by Craig Masters
FHFA-OIG was established by the Housing and Economic Recovery Act of 2008 (HERA), which amended the Inspector General Act of 1978. FHFA-OIG is authorized to conduct audits, evaluations, investigations, and other activities of the programs and operations of FHFA; to recommend policies that promote economy and efficiency in the administration of such programs and operations; and to prevent and detect fraud and abuse in them.
That’s the way a 29-page report released February 22, 2012 entitled, “Evaluation of FHFA’s Management of Legal Fees for Indemnified Executives” begins. This report is about an extensive study into the amount and use of taxpayer money being spent to both prosecute and defend the former senior executives of Fannie Mae and Freddie Mac.
This is only the latest in a series of special reports covering taxpayer paid legal payments for three former senior executives, Franklin D. Raines, J. Timothy Howard, and Leanne G. Spencer, who have paid fines for manipulating stock prices of Fannie Mae. But their real crimes were those that collapsed the federally-backed mortgage industry and led to what the mainstream media labeled a “bank bailout” back in September of 2008.
As the report searches for the reasons taxpayers should continue to pay legal fees, currently at about $200million, for the indemnified executives of Fannie and Freddie, the root cause of the collapse of the housing mortgage industry is traced all the way back to the second term of Bill Clinton followed by years of failure of oversight in the early 2000’s by the House Banking Committee chaired by Barney Frank (D.MA)
Fannie Mae and Freddie Mac are government-sponsored private corporations that more or less co-sign for people who need help getting a home loan. They buy mortgages so sellers (banks) can have the money to lend or cash checks or whatever. But there are other businesses that buy and sell bundles of mortgages, often called mortgage-backed securities (MBS). In fact, in a convoluted way, Fannie and Freddie were allowed to borrow against their own MBS. It gets complicated, but these enterprises were allowed to buy government bonds with money they were supposed to collect from homeowners. If homeowners didn’t pay their mortgages, Fannie or Freddie might have to pay the banks. So if Fannie or Freddie didn’t collect from homeowners, the money they had expected to have to loan to the government by buying bonds was essentially the taxpayers’ money being taken as taxes, which was then used to loan the government money which the government paid back by collecting taxes.
Put it another way. I have $8.00. I loan $9.00 because I expect to receive $10.00. But, until I collect the $10.00 I have nothing – in fact, even on paper I am $1.00 in debt. The only way this works is if I can print enough money to pay myself back whatever amount I need to end up with $10.00. The more this happens the more money I have to print.
As of December 31, 2011, Treasury (taxpayers) has invested a total of $183 billion in Fannie and Freddie in the form of purchases of shares of senior preferred stock. The FHFA-OIG report explains that taxpayers’ money was used, not to cover what was owed to banks, but to give the money to Fannie and Freddie who were then entrusted to operate as usual. Ironically, the taxpayers bought the same kind of stock the government essentially rendered valueless in the General Motors take over. Moreover, inflating stock prices was the crime the senior managers were convicted of in the first place.
Since this most recent FHFA-OIG report deals mainly with legal defense arising from alleged crimes which occurred more than a decade ago, the question arises as to why it has taken so many years for this information to be released. The answer to that question is difficult, but perhaps addressed in page nine where details about a class action suit against the senior executives are mentioned. In the preparation stages, called the discovery process, more than 120 depositions were taken. The process has been ongoing since 2004 and has produced sixty-seven million (67,000,000) pages of documents.
Sixty-seven million pages divided by roughly 120 means that the lawyers have successfully generated more than half a million pages for each deposition. If you could print 2 pages per second it would take more than a year of 24/7 printing just to make one copy of each page. Then, if you could read 20 pages per minute and read 8 hours a day 5 days a week 50 weeks a year, you would be able to read through all those important pages in just under 28 years.
At least this 29-page report helps us understand why we had to pay an office full of accountants and lawyers to oversee an agency which was the government oversight committee to keep tabs on a couple of government-sponsored corporations which were spending taxpayer money by the truckload defending some senior executives in a legal battle prosecuted and defended by taxpayers.