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+
+ - AN ANALYSIS OF THE POST-CONSERVATORSHIP LEGAL EXPENSES OF FANNIE MAE AND FREDDIE MAC
+
+[House Hearing, 112 Congress]
+[From the U.S. Government Publishing Office]
+
+
+
+
+
+ AN ANALYSIS OF THE POST-CONSERVATORSHIP
+ LEGAL EXPENSES OF FANNIE MAE
+ AND FREDDIE MAC
+
+=======================================================================
+
+ HEARING
+
+ BEFORE THE
+
+ SUBCOMMITTEE ON
+ OVERSIGHT AND INVESTIGATIONS
+
+ OF THE
+
+ COMMITTEE ON FINANCIAL SERVICES
+
+ U.S. HOUSE OF REPRESENTATIVES
+
+ ONE HUNDRED TWELFTH CONGRESS
+
+ FIRST SESSION
+
+ __________
+
+ FEBRUARY 15, 2011
+
+ __________
+
+ Printed for the use of the Committee on Financial Services
+
+ Serial No. 112-4
+
+
+
+
+ U.S. GOVERNMENT PRINTING OFFICE
+64-553 WASHINGTON : 2011
+-----------------------------------------------------------------------
+For sale by the Superintendent of Documents, U.S. Government Printing Office,
+http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, [email protected].
+
+ HOUSE COMMITTEE ON FINANCIAL SERVICES
+
+ SPENCER BACHUS, Alabama, Chairman
+
+JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
+ Chairman Ranking Member
+PETER T. KING, New York MAXINE WATERS, California
+EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
+FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
+RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
+DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
+WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
+JUDY BIGGERT, Illinois BRAD SHERMAN, California
+GARY G. MILLER, California GREGORY W. MEEKS, New York
+SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
+SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
+RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
+PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
+JOHN CAMPBELL, California JOE BACA, California
+MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
+KENNY MARCHANT, Texas BRAD MILLER, North Carolina
+THADDEUS G. McCOTTER, Michigan DAVID SCOTT, Georgia
+KEVIN McCARTHY, California AL GREEN, Texas
+STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
+BILL POSEY, Florida GWEN MOORE, Wisconsin
+MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
+ Pennsylvania ED PERLMUTTER, Colorado
+LYNN A. WESTMORELAND, Georgia JOE DONNELLY, Indiana
+BLAINE LUETKEMEYER, Missouri ANDRE CARSON, Indiana
+BILL HUIZENGA, Michigan JAMES A. HIMES, Connecticut
+SEAN P. DUFFY, Wisconsin GARY C. PETERS, Michigan
+NAN A. S. HAYWORTH, New York JOHN C. CARNEY, Jr., Delaware
+JAMES B. RENACCI, Ohio
+ROBERT HURT, Virginia
+ROBERT J. DOLD, Illinois
+DAVID SCHWEIKERT, Arizona
+MICHAEL G. GRIMM, New York
+FRANCISCO ``QUICO'' CANSECO, Texas
+STEVE STIVERS, Ohio
+
+ Larry C. Lavender, Chief of Staff
+ Subcommittee on Oversight and Investigations
+
+ RANDY NEUGEBAUER, Texas, Chairman
+
+MICHAEL G. FITZPATRICK, MICHAEL E. CAPUANO, Massachusetts,
+ Pennsylvania, Vice Chairman Ranking Member
+PETER T. KING, New York STEPHEN F. LYNCH, Massachusetts
+MICHELE BACHMANN, Minnesota MAXINE WATERS, California
+STEVAN PEARCE, New Mexico JOE BACA, California
+BILL POSEY, Florida BRAD MILLER, North Carolina
+NAN A. S. HAYWORTH, New York KEITH ELLISON, Minnesota
+JAMES B. RENACCI, Ohio JAMES A. HIMES, Connecticut
+MICHAEL G. GRIMM, New York JOHN C. CARNEY, Jr., Delaware
+FRANCISCO ``QUICO'' CANSECO, Texas
+
+
+ C O N T E N T S
+
+ ----------
+ Page
+Hearing held on:
+ February 15, 2011............................................ 1
+Appendix:
+ February 15, 2011............................................ 37
+
+ WITNESSES
+ Tuesday, February 9, 2011
+
+DeMarco, Edward J., Acting Director, Federal Housing Finance
+ Agency, accompanied by Alfred Pollard, General Counsel, Federal
+ Housing Finance Agency (FHFA).................................. 5
+DeWine, Hon. Mike, Attorney General of Ohio...................... 29
+Williams, Michael J., President and Chief Executive Officer,
+ Federal National Mortgage Association, accompanied by Timothy
+ J. Mayopoulos, General Counsel, Federal National Mortgage
+ Association (Fannie Mae)....................................... 6
+
+ APPENDIX
+
+Prepared statements:
+ Canseco, Hon. Francisco...................................... 38
+ DeMarco, Edward J............................................ 39
+ DeWine, Hon. Mike............................................ 44
+ Williams, Michael J.......................................... 48
+
+
+ AN ANALYSIS OF THE POST-
+ CONSERVATORSHIP LEGAL
+ EXPENSES OF FANNIE MAE
+ AND FREDDIE MAC
+
+ ----------
+
+
+ Tuesday, February 15, 2011
+
+ U.S. House of Representatives,
+ Subcommittee on Oversight
+ and Investigations,
+ Committee on Financial Services,
+ Washington, D.C.
+ The subcommittee met, pursuant to notice, at 2:23 p.m., in
+room 2128, Rayburn House Office Building, Hon. Randy Neugebauer
+[chairman of the subcommittee] presiding.
+ Members present: Representatives Neugebauer, Fitzpatrick,
+Bachmann, Pearce, Posey, Hayworth, Renacci, Grimm, Canseco;
+Capuano, Lynch, Baca, and Miller of North Carolina.
+ Also present: Representative Garrett.
+ Chairman Neugebauer. This hearing will come to order. I
+want to thank everyone for being here. We have a lot going on;
+we had a vote, and we have some members who are in a meeting,
+and hopefully they will be able to join us very soon.
+ This hearing will come to order. And without objection, all
+members' opening statements will be made a part of the record.
+ Let me start off by saying this is the first meeting of the
+Oversight and Investigations Subcommittee of the Committee on
+Financial Services, and I am delighted to be serving with my
+good friend, Mr. Capuano, and we have actually had a meeting,
+and we think that overseeing the agencies and the
+responsibility of making sure that the American people--
+taxpayers' money is being well spent, and that rules and
+regulations are being implemented in an appropriate way are
+important. And I look forward to working in a very bipartisan
+way to make sure that this is a productive committee.
+ We will start off by having our opening statements. I will
+open with my statement, and then the ranking member with his.
+ Since September 7, 2008, the U.S. taxpayers have sunk $153
+billion into Fannie Mae and Freddie Mac. And according to the
+Federal Housing Finance Agency, the final tab could be as high
+as $363 billion.
+ As if the news couldn't get any worse for the American
+people, an investigation undertaken by this subcommittee has
+discovered that the taxpayers have spent more than $162 million
+defending Freddie and Fannie and their former top executives in
+civil lawsuits accusing them of fraud. This includes over tens
+of millions of dollars for former executives who knowingly and
+purposely manipulated earnings to increase their own
+compensation and whose actions directly contributed to the
+demise of the GSEs.
+ The history of Fannie Mae under the management of Franklin
+Raines, Timothy Howard, and Leanne Spencer is a story of
+abusing their positions to use assets of the Enterprises to
+further their own interests and careers. The abuse by these
+individuals was so far-ranging that Fannie and Freddie were
+forced to restate earnings by over $10 billion, which was
+followed by a $400 million settlement with the SEC and OFHEO,
+and losses of tens of billion dollars in market capitalization
+for Fannie's shareholders.
+ Unfortunately today, years after they were forced out of
+the company, these misdeeds of Franklin Raines and his
+management team have continued their abuse. This time, however,
+it is against the U.S. taxpayers. As a result of my inquiries,
+I have discovered that taxpayers have advanced $24.2 million in
+legal expenses against civil lawsuits accusing them of
+securities fraud.
+ These three individuals, who collectively earned $150
+million in total compensation from 1998 to 2003, are not just
+assured of indemnification, but are actually being advanced
+funds, which means that they have no expenses and are just
+running up the tab for the U.S. taxpayers. Moreover, their
+attorneys have every incentive to keep the case going for as
+long as possible to maximize their fees, which already are in
+the tens of millions of dollars.
+ One case in particular has been ongoing since 2004 and has
+included over 120 fact depositions, various expert depositions,
+and millions of discovery documents. Unfortunately, the end is
+nowhere in sight. This open-ended taxpayer commitment was
+approved by the FHFA, the very entity that has an obligation to
+conserve the assets of the GSEs in such a way as to minimize
+taxpayers' exposure. It was approved even though Fannie Mae
+bylaws clearly state that the indemnification shall not apply
+to directors and officers who breach their duty of loyalty to
+shareholders or engage in intentional misconduct, two measures
+that Franklin Raines and his management team clearly violated.
+ It is also worth noting that under section 4617 of the
+Housing and Economic Recovery Act, or HERA, the FHFA has the
+power to repudiate the indemnification agreements for these
+individuals. With all of that being said, even if the FHFA
+still feels obligated to advance legal expenses for Mr. Raines,
+Mr. Howard, and Ms. Spencer, the contracts state that they are
+entitled to the advancement of reasonable legal fees, and I
+think many of--all of my colleagues can agree that many of
+these fees are not reasonable, given the mounting taxpayer
+exposure.
+ The delay tactic of the defendants and the fact that many
+of these security-related lawsuits have no end in sight, one
+thing I feel very strongly about is that this subcommittee
+needs to do everything it can to minimize further taxpayer
+exposure associated with Fannie Mae and Freddie Mac. I would
+like to work with Mr. DeMarco and the FHFA to make sure that
+they are equipped with all the tools necessary to accomplish
+this objective.
+ In closing, I would like to state that this particular
+topic has raised many more questions about continuing
+operations of GSEs and, accordingly, this will more than likely
+not be the last of many hearings to happen in the future. Along
+these lines, I am also looking forward to working with Chairman
+Bachus and Chairman Garrett to take a serious look at whether
+conservatorship of the GSEs is the best structure to protect
+the U.S. taxpayers.
+ And with that, I would yield to the gentleman from
+Massachusetts, Ranking Member Capuano.
+ Mr. Capuano. Thank you, Mr. Chairman. I look forward to
+working with you, as well. As you stated, we had a meeting that
+was very productive and very cooperative, and I think it is
+going to be actually a great term to be able to work together.
+There are a lot of questions that we both have about a lot of
+different things that have gone on in the financial services
+world. This is one of many.
+ I, for one, really want to hear today about industry
+standards and whether this situation mirrors industry
+standards, and if not, why not, and what are we going to do
+about it? And even if it does, I think we have serious
+questions of what to do, going forward. To me, those are the
+biggest questions. I have some understanding of what happens in
+the private industry world and how it works, but I want to make
+sure that has been the situation.
+ And my hope is that the panelists here today address that
+issue more than anything else. I am not here on a witch hunt
+for anything or anybody, but at the same time, this is a huge
+amount of money. On its face, it appears to be unreasonable,
+but again, I will listen to others if they disagree, and if so,
+why. And I think that, more than anything else, this hearing is
+a very good hearing to ask serious questions on an important
+issue.
+ And with that, I yield back the balance of my time.
+ Chairman Neugebauer. Thank you. I will now yield 2 minutes
+to the gentleman from New York, Mr. Grimm.
+ Mr. Grimm. Mr. Chairman, I am going to yield right now. I
+am waiting for my--I have a couple of questions that I just
+wrote right before I came in that are being printed up for me.
+ Chairman Neugebauer. Okay, thank you. Does any other member
+on this side want to make an opening statement? Mr. Miller?
+ Mr. Baca. I am Mr. Baca. Excuse me. Thank you very much,
+Mr. Chairman and Mr. Ranking Member, for calling this hearing
+today. I also want to thank the witnesses for sharing
+substantive understanding regarding Freddie Mac and Fannie Mae,
+as well as the legal expenses incurred.
+ This hearing is important to the American taxpayers. It is
+important for us to understand the complexity of the problem
+caused by the fall of the housing market.
+ So much damage was caused by allowing an industry to take
+advantage of our families, and I state, ``take advantage of our
+families'' who only wanted to have the American dream, and that
+is to own a home. They wanted to own their own homes, and now
+some are homeless. Others are forced to endure the nightmare of
+foreclosure, and in my district, we have one of the highest
+foreclosures in the Nation, so I am very much concerned.
+ Sadly, there are even more Americans who own a home that is
+not worth the financial obligations they legally were bound to
+pay because of the housing crisis that caused the market to
+fall. And this is very depressing, when many of the individuals
+who ended up buying their homes ended up paying outrageous
+prices, and it is not even worth it at this point.
