Fannie Mae, Freddie Mac Stick Taxpayers With Legal Bill

fannie mae freddie macSince the government took over Fannie Mae and Freddie Mac, taxpayers have been on the hook for $410.7 million in legal expenses, according to Rep. Randy Neugebauer (R-TX), chairman of the oversight subcommittee. Of those expenses $162.4 million have been spent defending the two entities and their former executives for securities-related lawsuits and indemnification. These numbers were provided to Neugebauer by the Federal Housing Finance Agency, after he requested a report on legal fees.

Now that Neugebauer runs the oversight subcommittee he plans to investigate further. He thinks a lot of questions need to be answered, such as "Are the conservators looking out for the taxpayers? Do they have the right tools and structure to do so?"

Neugebauer told AOL Real Estate he also plans to investigate whether other activities occurring within Fannie Mae and Freddie Mac "diminish the taxpayers' potential recovery and minimize capital infusion. This drain on the American taxpayer must be plugged as quickly as possible.
The Administration's report on what to do with Fannie and Freddie is expected in early February fannie mae freddie macand the decisions about what to do with the mortgage giants will likely be made later this year by the Congress.

The current legal problem stem from accounting problems at both mortgage giants. Freddie's problems came to light in 2003 when it had to restate income from 2000 to 2002, which had been understated by $5 billion. Fannie first reported its problems in 2004 when it reported it had overstated its income by $6.3 billion.

The Office of Federal Housing Enterprise and Oversight sued three former executives of Fannie Mae: Franklin D. Raines, former CEO; Timothy Howard, former CFO; and Leanne Spencer, former controller. The office did settle with these executives, who returned $31.4 million in compensation, but then lawsuits were filed by investors who lost money when the accounting problems were reported.

Now the taxpayers are footing the bill to defend these executives, as well as defend the two mortgage giants. That's because the employment contracts protect executives when sued defending such lawsuits. Some question whether the government should continue paying the bills since the executives breached their duty of loyalty to the company and its stockholders. But, so far, the FHFA has taken the position that following applicable state and federal law in paying these fees.

The bulk of these fees are going toward toward defending a lawsuit centered on accounting improprieties at Fannie
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Mae in 2004. This shareholder class action suit was brought by the Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio. A trial date has not been set and depositions still need to be taken, so the legal fees will continue to mount unless the government works out some type of settlement to end the suit. Either way the taxpayers will likely pay out millions more in either legal fees or settlement costs.

Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies.

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