Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Taxpayers Will Foot the Bills of Fannie, Freddie Defendants

US Capitol Building with cash

One reason to suspect that the six executives from Fannie Mae and Freddie Mac will not settle with the Securities and Exchange Commission any time soon: They are not paying their own legal bills.

The cost of litigating a case against the SEC is one of the main reasons defendants in these cases opt for a settlement. Goldman Sachs spent hundreds of millions of dollars in its case, only agreeing to settle after the SEC dropped the fraud charge. Few ordinary mortals can afford such things.

The legal fees in these cases are likely to be enormous. The discovery process will likely involve millions of pages of documents. Hundreds of witnesses will be deposed. Because of conflict of interest rules, each defendant will get his own legal team.

And it will all be paid for by the U.S. government. Back when Fannie and Freddie were nominally private government-sponsored entities, each company granted its executives indemnification rights under which the companies have to pay their legal fees.

So does that change now that Fannie and Freddie are owned by the government? Not according to the person who most matters, the director of the Federal Housing Finance Agency.

Peter Henning explains:

The Subcommittee on Oversight and Investigations of the House Financial Services Committee held a hearing in February that considered the right to indemnification of former Fannie Mae executives involved in the accounting case settled in 2007. The written testimony of the acting director of the Federal Housing Finance Agency, which oversees the two companies, stated that it was committed to following the indemnification provisions provided to its executives by paying reasonable lawyer’s fees.

So it seems very likely that the U.S. taxpayer will pay the legal fees for the six executives accused last week.

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