+ Today, we will hear about the legal fees, another example
+of a financial loss caused by allowing an industry to go
+unregulated or, simply stated, they got greedy. Today, we will
+learn that these legal fees are an additional ramification
+caused by the Bush Administration's failure to monitor and
+control the housing industry. So let us put it where it
+started, not where it was the last 2 years, but where it
+started, with no oversight and no transparency.
+ Again, I want to thank the chairman and the ranking member
+for their leadership on this issue. I look forward to hearing
+from my colleagues and the witnesses on the issues at hand. I
+yield back the balance of my time.
+ Chairman Neugebauer. The Chair recognizes Mr. Miller.
+ Mr. Miller of North Carolina. Thank you, Mr. Chairman.
+ The financial crisis is now well into the litigation stage
+where everybody is suing everybody for everything. According to
+published reports, Chase is involved in litigation as a
+plaintiff against--as a securitizer of mortgage-backed
+securities suing the lenders who made the mortgages in the
+first place, saying the mortgages fail to meet the contractual
+requirements and are defendants in other litigation against the
+people who bought the mortgage-backed securities, saying that
+the mortgages are perfectly fine, the very same mortgages.
+ So we will--I think we can expect more of that, and this is
+probably the period in this crisis that we learn more from the
+litigation than we learn from the Financial Crisis Inquiry
+Commission, SIGTARP, or the Congressional Oversight Panel, from
+well-motivated lawyers going after their claims.
+ And this is also the period in which the taxpayers'
+exposure for ultimate loss for Fannie and Freddie is really
+going to be determined. It is going to be very easy to hide
+behind the lawyers and provide further subsidies, back-door
+subsidies, to an industry that has already gotten too many
+subsidies by failing to vigorously pursue claims that Fannie
+and Freddie have or by giving in too easily where Fannie and
+Freddie are the defendant.
+ Now, it is not that easy for lawyers to conduct litigation
+while providing a continuous play-by-play commentary of the
+facts and the law and of every strategic decision. But it is
+very entirely appropriate for the taxpayers, and for us as a
+Congress, to expect that there will ultimately be some
+openness, some transparency about how the litigation was
+conducted, litigation that will really determine how much the
+taxpayers are going to lose from Fannie and Freddie.
+ So whether I ultimately agree that Fannie and Freddie
+have--or that FHFA has handled this litigation appropriately or
+not, I do welcome the oversight into litigation in which Fannie
+and Freddie are parties. It is the least that we should do.
+ Chairman Neugebauer. Thank you. If there are no other
+opening statements, then we will hear from our panelists.
+First, we will hear from Mr. Edward DeMarco. He is the Acting
+Director of the Federal Housing Finance Agency, and I believe
+you have with you Mr. Pollard, who is your general counsel. So
+Mr. DeMarco, thank you for being here, and you may proceed.
+
+ STATEMENT OF EDWARD J. DeMARCO, ACTING DIRECTOR, FEDERAL
+HOUSING FINANCE AGENCY, ACCOMPANIED BY ALFRED POLLARD, GENERAL
+ COUNSEL, FEDERAL HOUSING FINANCE AGENCY (FHFA)
+
+ Mr. DeMarco. Yes, sir. Thank you, Mr. Chairman.
+ Chairman Neugebauer, Ranking Member Capuano, and members of
+the subcommittee, thank you for inviting me to address matters
+relating to legal expenses of Fannie Mae and Freddie Mac and
+advancement of legal fees for certain former officers.
+ I share the frustration of members of this subcommittee and
+others that funds are being advanced to finance the legal
+defense of former officers at Fannie Mae, funds that
+effectively increase the cost to taxpayers of the
+conservatorship.
+ These former officers have been disgraced by the findings
+of FHFA's predecessor agency, OFHEO, and they were forced from
+their jobs as a result of those findings. Yet our frustration
+cannot interfere with our responsibilities to follow the law,
+respect the rights of those involved, allow the judicial
+process to proceed under the oversight of the presiding judge,
+and allow other government agencies to act under their
+authorities.
+ As some of the matters you have asked me to address are
+currently in litigation in which FHFA participates as
+conservator, I have accepted the offer of the chairman to have
+FHFA's General Counsel, Alfred Pollard, here with me during
+this hearing. Members should know that I am not a lawyer, but
+many of the subjects of concern involved technical legal
+matters.
+ The Federal Housing Finance Agency has consistently viewed
+indemnification as a prerequisite for attracting and retaining
+skilled officers and directors. Indemnification, properly
+administered, is in the best interest of Fannie Mae and Freddie
+Mac, and therefore fits within FHFA's goal of preserving and
+conserving assets.
+ At the same time, properly structured indemnification
+includes guidelines for denying indemnification and requiring
+repayment of advanced fees in certain circumstances.
+Overturning existing contracts or policies would be a
+determination with potential adverse consequences and would be
+inconsistent with standard business practice.
+ At the time of the conservatorship, FHFA announced it
+intended for the Enterprises to operate as going concerns with
+new CEOs and Boards of Directors, and that they were to
+continue normal business operations in support of the mortgage
+markets. This included the need to attract and retain skilled
+professionals. These officers and directors, therefore, could
+be sued just as before conservatorship, thus the need for
+retaining indemnification.
+ The determination by FHFA not to interfere with
+indemnification in advancement of legal fees for former Fannie
+Mae executives was based on Fannie Mae's corporate bylaws,
+governing Delaware State law, the provisions of statute
+governing FHFA's oversight of Fannie Mae, and court cases
+addressing such an action.
+ FHFA believed the continued advancement of funds was in
+line with the conservatorship framework and that actions to
+interfere would be counterproductive due to the ability of
+individuals denied to sue the agency for such actions. Also,
+such action would raise secondary issues related to other
+employees and their view of the validity of indemnification of
+their legal expenses and their willingness to continue their
+employment at the Enterprises.
+ At the time the Enterprises were placed into
+conservatorship, it was important to avoid losing personnel who
+could help reduce costs to the taxpayer from their large
+portfolios and business activities and who could be distracted
+by an absence, or potential absence, of indemnification.
+Securing new CEOs, Boards of Directors, and employees for the
+Enterprises would not have been possible without
+indemnification.
+ Even in ordinary times, the Enterprises are large
+corporations and incur significant legal expenses. Clearly, in
+conservatorship, their legal expenses continue and the mortgage
+market crisis has led to even greater legal costs. Beyond legal
+expenses associated with pre-conservatorship lawsuits, the
+companies have substantial legal expenses related to lawsuits
+by homeowners, investigations by government agencies, and
+expenses related to securing recovery of damages from their
+counterparties.
+ In all of these activities, the legal issues are very
+complex and litigation involves significant expenses associated
+with extensive discovery, document production, expert
+witnesses, and other costs involved in judicial and regulatory
+proceedings.
+ Clearly, Mr. Chairman, controlling expenses has been the
+concern that you have highlighted by calling this hearing. I
+believe that FHFA can build on its existing work with the
+Enterprises to control legal and other expenses in a way that
+protects taxpayers. Likewise, I believe we can inform the
+courts and other regulators of the expenses involved and the
+role of the taxpayers while the Enterprises are in
+conservatorship.
+ Thank you for this opportunity, and I would be happy to
+answer questions.
+ [The prepared statement of Acting Director DeMarco can be
+found on page 39 of the appendix.]
+ Chairman Neugebauer. Thank you.
+ Our next panelist is Mr. Michael Williams. He is the Chief
+Executive Officer of the Federal National Mortgage Association.
+I believe you are accompanied by your General Counsel, Mr.
+Mayopoulos. Is that correct? Mr. Williams, you may proceed.
+Thank you.
+
+STATEMENT OF MICHAEL J. WILLIAMS, PRESIDENT AND CHIEF EXECUTIVE
+ OFFICER, FEDERAL NATIONAL MORTGAGE ASSOCIATION (FANNIE MAE),
+ACCOMPANIED BY TIMOTHY J. MAYOPOULOS, GENERAL COUNSEL, FEDERAL
+ NATIONAL MORTGAGE ASSOCIATION
+
+ Mr. Williams. Chairman Neugebauer, Ranking Member Capuano,
+and members of the committee, good afternoon. My name is Mike
+Williams, and I am the President and Chief Executive Officer of
+Fannie Mae. I was named to that role in April of 2009 after the
+company had been placed in conservatorship.
+ Fannie Mae is playing a critical role in stabilizing the
+Nation's fragile housing market. Since 2009, Fannie Mae has
+provided more than $1.2 trillion in mortgage liquidity, helped
+one million families to buy homes, and enabled 3.8 million
+homeowners to refinance into lower-cost mortgages. In that
+time, we have also provided over $30 billion of financing for
+more than 570,000 units of affordable rental housing.
+ Fannie Mae has also substantially strengthened its
+underwriting standards and set new guidelines for the industry
+on loan quality. As a result, we are building a profitable new
+book of business. We are committed to putting a very strong
+foundation in place for a sustained recovery in housing, which
+is key to getting the U.S. economy back on track.
+ The committee has asked me to discuss Fannie Mae's post-
+conservatorship legal expenses. As CEO, I am keenly aware of
+Fannie Mae's responsibility to manage expenses prudently.
+Fannie Mae is currently facing an unprecedented volume of
+complex legal matters. For example, various members of the
+plaintiffs' trial bar are pursuing class-action lawsuits
+against Fannie Mae, including one brought on behalf of the
+Attorney General of Ohio. Plaintiffs and their lawyers are
+seeking billions of dollars. Fannie Mae has substantial
+defenses in these lawsuits and is vigorously defending the
+company and the taxpayers from this potential liability.
+ Fannie Mae has also been the subject of numerous agency and
+congressional investigations. In cooperating fully, we have
+incurred significant expenses collecting, processing,
+reviewing, storing, and producing tens of millions of pages of
+data and documents.
+ We also incur legal expenses in the aggressive pursuit of
+claims against entities that owe Fannie Mae money. To date, we
+have been successful in recovering sums well in excess of our
+legal costs.
+ In addition to our legal expenses, Fannie Mae is obligated
+to advance certain legal expenses incurred by current and
+former officers. This obligation derives from Article 6 of our
+bylaws, which Fannie Mae's shareholders adopted in 1987. It is
+also governed by the contracts that Fannie Mae's Board has
+entered into with each of its officers and directors.
+ Our conservator affirmed these contracts in 2008. Where
+they apply, the company's obligation is to advance legal
+expenses, and that is always mandatory. If Fannie Mae were to
+refuse to honor this obligation, we would undoubtedly be sued
+and likely be subject to additional costs.
+ Corporations throughout America make provisions similar to
+ours in order to attract and retain strong and experienced
+officers and directors. Since 2009, Fannie Mae has put in place
+a new Board of Directors and senior executive team. It would
+not have been possible for the company to recruit and retain
+these professionals without offering advancement protections
+and applying them consistently.
+ Since 2005, Fannie Mae's General Counsel has used the
+services of a third-party vendor to review all legal bills for
+individuals entitled to advancement. Currently, we use a legal
+invoice audit firm that has provided services for some of the
+largest corporations in America and various government
+entities. The vendor negotiates billing rates and determines
+reasonableness and necessity of all charges.
+ In closing, we take seriously our responsibility to manage
+effectively the resources that we have been provided. Today, I
+am joined by our General Counsel, Timothy Mayopoulos, and we
+look forward to taking your questions, Mr. Chairman.
+ [The prepared statement of Mr. Williams can be found on
+page 48 of the appendix.]
+ Chairman Neugebauer. Thank you, Mr. Williams. I do want to
+remind everyone that, without objection, your written
+statements will be made a part of the record.
+ I will start the questioning. Mr. DeMarco, under section
+4617 of the Housing and Economic Recovery Act of 2008, the
+conservator or receiver of the GSEs may disaffirm or repudiate
+any contract if the conservator determines that the performance
+of these contracts is burdensome and that the repudiation of
+the contract will promote the orderly administration of the
+affairs of the GSE. You evidently made a determination that
+paying these legal fees and continuing to defend these
+individuals was not burdensome to the corporation. How do you
+justify that?
+ Mr. DeMarco. Mr. Chairman, yes, that determination was
+made. It was made at the time the conservatorship was
+established by my predecessor, and the determination was made
+by my predecessor for the reasons that are outlined in my
+testimony, that this advancement of legal fees was required by
+FHFA's own regulation, that the indemnification that was in
+place was required by FHFA's own regulation, was consistent
+with Fannie Mae's bylaws and was, at that point, a requirement
+under applicable State law.
+ So the determination was made at that point, and that is
+not, at this point, a determination to be revisited.
+ Chairman Neugebauer. We keep talking about Fannie Mae's
+bylaws. I want to read you something that is also from Fannie
+Mae's bylaws. For example, it states that the indemnification
+will not be provided when the officer or director breaches his
+duty of loyalty to the corporation, acts, or fails to act in
+good faith, and engages in intentional misconduct.
