[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

AN ANALYSIS OF THE POST-CONSERVATORSHIP
LEGAL EXPENSES OF FANNIE MAE
AND FREDDIE MAC

=======================================================================

HEARING

BEFORE THE

SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

__________

FEBRUARY 15, 2011

__________

Printed for the use of the Committee on Financial Services

Serial No. 112-4

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HOUSE COMMITTEE ON FINANCIAL SERVICES

SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
KENNY MARCHANT, Texas BRAD MILLER, North Carolina
THADDEUS G. McCOTTER, Michigan DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JOE DONNELLY, Indiana
BLAINE LUETKEMEYER, Missouri ANDRE CARSON, Indiana
BILL HUIZENGA, Michigan JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin GARY C. PETERS, Michigan
NAN A. S. HAYWORTH, New York JOHN C. CARNEY, Jr., Delaware
JAMES B. RENACCI, Ohio
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio

Larry C. Lavender, Chief of Staff
Subcommittee on Oversight and Investigations

RANDY NEUGEBAUER, Texas, Chairman

MICHAEL G. FITZPATRICK, MICHAEL E. CAPUANO, Massachusetts,
Pennsylvania, Vice Chairman Ranking Member
PETER T. KING, New York STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota MAXINE WATERS, California
STEVAN PEARCE, New Mexico JOE BACA, California
BILL POSEY, Florida BRAD MILLER, North Carolina
NAN A. S. HAYWORTH, New York KEITH ELLISON, Minnesota
JAMES B. RENACCI, Ohio JAMES A. HIMES, Connecticut
MICHAEL G. GRIMM, New York JOHN C. CARNEY, Jr., Delaware
FRANCISCO ``QUICO'' CANSECO, Texas

C O N T E N T S

----------
Page
Hearing held on:
February 15, 2011............................................ 1
Appendix:
February 15, 2011............................................ 37

WITNESSES
Tuesday, February 9, 2011

DeMarco, Edward J., Acting Director, Federal Housing Finance
Agency, accompanied by Alfred Pollard, General Counsel, Federal
Housing Finance Agency (FHFA).................................. 5
DeWine, Hon. Mike, Attorney General of Ohio...................... 29
Williams, Michael J., President and Chief Executive Officer,
Federal National Mortgage Association, accompanied by Timothy
J. Mayopoulos, General Counsel, Federal National Mortgage
Association (Fannie Mae)....................................... 6

APPENDIX

Prepared statements:
Canseco, Hon. Francisco...................................... 38
DeMarco, Edward J............................................ 39
DeWine, Hon. Mike............................................ 44
Williams, Michael J.......................................... 48

AN ANALYSIS OF THE POST-
CONSERVATORSHIP LEGAL
EXPENSES OF FANNIE MAE
AND FREDDIE MAC

----------

Tuesday, February 15, 2011

U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:23 p.m., in
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer
[chairman of the subcommittee] presiding.
Members present: Representatives Neugebauer, Fitzpatrick,
Bachmann, Pearce, Posey, Hayworth, Renacci, Grimm, Canseco;
Capuano, Lynch, Baca, and Miller of North Carolina.
Also present: Representative Garrett.
Chairman Neugebauer. This hearing will come to order. I
want to thank everyone for being here. We have a lot going on;
we had a vote, and we have some members who are in a meeting,
and hopefully they will be able to join us very soon.
This hearing will come to order. And without objection, all
members' opening statements will be made a part of the record.
Let me start off by saying this is the first meeting of the
Oversight and Investigations Subcommittee of the Committee on
Financial Services, and I am delighted to be serving with my
good friend, Mr. Capuano, and we have actually had a meeting,
and we think that overseeing the agencies and the
responsibility of making sure that the American people--
taxpayers' money is being well spent, and that rules and
regulations are being implemented in an appropriate way are
important. And I look forward to working in a very bipartisan
way to make sure that this is a productive committee.
We will start off by having our opening statements. I will
open with my statement, and then the ranking member with his.
Since September 7, 2008, the U.S. taxpayers have sunk $153
billion into Fannie Mae and Freddie Mac. And according to the
Federal Housing Finance Agency, the final tab could be as high
as $363 billion.
As if the news couldn't get any worse for the American
people, an investigation undertaken by this subcommittee has
discovered that the taxpayers have spent more than $162 million
defending Freddie and Fannie and their former top executives in
civil lawsuits accusing them of fraud. This includes over tens
of millions of dollars for former executives who knowingly and
purposely manipulated earnings to increase their own
compensation and whose actions directly contributed to the
demise of the GSEs.
The history of Fannie Mae under the management of Franklin
Raines, Timothy Howard, and Leanne Spencer is a story of
abusing their positions to use assets of the Enterprises to
further their own interests and careers. The abuse by these
individuals was so far-ranging that Fannie and Freddie were
forced to restate earnings by over $10 billion, which was
followed by a $400 million settlement with the SEC and OFHEO,
and losses of tens of billion dollars in market capitalization
for Fannie's shareholders.
Unfortunately today, years after they were forced out of
the company, these misdeeds of Franklin Raines and his
management team have continued their abuse. This time, however,
it is against the U.S. taxpayers. As a result of my inquiries,
I have discovered that taxpayers have advanced $24.2 million in
legal expenses against civil lawsuits accusing them of
securities fraud.
These three individuals, who collectively earned $150
million in total compensation from 1998 to 2003, are not just
assured of indemnification, but are actually being advanced
funds, which means that they have no expenses and are just
running up the tab for the U.S. taxpayers. Moreover, their
attorneys have every incentive to keep the case going for as
long as possible to maximize their fees, which already are in
the tens of millions of dollars.
One case in particular has been ongoing since 2004 and has
included over 120 fact depositions, various expert depositions,
and millions of discovery documents. Unfortunately, the end is
nowhere in sight. This open-ended taxpayer commitment was
approved by the FHFA, the very entity that has an obligation to
conserve the assets of the GSEs in such a way as to minimize
taxpayers' exposure. It was approved even though Fannie Mae
bylaws clearly state that the indemnification shall not apply
to directors and officers who breach their duty of loyalty to
shareholders or engage in intentional misconduct, two measures
that Franklin Raines and his management team clearly violated.
It is also worth noting that under section 4617 of the
Housing and Economic Recovery Act, or HERA, the FHFA has the
power to repudiate the indemnification agreements for these
individuals. With all of that being said, even if the FHFA
still feels obligated to advance legal expenses for Mr. Raines,
Mr. Howard, and Ms. Spencer, the contracts state that they are
entitled to the advancement of reasonable legal fees, and I
think many of--all of my colleagues can agree that many of
these fees are not reasonable, given the mounting taxpayer
exposure.
The delay tactic of the defendants and the fact that many
of these security-related lawsuits have no end in sight, one
thing I feel very strongly about is that this subcommittee
needs to do everything it can to minimize further taxpayer
exposure associated with Fannie Mae and Freddie Mac. I would
like to work with Mr. DeMarco and the FHFA to make sure that
they are equipped with all the tools necessary to accomplish
this objective.
In closing, I would like to state that this particular
topic has raised many more questions about continuing
operations of GSEs and, accordingly, this will more than likely
not be the last of many hearings to happen in the future. Along
these lines, I am also looking forward to working with Chairman
Bachus and Chairman Garrett to take a serious look at whether
conservatorship of the GSEs is the best structure to protect
the U.S. taxpayers.
And with that, I would yield to the gentleman from
Massachusetts, Ranking Member Capuano.
Mr. Capuano. Thank you, Mr. Chairman. I look forward to
working with you, as well. As you stated, we had a meeting that
was very productive and very cooperative, and I think it is
going to be actually a great term to be able to work together.
There are a lot of questions that we both have about a lot of
different things that have gone on in the financial services
world. This is one of many.
I, for one, really want to hear today about industry
standards and whether this situation mirrors industry
standards, and if not, why not, and what are we going to do
about it? And even if it does, I think we have serious
questions of what to do, going forward. To me, those are the
biggest questions. I have some understanding of what happens in
the private industry world and how it works, but I want to make
sure that has been the situation.
And my hope is that the panelists here today address that
issue more than anything else. I am not here on a witch hunt
for anything or anybody, but at the same time, this is a huge
amount of money. On its face, it appears to be unreasonable,
but again, I will listen to others if they disagree, and if so,
why. And I think that, more than anything else, this hearing is
a very good hearing to ask serious questions on an important
issue.
And with that, I yield back the balance of my time.
Chairman Neugebauer. Thank you. I will now yield 2 minutes
to the gentleman from New York, Mr. Grimm.
Mr. Grimm. Mr. Chairman, I am going to yield right now. I
am waiting for my--I have a couple of questions that I just
wrote right before I came in that are being printed up for me.
Chairman Neugebauer. Okay, thank you. Does any other member
on this side want to make an opening statement? Mr. Miller?
Mr. Baca. I am Mr. Baca. Excuse me. Thank you very much,
Mr. Chairman and Mr. Ranking Member, for calling this hearing
today. I also want to thank the witnesses for sharing
substantive understanding regarding Freddie Mac and Fannie Mae,
as well as the legal expenses incurred.
This hearing is important to the American taxpayers. It is
important for us to understand the complexity of the problem
caused by the fall of the housing market.
So much damage was caused by allowing an industry to take
advantage of our families, and I state, ``take advantage of our
families'' who only wanted to have the American dream, and that
is to own a home. They wanted to own their own homes, and now
some are homeless. Others are forced to endure the nightmare of
foreclosure, and in my district, we have one of the highest
foreclosures in the Nation, so I am very much concerned.
Sadly, there are even more Americans who own a home that is
not worth the financial obligations they legally were bound to
pay because of the housing crisis that caused the market to
fall. And this is very depressing, when many of the individuals
who ended up buying their homes ended up paying outrageous
prices, and it is not even worth it at this point.
Today, we will hear about the legal fees, another example
of a financial loss caused by allowing an industry to go
unregulated or, simply stated, they got greedy. Today, we will
learn that these legal fees are an additional ramification
caused by the Bush Administration's failure to monitor and
control the housing industry. So let us put it where it
started, not where it was the last 2 years, but where it
started, with no oversight and no transparency.
Again, I want to thank the chairman and the ranking member
for their leadership on this issue. I look forward to hearing
from my colleagues and the witnesses on the issues at hand. I
yield back the balance of my time.
Chairman Neugebauer. The Chair recognizes Mr. Miller.
Mr. Miller of North Carolina. Thank you, Mr. Chairman.
The financial crisis is now well into the litigation stage
where everybody is suing everybody for everything. According to
published reports, Chase is involved in litigation as a
plaintiff against--as a securitizer of mortgage-backed
securities suing the lenders who made the mortgages in the
first place, saying the mortgages fail to meet the contractual
requirements and are defendants in other litigation against the
people who bought the mortgage-backed securities, saying that
the mortgages are perfectly fine, the very same mortgages.
So we will--I think we can expect more of that, and this is
probably the period in this crisis that we learn more from the
litigation than we learn from the Financial Crisis Inquiry
Commission, SIGTARP, or the Congressional Oversight Panel, from
well-motivated lawyers going after their claims.
And this is also the period in which the taxpayers'
exposure for ultimate loss for Fannie and Freddie is really
going to be determined. It is going to be very easy to hide
behind the lawyers and provide further subsidies, back-door
subsidies, to an industry that has already gotten too many
subsidies by failing to vigorously pursue claims that Fannie
and Freddie have or by giving in too easily where Fannie and
Freddie are the defendant.
Now, it is not that easy for lawyers to conduct litigation
while providing a continuous play-by-play commentary of the
facts and the law and of every strategic decision. But it is
very entirely appropriate for the taxpayers, and for us as a
Congress, to expect that there will ultimately be some
openness, some transparency about how the litigation was
conducted, litigation that will really determine how much the
taxpayers are going to lose from Fannie and Freddie.
So whether I ultimately agree that Fannie and Freddie
have--or that FHFA has handled this litigation appropriately or
not, I do welcome the oversight into litigation in which Fannie
and Freddie are parties. It is the least that we should do.
Chairman Neugebauer. Thank you. If there are no other
opening statements, then we will hear from our panelists.
First, we will hear from Mr. Edward DeMarco. He is the Acting
Director of the Federal Housing Finance Agency, and I believe
you have with you Mr. Pollard, who is your general counsel. So
Mr. DeMarco, thank you for being here, and you may proceed.

