US taxpayers may pay legal bills of mortgage executives

When the US government took over mortgage giants Fannie Mae and Freddie Mac, taxpayers inherited more than bad debts. They also potent
ially are responsible for tens of millions of dollars in legal fees for the executives at the center of the housing market's collapse.

With the Justice Department investigating companies involved in the mortgage and financial meltdown, executives around the country are hiring high-powered defence lawyers. Like many large companies, Fannie and Freddie had contracts promising to cover legal bills for their executives.

When the US government delivered a $200 billion bailout to Fannie and Freddie, that representation obligation passed to the federal government, which may find itself paying for the lawyers defending the executives against the government's own prosecutors.
"Who'd have thought we might be on the hook for paying the defense costs when we're also paying the prosecution costs?" said Doug Heller, executive director of Consumer Watchdog, a group that has been critical of the financial bailout packages. "To defend the economy from the havoc that's been created, we're going to defend the havoc creators?"

The Bush administration is working to avoid it. The Federal Housing Finance Agency, an oversight organization, said in regulatory filings it soon will try to prohibit Fannie and Freddie from paying legal fees to its executives. Such a prohibition almost certainly would lead to a costly court fight over who is responsible for the bills when the Justice Department comes knocking.

Fannie and Freddie's contracts also cover legal fees from shareholder lawsuits. Taxpayers could be forced to pay those legal bills, too. If the shareholders should win, which they could do by proving the companies were mismanaged, the government could be liable for millions of dollars to make up for the executives' failures.

It would not be the first time federal money intended to prop up the financial industry was used for unintended purposes. Days after it received an $85 billion federal bailout loan, American International Group Inc. spent $440,000 on an executive retreat with spa treatments, banquets and golf outings.

Both Fannie Mae and Freddie Mac have been subpoenaed as part of the wide-ranging Justice Department investigation. The two companies are key to the US mortgage industry. After banks make loans to home buyers, Fannie and Freddie buy the mortgages from the banks so bankers can have cash on hand to make more loans and keep the economy humming. Fannie and Freddie then bundle those loans and sell them as mortgage-backed securities. The proceeds of those sales help buy more mortgages.

In recent years, however, the companies have bought more risky, subprime mortgages. When the housing bubble burst and the subprime industry imploded, investors feared the risk of buying Fannie and Freddie's mortgage-backed securities, making it harder for the companies to raise money.

Combined, Fannie and Freddie own or guarantee almost half the mortgages in the United States. The Treasury Department stepped in to keep the companies from collapsing and taking the mortgage industry down with them.

Neither Fannie nor Freddie has said whether they already have advanced any legal fees to former executives. The companies are required to make general disclosures about such payments, but only on quarterly corporate filings.

http://economictimes.indiatimes.com/US_taxpayers_to_pay_bills

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US taxpayers may pay legal bills of mortgage executives