+ I know that you have read the OFHEO report, and this is a
+copy of the report. All of these tabs represent areas where the
+three individuals that you are continuing to pay legal fees on
+acted in ways that were not in the best interest of the
+corporation and, to me, violated the very bylaws of this
+corporation.
+ And so, for the determination to find that is not
+burdensome, and that, in fact, these contracts should be
+honored, is a little puzzling to me, and I think it is a little
+puzzling to the American taxpayers, because they are continuing
+to pay fairly substantial legal fees for these three
+individuals who, according to this report, weren't doing things
+that were to the benefit of the corporation and, ultimately,
+the taxpayers had to come in to the tune of--right now of about
+$150 billion.
+ And that total could go up. So I am still trying to figure
+out how you felt like that was in the best interest of the
+corporation.
+ Mr. DeMarco. Mr. Chairman, that is a fair question. And I
+think that my written statement, which goes into some detail in
+defining indemnification, defining the grounds under which
+indemnification would be denied, may be helpful here. But let
+me try to summarize, and then if counsel wants to supplement,
+that may be helpful as well.
+ But essentially, indemnification is something that actually
+takes place at the conclusion of a judicial or administrative
+activity. There are two areas in which the actions of these
+former executives have come under review. The first is there
+was an administrative notice of charges that was filed by
+FHFA's predecessor agency, OFHEO, based upon the findings in
+the report that you referenced.
+ That notice of charges was made in December of 2006 and
+ultimately resulted in a settlement in April of 2008, a
+settlement with the three former executives that resulted in
+payments by those executives but did not result in any finding
+or admission of the breaches that would violate--that would
+meet the standards in the bylaws to avoid indemnification.
+ The litigation that is ongoing today, the multi-district
+litigation that is the subject of such attention here, is in
+fact to determine the behavior and activities of these former
+officers and whether they did breach. So the finding that would
+be the predicate for denying indemnification has not taken
+place yet because we are, in fact, in the midst of such
+litigation.
+ Therefore, what is going on right now is an advancement of
+legal fees, and that is very much required by contract and by
+law, and the advancement of legal fees will continue until the
+conclusion of this judicial action when there is finality to
+that based upon what the outcome or findings of that may be.
+ There would then be a determination as to whether
+indemnification of these officers would be provided or whether
+there are grounds to seek repayment of the advancement of those
+fees. But that cannot take place while this is in process. It
+is something that takes place at the end of the legal process.
+ Chairman Neugebauer. I would also say, though, that you
+could have denied advancement, or if you weren't going to
+repudiate the indemnification, you had the ability to say to
+these individuals, ``You know what? We have a little problem
+here. We are broke, and we are not advancing additional monies
+for these fees.'' Obviously, I think that brings some incentive
+for those individuals not to keep burning taxpayers' money.
+ Mr. DeMarco. Mr. Chairman, I certainly understand the issue
+and the concern that you are raising there. I would simply say
+that the determination at FHFA was that to cease advancing
+those legal fees would have resulted in suits against us, and
+operating with the responsibility as conservator, we determined
+that, looking at the legal case law here and the facts and
+circumstances and what governed in terms of contract law and
+other applicable law, what needed to be done was to continue
+advancing those fees.
+ That is the determination that was made at the time the
+conservatorship was established. FHFA did affirm that for the
+company, and so we continue to operate with that affirmation in
+place.
+ Chairman Neugebauer. My time has expired.
+ Mr. Capuano?
+ Mr. Capuano. Thank you, Mr. Chairman.
+ Mr. DeMarco, basically you made a determination as to who
+makes the decision as to who breached these fiduciary
+responsibilities, and obviously you made a determination--
+correct me if I am wrong--that would require a final court
+decision as to whether they breached their responsibilities. Is
+that a fair summary?
+ Mr. DeMarco. I did not make that determination, Mr.
+Capuano. I believe that determination is effectively what is
+required by statute and governing law here.
+ Mr. Capuano. So that is--but still--
+ Mr. DeMarco. But--interpretation of that, yes--
+ Mr. Capuano. --somebody had to interpret the law.
+ Mr. DeMarco. --it is our interpretation.
+ Mr. Capuano. I don't mean to be disrespectful. I am a
+lawyer. Without differences of opinion as to what laws mean,
+you wouldn't need lawyers. So somebody had to make a
+determination that is what the law meant, and I understand
+that. And I would respectfully suggest that, going forward, we
+make a determination as to where we are going to draw the line.
+ And I would argue that I understand the legal arguments
+that you probably would have gotten sued. I agree, you would
+have. You may have won. You may have lost. You still should
+have taken the hit, done the right thing, taken the hit, and if
+you lose it going forward, you lose it going forward. Having
+done the right thing, you wouldn't be here today. We would be
+saying, ``Good job. Keep it up.''
+ As opposed to that, you made a decision to take the
+conservative view, to allow them to keep going, and now you are
+here today, and we are going to beat you up a little bit today
+and probably a little bit more, going forward. And in my
+opinion, in defending the taxpayer's money, I think on occasion
+you have to take a little bit of a reach as to who makes those
+determinations.
+ I would also ask, is this agreement--and as I understand
+it, it is, but I want to hear it from you and from Mr.
+Williams--is the current agreement, and even the one that was
+in place then, I agree that directors and officers liability
+insurance is an important aspect. I buy the concept. There are
+many ways to do that. Do you believe that the past and current
+agreements on directors and officer liability is within the
+standard of normal operating business procedures today?
+ Mr. DeMarco. I do.
+ Mr. Capuano. Mr. Williams, do you?
+ Mr. Williams. Yes, I do.
+ Mr. Capuano. Okay. I--again, I would like to pursue that a
+little bit more at a later time with maybe some outside
+experts. But at the moment, I accept your decision.
+ At the same time, the definition of the term
+``reasonable''--has anyone questioned the term ``reasonable
+amounts of money that have been paid out?'' I understand you
+have an outside agency doing it. Has anyone questioned that,
+either inside Fannie or inside FHFA or any of the plaintiffs?
+Has anyone said we disagree with this vendor's determination
+that these charges of X gazillion dollars are reasonable?
+ Mr. DeMarco. Sorry. I am not aware of particular claims
+being made that the legal fees that have been incurred are
+unreasonable as based on an industry standard. I am simply not
+aware of that.
+ Mr. Capuano. Mr. Williams, are you aware of anything?
+ Mr. Williams. Congressman, I am not aware.
+ Mr. Capuano. Okay. I guess for me, the question is also I
+understand--yes, go ahead, Mr. Pollard. Sorry.
+ Mr. Pollard. In our oversight capacity, we have a--to make
+all efforts to observe the reasonable--
+ Mr. Capuano. Yes. I think your microphone is not on.
+ Mr. Pollard. I apologize. I would say that our oversight
+capacity from the office of general counsel and the agency, we
+have spoken with both companies on an ongoing basis, reminding
+them of the need to keep fees down across-the-board, not just
+for individuals here, but the general legal expenses.
+ And I believe they have undertaken to do the best they can
+in this market to try and keep fees down and to hold fees in
+line. Their fees are very much going to be judged, in fact, by
+their legal advisory firm by looking at what other firms do. In
+other words, what do other courts--
+ Mr. Capuano. I understand that. So that is always the
+problem with the term ``reasonable'' is that people read it
+differently. For me, $160 million worth of legal fees, it
+certainly sounds unreasonable. Again, I understand people can
+disagree. But I am also interested in going forward. Is there
+anything in these provisions? And if not, can you put them in?
+Would you consider putting them in?
+ For the sake of discussion in this case, clearly OFHEO
+should not have accepted this deal the way it was written.
+Somebody should have sat up and screamed that they were not
+going to take the deal because it means we now have to pay
+these outrageous legal fees. Okay, it was done.
+ Going forward, at the very least, and hopefully today, and
+hopefully if not soon, let us assume this happens again
+tomorrow, and you, Mr. DeMarco, make a determination that
+somebody else has breached their responsibility. Why shouldn't
+we then, continuing with the typical rules of directors, not
+just liability, say, Okay, from this day forward, we will
+either put these payments in some kind of a contingency fee, or
+we will put a lien on something, or we will have some other
+surety to guarantee that we will be able to get these fees
+back, since an initial determination has already been made by a
+neutral body that you have violated some standard?
+ Understanding fully well that determination won't be final
+until it is final, but in the meantime, right now, as we sit
+here, let us be serious. We are never going to get this money
+back, at least I don't think any reasonable person thinks we
+will. And that is the problem. I understand paying it up front.
+I understand having liability coverage. I get all that.
+ But what I don't get is why we leave ourselves totally
+naked to someone who on at least one level, understanding it is
+not final, has already been determined to have breached their
+fiduciary responsibilities, and yet we are still going to pay
+through the nose forever and ever with no real hope of
+recouping that money. Is there anything we can do going
+forward, either in this case or in future cases, to say, if
+this happens again, at the very least, we will have a lien, we
+will have sureties, we will have something else on the side
+that we can recoup this money when the time comes?
+ Mr. DeMarco. I am sorry, I am not aware of what--I don't
+have that particular recommendation or answer to that question.
+I would observe that the matter that you are asking is far
+broader than two companies in conservatorship. This strikes me
+as a general matter of both corporate practice and existing law
+that governs these matters. There is a great deal of case
+history, as I have been told about these things. So to your
+question of what could be done, it is a much broader question
+here--
+ Mr. Capuano. But these case histories are not based on
+taxpayer dollars doing this. These case histories are on
+shareholders' dollars doing it, not taxpayer dollars. This is a
+unique and different situation that I would suggest we consider
+going forward, at the very least, having unique and different
+approach.
+ Mr. DeMarco. Right. I would certainly agree with that, sir.
+There is no precedent for 2\1/2\ years of conservatorship for
+major financial institutions like this in conservatorships that
+are likely to continue for a number of years further until this
+is ultimately resolved. There has been nothing like this
+before, sir, and it does pose unique and new questions for us.
+ Chairman Neugebauer. I thank the gentleman.
+ And now the vice chairman of the committee, Mr.
+Fitzpatrick.
+ Mr. Fitzpatrick. Thank you, Mr. Chairman, for calling this
+hearing.
+ This question is for Mr. DeMarco and Mr. Williams, sort of
+following up on Mr. Capuano's comments that Fannie Mae and
+Freddie Mac have never really been private entities, fully
+private. So when a member of our panel questions the
+appropriateness or reasonableness of paying for the legal
+defense of former Fannie officers or directors, we just ask
+that you keep that in mind.
+ Before the conservatorship, Fannie enjoyed privileges that
+other private firms were denied. It did not have to pay State
+taxes, and it didn't have to pay local taxes. Until 2006, they
+did not have to register the securities with the SEC. They had
+a line of credit with the Treasury.
+ Above all, they had a lower cost of funding than any other
+private entity would have because they were beneficiaries of an
+implied government guarantee. Notwithstanding this, they are
+advantages that still resulted in paying for the GSE's
+shareholders as a result of accounting scandals, and now paying
+for the taxpayers as a result of the conservatorship status.
+ The accounting scandals resulted in fines, decreases in
+market capitalization, expensive internal corrective actions,
+and declines in share prices which cumulatively blocked the
+safety and soundness of these institutions. $400 million in
+fines were paid to the SEC and OFHEO in 2006. Earnings
+restatements totaling $11 billion were made for both firms.
+ In 2006, Acting Director of OFHEO Jim Lockhart said this
+about the cost of Fannie's earning manipulation executed by
+Fannie senior management. This is his quote: ``Fannie Mae's
+executives were precisely managing earnings to the 100th of a
+penny to maximize their bonuses while neglecting investments in
+systems, internal controls, and risk management.''
+ And he went on to say, ``The combination of earnings
+manipulation, mismanagement and unconstrained growth resulted
+in an estimated $10.6 billion in losses, well over $1 billion
+in expenses to fix the problems, and ill-begotten bonuses in
+the hundreds of millions of dollars.''
+ The conservatorship has brought cost to the taxpayers for
+the GSEs misdeeds. To date, the Fannie Mae and Freddie Mac
+bailout total stands at about $153 billion, making the GSE
+conservatorship by far the costliest of all the taxpayer
+bailouts carried out over the past 3 years. The cost of the
+bailout could still go higher. On September 15, 2010, in
+testimony before this committee, Mr. DeMarco stated severe
+stress scenarios. The Treasury draws for the GSEs could come
+in, I think you said, at about--or perhaps just under $400
+billion.
+ That brings us to the question before us today of legal
+fees for Franklin Raines, Tim Howard, Leanne Spencer and the
+others at Fannie Mae who have been responsible for the massive
+losses to shareholders and now taxpayers. And so I ask the two
+of you, in this context, is it reasonable to advance legal fees
+for individuals who have been found by both OFHEO and the SEC
+to have manipulated earnings for their own private benefit? Is
+that reasonable to ask the taxpayers?