STATEMENT OF EDWARD J. DeMARCO, ACTING DIRECTOR, FEDERAL
HOUSING FINANCE AGENCY, ACCOMPANIED BY ALFRED POLLARD, GENERAL
COUNSEL, FEDERAL HOUSING FINANCE AGENCY (FHFA)

Mr. DeMarco. Yes, sir. Thank you, Mr. Chairman.
Chairman Neugebauer, Ranking Member Capuano, and members of
the subcommittee, thank you for inviting me to address matters
relating to legal expenses of Fannie Mae and Freddie Mac and
advancement of legal fees for certain former officers.
I share the frustration of members of this subcommittee and
others that funds are being advanced to finance the legal
defense of former officers at Fannie Mae, funds that
effectively increase the cost to taxpayers of the
conservatorship.
These former officers have been disgraced by the findings
of FHFA's predecessor agency, OFHEO, and they were forced from
their jobs as a result of those findings. Yet our frustration
cannot interfere with our responsibilities to follow the law,
respect the rights of those involved, allow the judicial
process to proceed under the oversight of the presiding judge,
and allow other government agencies to act under their
authorities.
As some of the matters you have asked me to address are
currently in litigation in which FHFA participates as
conservator, I have accepted the offer of the chairman to have
FHFA's General Counsel, Alfred Pollard, here with me during
this hearing. Members should know that I am not a lawyer, but
many of the subjects of concern involved technical legal
matters.
The Federal Housing Finance Agency has consistently viewed
indemnification as a prerequisite for attracting and retaining
skilled officers and directors. Indemnification, properly
administered, is in the best interest of Fannie Mae and Freddie
Mac, and therefore fits within FHFA's goal of preserving and
conserving assets.
At the same time, properly structured indemnification
includes guidelines for denying indemnification and requiring
repayment of advanced fees in certain circumstances.
Overturning existing contracts or policies would be a
determination with potential adverse consequences and would be
inconsistent with standard business practice.
At the time of the conservatorship, FHFA announced it
intended for the Enterprises to operate as going concerns with
new CEOs and Boards of Directors, and that they were to
continue normal business operations in support of the mortgage
markets. This included the need to attract and retain skilled
professionals. These officers and directors, therefore, could
be sued just as before conservatorship, thus the need for
retaining indemnification.
The determination by FHFA not to interfere with
indemnification in advancement of legal fees for former Fannie
Mae executives was based on Fannie Mae's corporate bylaws,
governing Delaware State law, the provisions of statute
governing FHFA's oversight of Fannie Mae, and court cases
addressing such an action.
FHFA believed the continued advancement of funds was in
line with the conservatorship framework and that actions to
interfere would be counterproductive due to the ability of
individuals denied to sue the agency for such actions. Also,
such action would raise secondary issues related to other
employees and their view of the validity of indemnification of
their legal expenses and their willingness to continue their
employment at the Enterprises.
At the time the Enterprises were placed into
conservatorship, it was important to avoid losing personnel who
could help reduce costs to the taxpayer from their large
portfolios and business activities and who could be distracted
by an absence, or potential absence, of indemnification.
Securing new CEOs, Boards of Directors, and employees for the
Enterprises would not have been possible without
indemnification.
Even in ordinary times, the Enterprises are large
corporations and incur significant legal expenses. Clearly, in
conservatorship, their legal expenses continue and the mortgage
market crisis has led to even greater legal costs. Beyond legal
expenses associated with pre-conservatorship lawsuits, the
companies have substantial legal expenses related to lawsuits
by homeowners, investigations by government agencies, and
expenses related to securing recovery of damages from their
counterparties.
In all of these activities, the legal issues are very
complex and litigation involves significant expenses associated
with extensive discovery, document production, expert
witnesses, and other costs involved in judicial and regulatory
proceedings.
Clearly, Mr. Chairman, controlling expenses has been the
concern that you have highlighted by calling this hearing. I
believe that FHFA can build on its existing work with the
Enterprises to control legal and other expenses in a way that
protects taxpayers. Likewise, I believe we can inform the
courts and other regulators of the expenses involved and the
role of the taxpayers while the Enterprises are in
conservatorship.
Thank you for this opportunity, and I would be happy to
answer questions.
[The prepared statement of Acting Director DeMarco can be
found on page 39 of the appendix.]
Chairman Neugebauer. Thank you.
Our next panelist is Mr. Michael Williams. He is the Chief
Executive Officer of the Federal National Mortgage Association.
I believe you are accompanied by your General Counsel, Mr.
Mayopoulos. Is that correct? Mr. Williams, you may proceed.
Thank you.

STATEMENT OF MICHAEL J. WILLIAMS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FEDERAL NATIONAL MORTGAGE ASSOCIATION (FANNIE MAE),
ACCOMPANIED BY TIMOTHY J. MAYOPOULOS, GENERAL COUNSEL, FEDERAL
NATIONAL MORTGAGE ASSOCIATION

