Feb 232012
 

The New York Times recently reported that the legal cost to defend three former executives of Fannie Mae and Freddie Mac is approaching $100 million.  Taxpayers have already covered almost half of the tab.     

The inspector general of the Federal Housing Finance Agency, the entity overseeing both companies as their conservator, is trying to protect taxpayers from further unnecessary and excessive costs.  In its report on the matter, the inspector general remarked that when the companies were taken over in September 2008 their legal contracts could have been repudiated but were not.  As a result, taxpayers are bearing the costs ever since.  The report suggests that these legal fees should be the subject of Congressional oversight to control costs.

The FHFA has submitted a plan to Congress to help manage the losses attributable to Fannie and Freddie.  Since legal expenses only account for a small portion of the losses, the proposal did not include any recommendations as to monitoring the mounting legal bills.  However, the two entities have implemented changes on their own to control fees.  For example, the companies have policies to “avoid duplicate legal representation” and monitor the reasonableness of legal expenses.  Fannie Mae also questions legal bills where more than one attorney attends a deposition. 

Although the FHFA has not “validated” the policies put into action by Fannie and Freddie, the inspector general has his own suggestions as to how to rein in legal costs.  Recommendations include writing new agreements to reduce future payment obligations as well as tapping into director and officer insurance policies to cover legal costs.  The agency agreed to move forward with these suggestions and that it would “continue its efforts at cost controls and will work expeditiously to seek greater standardization in the administration of such legal costs by the enterprises.”