+ Mr. DeMarco. Congressman, I believe the answer is we have
+an obligation to advance these legal fees. And at this point, I
+think it may be best to ask my counsel to provide a little bit
+more of the legal context as to why we have that view.
+ Mr. Pollard. Congressman, OFHEO put in place regulations
+requiring the Enterprises to select a State law under which to
+operate. Fannie Mae operates under Delaware law. If you go into
+Federal court, Delaware law will be the subject that will be
+raised in any action.
+ In looking at the requirements of that law and the court
+decisions under it, there is indemnification, which comes at
+the end, and there is advancement of legal fees. Even if a
+company sues its own employees for breaches of fiduciary
+duties, they are entitled to advancement of legal fees until
+the final determination. I am just trying to give you, at the
+extreme end of this.
+ So I think, just in looking at the law and what we have had
+to advise from the office of general counsel to the senior
+management of our agency is that the obligation that we are
+looking to, under Delaware law, is to advance fees. That does
+not mean at the end of the day, when a decision is made on
+indemnification, if someone determines the findings by the
+agency are its findings, here is what we found, but for someone
+to sue--and I might note some of the court cases preceded
+actions by our agency even--that requires the determination by
+a court or another adjudicative body that you have, in fact,
+breached these fiduciary duties. And that is what I think the
+Director has been trying to say.
+ So the short answer is, under all the law that I have seen
+and read in Delaware and other States, looking at State law in
+this matter, is that advancement of legal fees is considered
+mandatory. The Supreme Court of the United States--excuse me,
+the Second Circuit of the United States has said that, where
+the Justice Department was looking to interfere with
+advancement of legal fees, this would be considered
+unconstitutional. This was in a criminal case, and I want to be
+clear, that is a different matter.
+ But clearly, the courts have been uniform that it is the
+very charge of the breach of the fiduciary duty, because it is
+so serious, that is the one that would permit, and even
+require, advancement of legal fees because you are the most at-
+risk in that situation. So I think that is the foundational
+law.
+ The chairman and the ranking member asked about why don't
+you step in. All the court cases that I have looked at in cases
+of advancement of legal fees have gone against the private
+sector firm, and even the government, where the government was
+trying to stop advancement of fees.
+ So I think that is sort of the foundational basis in which
+we operate, and I think the ranking member's question about
+what can we do, and I think the Director's answer about that, a
+large question is there. So I hope that is helpful in terms--
+ Mr. Fitzpatrick. So the court cases were construing mostly
+private corporation?
+ Mr. Pollard. They are private corporations, companies, but
+I even have one case of a company under the RTC that was in
+receivership. And the court ordered the advancement of legal
+fees to the officers of that firm when they were being sued by
+the company.
+ Mr. Fitzpatrick. But none of those cases are construing a
+law with respect to government-sponsored enterprises?
+ Mr. Pollard. No, sir.
+ Mr. Fitzpatrick. So this would be a case of first
+impressions?
+ Mr. Pollard. It would be a case of--yes, sir.
+ Mr. Fitzpatrick. And they are construing the law of
+indemnification on the corporate side, correct?
+ Mr. Pollard. In advancement of fees, yes.
+ Mr. Fitzpatrick. And are you relying on sort of the
+corporate law of indemnification, as you understand it, as well
+as the contracts of these individual employees?
+ Mr. Pollard. Yes, that, but also our own regulation, which
+says select a State law, our own regulation which says you can
+indemnify your employees with appropriate safeguards. By the
+way, I think the word ``reasonableness'' from our perspective,
+is that it has to be done appropriately and it needs to be
+reasonable.
+ Chairman Neugebauer. I thank the gentleman for his
+questions.
+ And I now yield to the other gentleman from Massachusetts,
+Mr. Lynch.
+ Mr. Lynch. Thank you, Mr. Chairman.
+ And I want to thank the witnesses for helping the committee
+with its work.
+ I have been reading through some of the descriptions of the
+court case against Fannie Mae and its officers by a couple of
+pension funds in Ohio. And I have to admit, while I understand
+the principle of indemnification in order to get officers to
+serve, this case has been going on for 6 years, and that is far
+longer than any average case under these circumstances.
+ I understand this is a big case, but I am also reading
+that, even at the most mundane and procedural conferences, that
+Fannie Mae and the officers are bringing in 35 to 40 lawyers
+and paralegals while the plaintiffs are coming in with 2 or 3,
+that they are bringing in 25 expert witnesses when the
+plaintiffs are bringing in one or two. And in many cases, the
+judge has pointed out that they are driving up the cost of this
+litigation.
+ So I am interested in indemnifying the taxpayer, because we
+are bleeding here. This is 6 years and counting, and these are
+staggering numbers that we are seeing here.
+ I understand the principle. You have to have
+indemnification to an extent in order for people to be willing
+to serve in these positions, but indemnification is an
+insurable risk. Now, I don't know who made the decisions, but
+we should have an insurance policy to provide a fixed amount of
+resources for a person to fight these claims against them. We
+shouldn't be having to reach into the taxpayers' pocket every
+time there is another hearing or a deposition or any other
+legal proceeding where we need counsel.
+ And it bothers me greatly that this is an insurable risk.
+Corporations, every one of them, all across America, get a
+policy to indemnify their officers. And here we are, Fannie
+Mae? That is what you would call a target-rich environment,
+where I am sure you have probably hundreds, if not thousands of
+folks, suing Fannie Mae for their either nonfeasance or
+malfeasance during this whole crisis. And it just bothers me to
+no end that we are not--we are worried about indemnifying these
+officers to the tune of $137 million and counting. They have
+already paid a $400 million fine, and nobody is watching out
+for the taxpayer, in my opinion.
+ Does anybody want to take a shot at this? Why did we not--
+is somebody managing this litigation from your standpoint,
+where they are saying, ``No, you shouldn't really have 40
+attorneys here? You shouldn't have 30 paralegals. You shouldn't
+have 25 expert witnesses.'' Someone to manage--believe me, if
+this was coming out of their pocket, they would not be handling
+this this way.
+ Mr. DeMarco. Right. Congressman Lynch, there are
+observations and questions. I believe that Mr. DeWine, who is
+in the next panel, has raised, in his prepared statement, a
+situation which, as you describe, there were numerous attorneys
+present at a particular deposition. I have been told that the
+presiding judge said something about that at that time, and
+that has not been repeated. More generally, of course, the
+judge is the presiding officer in the litigation, and excesses
+and delays that are taking place on either side are the
+responsibility of the judge to address.
+ And finally, with respect to this litigation--and it is in
+litigation, so I need to be careful about what I can say, but
+one might ask the other side, the plaintiff in this case is
+continuing to pursue the litigation in light of the
+conservatorship. At this point, the plaintiffs are effectively
+suing for funds that ultimately could come from the U.S.
+taxpayer.
+ So the defense that is being put up here is defense against
+a suit that, if successful, would presumably result in a claim
+against Fannie Mae, Fannie Mae in conservatorship being backed
+by the taxpayer, so there are some questions here about--I
+agree about the situation that we are in. But what we are
+trying to do is to respect everyone's legal rights, and the
+judicial process in this matter is with the judge.
+ And the other thing I would say that I think may be helpful
+here is I intend to file my written statement for this hearing
+with the court so that the court is aware of the concern of
+this body and the discussion that we had here today.
+ Mr. Lynch. Thank you.
+ Thank you, Mr. Chairman.
+ Chairman Neugebauer. Thank you.
+ We have been joined by Mr. Garrett, who is the chairman of
+the Capital Markets Subcommittee, and I would ask unanimous
+consent to allow him to be a part of our--on the dais today and
+ask questions if he chooses, without objection.
+ Next, to the gentleman from Florida, Mr. Posey.
+ Mr. Posey. Thank you, Mr. Chairman.
+ I guess you have read Mr. Devine's statement--is it
+Devine--DeWine--have you all read that?
+ Mr. DeMarco. Yes, sir.
+ Mr. Williams. Yes, we have.
+ Mr. Posey. I was struck somewhat by the fact that 13
+lawyers appeared at the April 2010 hearing, the deposition, to
+represent the accused, so to speak, here. And I was wondering,
+what if they had brought 50? Would that be okay? They brought
+13 for 5 defendants. What if they had brought 50? Would that
+have been okay?
+ Mr. Mayopoulos. Congressman, perhaps I could address this
+issue, because I think there is--the statement in Mr.
+DeWine's--sorry, Attorney General DeWine's statement that there
+were 13 attorneys present for the defendants at Mr. Raines'
+deposition is not entirely accurate.
+ As you know, Mr. Raines and Mr. Howard and Ms. Spencer are
+all defending lawsuits alleging significant liability, and they
+are all entitled to have their own separate representation. But
+at most depositions, one attorney for each defendant appears.
+For particularly important depositions, such as the deposition
+of Mr. Raines, it may be appropriate to have more than one.
+ But for this particular deposition, it lasted for 2 days.
+Fannie Mae advanced the legal fees for a total of six
+attorneys, two for Mr. Raines, two for Mr. Howard, and one for
+Ms. Spencer, and one for Mr. Mudd, who, while not a party
+directly to this lawsuit, is a party to other lawsuits for
+which discovery is being conducted at the same time.
+ And Fannie Mae itself was represented by two attorneys, one
+of whom became ill during the first day and was replaced by a
+different person. In fact, Ms. Spencer sought advancement for
+two attorneys, and we declined that.
+ So the suggestion that we paid for 13 attorneys to attend
+this deposition is just not accurate. I don't think Attorney
+General DeWine would know that. He may know how many people
+actually showed up, but he doesn't know how many actually got
+paid. And we know how many got paid, and 13 did not get paid.
+ Mr. Posey. Mr. Chairman--how many got paid that day?
+ Mr. Mayopoulos. The number who got paid was a total of
+seven for the individuals--two for Mr. Raines, two for Mr.
+Howard, one for Ms. Spencer--I am sorry, that is five--and two
+for Fannie Mae, one of whom became ill during the course of the
+deposition. So in effect, six or seven if you count the one who
+fell ill.
+ Mr. Posey. Okay. And we will continue to advance--pay legal
+fees until there is some adjudication of their guilt. Is that
+correct?
+ Mr. Mayopoulos. That is correct.
+ Mr. Posey. And there is no limit on the future, correct?
+ Mr. Mayopoulos. All the parties, I think, are trying to
+bring this matter to a close. In terms of how long the case is
+going to last, I will say that there have been over 120
+depositions in the case. A hundred of those were noticed by the
+plaintiffs, not by the defendants, but by the plaintiffs. The
+plaintiffs took 100 depositions. So of course, the defendants
+must show up to appear at those depositions and to examine
+those witnesses.
+ So this case has gone on for 6 years, but it is the
+plaintiffs who have alleged 1,500 pages of accusations; between
+their complaint, the Paul Weiss report, and the OFHEO report,
+there are 1,500 pages of allegations. They have done very
+little to try to winnow the case down.
+ And frankly, the plaintiffs are the parties who added the
+three defendants we are talking about. The plaintiffs are not
+going to collect $9 billion from Mr. Raines, Mr. Howard, and
+Ms. Spencer. I don't know them, but I doubt that they have $9
+billion. It is unclear to me why the Attorney General of Ohio
+has even named those parties as defendants since the only
+entity that could actually pay the $9 billion that the Attorney
+General says he is seeking would be Fannie Mae, and, in effect,
+not even Fannie Mae, but the U.S. Treasury.
+ Mr. Posey. Just a quick response. I would probably fault
+the agency more than the plaintiffs if they have 1,500 pages
+worth of allegations. I don't think that is the plaintiff's
+fault. I think, in all likelihood, there is something that the
+defendants did wrong that resulted in them coming up with 1,500
+pages in accusations.
+ Mr. DeMarco. If I may, Mr. Posey, this matter is in
+litigation. There is a presiding judge. And whether people were
+right or wrong is something that will be determined through the
+judicial process, respecting the rights of all those involved.
+These are very difficult matters, and I appreciate the concern
+about the legal expenses, but there are various rights here.
+And I think we are all striving to respect them.
+ Mr. Posey. We are trying to respect the taxpayers, too,
+obviously, and that is who gets left out of the equation,
+usually. What steps are you taking to protect the assets of the
+people who are accused of wrongdoing? In the event they are
+found guilty of wrongdoing, what steps are you taking to get
+the greatest amount of reimbursement possible?
+ Mr. Pollard. We have no authority to freeze any of their
+assets or to limit that. What I would say is, in the
+indemnification agreements that they signed, they have to agree
+to restore any funds given to them if an adverse decision is
+made. That would mean all of their assets are at risk. In terms
+of controlling or limiting those assets before such
+determination, we do not have the authority to do that.
+ Mr. Posey. But you have a plan? With the indemnification
+agreement, you have a course of action that you would take?
