ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Friday, February 18, 2011

Members of Congress Advocate Avoidance of Indemnification Clauses for Fannie Mae Executives

Fannie_Mae_Headquarters Behind the placid exterior, shown at left, not all is well at Fannie Mae Headquarters. Legal fees have mounted for the mortgage giant's former executives.  The executives have been defending themselves against accusations of accounting improprieties alleged in a shareholder suit brought in 2004. The New York Times reports that their legal fees have climbed to over $100 million since the suit began, with the best estimate being in the $160 million range.  It is not difficult to rack up such fees when, as Ohio Attorney General Mike DeWine claims in the Washington Post, they are “lawyering this case to death.” Evidence of such over-lawyering included bringing upwards of 13 seemingly mute lawyers to some 123 depositions and another 35-40 lawyers to monthly conference meetings.  All of this, and the former executives are reportedly still years from trial.

Who could be paying for all of this you ask?

Well, you are, in a way.  As of 2008, the government took over Fannie Mae. The executives were part of the deal, along with contracts including standard provisions calling upon Fannie Mae to indemnify them for “reasonable” legal fees associated with their employment at Fannie Mae. These contracts remain in place, even though the Housing and Economic Recovery Act of 2008, the act that created the Federal Housing Finance Agency, empowered to oversee of Fannie Mae and Freddie Mack, allowed for these contracts to be voided. Officials at the Federal Housing Finance Agency have claimed that overturning these contracts would have been "inappropriate and possibly unconstitutional."  

In any case, if the executives are found liable, the Times reports, the executives will have to reimburse the corporation for the legal fees.  The executives, who have already paid $31 million to settle with the Office of Federal Housing Enterprise Oversight, a predecessor regulator, may not have the means to repay the legal fees already advanced to them.  

Members of Congress know a moral hazard when they see one.  At a Congressional Hearing earlier this week, lawmakers questioned whether these fees are actually “reasonable.”  Randy Neugebauer, chairman of the Oversight and Investigations Subcommittee of the House Financial Services Committee, claims that keeping these contracts intact gives the former execs incentive to keep running up enormous legal bills- all at the expense of the taxpayers. U.S. District Judge Richard J. Leon said it best at a hearing in 2009, "I am not so sure the taxpayers are doing pretty well, but the lawyers are doing pretty well in this deal." 

[JT & Katherine Freeman]

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