Mr. Williams. Chairman Neugebauer, Ranking Member Capuano,
and members of the committee, good afternoon. My name is Mike
Williams, and I am the President and Chief Executive Officer of
Fannie Mae. I was named to that role in April of 2009 after the
company had been placed in conservatorship.
Fannie Mae is playing a critical role in stabilizing the
Nation's fragile housing market. Since 2009, Fannie Mae has
provided more than $1.2 trillion in mortgage liquidity, helped
one million families to buy homes, and enabled 3.8 million
homeowners to refinance into lower-cost mortgages. In that
time, we have also provided over $30 billion of financing for
more than 570,000 units of affordable rental housing.
Fannie Mae has also substantially strengthened its
underwriting standards and set new guidelines for the industry
on loan quality. As a result, we are building a profitable new
book of business. We are committed to putting a very strong
foundation in place for a sustained recovery in housing, which
is key to getting the U.S. economy back on track.
The committee has asked me to discuss Fannie Mae's post-
conservatorship legal expenses. As CEO, I am keenly aware of
Fannie Mae's responsibility to manage expenses prudently.
Fannie Mae is currently facing an unprecedented volume of
complex legal matters. For example, various members of the
plaintiffs' trial bar are pursuing class-action lawsuits
against Fannie Mae, including one brought on behalf of the
Attorney General of Ohio. Plaintiffs and their lawyers are
seeking billions of dollars. Fannie Mae has substantial
defenses in these lawsuits and is vigorously defending the
company and the taxpayers from this potential liability.
Fannie Mae has also been the subject of numerous agency and
congressional investigations. In cooperating fully, we have
incurred significant expenses collecting, processing,
reviewing, storing, and producing tens of millions of pages of
data and documents.
We also incur legal expenses in the aggressive pursuit of
claims against entities that owe Fannie Mae money. To date, we
have been successful in recovering sums well in excess of our
legal costs.
In addition to our legal expenses, Fannie Mae is obligated
to advance certain legal expenses incurred by current and
former officers. This obligation derives from Article 6 of our
bylaws, which Fannie Mae's shareholders adopted in 1987. It is
also governed by the contracts that Fannie Mae's Board has
entered into with each of its officers and directors.
Our conservator affirmed these contracts in 2008. Where
they apply, the company's obligation is to advance legal
expenses, and that is always mandatory. If Fannie Mae were to
refuse to honor this obligation, we would undoubtedly be sued
and likely be subject to additional costs.
Corporations throughout America make provisions similar to
ours in order to attract and retain strong and experienced
officers and directors. Since 2009, Fannie Mae has put in place
a new Board of Directors and senior executive team. It would
not have been possible for the company to recruit and retain
these professionals without offering advancement protections
and applying them consistently.
Since 2005, Fannie Mae's General Counsel has used the
services of a third-party vendor to review all legal bills for
individuals entitled to advancement. Currently, we use a legal
invoice audit firm that has provided services for some of the
largest corporations in America and various government
entities. The vendor negotiates billing rates and determines
reasonableness and necessity of all charges.
In closing, we take seriously our responsibility to manage
effectively the resources that we have been provided. Today, I
am joined by our General Counsel, Timothy Mayopoulos, and we
look forward to taking your questions, Mr. Chairman.
[The prepared statement of Mr. Williams can be found on
page 48 of the appendix.]
Chairman Neugebauer. Thank you, Mr. Williams. I do want to
remind everyone that, without objection, your written
statements will be made a part of the record.
I will start the questioning. Mr. DeMarco, under section
4617 of the Housing and Economic Recovery Act of 2008, the
conservator or receiver of the GSEs may disaffirm or repudiate
any contract if the conservator determines that the performance
of these contracts is burdensome and that the repudiation of
the contract will promote the orderly administration of the
affairs of the GSE. You evidently made a determination that
paying these legal fees and continuing to defend these
individuals was not burdensome to the corporation. How do you
justify that?
Mr. DeMarco. Mr. Chairman, yes, that determination was
made. It was made at the time the conservatorship was
established by my predecessor, and the determination was made
by my predecessor for the reasons that are outlined in my
testimony, that this advancement of legal fees was required by
FHFA's own regulation, that the indemnification that was in
place was required by FHFA's own regulation, was consistent
with Fannie Mae's bylaws and was, at that point, a requirement
under applicable State law.
So the determination was made at that point, and that is
not, at this point, a determination to be revisited.
Chairman Neugebauer. We keep talking about Fannie Mae's
bylaws. I want to read you something that is also from Fannie
Mae's bylaws. For example, it states that the indemnification
will not be provided when the officer or director breaches his
duty of loyalty to the corporation, acts, or fails to act in
good faith, and engages in intentional misconduct.
I know that you have read the OFHEO report, and this is a
copy of the report. All of these tabs represent areas where the
three individuals that you are continuing to pay legal fees on
acted in ways that were not in the best interest of the
corporation and, to me, violated the very bylaws of this
corporation.
And so, for the determination to find that is not
burdensome, and that, in fact, these contracts should be
honored, is a little puzzling to me, and I think it is a little
puzzling to the American taxpayers, because they are continuing
to pay fairly substantial legal fees for these three
individuals who, according to this report, weren't doing things
that were to the benefit of the corporation and, ultimately,
the taxpayers had to come in to the tune of--right now of about
$150 billion.
And that total could go up. So I am still trying to figure
out how you felt like that was in the best interest of the
corporation.
Mr. DeMarco. Mr. Chairman, that is a fair question. And I
think that my written statement, which goes into some detail in
defining indemnification, defining the grounds under which
indemnification would be denied, may be helpful here. But let
me try to summarize, and then if counsel wants to supplement,
that may be helpful as well.
But essentially, indemnification is something that actually
takes place at the conclusion of a judicial or administrative
activity. There are two areas in which the actions of these
former executives have come under review. The first is there
was an administrative notice of charges that was filed by
FHFA's predecessor agency, OFHEO, based upon the findings in
the report that you referenced.
That notice of charges was made in December of 2006 and
ultimately resulted in a settlement in April of 2008, a
settlement with the three former executives that resulted in
payments by those executives but did not result in any finding
or admission of the breaches that would violate--that would
meet the standards in the bylaws to avoid indemnification.
The litigation that is ongoing today, the multi-district
litigation that is the subject of such attention here, is in
fact to determine the behavior and activities of these former
officers and whether they did breach. So the finding that would
be the predicate for denying indemnification has not taken
place yet because we are, in fact, in the midst of such
litigation.
Therefore, what is going on right now is an advancement of
legal fees, and that is very much required by contract and by
law, and the advancement of legal fees will continue until the
conclusion of this judicial action when there is finality to
that based upon what the outcome or findings of that may be.
There would then be a determination as to whether
indemnification of these officers would be provided or whether
there are grounds to seek repayment of the advancement of those
fees. But that cannot take place while this is in process. It
is something that takes place at the end of the legal process.
Chairman Neugebauer. I would also say, though, that you
could have denied advancement, or if you weren't going to
repudiate the indemnification, you had the ability to say to
these individuals, ``You know what? We have a little problem
here. We are broke, and we are not advancing additional monies
for these fees.'' Obviously, I think that brings some incentive
for those individuals not to keep burning taxpayers' money.
Mr. DeMarco. Mr. Chairman, I certainly understand the issue
and the concern that you are raising there. I would simply say
that the determination at FHFA was that to cease advancing
those legal fees would have resulted in suits against us, and
operating with the responsibility as conservator, we determined
that, looking at the legal case law here and the facts and
circumstances and what governed in terms of contract law and
other applicable law, what needed to be done was to continue
advancing those fees.
That is the determination that was made at the time the
conservatorship was established. FHFA did affirm that for the
company, and so we continue to operate with that affirmation in
place.
Chairman Neugebauer. My time has expired.
Mr. Capuano?
Mr. Capuano. Thank you, Mr. Chairman.
Mr. DeMarco, basically you made a determination as to who
makes the decision as to who breached these fiduciary
responsibilities, and obviously you made a determination--
correct me if I am wrong--that would require a final court
decision as to whether they breached their responsibilities. Is
that a fair summary?
Mr. DeMarco. I did not make that determination, Mr.
Capuano. I believe that determination is effectively what is
required by statute and governing law here.
Mr. Capuano. So that is--but still--
Mr. DeMarco. But--interpretation of that, yes--
Mr. Capuano. --somebody had to interpret the law.
Mr. DeMarco. --it is our interpretation.
Mr. Capuano. I don't mean to be disrespectful. I am a
lawyer. Without differences of opinion as to what laws mean,
you wouldn't need lawyers. So somebody had to make a
determination that is what the law meant, and I understand
that. And I would respectfully suggest that, going forward, we
make a determination as to where we are going to draw the line.
And I would argue that I understand the legal arguments
that you probably would have gotten sued. I agree, you would
have. You may have won. You may have lost. You still should
have taken the hit, done the right thing, taken the hit, and if
you lose it going forward, you lose it going forward. Having
done the right thing, you wouldn't be here today. We would be
saying, ``Good job. Keep it up.''
As opposed to that, you made a decision to take the
conservative view, to allow them to keep going, and now you are
here today, and we are going to beat you up a little bit today
and probably a little bit more, going forward. And in my
opinion, in defending the taxpayer's money, I think on occasion
you have to take a little bit of a reach as to who makes those
determinations.
I would also ask, is this agreement--and as I understand
it, it is, but I want to hear it from you and from Mr.
Williams--is the current agreement, and even the one that was
in place then, I agree that directors and officers liability
insurance is an important aspect. I buy the concept. There are
many ways to do that. Do you believe that the past and current
agreements on directors and officer liability is within the
standard of normal operating business procedures today?
Mr. DeMarco. I do.
Mr. Capuano. Mr. Williams, do you?
Mr. Williams. Yes, I do.
Mr. Capuano. Okay. I--again, I would like to pursue that a
little bit more at a later time with maybe some outside
experts. But at the moment, I accept your decision.
At the same time, the definition of the term
``reasonable''--has anyone questioned the term ``reasonable
amounts of money that have been paid out?'' I understand you
have an outside agency doing it. Has anyone questioned that,
either inside Fannie or inside FHFA or any of the plaintiffs?
Has anyone said we disagree with this vendor's determination
that these charges of X gazillion dollars are reasonable?
Mr. DeMarco. Sorry. I am not aware of particular claims
being made that the legal fees that have been incurred are
unreasonable as based on an industry standard. I am simply not
aware of that.
Mr. Capuano. Mr. Williams, are you aware of anything?
Mr. Williams. Congressman, I am not aware.
Mr. Capuano. Okay. I guess for me, the question is also I
understand--yes, go ahead, Mr. Pollard. Sorry.
Mr. Pollard. In our oversight capacity, we have a--to make
all efforts to observe the reasonable--
Mr. Capuano. Yes. I think your microphone is not on.
Mr. Pollard. I apologize. I would say that our oversight
capacity from the office of general counsel and the agency, we
have spoken with both companies on an ongoing basis, reminding
them of the need to keep fees down across-the-board, not just
for individuals here, but the general legal expenses.
And I believe they have undertaken to do the best they can
in this market to try and keep fees down and to hold fees in
line. Their fees are very much going to be judged, in fact, by
their legal advisory firm by looking at what other firms do. In
other words, what do other courts--
Mr. Capuano. I understand that. So that is always the
problem with the term ``reasonable'' is that people read it
differently. For me, $160 million worth of legal fees, it
certainly sounds unreasonable. Again, I understand people can
disagree. But I am also interested in going forward. Is there
anything in these provisions? And if not, can you put them in?
Would you consider putting them in?
For the sake of discussion in this case, clearly OFHEO
should not have accepted this deal the way it was written.
Somebody should have sat up and screamed that they were not
going to take the deal because it means we now have to pay
these outrageous legal fees. Okay, it was done.