+ Mr. Pollard. Yes. In order to be advanced fees, they sign
+an agreement that, if they are found to have violated those
+fiduciary duties, they will repay the funds. And if they refuse
+to do that, you can go after them to the maximum of all their
+assets.
+ Mr. Posey. And it would appear that they probably don't
+have the assets to do that. Is that what you are telling me?
+Did I read that between the lines earlier?
+ Mr. Pollard. I personally don't know the size of their
+assets and what the final fees would be, so I don't know.
+ Mr. Posey. Thank you, Mr. Chairman.
+ Chairman Neugebauer. Mr. Miller?
+ Mr. Miller of North Carolina. Thank you, Mr. Chairman. I am
+glad that I attended this hearing just to hear a Republican say
+that, if a plaintiff brought a civil lawsuit against the
+defendant, the defendant must have done something wrong.
+ Mr. DeMarco, I have been greatly interested in how Fannie
+and Freddie--how FHFA handles the litigation that may very well
+affect--will undoubtedly affect taxpayers' ultimate expense for
+the conservatorship of Fannie and Freddie.
+ But my questions today are about another topic that will
+affect taxpayer exposure as much or more, and that is the
+manner in which mortgages within Fannie and Freddie's control
+are being handled, the way they are being modified or not
+modified, proceeding to foreclosure or not. What I have heard
+from those who are working directly with homeowners facing
+foreclosure is that Fannie and Freddie are more infuriating to
+deal with than the private label securitizers, or the servicers
+for PLS mortgages.
+ And it is hideously expensive to foreclose. There are
+obviously many occasions when it clearly would be much wiser to
+enter into a sensible modification. It appears, from our
+history, that we have done it successfully in the past. That is
+what the Homeowners Loan Corporation did during the New Deal,
+and 20 years later when the program wrapped up, it had made a
+slight profit and probably saved the middle class.
+ The former Mac statute provides, by statute, for loss
+mitigation procedures, for who qualifies for modification,
+when, and what the modification will be. Those who work in this
+area say they understand there is a standing order from Fannie
+and Freddie not to reduce principal. And it is almost
+impossible to get any kind of information about Fannie and
+Freddie's loss mitigation practices.
+ Is there such a standing order? What are the criteria, and
+why do we know so little about it?
+ Mr. DeMarco. Thank you, Congressman. There are a number of
+questions in there, so let me see if I can work my way through
+them.
+ First of all, FHFA is required to file a monthly report to
+this committee, and so I will make sure that this gets directly
+to your office. We report monthly on the activities of Fannie
+Mae and Freddie Mac with regard to foreclosure prevention. This
+is a requirement of law. It is our Federal property manager's
+report.
+ And I would like to share with you a few sort of general
+numbers to demonstrate that, in fact, Fannie Mae and Freddie
+Mac are vigorously working on loss mitigation activities. That
+is the top priority that FHFA has as conservator of the
+Enterprises, is to see that the delinquent mortgages that they
+own or guaranty are resolved at the least cost method to the
+conservatorship, and with all appropriate attempts to avoid
+foreclosure both for the good of the company and for the
+borrower.
+ Let me say that, for calendar year 2010, combined, the two
+companies completed close to 600,000 loan modifications, and
+yet their total foreclosure prevention actions, meaning a range
+of home retention plans like loan modifications, repayment
+plans, forbearance, as well as foreclosure alternatives, such
+as short sales and deeds in lieu amounted to about 950,000
+finished transactions. That is just for last year.
+ Since the establishment of the conservatorship, there have
+been close to 1.5 million loans that have either been modified,
+have had some other home retention action taken, or have gone
+through a short sale or deed in lieu in order to avoid
+foreclosure. That is nearly 1.5 million loans in about 2\1/2\
+years on a book of business of about 30 million loans.
+ So I would say that FHFA and Fannie Mae and Freddie Mac
+have been aggressive and have been leaders in the marketplace
+with respect to helping loan servicers to undertake appropriate
+and rigorous loss mitigation activities. This is essential for
+what we are trying to do as conservator, and I view this as
+essential to our responsibility to mitigate losses for the very
+reason, Congressman, that you said, is that where it is
+achievable to do a loan modification or some other sort of
+foreclosure alternative, that is generally going to be less
+costly to the enterprises than to go through foreclosure.
+ You asked about principal forgiveness, and there has been
+very little or no principal forgiveness activity as--to date as
+part of loss mitigation because the focus has been on loan
+modifications and these other activities, and because we have
+not determined or have found a particular principal forgiveness
+approach that, in our judgment, would result in a lower cost
+outcome or higher rate of success than the alternatives that we
+are pursuing.
+ What we are pursuing right now with respect to the range of
+modification and foreclosure prevention actions requires a
+great deal of interaction with mortgage servicers, and it is
+complex enough, and we are working very, very hard to make this
+work. And as I say, close to 1.5 million completed transactions
+since the establishment of the conservatorships.
+ Chairman Neugebauer. I thank the gentleman.
+ Mr. Renacci?
+ Mr. Renacci. Thank you, Mr. Chairman.
+ And thank you, gentlemen, for being here. I have two
+questions. First, I am going to go back to indemnification,
+just a simple question.
+ With the indemnifications that these gentlemen signed, was
+that a standard practice for all employees when they were
+hired? And then the next question would be, was this
+indemnification changed at any time during their employment?
+ Mr. DeMarco. It was standard as part of our regulation. I
+will have my counsel provide further detail.
+ Mr. Pollard. The bylaws of the corporation address this,
+and the individuals had contracts. Ms. Spencer did not have a
+contract but agreed to an indemnification repayment contract,
+which was a standard contract in 2004, so this dates back to
+that time. They have not been modified.
+ Mr. Mayopoulos. That is correct. All officers and directors
+receive indemnification and advancement contracts currently,
+and that has been the practice since 2004.
+ Mr. Renacci. Thank you. Next question, we are going to go
+back to reasonableness, because, quite frankly, reasonableness
+is in the eyes of the payer. And my biggest concern is, going
+forward--and it is really I am looking, going forward, is how
+we make sure we mitigate and minimize taxpayers' expense.
+ If Mr. Raines was here today, I would really ask him if he
+would be willing to voluntarily pay his legal fees, going
+forward, because then we would really determine what
+reasonableness was or wasn't. But since he is not here, I am
+going to ask the question of you. And I know you have talked
+about a panel outside of your organization as to--the panel is
+who you look to for reasonableness.
+ But the question is reasonableness, again, is in the eyes
+of the beholder, the eyes of the payer. So my question to you
+is, what are the guidelines that this panel was looking at when
+it comes to reasonableness? Quite frankly, as a business owner
+for the last 28 years, I pretty well have determined what
+unreasonableness is in a courtroom when you see 10, 12, 14
+attorneys on the other side. So is there reasonableness
+standards that were given, or are you relying 100 percent on
+what this panel says?
+ And I would ask this next question as a follow up. As the
+director of the organization, you could also determine
+reasonableness and overrule their opinion. I would ask that
+question, too.
+ Mr. DeMarco. Yes, sir. So I will begin, but others may want
+to contribute.
+ As you noted, the first line of defense here, the first
+test of reasonableness, the first level of review is the
+outside firm retained by Fannie Mae with expertise in this area
+to review line-by-line the submissions that are made for
+advancement fees.
+ The next line of review is the Fannie Mae legal department
+itself overseeing the activities and the expenses that are
+involved.
+ The next line of review is FHFA's legal department that is
+monitoring this activity and is doing so with the benefit of
+our own outside counsel, who is aware of the ongoing major
+litigation activities. So those are the various reviews that
+are in place.
+ But I will say, in fairness to this hearing--and I think
+that this hearing that the chairman is bringing is raising
+important questions, and I respect that. And I will say that
+FHFA is committed to redoubling its efforts of review here even
+though I am not aware of any evidence that there have been
+unreasonable payments made. There are reasonable questions
+being asked, and we will take additional steps to monitor this.
+ And as I have already said in response to a question from a
+previous member, I intend to file with the judge in the
+particular case my testimony so that he is aware of the
+concerns that have been raised here.
+ Mr. Williams. Yes. Congressman, we take this very
+seriously, our responsibility to manage the expenses of the
+company, and including the legal fees. I would like to actually
+ask Mr. Mayopoulos to walk through the process and what the
+expectations are as it relates to these expenses.
+ Mr. Mayopoulos. Congressman, we retain a company called
+Legal Cost Control, which is, frankly, the leader in this
+space. It is really one of the most respected invoice and audit
+firms in the country, with over 20 years of experience. They
+were selected by the bankruptcy court in some of the largest
+matters in history, including Enron, WorldCom and Adelphia to
+review the legal fee applications of lawyers in those cases.
+ They analyze over $60 million in monthly billings for
+corporations such as Microsoft and Pfizer and Walmart, and so
+they are very experienced at this. They have a set of
+guidelines that they have developed with us that are 13 pages
+long and quite detailed. They distribute those to all the law
+firms involved, require them to acknowledge that they have
+received them and read them and that they will abide by them.
+And then they review each one of these invoices line-by-line
+and raise questions where they think that the fees are not
+appropriate, that it is in line with what similar lawyers
+charge for similar matters.
+ I think in the context of this matter, the question of
+reasonableness doesn't mean that we always end up with a small
+number, okay? We clearly are spending quite large amounts of
+money on this matter. But this is a case that involves billions
+of dollars of potential liability, billions of dollars. And I
+have been doing this kind of work myself for 25 years now in my
+career.
+ And when you look at what it costs to defend a case, such
+as a WorldCom or an Enron or an Adelphia, or this matter, the
+amounts of money we are talking about are comparable in terms
+of what you see. These are enormously expensive, time-consuming
+matters with very complex legal issues. The lawyers who get
+paid get paid a lot of money for their skills and experience
+and expertise in these matters.
+ And so I don't mean to suggest by saying that--while we
+think that the fees that have been paid are reasonable--we are
+happy to pay them. We clearly would prefer not to--but they are
+consistent with what lawyers who do this kind of work in this
+kind of matter get paid. And that is really the test that Legal
+Cost Control is applying as it goes through this process.
+ Chairman Neugebauer. I thank the gentleman.
+ Mr. Capuano?
+ Mr. Capuano. Thank you, Mr. Chairman.
+ Mr. DeMarco, you had, I think, pretty clearly outlined the
+difficulties you have in defending what could be taxpayer
+payout if you lose it. But you also indicated by that, raised a
+question to me that you may have significantly different
+interest in this lawsuit as a defendant than do these three
+individuals, or other individuals that are involved.
+ Have you attempted to split out the cases and to say, look,
+we will defend our stuff and take the hit, but these three
+guys, their interests are different than the interests of you
+and your agency. Have you attempted to split up the case?
+ Mr. DeMarco. Mr. Capuano, as FHFA, we are not a defendant
+in this case. As conservator, we stand in the shoes of the
+Boards of Directors and senior management of the firm as
+conservator. So there is no separation there with regard to we
+are here and someone else is over there. The suit is against
+the firm and the activities of the firm. One of the counsels
+here may be able to better explain it than I can, but that is
+the situation. I don't believe--
+ Mr. Capuano. It certainly strikes me that, in theory, if
+these individuals acted badly, the company is a victim as much
+as anybody else. And therefore, the interest of the defendants
+may not be the same, and I would argue that the interest at one
+table should at least overlap significantly, and it strikes me
+just on the face of it that it may not.
+ Mr. Mayopoulos, or Mr. Pollard, I would like to hear from
+you on this.
+ Mr. Mayopoulos. I think one of the challenges, Congressman,
+is that while there are some potentially different interests
+here, the fact is that, if these individuals did things that
+violated the law, the company is liable for that whether the
+company was a victim or not. That is just the nature of
+corporate liability.
+ But there are potential differences in the defenses here.
+Fannie Mae did acknowledge that its accounting was not correct
+and it restated its accounting. But the individuals have never
+admitted to any improprieties whatsoever. They didn't do that
+in the OFHEO special examination, and they didn't make any
+admission in connection with the SEC matter. In fact--
+ Mr. Capuano. So you don't think it is possible to split it
+out?
+ Mr. Mayopoulos. I don't think--the case that has been
+brought has been framed by the plaintiffs. The plaintiffs chose
+to sue all these defendants together, and that is what we have
+been dealing with.
+ Mr. Capuano. I get it. So you don't think it is worth
+trying to split it?
+ Mr. Mayopoulos. I think it is because there are differences
+of interest that all these individual defendants are entitled
+to their own legal defense, but I don't think that we on the
+defense side can actually split the case up in any way that
+will be productive.
+ Mr. Capuano. Mr. Pollard, do you agree with that? Okay.
+ Have any of you asked the court if there are any actions
+you might be able to take, going forward, relative to securing
+your potential liability from these individuals, going to them
+and saying to the court, look--actually, Mr. DeMarco, you say
+you are going to submit something to the court. I would ask you
+to submit this hearing to the court and tell them that we are
+concerned about getting this money back if and when this case
+is finally determined.
