Matt Stoller: Taxpayers Paying to Defend ex-Fannie, Freddie Executives from SEC

By Matt Stoller, the former Senior Policy Advisor to Rep. Alan Grayson and a fellow at the Roosevelt Institute. You can reach him at stoller (at) or follow him on Twitter at @matthewstoller.

Last Friday, the SEC announced it was suing six top executives at Fannie Mae and Freddie Mac for misleading investors. Though the SEC can only sue on civil fraud charges, the announcement was greeted with fanfare, since it does relate directly to the housing bubble.

I noticed a tidbit in the FT that I think is more significant than commonly understood: “Fannie and Freddie are paying the legal fees of the former executives, officials said.”  To be clear, it’s not Fannie and Freddie putting out these fees, it’s the taxpayer that owns and continually pumps capital into these companies.

The Federal Housing Finance Agency, led by acting Director Ed Demarco, made the choice to pay the legal fees for these executives facing the SEC. In effect, one government agency is putting forward resources to sue six individuals defended by the resources of another government agency.

And how much will this cost? Before this SEC suit, executives at Fannie and Freddie had other lawsuits against them. When I worked for Rep. Grayson in 2009, he asked, and found out that the taxpayer had already shelled out millions. Rep. Randy Neugebauer updated the costs in 2011, and found that it had cost something on the order of $100 million for pre and post bailout costs reimbursed to executives at Freddie and Fannie.

What I heard about these suits is that because legal fees were paid by the taxpayer, Frank Raines and his cohort were deposing “everyone in town”. And why wouldn’t they? Cost was no object. You can expect something similar with this suit with the SEC. The FHFA is ensuring that these six executives will have an unlimited budget to fight the SEC.

This is yet another example of executive compensation packages creating perverse socially destructive behavior, with the twist that this is explicitly done in collusion with a government agency.  First of all, covering the legal liabilities of executives at corporations for misbehavior is a problematic risk shift.  Second, when this happens at a bailed out company and the cost is actually borne by the taxpayer, it is an indication that regulators do not think it is problematic to encourage such irresponsible misbehavior.  As we’ll see, the head of the Federal Housing Finance Agency seems to simply think that this is how business is done.

Does the taxpayer have to write a blank check to these former executives to defend them against an SEC suit?  Of course not – paying for these legal fees is simply a policy choice by FHFA Acting Chief Ed Demarco. The FHFA could have repudiated these obligations when it took the GSEs into conservatorship. FHFA officials claimed argued that canceling employment contracts would be unconstitutional and that doing so might make it difficult to attract skilled individuals to the company. I found this baffling, since the Housing and Economic Recovery Act of 2008 authorizing the conservatorship allowed the the FHFA to repudiate claims. There is the possibility Fannie and Freddie could be sued by former executives for these legal fees. It’s not clear they would win, and in the meantime, these former executives would have to pay out of pocket to defend themselves.

There’s a consistent pattern at work at the FHFA. In November, we learned that the executives at Fannie/Freddie were paid a total of $12 million in performance bonuses for 2010, which Demarco again justified as necessary for getting employees with the requisite skills.

This is nonsense. Treasury is stuffed with so-called “dollar a year” men. People will do public service at reasonable salaries, if they believe it is public service. Of course, now that the FHFA has committed to paying the legal fees of the executives that destroyed Fannie and Freddie and cost us hundreds of billions of dollars, we can see that paying for talent is not what was actually going on.

I believe Demarco, unlike many regulators in Washington, has integrity, and executes according to what he perceives of as his legal mandate. But I really don’t understand the thinking here. He overpays GSE chiefs, and unnecessarily fronts money to former GSE executives that may now actually be held accountable for misleading investors.

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About Matt Stoller

From 2011-2012, Matt was a fellow at the Roosevelt Institute. He contributed to Politico, Alternet, Salon, The Nation and Reuters, focusing on the intersection of foreclosures, the financial system, and political corruption. In 2012, he starred in “Brand X with Russell Brand” on the FX network, and was a writer and consultant for the show. He has also produced for MSNBC’s The Dylan Ratigan Show. From 2009-2010, he worked as Senior Policy Advisor for Congressman Alan Grayson. You can follow him on Twitter at @matthewstoller.


  1. Middle Seaman

    This is the common practice of the government. The outrage in the charges against the Fannies are in the fact that the bankester were not, so far and probably never, the target for the SEC. They throw us fake raw meat to appease us.

    The SEC should have started with Citibank and JPMorgan and then went on to the Fannies.

  2. readerOfTeaLeaves

    Jeebuz. Next we’ll see something about a government agency underwriting Corzine’s defense.

    So much for the ‘trust’ in government thingy.

  3. Jack M.Hoff

    Matt, whats your reasoning for thinking this Demarco fellow has any integrity? His actions prove otherwise. He obviously gives a shit less about anybody but who’s in the ‘club’.

