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

                      LEGAL EXPENSES OF FANNIE MAE
                            AND FREDDIE MAC



                               BEFORE THE

                            SUBCOMMITTEE ON

                                 OF THE


                     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

64-553                    WASHINGTON : 2011
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                   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
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
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
    Pennsylvania                     ED PERLMUTTER, Colorado
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
ROBERT J. DOLD, Illinois

                   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

                            C O N T E N T S

Hearing held on:
    February 15, 2011............................................     1
    February 15, 2011............................................    37

                       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


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 
    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 
    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.


    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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.


    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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. 
    Mr. Fitzpatrick. Thank you, Mr. Chairman, for calling this 
    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 
    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 
    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 
    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 
    Chairman Neugebauer. I thank the gentleman for his 
    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 
    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. 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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, 
    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 
    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.


    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, 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    Mr. Renacci. Sure. What I was trying to get to was your 
actual costs in comparison to the number of people you are 
    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 
    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 
    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 
    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 
    [Whereupon, at 4:24 p.m., the hearing was adjourned.]

                            A P P E N D I X

                           February 15, 2011