+ I get that. Maybe they could find a way to allow some sort
+of lien or some sort of surety or some other such activity
+again that may never be paid. If they are found innocent and
+not a problem, we get it. But if they are, I am also concerned
+with getting our money back, and maybe the court could help you
+find a way to secure that future ability. Do you think that is
+a reasonable approach?
+ Mr. DeMarco. Mr. Capuano, I have already committed that I
+will file with the court my statement and that the court will
+be made aware of this proceeding here. But in terms of the
+particulars, because this is a matter in litigation, it is with
+the judge, I am not feeling comfortable with sort of further
+expanding in the line of--
+ Mr. Capuano. All I am asking you to do is to ask the court
+if they can help.
+ Mr. DeMarco. Yes, sir.
+ Mr. Capuano. That is all I am asking.
+ Mr. DeMarco. And I have said that we would bring this to
+the court's attention, yes.
+ Mr. Capuano. So you will ask them, in a positive manner, if
+you can help you find a way to do that?
+ Mr. DeMarco. Yes, sir.
+ Mr. Capuano. Mr. Williams, Mr. Mayopoulos?
+ Mr. Mayopoulos. Congressman, I would note that the
+indemnification contract has a specific provision in it that no
+surety or collateral will be required of a party receiving
+advancement of legal fees. So to do what you are suggesting,
+while I understand why you are suggesting it, seems to have
+been anticipated in the contract, and--
+ Mr. Capuano. I respect that, but--I don't mean to be
+disrespectful. Isn't that what courts are, to determine what
+the contract actually says? All you have to do is ask. Let them
+say no. You might be right, but you might be wrong.
+ Mr. Mayopoulos. Yes, that is what courts are for, is to
+determine where there are differences. With respect, having
+looked at this issue, I believe, sir, that this one is pretty
+clear.
+ Mr. Capuano. I respect that, but I guess what I am trying
+to say is you guys don't seem to get it. The difference between
+this and everything else that has ever happened, this is
+taxpayer dollars. This is not Enron. This is not WorldCom. We
+are not shareholders. We are taxpayers. And all I am trying to
+do is--yes, it is unique. Yes, it is unusual.
+ What I am asking you to do is get a little aggressive on
+behalf of taxpayers even if you lose. There is no dishonor in
+losing if you are doing the right thing. But to sit there and
+presume that you cannot even try to do the right thing because
+you think the answer might be no, that is not an acceptable
+answer, not to me, it is not.
+ Make the fight. If you lose, fine. But what if you are
+wrong and you win, and you get a judge who says, ``You know
+something? This is a little unusual.'' Take the shot. Taxpayers
+deserve it.
+ Chairman Neugebauer. I thank the gentleman.
+ Mr. Grimm?
+ Mr. Grimm. Thank you, Mr. Chairman.
+ Obviously, there is a lot of passion in the room, and that
+is for good reason. Everyone here is frustrated, and I think
+you are frustrated as well, because the answer to almost every
+question is, we have to play the hand that we are now dealt. So
+rather than beat a dead horse, I am going to see--looking for
+the future, is there a way that we don't get dealt this hand
+again.
+ So I have two questions for you. First of all, one of the
+reasons why I believe we are in this boat that the taxpayers,
+quite frankly, are paying for is because the individuals who
+are spending this much money on defense have entered into a
+settlement whereby they had no admission of guilt. So the first
+question is, could we have avoided that by not entering into
+that settlement?
+ And second, who made the decision to go with
+conservatorship as opposed to a receivership? And can you
+explain what boat we would be in now had we been in a
+receivership and not a conservatorship?
+ Mr. DeMarco. With respect to your first question,
+Congressman, the determination to reach a settlement agreement
+with the three former officers was something that was--a
+decision that was made by the then-director of OFHEO. It was
+done based upon the facts and circumstances in which he was
+operating at this time. And that was not my decision, but I
+believe he had solid grounds for his determination at that
+point, but that was done at that time.
+ With respect to the decision of conservatorship versus
+receivership, I believe that that has been described at some
+length by the participants who were involved in that decision
+at the time. That would be principally Secretary Paulson and
+FHFA Director Lockhart about the determination of what form of
+intervention the government would take with Fannie Mae and
+Freddie Mac being--removing from the market and having their
+access to the capital markets rapidly being withdrawn.
+ The issues there are far broader than the immediate matter
+that we are talking about here today regarding certain
+litigation. And the determination was that it was necessary
+for--the goal was appropriate to provide government support in
+using the vehicle of conservatorship because there were grounds
+to appoint a conservator, and there was a public policy goal of
+assuring that the country maintained a functioning secondary
+mortgage market right at the point that the whole U.S.
+financial system was teetering on the brink.
+ And so that was a determination made at that time. I
+believe it was the right one, and it was done for reasons that
+are far broader and have far more--more far-reaching
+implications than the particular matters of litigation that we
+are discussing today, sir.
+ Mr. Grimm. Understood. But it still leaves--one of the
+problems that we have here is that, overall, this is the exact
+reason why the general public doesn't trust the government and
+doesn't believe that we ever have their interest at heart.
+ What we have here are three individuals that we know have
+abdicated their fiduciary responsibilities, at a minimum, and
+in doing so caused a tremendous amount of harm to the markets
+and to the taxpayers. And because they were able to enter into
+a settlement where they didn't have to admit any guilt, the
+taxpayer bears the second burden.
+ That frustration is overwhelming, and I have to believe
+there is a better way. And there has to be a mechanism that,
+when we look at these types of settlements, and when we decide
+whether--and I understand it is a very complicated issue
+between conservatorship versus receivership. I understand that.
+But when you break it all down and get past all the legal
+jargon, I have to believe there is a better way than leaving
+the taxpayers constantly holding the bag.
+ So I leave you with the thought that, when we are entering
+into settlements, in this very unique situation where there is
+almost unlimited liability for the taxpayers, that has to be
+part of the decisions process when entering into these
+settlements.
+ Thank you.
+ Chairman Neugebauer. The gentleman from Texas, Mr. Canseco.
+ Mr. Canseco. Thank you, Mr. Chairman.
+ Let me, first of all, ask you this question. Prudence would
+dictate that if you, indeed, represent Fannie and Freddie and
+making sure that the mortgage market continues to function when
+you took on the conservatorship, that you really represented
+the American people. Yet it seems to me that your act in
+extending this indemnity, that you were no longer representing
+the American people, that you were representing the defendants
+in this particular case.
+ Wouldn't it have been more prudent to allow the defendants
+to sue the conservatorship for indemnity than to go ahead and
+honor the indemnity agreement that was in place?
+ Mr. DeMarco. Thank you, Congressman. I am going to ask my
+counsel to respond to that question.
+ Mr. Pollard. Congressman, the difficult decision that you
+have posited is one of a lawyer looking at the situation at
+hand, which is someone being indemnified, and what would happen
+if, in fact, we had repudiated the contract. What would happen
+in that situation, my best estimation as a lawyer advising the
+agency, was that the defendants would sue us. Our repudiation
+of contract is specifically authorized and in HERA in 2008 to
+authorize them--anyone to challenge that. Therefore, they could
+sue us, as provided by the statute, for which they would be
+advanced legal fees.
+ The predominant court cases that I have looked at is that,
+at a time when they were being advanced fees, when there was no
+final action, that they would in fact have a chance, and a very
+strong chance--understanding what Mr. Capuano has asked us
+about taking that chance--that they had a very strong chance of
+prevailing and that we could be in extended litigation on this
+matter with a set under Delaware law that is very, very strong.
+ And let me make this point. I think the question--
+ Mr. Canseco. Understood, but--
+ Mr. Pollard. --I am just trying to say, advancement of
+legal fees is actually accorded even greater strength at times
+than indemnification. That is really the challenge.
+ Mr. DeMarco. But there is an important other concept here
+if I may, Congressman, and maybe secondary, but it is
+nonetheless critical, and I would call the subcommittee's
+attention to it, which is that when we place these companies in
+conservatorship and we place the American taxpayer support
+behind the operations of Fannie Mae and Freddie Mac in
+conservatorship, that support is backing $5.5 trillion worth of
+securities that are trading in global financial markets.
+ We need, in the conservatorships, there to be talented,
+capable professionals who continue to operate the day-to-day
+operations of these companies, and we needed to replace a
+number of senior officers and the entire Boards of Directors of
+both companies.
+ If FHFA was to take an action that would have called into
+question the reliability of the government's affirmation of
+indemnification to these folks because it saves--and we are
+going to back out from it, we would not have been able to
+attract and retain the talent that we brought in post-
+conservatorship, as well as the existing managers and staff
+that were there to do their important job.
+ These individuals are subject to lawsuits today. They are
+subject to a wide array of government investigations. And it is
+incumbent on us to provide the standard protections of
+indemnification and advancement of legal fees that are
+available.
+ Mr. Canseco. I appreciate your comments on that, but my
+time is a little limited here. And my comment on that is you
+would have had an opportunity to at least question the size of
+the legal fees and the quantity of the legal fees and at least
+put into issue the fact that you were doing it under protest
+because, after all, your main client is the taxpayers of this
+country and not the people that you are indemnifying.
+ Now let me go off into something else, if I may. Mr.
+Williams and Mr. DeMarco, in the timeline leading up to the May
+23, 2004, signing of the comprehensive indemnification
+agreements with Franklin Raines and Tim Howard and Leanne
+Spencer and Fannie Mae, on the 17th of July of 2003, the
+Director of OFHEO, Armando Falcon, announced that OFHEO would
+conduct a special accounting review of Fannie Mae in testimony
+before the Senate Banking Committee. By January of 2004, press
+reports and market analysis began to call into question Fannie
+Mae's accounting practices.
+ The indemnification agreements were then signed on May 23rd
+of 2004, less than 4 months before the release of OFHEO's first
+report on Fannie's noncompliance with accounting rules. The
+September 17, 2004, report of findings, the date of the special
+examination of Fannie Mae, stated that Fannie's management
+culture made noncompliance with accounting rules possible--
+``The problems relating to these accounting areas differ in
+their specifics, but they have emerged from a culture and
+environment that made these problems possible. Characteristics
+of this culture included''--and it goes on.
+ These facts call into question the timing of the signing of
+the comprehensive indemnification agreements. To the best of
+your knowledge, did Fannie Mae executives request new
+indemnification agreements because they feared their accounting
+misdeeds would soon be exposed by OFHEO investigation? Do you
+know that? Do you have an answer to that?
+ Mr. Williams. Congressman, yes, let me answer that. The
+Board of Directors at the time had undertaken a review of the
+indemnification agreements and had decided to re-issue a
+standard agreement for all officers. Mr. Raines, Mr. Howard and
+Ms. Spencer already had indemnification agreements in place,
+Mr. Howard's from 1987, Mr. Raines' from 1991, and Ms. Spencer
+from 1993.
+ Mr. Canseco. So all you did was just renew them in this
+short period of time?
+ Mr. Williams. The Board of Directors--I was not on the
+Board at the time, but the Board of Directors wanted to re-
+issue standard indemnification agreements. They have been
+custom or unique to each individual in one standard agreement.
+ Mr. Canseco. And it just seems odd that these new
+indemnification agreements were signed less than 4 months
+before the regulator issued a report blaming senior management
+for mismanaging earnings statements, given the questions about
+the motivation of Raines et al. to seek new indemnification
+agreements. Do you still believe that it is appropriate to
+advance fees for these individuals, given their egregious
+conduct?
+ Mr. Williams. Congressman, the agreements have been in
+place since 2004, and as both Mr. DeMarco and I have said, we
+have to advance the fees under the agreements.
+ Mr. Canseco. Thank you, sir. My time has expired.
+ Chairman Neugebauer. I thank the gentleman.
+ Mr. Garrett?
+ Mr. Garrett. And I thank you.
+ I guess I will go to Mr. Williams, and I am going to go
+down a totally different road, although it is tangentially
+related. It is related to the issue of what we have heard
+before with regard to legal fees and the payments and the like.
+It goes to the issue of when Fannie purchases loans originated
+in names of persons other than a seller, and specifically
+taking a look at the situation with various credit unions,
+specifically Picatinny Federal Credit Union.
+ And if you are familiar with this situation, this is where
+there is legal action pending, where Picatinny Federal Credit
+Union has 52 loans with a total outstanding balance of around
+$13 million that were sold to Fannie without Picatinny's
+knowledge or authorization. To date, my understanding is Fannie
+has not offered Picatinny more than basically in the settlement
+discussions, 23 cents on a dollar in settlement, and even that
+offer, I understand, had a number of conditions attached to it.
+ So, I have a couple of questions here on this. First, is
+that a meaningful settlement, from your perspective? And
+second, can you tell me how much it is costing--or we should
+say us, or Fannie--what it is costing to continue with the
+settlement negotiations, the investigation, and defending the
+claims brought by them and the other credit unions in this
+matter? Let me just stop there and go on.