Going forward, at the very least, and hopefully today, and
hopefully if not soon, let us assume this happens again
tomorrow, and you, Mr. DeMarco, make a determination that
somebody else has breached their responsibility. Why shouldn't
we then, continuing with the typical rules of directors, not
just liability, say, Okay, from this day forward, we will
either put these payments in some kind of a contingency fee, or
we will put a lien on something, or we will have some other
surety to guarantee that we will be able to get these fees
back, since an initial determination has already been made by a
neutral body that you have violated some standard?
Understanding fully well that determination won't be final
until it is final, but in the meantime, right now, as we sit
here, let us be serious. We are never going to get this money
back, at least I don't think any reasonable person thinks we
will. And that is the problem. I understand paying it up front.
I understand having liability coverage. I get all that.
But what I don't get is why we leave ourselves totally
naked to someone who on at least one level, understanding it is
not final, has already been determined to have breached their
fiduciary responsibilities, and yet we are still going to pay
through the nose forever and ever with no real hope of
recouping that money. Is there anything we can do going
forward, either in this case or in future cases, to say, if
this happens again, at the very least, we will have a lien, we
will have sureties, we will have something else on the side
that we can recoup this money when the time comes?
Mr. DeMarco. I am sorry, I am not aware of what--I don't
have that particular recommendation or answer to that question.
I would observe that the matter that you are asking is far
broader than two companies in conservatorship. This strikes me
as a general matter of both corporate practice and existing law
that governs these matters. There is a great deal of case
history, as I have been told about these things. So to your
question of what could be done, it is a much broader question
here--
Mr. Capuano. But these case histories are not based on
taxpayer dollars doing this. These case histories are on
shareholders' dollars doing it, not taxpayer dollars. This is a
unique and different situation that I would suggest we consider
going forward, at the very least, having unique and different
approach.
Mr. DeMarco. Right. I would certainly agree with that, sir.
There is no precedent for 2\1/2\ years of conservatorship for
major financial institutions like this in conservatorships that
are likely to continue for a number of years further until this
is ultimately resolved. There has been nothing like this
before, sir, and it does pose unique and new questions for us.
Chairman Neugebauer. I thank the gentleman.
And now the vice chairman of the committee, Mr.
Fitzpatrick.
Mr. Fitzpatrick. Thank you, Mr. Chairman, for calling this
hearing.
This question is for Mr. DeMarco and Mr. Williams, sort of
following up on Mr. Capuano's comments that Fannie Mae and
Freddie Mac have never really been private entities, fully
private. So when a member of our panel questions the
appropriateness or reasonableness of paying for the legal
defense of former Fannie officers or directors, we just ask
that you keep that in mind.
Before the conservatorship, Fannie enjoyed privileges that
other private firms were denied. It did not have to pay State
taxes, and it didn't have to pay local taxes. Until 2006, they
did not have to register the securities with the SEC. They had
a line of credit with the Treasury.
Above all, they had a lower cost of funding than any other
private entity would have because they were beneficiaries of an
implied government guarantee. Notwithstanding this, they are
advantages that still resulted in paying for the GSE's
shareholders as a result of accounting scandals, and now paying
for the taxpayers as a result of the conservatorship status.
The accounting scandals resulted in fines, decreases in
market capitalization, expensive internal corrective actions,
and declines in share prices which cumulatively blocked the
safety and soundness of these institutions. $400 million in
fines were paid to the SEC and OFHEO in 2006. Earnings
restatements totaling $11 billion were made for both firms.
In 2006, Acting Director of OFHEO Jim Lockhart said this
about the cost of Fannie's earning manipulation executed by
Fannie senior management. This is his quote: ``Fannie Mae's
executives were precisely managing earnings to the 100th of a
penny to maximize their bonuses while neglecting investments in
systems, internal controls, and risk management.''
And he went on to say, ``The combination of earnings
manipulation, mismanagement and unconstrained growth resulted
in an estimated $10.6 billion in losses, well over $1 billion
in expenses to fix the problems, and ill-begotten bonuses in
the hundreds of millions of dollars.''
The conservatorship has brought cost to the taxpayers for
the GSEs misdeeds. To date, the Fannie Mae and Freddie Mac
bailout total stands at about $153 billion, making the GSE
conservatorship by far the costliest of all the taxpayer
bailouts carried out over the past 3 years. The cost of the
bailout could still go higher. On September 15, 2010, in
testimony before this committee, Mr. DeMarco stated severe
stress scenarios. The Treasury draws for the GSEs could come
in, I think you said, at about--or perhaps just under $400
billion.
That brings us to the question before us today of legal
fees for Franklin Raines, Tim Howard, Leanne Spencer and the
others at Fannie Mae who have been responsible for the massive
losses to shareholders and now taxpayers. And so I ask the two
of you, in this context, is it reasonable to advance legal fees
for individuals who have been found by both OFHEO and the SEC
to have manipulated earnings for their own private benefit? Is
that reasonable to ask the taxpayers?
Mr. DeMarco. Congressman, I believe the answer is we have
an obligation to advance these legal fees. And at this point, I
think it may be best to ask my counsel to provide a little bit
more of the legal context as to why we have that view.
Mr. Pollard. Congressman, OFHEO put in place regulations
requiring the Enterprises to select a State law under which to
operate. Fannie Mae operates under Delaware law. If you go into
Federal court, Delaware law will be the subject that will be
raised in any action.
In looking at the requirements of that law and the court
decisions under it, there is indemnification, which comes at
the end, and there is advancement of legal fees. Even if a
company sues its own employees for breaches of fiduciary
duties, they are entitled to advancement of legal fees until
the final determination. I am just trying to give you, at the
extreme end of this.
So I think, just in looking at the law and what we have had
to advise from the office of general counsel to the senior
management of our agency is that the obligation that we are
looking to, under Delaware law, is to advance fees. That does
not mean at the end of the day, when a decision is made on
indemnification, if someone determines the findings by the
agency are its findings, here is what we found, but for someone
to sue--and I might note some of the court cases preceded
actions by our agency even--that requires the determination by
a court or another adjudicative body that you have, in fact,
breached these fiduciary duties. And that is what I think the
Director has been trying to say.
So the short answer is, under all the law that I have seen
and read in Delaware and other States, looking at State law in
this matter, is that advancement of legal fees is considered
mandatory. The Supreme Court of the United States--excuse me,
the Second Circuit of the United States has said that, where
the Justice Department was looking to interfere with
advancement of legal fees, this would be considered
unconstitutional. This was in a criminal case, and I want to be
clear, that is a different matter.
But clearly, the courts have been uniform that it is the
very charge of the breach of the fiduciary duty, because it is
so serious, that is the one that would permit, and even
require, advancement of legal fees because you are the most at-
risk in that situation. So I think that is the foundational
law.
The chairman and the ranking member asked about why don't
you step in. All the court cases that I have looked at in cases
of advancement of legal fees have gone against the private
sector firm, and even the government, where the government was
trying to stop advancement of fees.
So I think that is sort of the foundational basis in which
we operate, and I think the ranking member's question about
what can we do, and I think the Director's answer about that, a
large question is there. So I hope that is helpful in terms--
Mr. Fitzpatrick. So the court cases were construing mostly
private corporation?
Mr. Pollard. They are private corporations, companies, but
I even have one case of a company under the RTC that was in
receivership. And the court ordered the advancement of legal
fees to the officers of that firm when they were being sued by
the company.
Mr. Fitzpatrick. But none of those cases are construing a
law with respect to government-sponsored enterprises?
Mr. Pollard. No, sir.
Mr. Fitzpatrick. So this would be a case of first
impressions?
Mr. Pollard. It would be a case of--yes, sir.
Mr. Fitzpatrick. And they are construing the law of
indemnification on the corporate side, correct?
Mr. Pollard. In advancement of fees, yes.
Mr. Fitzpatrick. And are you relying on sort of the
corporate law of indemnification, as you understand it, as well
as the contracts of these individual employees?
Mr. Pollard. Yes, that, but also our own regulation, which
says select a State law, our own regulation which says you can
indemnify your employees with appropriate safeguards. By the
way, I think the word ``reasonableness'' from our perspective,
is that it has to be done appropriately and it needs to be
reasonable.
Chairman Neugebauer. I thank the gentleman for his
questions.
And I now yield to the other gentleman from Massachusetts,
Mr. Lynch.
Mr. Lynch. Thank you, Mr. Chairman.
And I want to thank the witnesses for helping the committee
with its work.
I have been reading through some of the descriptions of the
court case against Fannie Mae and its officers by a couple of
pension funds in Ohio. And I have to admit, while I understand
the principle of indemnification in order to get officers to
serve, this case has been going on for 6 years, and that is far
longer than any average case under these circumstances.
I understand this is a big case, but I am also reading
that, even at the most mundane and procedural conferences, that
Fannie Mae and the officers are bringing in 35 to 40 lawyers
and paralegals while the plaintiffs are coming in with 2 or 3,
that they are bringing in 25 expert witnesses when the
plaintiffs are bringing in one or two. And in many cases, the
judge has pointed out that they are driving up the cost of this
litigation.
So I am interested in indemnifying the taxpayer, because we
are bleeding here. This is 6 years and counting, and these are
staggering numbers that we are seeing here.
I understand the principle. You have to have
indemnification to an extent in order for people to be willing
to serve in these positions, but indemnification is an
insurable risk. Now, I don't know who made the decisions, but
we should have an insurance policy to provide a fixed amount of
resources for a person to fight these claims against them. We
shouldn't be having to reach into the taxpayers' pocket every
time there is another hearing or a deposition or any other
legal proceeding where we need counsel.
And it bothers me greatly that this is an insurable risk.
Corporations, every one of them, all across America, get a
policy to indemnify their officers. And here we are, Fannie
Mae? That is what you would call a target-rich environment,
where I am sure you have probably hundreds, if not thousands of
folks, suing Fannie Mae for their either nonfeasance or
malfeasance during this whole crisis. And it just bothers me to
no end that we are not--we are worried about indemnifying these
officers to the tune of $137 million and counting. They have
already paid a $400 million fine, and nobody is watching out
for the taxpayer, in my opinion.
Does anybody want to take a shot at this? Why did we not--
is somebody managing this litigation from your standpoint,
where they are saying, ``No, you shouldn't really have 40
attorneys here? You shouldn't have 30 paralegals. You shouldn't
have 25 expert witnesses.'' Someone to manage--believe me, if
this was coming out of their pocket, they would not be handling
this this way.
Mr. DeMarco. Right. Congressman Lynch, there are
observations and questions. I believe that Mr. DeWine, who is
in the next panel, has raised, in his prepared statement, a
situation which, as you describe, there were numerous attorneys
present at a particular deposition. I have been told that the
presiding judge said something about that at that time, and
that has not been repeated. More generally, of course, the
judge is the presiding officer in the litigation, and excesses
and delays that are taking place on either side are the
responsibility of the judge to address.
And finally, with respect to this litigation--and it is in
litigation, so I need to be careful about what I can say, but
one might ask the other side, the plaintiff in this case is
continuing to pursue the litigation in light of the
conservatorship. At this point, the plaintiffs are effectively
suing for funds that ultimately could come from the U.S.
taxpayer.
So the defense that is being put up here is defense against
a suit that, if successful, would presumably result in a claim
against Fannie Mae, Fannie Mae in conservatorship being backed
by the taxpayer, so there are some questions here about--I
agree about the situation that we are in. But what we are
trying to do is to respect everyone's legal rights, and the
judicial process in this matter is with the judge.
And the other thing I would say that I think may be helpful
here is I intend to file my written statement for this hearing
with the court so that the court is aware of the concern of
this body and the discussion that we had here today.
Mr. Lynch. Thank you.
Thank you, Mr. Chairman.
Chairman Neugebauer. Thank you.
We have been joined by Mr. Garrett, who is the chairman of