    1. H. Alexander Ivey

      I’m afraid I agree with Jack. Integrity is not just the heart, it’s in the actions. Obama is an example of all talk without any meaning in the words he speaks.

    2. LucyLulu

      DeMarco has been acting as the conservator of the GSE’s since the government took a majority interest in them. As such he has seen his job as being to recoup as much as possible of the US government/taxpayer’s investment. That has been his rationale for pushing putbacks on the banks, filing the lawsuits against most of the large banks on reps and warranties issues, and refusing to consider principal writedowns (which WOULD result in losses to Fannie/Freddie). Until the recent state AG investigations and suits, he has been the only one to take on the big banks, which he started investigating about a year and a half ago. During the course of that investigation he issued subpeonas for documents, got depositions, and did on-site auditing of the banks. While his focus has been arguably narrow at times, and with a lack of support from the current administration, he has been totally consistent in his actions of doggedly pursuing the best financial interests of Fannie and Freddie.

      So, in terms of protecting the taxpayer, as defined by his job description, I agree with Matt. He has been a rarity in the foreclosure mess by being the epitome of ethical.

  4. Jonathan Dean

    This feels like small potatoes to me. It’s poor behavior, but too many of these quasi-shrill “rage bait” articles and the overall thrust of NC risks losing some credibility IMO. Regards, Jonathan.

    1. Matt Stoller

      It’s pivotal money, much as the million dollar bonus encourages the billion dollar risk. This is removing risk from executives who do bad.

  5. LucyLulu

    When I first read about the suits I had wondered who would be footing the costs. Next question is who will pay any fines if they are imposed? The executives or the taxpayers?

    1. psychohistorian

      Maybe we will be faced with the conundrum of some prosecution defense supported by us taxpayers that results in jail time.

      Which of us lucky taxpayers gets to go to jail for one of these puppets perfidy?

      This sick arrangement gives new life and meaning to the non-word oxymoronic.

  6. EricJ

    “…the executives at Fannie/Freddie were paid a total of $12 million in performance bonuses for 2010, which Demarco again justified as necessary for getting employees with the requisite skills.”

    After reading today’s Mirowski piece, the above argument seems an exquisite example of cognitive dissonance.

  7. Tom

    If legal costs such as these are part of executive compensation, then it seems like they should be considered taxable income. Clearly these folks are receiving an economic benefit from having their old companies cover the legal fees for their acts. This seems no different from a host of other “economic benefits” that the IRS treats as taxable income, even if no actual cash is received. For instance, canceled debt or an employer paid gym or fitness program can be considered income for the employee.

    Perhaps Franklin Raines and the others would be a little more frugal with their legal expenses if the fees spent taking dozens of useless depositions had an adverse tax impact on them.
    Of course, while the IRS can be very efficient tracking down this sort of income for ordinary citizens, the odds of them pursuing this angle are slimmer (and the subsequent tax challenge by Raines, Mudd et al would probably also be covered by the taxpayers).

  8. Pat

    “Does the taxpayer have to write a blank check to these former executives to defend them against an SEC suit? Of course not – paying for these legal fees is simply a policy choice by FHFA Acting Chief Ed Demarco.”

    I wouldn’t be so sure about that. It is very very common, perhaps almost universal, for companies to indemnify officers and directors in case they get sued, in other words, to cover their legal costs. Normally this promise comes in the form of an indemnification clause in the employment contract. So a company must pay according to the clause, unless it wants to break the contract. A company or trustee or conservator cannot simply waive that clause.

    Personally, I think these indemnification clauses are unconscionable. What should happen is that some brave judge should nullify indemnification clauses, as being void as a matter of public policy. And then some other judges and maybe Congress would follow. This will not happen until public interest groups start filing amicus briefs in cases where the issue comes up.

    Until that happens, you will continue to this grotesque practice continue.

  9. Ransome

    The government has unlimited resources, what is the other party to do? When I worked as a lowly contractor, I had an indemnity clause because when lawyers get involved everybody gets sued. I not so sure Mudd is guilty as charged. He was brought in after a scandal. It is not clear what risk he did not expose. The 2008 2 quarter report (Freddie?) had a pretty through analysis of what types of mortgages were held. You would do your own risk assessment. Of course there were the persons at the AEI that created their own risk profiles, lumping certain types of mortgages as sub-prime. Remember it is their contention that F&F caused the whole crisis and the banks were grocers delivering products people were requesting. You have two different opinions that were essentially after the fact. F&F did not send out auditors to check the quality of individual mortgages as that is the responsibility of the originators.

    As far as sub-prime, I thought it referred to a person’s credit score and it limited their eligibility of mortgage choices. The question is, which was more important, the credit score or the mortgage structure and who could predict back then. As far as no doc loans, I can’t see anyone demanding no doc loans yet they appeared. I’m neutral on this issue.

  10. Nathanael

    I think that these executives should get the same publicly funded defense that your average indigent person gets from a public defender.

    That is all.

Comments are closed.