+ Mr. Williams. Thank you, Congressman. As you know, this was
+a fraud that was brought upon both Fannie Mae and the credit
+unions, and I would like to ask Mr. Mayopoulos to discuss the
+nature of the settlement.
+ Mr. Garrett. Sure.
+ Mr. Mayopoulos. Congressman, as Mr. Williams has indicated,
+this is a fraud that was perpetrated on both the credit unions
+and on Fannie Mae. And basically, the question in the
+litigation is, who bears that loss? Is it the credit union that
+originally bought the mortgages and sold them to Fannie Mae or
+is it Fannie Mae?
+ There are--my recollection, I don't remember precisely--my
+recollection is there are about two dozen credit unions who had
+a similar set of issues, all victims of the same fraud. And we
+have reached settlements with the vast majority of them. There
+are a handful, including Picatinny, with whom we have not
+reached settlements. We have sought to do that. And the terms
+on which we have sought to reach a settlement with Picatinny
+are essentially the same as they are with the other credit
+unions, and the vast majority of the credit unions have
+accepted that settlement.
+ Mr. Garrett. Do you have an answer, though--I appreciate
+that. Do you have numbers at your fingertips with regard to
+what it is actually costing us with regard to defending the
+claim, all the investigations and all that that goes on, at
+least with regard to this credit union--or all the credit
+unions out there?
+ Mr. Mayopoulos. I am sorry, Congressman, I don't have those
+numbers at my fingertips. We can--
+ Mr. Garrett. You can provide that?
+ Mr. Mayopoulos. --work--we can get those for you.
+ Mr. Garrett. That would be great. And also, along the same
+lines, I used to be with law firms, and I always thought that
+small ones were better than the big guys. I know we were
+certainly cheaper than the big guys. The Picatinny has hired
+one of those smaller ones, and I think it is connected with--I
+should say that. Fannie Mae has retained, I guess, Latham &
+Watkins, I guess one of the bigger guys in the entire country.
+Can you also--you probably don't have it at your fingertips--
+just provide us also at the same time what that is costing us,
+the rates and the billing and proceedings on that?
+ What we are dealing with--and I appreciate you both making
+the same comment. You started out with your comment that this
+is basically a fraud not just on the GSEs, on Fannie, this is
+also a fraud that was against credit unions as well, Picatinny,
+right? Yes, I appreciate that, because basically what you have
+here is when--I could basically come to Fannie and say I want
+to sell some loans to them, and Fannie buys them, and the owner
+of them doesn't know a thing about it. That is really what we
+are talking about here, correct, and that is where the fraud is
+engaged?
+ Mr. Mayopoulos. Yes. My understanding of the fraud here was
+that the person who sold these loans from credit unions to
+Fannie Mae appeared to have authority to do that, and the law
+firm on the side of the credit unions now say that no, that
+person didn't have the authority. So the question is, who bears
+that risk?
+ Mr. Garrett. Right. And so, because I only have 45 seconds
+left, what is done, as far as from Fannie's perspective, in
+order to see whether that individual maybe in that situation,
+that hypothetical, had the authority to do it? You notify the
+borrowers at some point in time that Fannie holds these loans
+at this point in time, right? So do you also notify the--would
+you have also notified the seller, which case would it be the
+credit unions at the same time? So what steps are taken to make
+sure that they are really the rightful owners, and do you
+notify them when they are secured at the same time?
+ Mr. Mayopoulos. We don't typically notify sellers of loans
+that they have sold loans to us. They--in this case, the person
+in question actually appeared to have apparent authority to do
+that, and in fact, if I recall the facts correctly, had in fact
+been authorized to sell some loans on behalf of Picatinny.
+ So this is a person that Picatinny brought to the
+situation, gave authority to to sell at least some loans, and
+then apparently this person sold loans beyond what he had
+authority to sell.
+ Mr. Garrett. And one last question, in the hearing, it is
+said that--it was understood that you continue to purchase
+loans from sellers who the principal owners are subject to
+criminal indictment or mortgage fraud, until the fraud has been
+judicially determined or discovered to have been committed upon
+Fannie Mae. Basically, you will, or have, continued to purchase
+loans from people even though they are indicted and there are
+fraud allegations against them, even until that is actually
+adjudicated in the court. Is that correct?
+ Mr. Mayopoulos. I am sorry. I am not familiar with that,
+Congressman.
+ Mr. Garrett. Okay. Then that will be one of the other
+points you can get back to me on.
+ Thank you very much. I appreciate the indulgence of the
+Chair.
+ Chairman Neugebauer. I thank the gentleman.
+ That concludes the questions for our first panel. I think
+you can tell by the questions that these members have asked
+that we are very concerned about this process and that when you
+look at some of the authority of the conservatorship, it in
+some ways emulates some of the same authority that FDIC has in
+certain actions.
+ And I think that the question here, while Mr. DeMarco was
+not the original conservator, that many of us are concerned
+that some decisions were made in the front end of that
+conservatorship that, quite honestly, weren't in the best
+interest of the taxpayers.
+ And while I think it is noble of you to defend these
+indemnification agreements, I believe that there is compelling
+evidence there that it is a little fishy. I think that we had
+to redo new contracts in 2004, but I think the other thing is
+that, when you look at the reports, that what these folks--what
+the entities agreed to in a $400 million fine is no small
+admission of wrongdoing.
+ And so we hope that, moving forward, you will look for ways
+to minimize additional exposure for the taxpayers. We hope that
+you will review this issue, go back and look at some of the
+corporate minutes and make sure that these agreements are on
+solid ground and that, if there are things that we can do, then
+we would like to look at that action.
+ I think the other question that was brought up, and that is
+was this the right structure, should this have been
+receivership rather than conservatorship, because obviously I
+think what Congress has in mind when we think about
+conservatorship, I think it is about conserving the taxpayers'
+investment in these entities.
+ Anyway, I thank the panel, and this panel is now excused.
+ We will call up the second panel. I am going to yield to
+the gentleman from Ohio, Mr. Renacci, to introduce our second
+panel. Thank you.
+ Mr. Renacci. Thank you, Mr. Chairman.
+ It is my pleasure to introduce to the subcommittee the
+attorney general of the great State of Ohio, Mike DeWine. Mr.
+DeWine is a native Ohioan, a former prosecutor, a four-term
+member of this chamber, and a two-term United States Senator.
+Mike has dedicated his entire career in public service to
+speaking out for the most vulnerable in our society, from
+children to the elderly to the unborn.
+ He and his bride of over 43 years, Fran, are the parents of
+8 and the grandparents of 13, with the 14th due any day. I have
+had the pleasure of knowing Mike DeWine for some time now, and
+I know that nothing is more important to him than family. It is
+because of his love of family and community that, when he took
+the office last month to become Ohio's 50th attorney general,
+he swore that he would do everything in his power to seek truth
+and justice and to protect Ohio's families.
+ I am pleased to introduce my friend, Mike DeWine.
+ Chairman Neugebauer. Thank you. Welcome.
+
+ STATEMENT OF THE HONORABLE MIKE DeWINE, ATTORNEY GENERAL OF
+ OHIO
+
+ Mr. DeWine. I am delighted to be here, and I thank you and
+the committee for inviting me. I must tell you, after having
+spent 20 years on your side of the dais, this is a different
+experience for me. But I appreciate the opportunity to be here.
+ And Mr. Renacci, thank you, Congressman. We are proud that
+you are from Ohio, and thank you for that kind introduction.
+ Mr. Chairman, members of the committee, I am here today
+because I represent the lead plaintiffs, the Ohio Public
+Employees Retirement System and the State Teachers Retirement
+System in a securities fraud class-action filed over 6 years
+ago against Fannie Mae, against its former three most senior
+officers, and against its auditor. This class-action also
+includes nearly 29 million other defrauded investors from each
+of the 50 States.
+ The defense engaged in a massive accounting fraud against
+the class to the tune of nearly $9 billion. Our case originally
+was filed in November 2004, and continues to this day
+unresolved. What is worse is that Fannie Mae and its former
+executives, whom Fannie Mae is indemnifying, have been using
+taxpayers' dollars to pay for their defense. It is wrong, and
+Mr. Chairman, it is unconscionable. And I urge the committee
+and Congress to bring this absurdity to an end.
+ We already know that Fannie Mae cooked its books. We
+already know that it smoothed its earnings. We already know
+that it violated 30 Generally Accepted Accounting Principles.
+And yet Fannie Mae continues to deny liability, dragging out
+the current litigation billable hour by billable hour by
+billable hour and bleeding Americans so far, by Fannie Mae's
+own admission, of at least $132 million for its legal fees
+alone. And according to your calculations, Mr. Chairman, the
+total cost to taxpayers is much higher.
+ But Mr. Chairman, I am not here today to use this hearing
+as a forum to try to reach a settlement. We are, in fact, quite
+anxious for this case to go to trial, and we are ready for that
+to happen. But Fannie Mae is doing everything in its power to
+stall. It is really easy to impede the resolution of a lawsuit
+when you have a bottomless coffer of taxpayers' dollars to pay
+your legion of lawyers to engage in delaying tactic after
+delaying tactic.
+ U.S. District Judge Richard Leon, who is the judge in this
+case, has done everything in his power to move this case
+forward. In fact, I have on this piece of paper several quotes
+from the judge indicating his displeasure with Fannie Mae's
+tactics. And those quotes are, Mr. Chairman, members of the
+committee, in my written testimony that I have submitted for
+the record.
+ To keep things moving, the judge holds regular conferences
+to check on the status of the litigation. Where we on our side
+typically bring 2 or 3 lawyers, the Fannie Mae defense,
+however, even just for short, routine conferences where really
+nothing of great substance is discussed, typically--typically--
+bring 35 to 40 attorneys and paralegals, costing taxpayers over
+$600 per hour for some of these lawyers.
+ At former Fannie Mae CEO Franklin Raines' April 2010 fact
+deposition, we were the only party asking questions, and yet
+the Fannie Mae defendants brought 13 lawyers--and we counted
+them, Mr. Chairman. We counted them--none of whom asked a
+single question, not a single question. They just sat there and
+billed the taxpayers for their hours.
+ We are now conducting, at this stage of the case, expert
+depositions where the bill to taxpayers continues to mount. As
+the lead plaintiffs, we have the burden of proof, and therefore
+we have designated eight experts on our side. Defendant KPMG
+has designated five experts. Fannie Mae defendants, however,
+have designated 25 experts. And Mr. Chairman, members of the
+committee, these experts are not cheap. According to documents
+filed with the court, their billable hours are between $600 to
+$1,500 per hour.
+ Franklin Raines has 9 experts just for himself, including 4
+to say essentially that he fulfilled his job as CEO by properly
+relying on others to tell him what to do, and 2 experts to say
+that his $91 million in compensation over 5 years was in fact,
+justified.
+ Now I fully understand an argument could be made, Mr.
+Chairman, and members of the committee that Fannie Mae has to
+defend itself and its former senior officers. But the amount
+they are spending, at the expense of U.S. taxpayers, is
+ridiculous. And you would think, Mr. Chairman, that a former
+CEO who made over $91 million just might--just might--be able
+to afford his own lawyer.
+ Mr. Chairman and members of the committee, Ohio families
+have been wronged. American families are being wronged, and it
+is time to just stop this. If I could just add one more thing,
+Mr. Chairman, and I know the light is on, the comment was made
+in the previous panel about 1,500 pages that we have filed. I
+do not apologize for filing 1,500 pages on behalf of 30 million
+victims in this country. The 1,500 pages represent not things
+that we did, not things that the victims did, but things that
+these defendants did.
+ Let me conclude with a quote from Judge Leon, which tells
+you what he thinks about this case and the gravity of this case
+when you look at whether 1,500 page is excessive: ``This is a
+case of monumental proportions. Indeed, it is a case unique in
+the annals of American industry and history and business at the
+highest levels. It has been regarded and referred to as the
+largest accounting fraud case in the history of the United
+States.''
+ I thank the Chair.
+ [The prepared statement of Attorney General DeWine can be
+found on page 44 of the appendix.]
+ Chairman Neugebauer. I thank the gentleman.
+ One of the things that appears to me is that the longer
+this goes on, obviously the longer the benefit to these three
+individuals, that there is not a lot of incentive out there as
+long as you can lawyer up and have all of these hearings and
+these depositions, and then you give Freddie and Fannie, and
+actually you give the taxpayers the bill for it. Is that your
+observation of what is going on here, is that this is really
+about, if we just keep churning here, that--
+ Mr. DeWine. Mr. Chairman, we want this case to be over. We
+want to be compensated. Thirty million victims want to be
+compensated. What these defendants are doing is lawyering us to
+death. They are showing up with dozens of lawyers. They are
+drawing this out, and I think Judge Leon said it best, if I
+could quote. He commented on the huge expense incurred by
+having so many defense lawyers, saying at a June 25, 2009,
+hearing that, ``The lawyers are doing pretty well. I am not so
+sure the taxpayers are doing pretty well, but the lawyers are
+doing pretty well in this deal.''