the Capital Markets Subcommittee, and I would ask unanimous
consent to allow him to be a part of our--on the dais today and
ask questions if he chooses, without objection.
Next, to the gentleman from Florida, Mr. Posey.
Mr. Posey. Thank you, Mr. Chairman.
I guess you have read Mr. Devine's statement--is it
Devine--DeWine--have you all read that?
Mr. DeMarco. Yes, sir.
Mr. Williams. Yes, we have.
Mr. Posey. I was struck somewhat by the fact that 13
lawyers appeared at the April 2010 hearing, the deposition, to
represent the accused, so to speak, here. And I was wondering,
what if they had brought 50? Would that be okay? They brought
13 for 5 defendants. What if they had brought 50? Would that
have been okay?
Mr. Mayopoulos. Congressman, perhaps I could address this
issue, because I think there is--the statement in Mr.
DeWine's--sorry, Attorney General DeWine's statement that there
were 13 attorneys present for the defendants at Mr. Raines'
deposition is not entirely accurate.
As you know, Mr. Raines and Mr. Howard and Ms. Spencer are
all defending lawsuits alleging significant liability, and they
are all entitled to have their own separate representation. But
at most depositions, one attorney for each defendant appears.
For particularly important depositions, such as the deposition
of Mr. Raines, it may be appropriate to have more than one.
But for this particular deposition, it lasted for 2 days.
Fannie Mae advanced the legal fees for a total of six
attorneys, two for Mr. Raines, two for Mr. Howard, and one for
Ms. Spencer, and one for Mr. Mudd, who, while not a party
directly to this lawsuit, is a party to other lawsuits for
which discovery is being conducted at the same time.
And Fannie Mae itself was represented by two attorneys, one
of whom became ill during the first day and was replaced by a
different person. In fact, Ms. Spencer sought advancement for
two attorneys, and we declined that.
So the suggestion that we paid for 13 attorneys to attend
this deposition is just not accurate. I don't think Attorney
General DeWine would know that. He may know how many people
actually showed up, but he doesn't know how many actually got
paid. And we know how many got paid, and 13 did not get paid.
Mr. Posey. Mr. Chairman--how many got paid that day?
Mr. Mayopoulos. The number who got paid was a total of
seven for the individuals--two for Mr. Raines, two for Mr.
Howard, one for Ms. Spencer--I am sorry, that is five--and two
for Fannie Mae, one of whom became ill during the course of the
deposition. So in effect, six or seven if you count the one who
fell ill.
Mr. Posey. Okay. And we will continue to advance--pay legal
fees until there is some adjudication of their guilt. Is that
correct?
Mr. Mayopoulos. That is correct.
Mr. Posey. And there is no limit on the future, correct?
Mr. Mayopoulos. All the parties, I think, are trying to
bring this matter to a close. In terms of how long the case is
going to last, I will say that there have been over 120
depositions in the case. A hundred of those were noticed by the
plaintiffs, not by the defendants, but by the plaintiffs. The
plaintiffs took 100 depositions. So of course, the defendants
must show up to appear at those depositions and to examine
those witnesses.
So this case has gone on for 6 years, but it is the
plaintiffs who have alleged 1,500 pages of accusations; between
their complaint, the Paul Weiss report, and the OFHEO report,
there are 1,500 pages of allegations. They have done very
little to try to winnow the case down.
And frankly, the plaintiffs are the parties who added the
three defendants we are talking about. The plaintiffs are not
going to collect $9 billion from Mr. Raines, Mr. Howard, and
Ms. Spencer. I don't know them, but I doubt that they have $9
billion. It is unclear to me why the Attorney General of Ohio
has even named those parties as defendants since the only
entity that could actually pay the $9 billion that the Attorney
General says he is seeking would be Fannie Mae, and, in effect,
not even Fannie Mae, but the U.S. Treasury.
Mr. Posey. Just a quick response. I would probably fault
the agency more than the plaintiffs if they have 1,500 pages
worth of allegations. I don't think that is the plaintiff's
fault. I think, in all likelihood, there is something that the
defendants did wrong that resulted in them coming up with 1,500
pages in accusations.
Mr. DeMarco. If I may, Mr. Posey, this matter is in
litigation. There is a presiding judge. And whether people were
right or wrong is something that will be determined through the
judicial process, respecting the rights of all those involved.
These are very difficult matters, and I appreciate the concern
about the legal expenses, but there are various rights here.
And I think we are all striving to respect them.
Mr. Posey. We are trying to respect the taxpayers, too,
obviously, and that is who gets left out of the equation,
usually. What steps are you taking to protect the assets of the
people who are accused of wrongdoing? In the event they are
found guilty of wrongdoing, what steps are you taking to get
the greatest amount of reimbursement possible?
Mr. Pollard. We have no authority to freeze any of their
assets or to limit that. What I would say is, in the
indemnification agreements that they signed, they have to agree
to restore any funds given to them if an adverse decision is
made. That would mean all of their assets are at risk. In terms
of controlling or limiting those assets before such
determination, we do not have the authority to do that.
Mr. Posey. But you have a plan? With the indemnification
agreement, you have a course of action that you would take?
Mr. Pollard. Yes. In order to be advanced fees, they sign
an agreement that, if they are found to have violated those
fiduciary duties, they will repay the funds. And if they refuse
to do that, you can go after them to the maximum of all their
assets.
Mr. Posey. And it would appear that they probably don't
have the assets to do that. Is that what you are telling me?
Did I read that between the lines earlier?
Mr. Pollard. I personally don't know the size of their
assets and what the final fees would be, so I don't know.
Mr. Posey. Thank you, Mr. Chairman.
Chairman Neugebauer. Mr. Miller?
Mr. Miller of North Carolina. Thank you, Mr. Chairman. I am
glad that I attended this hearing just to hear a Republican say
that, if a plaintiff brought a civil lawsuit against the
defendant, the defendant must have done something wrong.
Mr. DeMarco, I have been greatly interested in how Fannie
and Freddie--how FHFA handles the litigation that may very well
affect--will undoubtedly affect taxpayers' ultimate expense for
the conservatorship of Fannie and Freddie.
But my questions today are about another topic that will
affect taxpayer exposure as much or more, and that is the
manner in which mortgages within Fannie and Freddie's control
are being handled, the way they are being modified or not
modified, proceeding to foreclosure or not. What I have heard
from those who are working directly with homeowners facing
foreclosure is that Fannie and Freddie are more infuriating to
deal with than the private label securitizers, or the servicers
for PLS mortgages.
And it is hideously expensive to foreclose. There are
obviously many occasions when it clearly would be much wiser to
enter into a sensible modification. It appears, from our
history, that we have done it successfully in the past. That is
what the Homeowners Loan Corporation did during the New Deal,
and 20 years later when the program wrapped up, it had made a
slight profit and probably saved the middle class.
The former Mac statute provides, by statute, for loss
mitigation procedures, for who qualifies for modification,
when, and what the modification will be. Those who work in this
area say they understand there is a standing order from Fannie
and Freddie not to reduce principal. And it is almost
impossible to get any kind of information about Fannie and
Freddie's loss mitigation practices.
Is there such a standing order? What are the criteria, and
why do we know so little about it?
Mr. DeMarco. Thank you, Congressman. There are a number of
questions in there, so let me see if I can work my way through
them.
First of all, FHFA is required to file a monthly report to
this committee, and so I will make sure that this gets directly
to your office. We report monthly on the activities of Fannie
Mae and Freddie Mac with regard to foreclosure prevention. This
is a requirement of law. It is our Federal property manager's
report.
And I would like to share with you a few sort of general
numbers to demonstrate that, in fact, Fannie Mae and Freddie
Mac are vigorously working on loss mitigation activities. That
is the top priority that FHFA has as conservator of the
Enterprises, is to see that the delinquent mortgages that they
own or guaranty are resolved at the least cost method to the
conservatorship, and with all appropriate attempts to avoid
foreclosure both for the good of the company and for the
borrower.
Let me say that, for calendar year 2010, combined, the two
companies completed close to 600,000 loan modifications, and
yet their total foreclosure prevention actions, meaning a range
of home retention plans like loan modifications, repayment
plans, forbearance, as well as foreclosure alternatives, such
as short sales and deeds in lieu amounted to about 950,000
finished transactions. That is just for last year.
Since the establishment of the conservatorship, there have
been close to 1.5 million loans that have either been modified,
have had some other home retention action taken, or have gone
through a short sale or deed in lieu in order to avoid
foreclosure. That is nearly 1.5 million loans in about 2\1/2\
years on a book of business of about 30 million loans.
So I would say that FHFA and Fannie Mae and Freddie Mac
have been aggressive and have been leaders in the marketplace
with respect to helping loan servicers to undertake appropriate
and rigorous loss mitigation activities. This is essential for
what we are trying to do as conservator, and I view this as
essential to our responsibility to mitigate losses for the very
reason, Congressman, that you said, is that where it is
achievable to do a loan modification or some other sort of
foreclosure alternative, that is generally going to be less
costly to the enterprises than to go through foreclosure.
You asked about principal forgiveness, and there has been
very little or no principal forgiveness activity as--to date as
part of loss mitigation because the focus has been on loan
modifications and these other activities, and because we have
not determined or have found a particular principal forgiveness
approach that, in our judgment, would result in a lower cost
outcome or higher rate of success than the alternatives that we
are pursuing.
What we are pursuing right now with respect to the range of
modification and foreclosure prevention actions requires a
great deal of interaction with mortgage servicers, and it is
complex enough, and we are working very, very hard to make this
work. And as I say, close to 1.5 million completed transactions
since the establishment of the conservatorships.
Chairman Neugebauer. I thank the gentleman.
Mr. Renacci?
Mr. Renacci. Thank you, Mr. Chairman.
And thank you, gentlemen, for being here. I have two
questions. First, I am going to go back to indemnification,
just a simple question.
With the indemnifications that these gentlemen signed, was
that a standard practice for all employees when they were
hired? And then the next question would be, was this
indemnification changed at any time during their employment?
Mr. DeMarco. It was standard as part of our regulation. I
will have my counsel provide further detail.
Mr. Pollard. The bylaws of the corporation address this,
and the individuals had contracts. Ms. Spencer did not have a
contract but agreed to an indemnification repayment contract,
which was a standard contract in 2004, so this dates back to
that time. They have not been modified.
Mr. Mayopoulos. That is correct. All officers and directors
receive indemnification and advancement contracts currently,
and that has been the practice since 2004.
Mr. Renacci. Thank you. Next question, we are going to go
back to reasonableness, because, quite frankly, reasonableness
is in the eyes of the payer. And my biggest concern is, going
forward--and it is really I am looking, going forward, is how
we make sure we mitigate and minimize taxpayers' expense.
If Mr. Raines was here today, I would really ask him if he
would be willing to voluntarily pay his legal fees, going
forward, because then we would really determine what
reasonableness was or wasn't. But since he is not here, I am
going to ask the question of you. And I know you have talked
about a panel outside of your organization as to--the panel is
who you look to for reasonableness.
But the question is reasonableness, again, is in the eyes
of the beholder, the eyes of the payer. So my question to you
is, what are the guidelines that this panel was looking at when
it comes to reasonableness? Quite frankly, as a business owner
for the last 28 years, I pretty well have determined what
unreasonableness is in a courtroom when you see 10, 12, 14
attorneys on the other side. So is there reasonableness
standards that were given, or are you relying 100 percent on
what this panel says?
And I would ask this next question as a follow up. As the
director of the organization, you could also determine
reasonableness and overrule their opinion. I would ask that
question, too.
Mr. DeMarco. Yes, sir. So I will begin, but others may want
to contribute.
As you noted, the first line of defense here, the first
test of reasonableness, the first level of review is the
outside firm retained by Fannie Mae with expertise in this area
to review line-by-line the submissions that are made for
advancement fees.
The next line of review is the Fannie Mae legal department
itself overseeing the activities and the expenses that are
involved.
The next line of review is FHFA's legal department that is
monitoring this activity and is doing so with the benefit of
our own outside counsel, who is aware of the ongoing major
litigation activities. So those are the various reviews that
are in place.
But I will say, in fairness to this hearing--and I think
that this hearing that the chairman is bringing is raising
important questions, and I respect that. And I will say that
