House Republicans to Fight Fannie Mae's Taxpayer-Backed Legal Expenses: Sources

House Republicans plan Tuesday to push the regulator of mortgage giant Fannie Mae to cut back on millions in legal expenses taxpayers are paying to defend three disgraced former executives who earned millions at the company, sources familiar with Republicans’ intentions said.

Last month, the oversight subcommittee of the House Financial Services Committee disclosed that since the government took them over in 2008, Fannie and its sister company, Freddie Mac, had spent $162 million in taxpayer funds defending themselves and former executives against civil fraud lawsuits and government investigations. So far, the Treasury Department has invested about $150 billion to keep the two firms afloat.

The legal payments will be the subject of a subcommittee hearing Tuesday.

A subcommittee investigation found that after the government’s takeover, Fannie had spent $24 million alone on civil legal expenses for former CEO Franklin Raines, former chief financial officer Timothy Howard, and former comptroller Leanne Spencer. They left the company in 2004 and 2005 after a major accounting scandal that inflated Fannie’s profits by billions.

A new subcommittee document obtained by Fox Business says the three former executives collectively “received more than $125 million in total compensation during the years of the accounting fraud.”

In 2008, the former executives settled one big civil case without admitting or denying wrongdoing by returning $31.4 million to the company.

But they remain defendants in other civil cases. And under Fannie by-laws and their employment contracts, the company has been required to pay their legal expense in those cases--a common practice in corporate America known as “indemnification.”

Sources close to the subcommittee proceedings said Fannie is obligated only to pay “reasonable” legal expenses for Raines, Howard and Spencer. One subcommittee document said that while the amounts of money involved are “paltry” compared to the size of the bailout for Fannie and Freddie, all of the companies’ expenses should be tightly monitored in the new environment of fiscal austerity in Washington.

The sources said that the hearing committee Republicans, led by Rep. Randy Neugebauer (R-Texas), plan to argue to the director of the Federal Housing Finance Agency, the regulator of Fannie and Freddie, that Fannie’s indemnification of legal bills for its former top executives has been “unreasonable” and can be reduced; that the former executives have no incentive to end litigation, and that they can afford to pay some of their legal expenses.

Among other things, Republicans may question payments that Fannie has made for the former executives for “expert witnesses” – legal consultants they have hired as part of their defenses.

Republicans “don’t intend to denigrate the use of indemnification in (employment) contracts,” one source close to the proceedings said. “But in these particular cases, it’s terrible.”

Last month, the FHFA’s acting director, Edward DeMarco, said that in approving continued legal payments for the companies and former executives, he was following “applicable federal and state law” and that “on the advice of counsel, I have concluded that the advancement of such fees is in the best interest” of the companies while they are owned by the government.

At the hearing, subcommittee investigators are also expected to disclose that of the $162 million the two companies had spent on legal fees since the 2008 takeover, they spent $69.5 million to respond to government investigations, including those by the Securities and Exchange Commission and the Justice Department. In other words, the companies used taxpayer money to defend themselves against taxpayer-funded cases.

Fox Business was seeking comment from Raines, Howard and Spencer, as well as the FHFA.