+ Chairman Neugebauer. Yes, I think the judge makes a good
+point there. I think the lawyers are doing well indeed, looking
+at these numbers.
+ And so, what could be done to begin a process to manage
+these fees and make--if they are going to continue this
+process, what are things that we could require or request that
+the conservator do to lower the cost of this process?
+ Mr. DeWine. Mr. Chairman and members of the committee, I
+think that is an excellent question. I know on this--I am on
+this side and you are on that side. Ultimately, you are the
+ones who have to make this determination.
+ But just since you asked, just maybe a comment, FHFA has a
+responsibility, it seems to me, to the taxpayers of this
+country. They have an obligation to conserve assets. They have
+an obligation to be concerned about what tax dollars are going
+out.
+ Even if you concede--and I don't concede this--that there
+is an obligation to indemnify Franklin Raines, Mr. Raines, who
+made $91 million, and even if we don't think he has the money
+to handle this, and we have to put that money up out front, it
+still seems that there are ways that FHFA could control this.
+How many lawyers do you really need? How many expert witnesses
+do you really need?
+ Now, it is not Judge Leon's job to tell the defense that
+they cannot bring more lawyers to the table. The scene, if I
+could describe the scene as an amazing scene, you have in Judge
+Leon's courtroom at these fairly routine hearings, pretrial
+conferences, you have a couple of lawyers for each who are
+sitting at the table, and then you can have a whole room full
+of the rest of the lawyers who are out there for the defense,
+all on billable hours, all not doing anything maybe but
+charging for thinking.
+ So FHFA has an obligation, it seems to me, to bring some
+reasonableness to this, some common sense to this, cut down on
+the number of lawyers, control the number of expert witnesses.
+Even if we believe that all these defendants are entitled to
+lawyers, somebody might be entitled to a lawyer, and I guess
+they can have as many lawyers as they want, but they are not
+entitled to have someone else pay for it.
+ Chairman Neugebauer. So have you all requested the trial
+date?
+ Mr. DeWine. We don't have a trial date. Judge--
+ Chairman Neugebauer. But have you requested--have you--
+ Mr. DeWine. We want to move forward on this as quickly as
+we can. We are now in the second phase of the depositions. We
+are in the depositions for the expert witnesses. And again, if
+I could explain, the problem is, when the other side comes up
+with 25 expert witnesses--and Judge Leon described it pretty
+well about these expert witnesses. Let me read what he said
+about these expert witnesses, because having 25 expert
+witnesses who have to be deposed over a period of time slows
+the process of the case.
+ At a June 14, 2010, hearing, Judge Leon said there is
+absolutely no way that so many experts will ultimately
+testify--actually testify--at court, admonishing Fannie Mae
+defendants, ``So you don't need to have five experts say the
+same damned thing. If one good one says it the right way, from
+your perspective, that is going to be more than enough. You
+don't need five to say it. It is not a me-too operation. So
+bear that in mind. Bear that in mind.'' The costs are just
+staggering.
+ Chairman Neugebauer. Mr. Capuano?
+ Mr. Capuano. Thank you, Mr. Chairman.
+ Mr. Chairman, I don't really have any questions for the
+attorney general. I get exactly what you are saying. You have
+been very clear. I don't disagree with what your parameters
+are. I am not exactly sure what we can do about it. I
+understand what you are saying, and that is why to some extent,
+as one of my colleagues said earlier, we are trying to play the
+cards we are dealt as of today and trying to move forward.
+ But I appreciate the points you raised. I agree with pretty
+much everything you have said. I am not exactly sure how we
+could accomplish what we want to accomplish, and I would be
+happy to hear later on at another time maybe some other ideas
+on how we might be able to do it.
+ At the same time, I also want to thank you for pursuing
+this matter as vigorously as you have, and wish you the best of
+luck as you go forward, because it will be important to get
+this thing settled, and it will be important to get these
+things answered and to get this issue behind us so that we can
+address the other issues related to Fannie Mae and Freddie Mac.
+Thank you.
+ Mr. DeWine. Thank you very much, Congressman.
+ Chairman Neugebauer. Mr. Fitzpatrick?
+ Mr. Fitzpatrick. Thank you, Mr. Chairman.
+ Attorney General DeWine, thank you for your time. I know
+that all of us here appreciate the fact that you are working
+hard to protect your constituents, the taxpayers of Ohio.
+ In the previous panel, Mr. Renacci of Ohio asked a great
+question to the witnesses. It had to do with the reasonableness
+of the attorney's fees. And the underlying assumption of his
+question was that reasonableness many times is in the eye of
+the beholder, as he said, or really the capacity of the payer
+to pay. And I guess my question is, if the Fannie Mae
+defendants, perhaps using Mr. Franklin Raines as an example, if
+they had to pay even a portion of the attorneys and the
+attorney's fees that were being paid on his behalf, do you
+think it would have had an impact on the number of attorneys
+who filled the courtroom the day that you described?
+ Mr. DeWine. Congressman, thank you for the question. Mr.
+Raines does, we assume, have a lot of resources, and I suppose
+if he wanted to fill the courtroom full of lawyers to be
+concerned and pay a lot of people to be thinking at the same
+time about his problem, he could do that. I am not sure any
+reasonable person would do that. I am not sure any defendant
+who has to reach into his own pocket, frankly, no matter how
+much money he or she might have, would have duplitive lawyers
+there at a fairly routine matter.
+ Congressman, it is one thing to go to trial and make sure
+you have enough lawyers there because you are going at it, and
+hard at it. It is something else, it seems to me, for a routine
+conference with the judge where there aren't huge matters to be
+thought out or be worried about. So I think the answer clearly
+is obvious, and that is no person in their right mind shows up
+with that many lawyers if they are paying for it themselves.
+ Mr. Fitzpatrick. And so, in this particular case, in your
+case, in the litigations that have been brought in Ohio, the
+taxpayers of Ohio are paying legal fees on both sides, I
+assume.
+ Mr. DeWine. That is right, and I think we don't want to
+forget the fact that each one of you represents some of these
+victims. We have 50 States that are represented, 30 million
+pensioners. These are mostly pension. It is interesting. Fannie
+Mae--I asked our lawyers who are working on this, why in the
+world are there so many pensioners? Why in the world so many
+pension systems? And the answer was, Fannie Mae marketed this
+as--and went for these pension systems and said, look, this is
+a very, very conservative investment.
+ So you have pensioners, 30 million of them, who through
+their representatives relied on this misrepresentation, first
+of all that it was a conservative investment, and second, they
+relied on the fact that they were getting facts about the
+condition of Fannie Mae. And that is one thing that is so
+ironic about this whole discussion in the previous panel, Mr.
+Chairman. There is no dispute about the facts. They have not,
+as I understand it, admitted liability, but we have had two
+regulators who have looked at this who have come to the same
+conclusion.
+ Fannie Mae settled with both of them, and in one even said
+we will not dispute in any way--we won't admit anything, but we
+will not dispute the factual determinations that we are
+agreeing to. So there is no dispute about what really happened
+here or that these are bad actors who did bad things.
+ Mr. Fitzpatrick. Thank you, Attorney General DeWine.
+ I yield back.
+ Chairman Neugebauer. Thank you.
+ Mr. Renacci?
+ Mr. Renacci. Thank you, Mr. Chairman.
+ Mr. DeWine, you are representing 30 million pensioners in
+your case here. Can you tell me what your costs are
+approximately?
+ Mr. DeWine. This case--and I am, by the way, Congressman,
+the fourth attorney general in Ohio to handle this case, or to
+oversee this case. We remained as the lead plaintiff because we
+had more pensioners. We had more at stake. Our costs are on a
+contingent basis. So if we win, the lawyers who are
+representing us, who my predecessors retained, they will get a
+certain percentage based on a contract.
+ But what is so aggravating is that, each day that goes on,
+we have a pension system in Ohio and pension systems in other
+States that are out this money. And you know, Congressman, the
+problems we are having, or the challenges we are having with
+the change in the market in the last few years, the down market
+with our pension system in the State of Ohio, and you know what
+that means. And we can only assume that most States who
+invested in Fannie Mae have a similar problem.
+ So this is not like the days when everything was going up
+and you could have a loss like this, and it would maybe not be
+good, but it wouldn't be as devastating. This is very tough for
+Ohio. It is tough for our pension system and the people who
+rely on it, the teachers, the firemen, and other public
+employees.
+ Mr. Renacci. Sure. What I was trying to get to was your
+actual costs in comparison to the number of people you are
+representing.
+ Mr. DeWine. I think a good way to look at it is, when we
+show up with 2 and they show up with 15, I think that is a
+pretty good indication. We try to do things in a reasonable
+way, and you do what you have to do in litigation. This is
+important litigation. No one thinks that you should not have
+lawyers. No one thinks that you shouldn't have two, whatever it
+takes.
+ But there comes a point, anybody who has tried civil
+litigation, as I know members of this committee have, that you
+just reach the point of absurdity, and we have reached that
+point today.
+ Mr. Renacci. Sure. All right. Again, I would assume that
+your cost per person is a lot less than the cost--
+ Mr. DeWine. It is going to be a lot less, much, much, much
+less. It is going to be a fraction of what their cost is. It
+simply has to be just based on numbers. And that is not even
+getting into the question of how much they are paid per hour.
+It is just a number of how many there are.
+ The same way with the expert witnesses. We are now--we bled
+so much. Taxpayers are bled. What this hearing--it seems to me,
+at least what my testimony, Mr. Chairman, at least in part is
+about is stop the bleeding.
+ We are headed into an era, or a period of time where we are
+going to have a lot more bleeding with 25 expert witnesses that
+Judge Leon has already said he is not going to let 25 in, but
+he is not going to stop people from taking depositions and not
+stop them from putting 4 of these people as potential
+witnesses. And each one is getting paid, according to documents
+filed with the court, $600 to $1,500 an hour.
+ So the lawyers are getting a lot, but these experts are
+getting a lot more.
+ Mr. Renacci. Thank you. I yield back.
+ Chairman Neugebauer. I thank the gentleman.
+ Mr. Canseco?
+ Mr. Canseco. Thank you, Mr. Chairman.
+ And thank you, Attorney General DeWine, for being here
+today, and thank you for taking a leadership role in
+representing the people of Ohio and also the people of the
+United States in this very important issue.
+ Let me ask you a technical question, because I am just
+appalled at this very outrageous and egregious amount of
+attorneys' fees. I have been a lawyer for 35 years and never in
+my life, not even in the tobacco cases, have I seen legal fees
+amount to such amounts.
+ Is there any way that you can challenge the necessity for
+so many witnesses, so many expert witnesses, so many attorneys
+coming in and limit the number of attorneys who go in there,
+and also find standing to challenge the fees that are being
+charged?
+ Mr. DeWine. Congressman, I think that is certainly a good
+question. I guess my answer would be that is not something that
+normally counsel for one side does. I think that only goes back
+to FHFA, their oversight responsibility. I think they have some
+obligation, even if they believe that indemnification is
+correct, even if they believe there is no choice in this
+matter, which I disagree with, they have responsibility to
+taxpayers to limit this.
+ And to put it back on the judge and to say that, as the
+previous panel did and to say this is something, ``Well, gee,
+Judge Leon should do this,'' he has commented on it. He has
+made a point about it. He said that he is not going to let, for
+example, that many expert witnesses testify in court because he
+is--this is a case that will go on for a long, long time, and
+he has every obligation to try to make it an efficient use of
+time.
+ But as far as a judge looking up or us looking up and
+trying to stop them from bringing in a whole bunch of lawyers,
+I don't think--I don't know what your experience has been, but
+at least in my experience in a practice, that is just normally
+not done.
+ I am doing today what I think I need to do, and that is
+talk about this issue, raise this issue, and say at least, in
+my opinion, FHFA has an obligation. They have an obligation to
+do something about this.
+ Mr. Canseco. Thank you.
+ Mr. DeWine. Thank you.
+ Chairman Neugebauer. Thank you, Congressman.
+ Mr. Canseco. I yield back my time.
+ Chairman Neugebauer. Attorney General DeWine, thank you
+very much for coming today and for your testimony.
+ The Chair notes that some members may have additional
+questions for today's witnesses, which they may wish to submit
+in writing. Without objection, the hearing record will remain
+open for 30 days for members to submit written questions to
+these witnesses and to place their responses in the record.
+ If there is no other business before the committee, we are
+adjourned.
+ [Whereupon, at 4:24 p.m., the hearing was adjourned.]
+
+
+ A P P E N D I X
+
+
+
+ February 15, 2011
+
+
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