FHFA is committed to redoubling its efforts of review here even
though I am not aware of any evidence that there have been
unreasonable payments made. There are reasonable questions
being asked, and we will take additional steps to monitor this.
And as I have already said in response to a question from a
previous member, I intend to file with the judge in the
particular case my testimony so that he is aware of the
concerns that have been raised here.
Mr. Williams. Yes. Congressman, we take this very
seriously, our responsibility to manage the expenses of the
company, and including the legal fees. I would like to actually
ask Mr. Mayopoulos to walk through the process and what the
expectations are as it relates to these expenses.
Mr. Mayopoulos. Congressman, we retain a company called
Legal Cost Control, which is, frankly, the leader in this
space. It is really one of the most respected invoice and audit
firms in the country, with over 20 years of experience. They
were selected by the bankruptcy court in some of the largest
matters in history, including Enron, WorldCom and Adelphia to
review the legal fee applications of lawyers in those cases.
They analyze over $60 million in monthly billings for
corporations such as Microsoft and Pfizer and Walmart, and so
they are very experienced at this. They have a set of
guidelines that they have developed with us that are 13 pages
long and quite detailed. They distribute those to all the law
firms involved, require them to acknowledge that they have
received them and read them and that they will abide by them.
And then they review each one of these invoices line-by-line
and raise questions where they think that the fees are not
appropriate, that it is in line with what similar lawyers
charge for similar matters.
I think in the context of this matter, the question of
reasonableness doesn't mean that we always end up with a small
number, okay? We clearly are spending quite large amounts of
money on this matter. But this is a case that involves billions
of dollars of potential liability, billions of dollars. And I
have been doing this kind of work myself for 25 years now in my
career.
And when you look at what it costs to defend a case, such
as a WorldCom or an Enron or an Adelphia, or this matter, the
amounts of money we are talking about are comparable in terms
of what you see. These are enormously expensive, time-consuming
matters with very complex legal issues. The lawyers who get
paid get paid a lot of money for their skills and experience
and expertise in these matters.
And so I don't mean to suggest by saying that--while we
think that the fees that have been paid are reasonable--we are
happy to pay them. We clearly would prefer not to--but they are
consistent with what lawyers who do this kind of work in this
kind of matter get paid. And that is really the test that Legal
Cost Control is applying as it goes through this process.
Chairman Neugebauer. I thank the gentleman.
Mr. Capuano?
Mr. Capuano. Thank you, Mr. Chairman.
Mr. DeMarco, you had, I think, pretty clearly outlined the
difficulties you have in defending what could be taxpayer
payout if you lose it. But you also indicated by that, raised a
question to me that you may have significantly different
interest in this lawsuit as a defendant than do these three
individuals, or other individuals that are involved.
Have you attempted to split out the cases and to say, look,
we will defend our stuff and take the hit, but these three
guys, their interests are different than the interests of you
and your agency. Have you attempted to split up the case?
Mr. DeMarco. Mr. Capuano, as FHFA, we are not a defendant
in this case. As conservator, we stand in the shoes of the
Boards of Directors and senior management of the firm as
conservator. So there is no separation there with regard to we
are here and someone else is over there. The suit is against
the firm and the activities of the firm. One of the counsels
here may be able to better explain it than I can, but that is
the situation. I don't believe--
Mr. Capuano. It certainly strikes me that, in theory, if
these individuals acted badly, the company is a victim as much
as anybody else. And therefore, the interest of the defendants
may not be the same, and I would argue that the interest at one
table should at least overlap significantly, and it strikes me
just on the face of it that it may not.
Mr. Mayopoulos, or Mr. Pollard, I would like to hear from
you on this.
Mr. Mayopoulos. I think one of the challenges, Congressman,
is that while there are some potentially different interests
here, the fact is that, if these individuals did things that
violated the law, the company is liable for that whether the
company was a victim or not. That is just the nature of
corporate liability.
But there are potential differences in the defenses here.
Fannie Mae did acknowledge that its accounting was not correct
and it restated its accounting. But the individuals have never
admitted to any improprieties whatsoever. They didn't do that
in the OFHEO special examination, and they didn't make any
admission in connection with the SEC matter. In fact--
Mr. Capuano. So you don't think it is possible to split it
out?
Mr. Mayopoulos. I don't think--the case that has been
brought has been framed by the plaintiffs. The plaintiffs chose
to sue all these defendants together, and that is what we have
been dealing with.
Mr. Capuano. I get it. So you don't think it is worth
trying to split it?
Mr. Mayopoulos. I think it is because there are differences
of interest that all these individual defendants are entitled
to their own legal defense, but I don't think that we on the
defense side can actually split the case up in any way that
will be productive.
Mr. Capuano. Mr. Pollard, do you agree with that? Okay.
Have any of you asked the court if there are any actions
you might be able to take, going forward, relative to securing
your potential liability from these individuals, going to them
and saying to the court, look--actually, Mr. DeMarco, you say
you are going to submit something to the court. I would ask you
to submit this hearing to the court and tell them that we are
concerned about getting this money back if and when this case
is finally determined.
I get that. Maybe they could find a way to allow some sort
of lien or some sort of surety or some other such activity
again that may never be paid. If they are found innocent and
not a problem, we get it. But if they are, I am also concerned
with getting our money back, and maybe the court could help you
find a way to secure that future ability. Do you think that is
a reasonable approach?
Mr. DeMarco. Mr. Capuano, I have already committed that I
will file with the court my statement and that the court will
be made aware of this proceeding here. But in terms of the
particulars, because this is a matter in litigation, it is with
the judge, I am not feeling comfortable with sort of further
expanding in the line of--
Mr. Capuano. All I am asking you to do is to ask the court
if they can help.
Mr. DeMarco. Yes, sir.
Mr. Capuano. That is all I am asking.
Mr. DeMarco. And I have said that we would bring this to
the court's attention, yes.
Mr. Capuano. So you will ask them, in a positive manner, if
you can help you find a way to do that?
Mr. DeMarco. Yes, sir.
Mr. Capuano. Mr. Williams, Mr. Mayopoulos?
Mr. Mayopoulos. Congressman, I would note that the
indemnification contract has a specific provision in it that no
surety or collateral will be required of a party receiving
advancement of legal fees. So to do what you are suggesting,
while I understand why you are suggesting it, seems to have
been anticipated in the contract, and--
Mr. Capuano. I respect that, but--I don't mean to be
disrespectful. Isn't that what courts are, to determine what
the contract actually says? All you have to do is ask. Let them
say no. You might be right, but you might be wrong.
Mr. Mayopoulos. Yes, that is what courts are for, is to
determine where there are differences. With respect, having
looked at this issue, I believe, sir, that this one is pretty
clear.
Mr. Capuano. I respect that, but I guess what I am trying
to say is you guys don't seem to get it. The difference between
this and everything else that has ever happened, this is
taxpayer dollars. This is not Enron. This is not WorldCom. We
are not shareholders. We are taxpayers. And all I am trying to
do is--yes, it is unique. Yes, it is unusual.
What I am asking you to do is get a little aggressive on
behalf of taxpayers even if you lose. There is no dishonor in
losing if you are doing the right thing. But to sit there and
presume that you cannot even try to do the right thing because
you think the answer might be no, that is not an acceptable
answer, not to me, it is not.
Make the fight. If you lose, fine. But what if you are
wrong and you win, and you get a judge who says, ``You know
something? This is a little unusual.'' Take the shot. Taxpayers
deserve it.
Chairman Neugebauer. I thank the gentleman.
Mr. Grimm?
Mr. Grimm. Thank you, Mr. Chairman.
Obviously, there is a lot of passion in the room, and that
is for good reason. Everyone here is frustrated, and I think
you are frustrated as well, because the answer to almost every
question is, we have to play the hand that we are now dealt. So
rather than beat a dead horse, I am going to see--looking for
the future, is there a way that we don't get dealt this hand
again.
So I have two questions for you. First of all, one of the
reasons why I believe we are in this boat that the taxpayers,
quite frankly, are paying for is because the individuals who
are spending this much money on defense have entered into a
settlement whereby they had no admission of guilt. So the first
question is, could we have avoided that by not entering into
that settlement?
And second, who made the decision to go with
conservatorship as opposed to a receivership? And can you
explain what boat we would be in now had we been in a
receivership and not a conservatorship?
Mr. DeMarco. With respect to your first question,
Congressman, the determination to reach a settlement agreement
with the three former officers was something that was--a
decision that was made by the then-director of OFHEO. It was
done based upon the facts and circumstances in which he was
operating at this time. And that was not my decision, but I
believe he had solid grounds for his determination at that
point, but that was done at that time.
With respect to the decision of conservatorship versus
receivership, I believe that that has been described at some
length by the participants who were involved in that decision
at the time. That would be principally Secretary Paulson and
FHFA Director Lockhart about the determination of what form of
intervention the government would take with Fannie Mae and
Freddie Mac being--removing from the market and having their
access to the capital markets rapidly being withdrawn.
The issues there are far broader than the immediate matter
that we are talking about here today regarding certain
litigation. And the determination was that it was necessary
for--the goal was appropriate to provide government support in
using the vehicle of conservatorship because there were grounds
to appoint a conservator, and there was a public policy goal of
assuring that the country maintained a functioning secondary
mortgage market right at the point that the whole U.S.
financial system was teetering on the brink.
And so that was a determination made at that time. I
believe it was the right one, and it was done for reasons that
are far broader and have far more--more far-reaching
implications than the particular matters of litigation that we
are discussing today, sir.
Mr. Grimm. Understood. But it still leaves--one of the
problems that we have here is that, overall, this is the exact
reason why the general public doesn't trust the government and
doesn't believe that we ever have their interest at heart.
What we have here are three individuals that we know have
abdicated their fiduciary responsibilities, at a minimum, and
in doing so caused a tremendous amount of harm to the markets
and to the taxpayers. And because they were able to enter into
a settlement where they didn't have to admit any guilt, the
taxpayer bears the second burden.
That frustration is overwhelming, and I have to believe
there is a better way. And there has to be a mechanism that,
when we look at these types of settlements, and when we decide
whether--and I understand it is a very complicated issue
between conservatorship versus receivership. I understand that.
But when you break it all down and get past all the legal
jargon, I have to believe there is a better way than leaving
the taxpayers constantly holding the bag.
So I leave you with the thought that, when we are entering
into settlements, in this very unique situation where there is
almost unlimited liability for the taxpayers, that has to be
part of the decisions process when entering into these
settlements.
Thank you.
Chairman Neugebauer. The gentleman from Texas, Mr. Canseco.
Mr. Canseco. Thank you, Mr. Chairman.
Let me, first of all, ask you this question. Prudence would
dictate that if you, indeed, represent Fannie and Freddie and
making sure that the mortgage market continues to function when
you took on the conservatorship, that you really represented
the American people. Yet it seems to me that your act in
extending this indemnity, that you were no longer representing
the American people, that you were representing the defendants
in this particular case.
Wouldn't it have been more prudent to allow the defendants
to sue the conservatorship for indemnity than to go ahead and
honor the indemnity agreement that was in place?
Mr. DeMarco. Thank you, Congressman. I am going to ask my
counsel to respond to that question.
Mr. Pollard. Congressman, the difficult decision that you
have posited is one of a lawyer looking at the situation at
hand, which is someone being indemnified, and what would happen
if, in fact, we had repudiated the contract. What would happen
in that situation, my best estimation as a lawyer advising the
agency, was that the defendants would sue us. Our repudiation
of contract is specifically authorized and in HERA in 2008 to
authorize them--anyone to challenge that. Therefore, they could
sue us, as provided by the statute, for which they would be
advanced legal fees.
The predominant court cases that I have looked at is that,
