Since the government took over Fannie Mae and Freddie Mac, taxpayers have spent more than $160 million defending the mortgage finance companies and their former top executives in civil lawsuits accusing them of fraud. The cost was a closely guarded secret until last week, when the companies and their regulator produced an accounting at the request of Congress.
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 payments show no sign of abating.
It is typical for corporations to cover such 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.
Since Fannie Mae and Freddie Mac were taken over by the government in September 2008, their losses stemming from bad loans have mounted, totaling about $150 billion in a recent reckoning.
Freddie’s problems arose in 2003 when it disclosed that it had understated its income from 2000 to 2002; the company revised its results by an additional $5 billion. In 2004, Fannie was found to have overstated its results for the preceding six years; conceding that its accounting was improper, it reduced its past earnings by $6.3 billion.
Mr. Raines retired in December 2004 and Mr. Howard resigned at the same time. Ms. Spencer left her position as controller in early 2005. The following year, the Office of Federal Housing Enterprise Oversight, then the company’s regulator, published an in-depth report on the company’s accounting practices, accusing Fannie’s top executives of taking actions to manipulate profits and generate $115 million in improper bonuses.
The office sued Mr. Raines, Mr. Howard and Ms. Spencer in 2006, seeking $100 million in fines and $115 million in restitution. In 2008, the three former executives settled with the regulator, returning $31.4 million in compensation. Without admitting or denying the regulator’s allegations, Mr. Raines paid $24.7 million and Mr. Howard paid $6.4 million; Ms. Spencer returned $275,000.
Fannie Mae also settled a fraud suit brought by the Securities and Exchange Commission without admitting or denying the allegations; the company paid $400 million in penalties.
Richard S. Carnell, an associate professor at Fordham University Law School who was an assistant secretary of the Treasury for financial institutions during the 1990s, questions why Mr. Raines, Mr. Howard and others, given their conduct detailed in the Housing Enterprise Oversight report, are being held harmless by the government and receiving payment of legal bills as a result.
“Their duty of loyalty required them to put shareholders’ interests ahead of their own personal interests,” Mr. Carnell said. “Had they cared about the shareholders, they would not have staked Fannie’s reputation on dubious accounting. They defied their duty of loyalty and served themselves. At a moral level, they don’t deserve indemnification, much less payment of such princely sums.”
How did Barney Frank put it before one of his many reelections?
… I do not think we are facing any kind of a crisis. That is, in my view, the two government sponsored enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis.
Some of the critics of Fannie Mae and Freddie Mac say that the problem is that the Federal Government is obligated to bail out people who might lose money in connection with them. I do not believe that we have any such obligation.
Foxes, hen houses, you know what I’m trying to say.