agency (FHFA), which oversees both companies.  The FHFA report is entitled “Evaluation of FHFA’s Management of Legal Fees for Indemnified Executives” (pdf).

Although the legal costs for the former executives are a small fraction of the companies’ mortgage losses, it is imperative that the housing agency move to limit these fees, said Steve A. Linick, inspector general of the agency.  “FHFA and Fannie Mae believe that their options are limited in paying current legal fees for former officers and directors,” Mr. Linick said in a statement.  But he called for greater oversight.  The legal costs are the responsibility of taxpayers because of contracts struck by the companies before they collapsed.  Those agreements, which are typical in corporate America, state that legal fees incurred by executives against lawsuits will be advanced by the companies.  If a court or jury rules that the officials breached their duties or acted in bad faith, the officials will have to pay the advances.

There were no recommendations in a plan submitted to Congress (pdf) regarding the rising legal bills for former executives.  They were the subject of heated Congressional hearings in February 2011.  Since then Fannie Mae and Freddie Mac have moved to control the legal fees, the report noted.  For instance, the companies have set up policies to avoid duplicated legal representation and to monitor legal expenses to determine if they are reasonable.  But the efforts are uneven.  Fannie Mae, for example, questions legal bills for depositions if more than one lawyer attends representing former officials; Freddie Mac does not, the report noted.  More significant, the housing agency has not independently validated the processes used by Fannie and Freddie to monitor the legal services provided to their former executives or the amount of the legal bills that are paid.