at a time when they were being advanced fees, when there was no
final action, that they would in fact have a chance, and a very
strong chance--understanding what Mr. Capuano has asked us
about taking that chance--that they had a very strong chance of
prevailing and that we could be in extended litigation on this
matter with a set under Delaware law that is very, very strong.
And let me make this point. I think the question--
Mr. Canseco. Understood, but--
Mr. Pollard. --I am just trying to say, advancement of
legal fees is actually accorded even greater strength at times
than indemnification. That is really the challenge.
Mr. DeMarco. But there is an important other concept here
if I may, Congressman, and maybe secondary, but it is
nonetheless critical, and I would call the subcommittee's
attention to it, which is that when we place these companies in
conservatorship and we place the American taxpayer support
behind the operations of Fannie Mae and Freddie Mac in
conservatorship, that support is backing $5.5 trillion worth of
securities that are trading in global financial markets.
We need, in the conservatorships, there to be talented,
capable professionals who continue to operate the day-to-day
operations of these companies, and we needed to replace a
number of senior officers and the entire Boards of Directors of
both companies.
If FHFA was to take an action that would have called into
question the reliability of the government's affirmation of
indemnification to these folks because it saves--and we are
going to back out from it, we would not have been able to
attract and retain the talent that we brought in post-
conservatorship, as well as the existing managers and staff
that were there to do their important job.
These individuals are subject to lawsuits today. They are
subject to a wide array of government investigations. And it is
incumbent on us to provide the standard protections of
indemnification and advancement of legal fees that are
available.
Mr. Canseco. I appreciate your comments on that, but my
time is a little limited here. And my comment on that is you
would have had an opportunity to at least question the size of
the legal fees and the quantity of the legal fees and at least
put into issue the fact that you were doing it under protest
because, after all, your main client is the taxpayers of this
country and not the people that you are indemnifying.
Now let me go off into something else, if I may. Mr.
Williams and Mr. DeMarco, in the timeline leading up to the May
23, 2004, signing of the comprehensive indemnification
agreements with Franklin Raines and Tim Howard and Leanne
Spencer and Fannie Mae, on the 17th of July of 2003, the
Director of OFHEO, Armando Falcon, announced that OFHEO would
conduct a special accounting review of Fannie Mae in testimony
before the Senate Banking Committee. By January of 2004, press
reports and market analysis began to call into question Fannie
Mae's accounting practices.
The indemnification agreements were then signed on May 23rd
of 2004, less than 4 months before the release of OFHEO's first
report on Fannie's noncompliance with accounting rules. The
September 17, 2004, report of findings, the date of the special
examination of Fannie Mae, stated that Fannie's management
culture made noncompliance with accounting rules possible--
``The problems relating to these accounting areas differ in
their specifics, but they have emerged from a culture and
environment that made these problems possible. Characteristics
of this culture included''--and it goes on.
These facts call into question the timing of the signing of
the comprehensive indemnification agreements. To the best of
your knowledge, did Fannie Mae executives request new
indemnification agreements because they feared their accounting
misdeeds would soon be exposed by OFHEO investigation? Do you
know that? Do you have an answer to that?
Mr. Williams. Congressman, yes, let me answer that. The
Board of Directors at the time had undertaken a review of the
indemnification agreements and had decided to re-issue a
standard agreement for all officers. Mr. Raines, Mr. Howard and
Ms. Spencer already had indemnification agreements in place,
Mr. Howard's from 1987, Mr. Raines' from 1991, and Ms. Spencer
from 1993.
Mr. Canseco. So all you did was just renew them in this
short period of time?
Mr. Williams. The Board of Directors--I was not on the
Board at the time, but the Board of Directors wanted to re-
issue standard indemnification agreements. They have been
custom or unique to each individual in one standard agreement.
Mr. Canseco. And it just seems odd that these new
indemnification agreements were signed less than 4 months
before the regulator issued a report blaming senior management
for mismanaging earnings statements, given the questions about
the motivation of Raines et al. to seek new indemnification
agreements. Do you still believe that it is appropriate to
advance fees for these individuals, given their egregious
conduct?
Mr. Williams. Congressman, the agreements have been in
place since 2004, and as both Mr. DeMarco and I have said, we
have to advance the fees under the agreements.
Mr. Canseco. Thank you, sir. My time has expired.
Chairman Neugebauer. I thank the gentleman.
Mr. Garrett?
Mr. Garrett. And I thank you.
I guess I will go to Mr. Williams, and I am going to go
down a totally different road, although it is tangentially
related. It is related to the issue of what we have heard
before with regard to legal fees and the payments and the like.
It goes to the issue of when Fannie purchases loans originated
in names of persons other than a seller, and specifically
taking a look at the situation with various credit unions,
specifically Picatinny Federal Credit Union.
And if you are familiar with this situation, this is where
there is legal action pending, where Picatinny Federal Credit
Union has 52 loans with a total outstanding balance of around
$13 million that were sold to Fannie without Picatinny's
knowledge or authorization. To date, my understanding is Fannie
has not offered Picatinny more than basically in the settlement
discussions, 23 cents on a dollar in settlement, and even that
offer, I understand, had a number of conditions attached to it.
So, I have a couple of questions here on this. First, is
that a meaningful settlement, from your perspective? And
second, can you tell me how much it is costing--or we should
say us, or Fannie--what it is costing to continue with the
settlement negotiations, the investigation, and defending the
claims brought by them and the other credit unions in this
matter? Let me just stop there and go on.
Mr. Williams. Thank you, Congressman. As you know, this was
a fraud that was brought upon both Fannie Mae and the credit
unions, and I would like to ask Mr. Mayopoulos to discuss the
nature of the settlement.
Mr. Garrett. Sure.
Mr. Mayopoulos. Congressman, as Mr. Williams has indicated,
this is a fraud that was perpetrated on both the credit unions
and on Fannie Mae. And basically, the question in the
litigation is, who bears that loss? Is it the credit union that
originally bought the mortgages and sold them to Fannie Mae or
is it Fannie Mae?
There are--my recollection, I don't remember precisely--my
recollection is there are about two dozen credit unions who had
a similar set of issues, all victims of the same fraud. And we
have reached settlements with the vast majority of them. There
are a handful, including Picatinny, with whom we have not
reached settlements. We have sought to do that. And the terms
on which we have sought to reach a settlement with Picatinny
are essentially the same as they are with the other credit
unions, and the vast majority of the credit unions have
accepted that settlement.
Mr. Garrett. Do you have an answer, though--I appreciate
that. Do you have numbers at your fingertips with regard to
what it is actually costing us with regard to defending the
claim, all the investigations and all that that goes on, at
least with regard to this credit union--or all the credit
unions out there?
Mr. Mayopoulos. I am sorry, Congressman, I don't have those
numbers at my fingertips. We can--
Mr. Garrett. You can provide that?
Mr. Mayopoulos. --work--we can get those for you.
Mr. Garrett. That would be great. And also, along the same
lines, I used to be with law firms, and I always thought that
small ones were better than the big guys. I know we were
certainly cheaper than the big guys. The Picatinny has hired
one of those smaller ones, and I think it is connected with--I
should say that. Fannie Mae has retained, I guess, Latham &
Watkins, I guess one of the bigger guys in the entire country.
Can you also--you probably don't have it at your fingertips--
just provide us also at the same time what that is costing us,
the rates and the billing and proceedings on that?
What we are dealing with--and I appreciate you both making
the same comment. You started out with your comment that this
is basically a fraud not just on the GSEs, on Fannie, this is
also a fraud that was against credit unions as well, Picatinny,
right? Yes, I appreciate that, because basically what you have
here is when--I could basically come to Fannie and say I want
to sell some loans to them, and Fannie buys them, and the owner
of them doesn't know a thing about it. That is really what we
are talking about here, correct, and that is where the fraud is
engaged?
Mr. Mayopoulos. Yes. My understanding of the fraud here was
that the person who sold these loans from credit unions to
Fannie Mae appeared to have authority to do that, and the law
firm on the side of the credit unions now say that no, that
person didn't have the authority. So the question is, who bears
that risk?
Mr. Garrett. Right. And so, because I only have 45 seconds
left, what is done, as far as from Fannie's perspective, in
order to see whether that individual maybe in that situation,
that hypothetical, had the authority to do it? You notify the
borrowers at some point in time that Fannie holds these loans
at this point in time, right? So do you also notify the--would
you have also notified the seller, which case would it be the
credit unions at the same time? So what steps are taken to make
sure that they are really the rightful owners, and do you
notify them when they are secured at the same time?
Mr. Mayopoulos. We don't typically notify sellers of loans
that they have sold loans to us. They--in this case, the person
in question actually appeared to have apparent authority to do
that, and in fact, if I recall the facts correctly, had in fact
been authorized to sell some loans on behalf of Picatinny.
So this is a person that Picatinny brought to the
situation, gave authority to to sell at least some loans, and
then apparently this person sold loans beyond what he had
authority to sell.
Mr. Garrett. And one last question, in the hearing, it is
said that--it was understood that you continue to purchase
loans from sellers who the principal owners are subject to
criminal indictment or mortgage fraud, until the fraud has been
judicially determined or discovered to have been committed upon
Fannie Mae. Basically, you will, or have, continued to purchase
loans from people even though they are indicted and there are
fraud allegations against them, even until that is actually
adjudicated in the court. Is that correct?
Mr. Mayopoulos. I am sorry. I am not familiar with that,
Congressman.
Mr. Garrett. Okay. Then that will be one of the other
points you can get back to me on.
Thank you very much. I appreciate the indulgence of the
Chair.
Chairman Neugebauer. I thank the gentleman.
That concludes the questions for our first panel. I think
you can tell by the questions that these members have asked
that we are very concerned about this process and that when you
look at some of the authority of the conservatorship, it in
some ways emulates some of the same authority that FDIC has in
certain actions.
And I think that the question here, while Mr. DeMarco was
not the original conservator, that many of us are concerned
that some decisions were made in the front end of that
conservatorship that, quite honestly, weren't in the best
interest of the taxpayers.
And while I think it is noble of you to defend these
indemnification agreements, I believe that there is compelling
evidence there that it is a little fishy. I think that we had
to redo new contracts in 2004, but I think the other thing is
that, when you look at the reports, that what these folks--what
the entities agreed to in a $400 million fine is no small
admission of wrongdoing.
And so we hope that, moving forward, you will look for ways
to minimize additional exposure for the taxpayers. We hope that
you will review this issue, go back and look at some of the
corporate minutes and make sure that these agreements are on
solid ground and that, if there are things that we can do, then
we would like to look at that action.
I think the other question that was brought up, and that is
was this the right structure, should this have been
receivership rather than conservatorship, because obviously I
think what Congress has in mind when we think about
conservatorship, I think it is about conserving the taxpayers'
investment in these entities.
Anyway, I thank the panel, and this panel is now excused.
We will call up the second panel. I am going to yield to
the gentleman from Ohio, Mr. Renacci, to introduce our second
panel. Thank you.
Mr. Renacci. Thank you, Mr. Chairman.
It is my pleasure to introduce to the subcommittee the
attorney general of the great State of Ohio, Mike DeWine. Mr.
DeWine is a native Ohioan, a former prosecutor, a four-term
member of this chamber, and a two-term United States Senator.
Mike has dedicated his entire career in public service to
speaking out for the most vulnerable in our society, from
children to the elderly to the unborn.
He and his bride of over 43 years, Fran, are the parents of
8 and the grandparents of 13, with the 14th due any day. I have
had the pleasure of knowing Mike DeWine for some time now, and
I know that nothing is more important to him than family. It is
because of his love of family and community that, when he took
the office last month to become Ohio's 50th attorney general,
he swore that he would do everything in his power to seek truth
and justice and to protect Ohio's families.
I am pleased to introduce my friend, Mike DeWine.
Chairman Neugebauer. Thank you. Welcome.

