The FHFArnOffice of Inspector General (OIG) recently evaluated FHFA’s oversight of thesernpayments.  FHFA, the OIG said, confrontsrna challenging balance of interests.  Itrnwants to avoid potential losses by defending ongoing lawsuits against thernEnterprises while at the same time controlling costs.  OIG said that while the agency available toolsrnare limited, it can and should do more to limit and control legal expenses. </p

FHFA was authorized to reject or repudiate contracts withinrna reasonable period, but made the determination at the inception of thernconservatorship not to do so and has not revisited the decision.   With thernpassage of time this option may no longer be available and might subject thernagency to additional costs if former officers brought suit challenging suchrnrepudiation.</p

FHFA may possess the ability to limit future indemnificationrnagreements by capping total or specific payments at pre-determined amounts,rnusing preferred providers who agree to limit costs, pre-approving payments,rnelecting to settle FHFA enforcement proceedings only if the officer or directorrnadmits to liability, and modifying future indemnification agreements to permitrndenying indemnification in situations that fall short of final courtrnadjudications. </p

Obviously none of these proscriptive solutions affectrnon-going litigation.  However, on Junern20, 2011, FHFA issued a final rule that provides that claims by shareholdersrnwill receive the lowest priority in a receivership behind administrativernexpenses of the receiver or an immediately preceding conservator, other generalrnor senior liability of the regulated entity, and obligations subordinated tornthose of general creditors.  It alsornprovides that FHFA will not pay securities litigation claims against arnregulated entity during conservatorship unless the FHFA Director determines itrnto be in the best interest of the conservatorship.  </p

FHFA unsuccessfully invoked this regulation in a pendingrnclass action suit against Fannie Mae in the District of Colombia and therndecision is being litigated.  If thernregulation survives, it would mean that should the plaintiffs obtain judgment,rnin any reorganization including receivership that judgment would bernsubordinated to all other claims by other creditors.  This is especially significant as it isrnunlikely that the Enterprises will ever earn enough to repay current debts includingrnthe $183 billion owed to the Treasury, let alone future obligations.  </p

“Accordingly, if the Enterprises are unable to make anyrnpayments with respect to legacy securities claims, there would appear to bernlittle value in having them continue to participate in ongoing litigation.”</p

As was stated above, however, this cannot be a definitivernanswer until the legal challenges involving the regulation are settled and thernregulation itself does not necessarily absolve the Enterprises of thernobligation to provide indemnification.  </p

The Enterprises have adopted various cost containment measuresrnrelative to the current litigation and OIG said that these have resulted inrncost savings but FHFA has not independently evaluated them.  FHFA-OIG believes that, given the significantrnamounts of taxpayer money involved and the issue’s high visibility, FHFA mustrncontinue to scrutinize intensively the Enterprises’ advances in order to limitrncosts.

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