STATEMENT OF THE HONORABLE MIKE DeWINE, ATTORNEY GENERAL OF
OHIO

Mr. DeWine. I am delighted to be here, and I thank you and
the committee for inviting me. I must tell you, after having
spent 20 years on your side of the dais, this is a different
experience for me. But I appreciate the opportunity to be here.
And Mr. Renacci, thank you, Congressman. We are proud that
you are from Ohio, and thank you for that kind introduction.
Mr. Chairman, members of the committee, I am here today
because I represent the lead plaintiffs, the Ohio Public
Employees Retirement System and the State Teachers Retirement
System in a securities fraud class-action filed over 6 years
ago against Fannie Mae, against its former three most senior
officers, and against its auditor. This class-action also
includes nearly 29 million other defrauded investors from each
of the 50 States.
The defense engaged in a massive accounting fraud against
the class to the tune of nearly $9 billion. Our case originally
was filed in November 2004, and continues to this day
unresolved. What is worse is that Fannie Mae and its former
executives, whom Fannie Mae is indemnifying, have been using
taxpayers' dollars to pay for their defense. It is wrong, and
Mr. Chairman, it is unconscionable. And I urge the committee
and Congress to bring this absurdity to an end.
We already know that Fannie Mae cooked its books. We
already know that it smoothed its earnings. We already know
that it violated 30 Generally Accepted Accounting Principles.
And yet Fannie Mae continues to deny liability, dragging out
the current litigation billable hour by billable hour by
billable hour and bleeding Americans so far, by Fannie Mae's
own admission, of at least $132 million for its legal fees
alone. And according to your calculations, Mr. Chairman, the
total cost to taxpayers is much higher.
But Mr. Chairman, I am not here today to use this hearing
as a forum to try to reach a settlement. We are, in fact, quite
anxious for this case to go to trial, and we are ready for that
to happen. But Fannie Mae is doing everything in its power to
stall. It is really easy to impede the resolution of a lawsuit
when you have a bottomless coffer of taxpayers' dollars to pay
your legion of lawyers to engage in delaying tactic after
delaying tactic.
U.S. District Judge Richard Leon, who is the judge in this
case, has done everything in his power to move this case
forward. In fact, I have on this piece of paper several quotes
from the judge indicating his displeasure with Fannie Mae's
tactics. And those quotes are, Mr. Chairman, members of the
committee, in my written testimony that I have submitted for
the record.
To keep things moving, the judge holds regular conferences
to check on the status of the litigation. Where we on our side
typically bring 2 or 3 lawyers, the Fannie Mae defense,
however, even just for short, routine conferences where really
nothing of great substance is discussed, typically--typically--
bring 35 to 40 attorneys and paralegals, costing taxpayers over
$600 per hour for some of these lawyers.
At former Fannie Mae CEO Franklin Raines' April 2010 fact
deposition, we were the only party asking questions, and yet
the Fannie Mae defendants brought 13 lawyers--and we counted
them, Mr. Chairman. We counted them--none of whom asked a
single question, not a single question. They just sat there and
billed the taxpayers for their hours.
We are now conducting, at this stage of the case, expert
depositions where the bill to taxpayers continues to mount. As
the lead plaintiffs, we have the burden of proof, and therefore
we have designated eight experts on our side. Defendant KPMG
has designated five experts. Fannie Mae defendants, however,
have designated 25 experts. And Mr. Chairman, members of the
committee, these experts are not cheap. According to documents
filed with the court, their billable hours are between $600 to
$1,500 per hour.
Franklin Raines has 9 experts just for himself, including 4
to say essentially that he fulfilled his job as CEO by properly
relying on others to tell him what to do, and 2 experts to say
that his $91 million in compensation over 5 years was in fact,
justified.
Now I fully understand an argument could be made, Mr.
Chairman, and members of the committee that Fannie Mae has to
defend itself and its former senior officers. But the amount
they are spending, at the expense of U.S. taxpayers, is
ridiculous. And you would think, Mr. Chairman, that a former
CEO who made over $91 million just might--just might--be able
to afford his own lawyer.
Mr. Chairman and members of the committee, Ohio families
have been wronged. American families are being wronged, and it
is time to just stop this. If I could just add one more thing,
Mr. Chairman, and I know the light is on, the comment was made
in the previous panel about 1,500 pages that we have filed. I
do not apologize for filing 1,500 pages on behalf of 30 million
victims in this country. The 1,500 pages represent not things
that we did, not things that the victims did, but things that
these defendants did.
Let me conclude with a quote from Judge Leon, which tells
you what he thinks about this case and the gravity of this case
when you look at whether 1,500 page is excessive: ``This is a
case of monumental proportions. Indeed, it is a case unique in
the annals of American industry and history and business at the
highest levels. It has been regarded and referred to as the
largest accounting fraud case in the history of the United
States.''
I thank the Chair.
[The prepared statement of Attorney General DeWine can be
found on page 44 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
One of the things that appears to me is that the longer
this goes on, obviously the longer the benefit to these three
individuals, that there is not a lot of incentive out there as
long as you can lawyer up and have all of these hearings and
these depositions, and then you give Freddie and Fannie, and
actually you give the taxpayers the bill for it. Is that your
observation of what is going on here, is that this is really
about, if we just keep churning here, that--
Mr. DeWine. Mr. Chairman, we want this case to be over. We
want to be compensated. Thirty million victims want to be
compensated. What these defendants are doing is lawyering us to
death. They are showing up with dozens of lawyers. They are
drawing this out, and I think Judge Leon said it best, if I
could quote. He commented on the huge expense incurred by
having so many defense lawyers, saying at a June 25, 2009,
hearing that, ``The lawyers are doing pretty well. I am not so
sure the taxpayers are doing pretty well, but the lawyers are
doing pretty well in this deal.''
Chairman Neugebauer. Yes, I think the judge makes a good
point there. I think the lawyers are doing well indeed, looking
at these numbers.
And so, what could be done to begin a process to manage
these fees and make--if they are going to continue this
process, what are things that we could require or request that
the conservator do to lower the cost of this process?
Mr. DeWine. Mr. Chairman and members of the committee, I
think that is an excellent question. I know on this--I am on
this side and you are on that side. Ultimately, you are the
ones who have to make this determination.
But just since you asked, just maybe a comment, FHFA has a
responsibility, it seems to me, to the taxpayers of this
country. They have an obligation to conserve assets. They have
an obligation to be concerned about what tax dollars are going
out.
Even if you concede--and I don't concede this--that there
is an obligation to indemnify Franklin Raines, Mr. Raines, who
made $91 million, and even if we don't think he has the money
to handle this, and we have to put that money up out front, it
still seems that there are ways that FHFA could control this.
How many lawyers do you really need? How many expert witnesses
do you really need?
Now, it is not Judge Leon's job to tell the defense that
they cannot bring more lawyers to the table. The scene, if I
could describe the scene as an amazing scene, you have in Judge
Leon's courtroom at these fairly routine hearings, pretrial
conferences, you have a couple of lawyers for each who are
sitting at the table, and then you can have a whole room full
of the rest of the lawyers who are out there for the defense,
all on billable hours, all not doing anything maybe but
charging for thinking.
So FHFA has an obligation, it seems to me, to bring some
reasonableness to this, some common sense to this, cut down on
the number of lawyers, control the number of expert witnesses.
Even if we believe that all these defendants are entitled to
lawyers, somebody might be entitled to a lawyer, and I guess
they can have as many lawyers as they want, but they are not
entitled to have someone else pay for it.
Chairman Neugebauer. So have you all requested the trial
date?
Mr. DeWine. We don't have a trial date. Judge--
Chairman Neugebauer. But have you requested--have you--
Mr. DeWine. We want to move forward on this as quickly as
we can. We are now in the second phase of the depositions. We
are in the depositions for the expert witnesses. And again, if
I could explain, the problem is, when the other side comes up
with 25 expert witnesses--and Judge Leon described it pretty
well about these expert witnesses. Let me read what he said
about these expert witnesses, because having 25 expert
witnesses who have to be deposed over a period of time slows
the process of the case.
At a June 14, 2010, hearing, Judge Leon said there is
absolutely no way that so many experts will ultimately
testify--actually testify--at court, admonishing Fannie Mae
defendants, ``So you don't need to have five experts say the
same damned thing. If one good one says it the right way, from
your perspective, that is going to be more than enough. You
don't need five to say it. It is not a me-too operation. So
bear that in mind. Bear that in mind.'' The costs are just
staggering.
Chairman Neugebauer. Mr. Capuano?
Mr. Capuano. Thank you, Mr. Chairman.
Mr. Chairman, I don't really have any questions for the
attorney general. I get exactly what you are saying. You have
been very clear. I don't disagree with what your parameters
are. I am not exactly sure what we can do about it. I
understand what you are saying, and that is why to some extent,
as one of my colleagues said earlier, we are trying to play the
cards we are dealt as of today and trying to move forward.
But I appreciate the points you raised. I agree with pretty
much everything you have said. I am not exactly sure how we
could accomplish what we want to accomplish, and I would be
happy to hear later on at another time maybe some other ideas
on how we might be able to do it.
At the same time, I also want to thank you for pursuing
this matter as vigorously as you have, and wish you the best of
luck as you go forward, because it will be important to get
this thing settled, and it will be important to get these
things answered and to get this issue behind us so that we can
address the other issues related to Fannie Mae and Freddie Mac.
Thank you.
Mr. DeWine. Thank you very much, Congressman.
Chairman Neugebauer. Mr. Fitzpatrick?
Mr. Fitzpatrick. Thank you, Mr. Chairman.
Attorney General DeWine, thank you for your time. I know
that all of us here appreciate the fact that you are working
hard to protect your constituents, the taxpayers of Ohio.
In the previous panel, Mr. Renacci of Ohio asked a great
question to the witnesses. It had to do with the reasonableness
of the attorney's fees. And the underlying assumption of his
question was that reasonableness many times is in the eye of
the beholder, as he said, or really the capacity of the payer
to pay. And I guess my question is, if the Fannie Mae
defendants, perhaps using Mr. Franklin Raines as an example, if
they had to pay even a portion of the attorneys and the
attorney's fees that were being paid on his behalf, do you
think it would have had an impact on the number of attorneys
who filled the courtroom the day that you described?
Mr. DeWine. Congressman, thank you for the question. Mr.
Raines does, we assume, have a lot of resources, and I suppose
if he wanted to fill the courtroom full of lawyers to be
concerned and pay a lot of people to be thinking at the same
time about his problem, he could do that. I am not sure any
reasonable person would do that. I am not sure any defendant
who has to reach into his own pocket, frankly, no matter how
much money he or she might have, would have duplitive lawyers
there at a fairly routine matter.
Congressman, it is one thing to go to trial and make sure
you have enough lawyers there because you are going at it, and
hard at it. It is something else, it seems to me, for a routine
conference with the judge where there aren't huge matters to be
thought out or be worried about. So I think the answer clearly
is obvious, and that is no person in their right mind shows up
with that many lawyers if they are paying for it themselves.
Mr. Fitzpatrick. And so, in this particular case, in your
case, in the litigations that have been brought in Ohio, the
taxpayers of Ohio are paying legal fees on both sides, I
assume.
Mr. DeWine. That is right, and I think we don't want to
forget the fact that each one of you represents some of these
victims. We have 50 States that are represented, 30 million
pensioners. These are mostly pension. It is interesting. Fannie
Mae--I asked our lawyers who are working on this, why in the
world are there so many pensioners? Why in the world so many
pension systems? And the answer was, Fannie Mae marketed this
as--and went for these pension systems and said, look, this is
a very, very conservative investment.
So you have pensioners, 30 million of them, who through
their representatives relied on this misrepresentation, first
of all that it was a conservative investment, and second, they
relied on the fact that they were getting facts about the
condition of Fannie Mae. And that is one thing that is so
ironic about this whole discussion in the previous panel, Mr.
Chairman. There is no dispute about the facts. They have not,
as I understand it, admitted liability, but we have had two
regulators who have looked at this who have come to the same
conclusion.
Fannie Mae settled with both of them, and in one even said
we will not dispute in any way--we won't admit anything, but we
will not dispute the factual determinations that we are
agreeing to. So there is no dispute about what really happened
here or that these are bad actors who did bad things.
Mr. Fitzpatrick. Thank you, Attorney General DeWine.
I yield back.
Chairman Neugebauer. Thank you.
Mr. Renacci?
Mr. Renacci. Thank you, Mr. Chairman.
Mr. DeWine, you are representing 30 million pensioners in
your case here. Can you tell me what your costs are
approximately?
Mr. DeWine. This case--and I am, by the way, Congressman,
the fourth attorney general in Ohio to handle this case, or to
oversee this case. We remained as the lead plaintiff because we
had more pensioners. We had more at stake. Our costs are on a
contingent basis. So if we win, the lawyers who are
representing us, who my predecessors retained, they will get a
certain percentage based on a contract.
But what is so aggravating is that, each day that goes on,
we have a pension system in Ohio and pension systems in other
States that are out this money. And you know, Congressman, the
problems we are having, or the challenges we are having with
the change in the market in the last few years, the down market
with our pension system in the State of Ohio, and you know what
that means. And we can only assume that most States who
invested in Fannie Mae have a similar problem.
So this is not like the days when everything was going up
and you could have a loss like this, and it would maybe not be
good, but it wouldn't be as devastating. This is very tough for
Ohio. It is tough for our pension system and the people who
rely on it, the teachers, the firemen, and other public
employees.
Mr. Renacci. Sure. What I was trying to get to was your
actual costs in comparison to the number of people you are
representing.
Mr. DeWine. I think a good way to look at it is, when we
show up with 2 and they show up with 15, I think that is a
pretty good indication. We try to do things in a reasonable
way, and you do what you have to do in litigation. This is
important litigation. No one thinks that you should not have
lawyers. No one thinks that you shouldn't have two, whatever it
takes.
But there comes a point, anybody who has tried civil
litigation, as I know members of this committee have, that you
just reach the point of absurdity, and we have reached that
point today.
Mr. Renacci. Sure. All right. Again, I would assume that
your cost per person is a lot less than the cost--
Mr. DeWine. It is going to be a lot less, much, much, much
less. It is going to be a fraction of what their cost is. It
simply has to be just based on numbers. And that is not even
getting into the question of how much they are paid per hour.
It is just a number of how many there are.
The same way with the expert witnesses. We are now--we bled
so much. Taxpayers are bled. What this hearing--it seems to me,
at least what my testimony, Mr. Chairman, at least in part is
about is stop the bleeding.
We are headed into an era, or a period of time where we are
going to have a lot more bleeding with 25 expert witnesses that
Judge Leon has already said he is not going to let 25 in, but
he is not going to stop people from taking depositions and not
stop them from putting 4 of these people as potential
witnesses. And each one is getting paid, according to documents
filed with the court, $600 to $1,500 an hour.
So the lawyers are getting a lot, but these experts are
getting a lot more.
Mr. Renacci. Thank you. I yield back.
Chairman Neugebauer. I thank the gentleman.
Mr. Canseco?
Mr. Canseco. Thank you, Mr. Chairman.
And thank you, Attorney General DeWine, for being here
today, and thank you for taking a leadership role in
representing the people of Ohio and also the people of the
United States in this very important issue.
Let me ask you a technical question, because I am just
appalled at this very outrageous and egregious amount of
attorneys' fees. I have been a lawyer for 35 years and never in
my life, not even in the tobacco cases, have I seen legal fees
amount to such amounts.
Is there any way that you can challenge the necessity for
so many witnesses, so many expert witnesses, so many attorneys
coming in and limit the number of attorneys who go in there,
and also find standing to challenge the fees that are being
charged?
Mr. DeWine. Congressman, I think that is certainly a good
question. I guess my answer would be that is not something that
normally counsel for one side does. I think that only goes back
to FHFA, their oversight responsibility. I think they have some
obligation, even if they believe that indemnification is
correct, even if they believe there is no choice in this
matter, which I disagree with, they have responsibility to
taxpayers to limit this.
And to put it back on the judge and to say that, as the
previous panel did and to say this is something, ``Well, gee,
Judge Leon should do this,'' he has commented on it. He has
made a point about it. He said that he is not going to let, for
example, that many expert witnesses testify in court because he
is--this is a case that will go on for a long, long time, and
he has every obligation to try to make it an efficient use of
time.
But as far as a judge looking up or us looking up and
trying to stop them from bringing in a whole bunch of lawyers,
I don't think--I don't know what your experience has been, but
at least in my experience in a practice, that is just normally
not done.
I am doing today what I think I need to do, and that is
talk about this issue, raise this issue, and say at least, in
my opinion, FHFA has an obligation. They have an obligation to
do something about this.
Mr. Canseco. Thank you.
Mr. DeWine. Thank you.
Chairman Neugebauer. Thank you, Congressman.
Mr. Canseco. I yield back my time.
Chairman Neugebauer. Attorney General DeWine, thank you
very much for coming today and for your testimony.
The Chair notes that some members may have additional
questions for today's witnesses, which they may wish to submit
in writing. Without objection, the hearing record will remain
open for 30 days for members to submit written questions to
these witnesses and to place their responses in the record.
If there is no other business before the committee, we are
adjourned.
[Whereupon, at 4:24 p.m., the hearing was adjourned.]

A P P E N D I X

February 15, 2011

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