Taxpayers have advanced almost $50 million in legal payments to defend former executives of Fannie Mae and Freddie Mac in the three years since the government rescued the giant mortgage companies, a regulatory analysis has found.

In that time, $37 million has gone to three former Fannie Mae executives accused of securities fraud, according to the analysis by the inspector general of the Federal Housing Finance Agency, which oversees both companies. Acting as their conservator, the agency is charged with protecting taxpayers from further losses at Fannie Mae and Freddie Mac. Those losses now stand at $183 billion.

Although the legal costs for the former executives are a small fraction of the companies? mortgage losses, it is imperative that the housing agency move to limit these fees, said Steve A Linick, inspector general of the agency.

?FHFA and Fannie Mae believe that their options are limited in paying current legal fees for former officers and directors,? Linick said in a statement. But he called for greater oversight. The legal costs are the responsibility of taxpayers because of contracts struck by the companies before they collapsed. Those agreements, which are typical in corporate America, state that legal fees incurred by executives defending against lawsuits will be advanced by the companies. If a court or jury rules that officials breached their duties or acted in bad faith, the officials will have to repay the advances.

But with legal outlays since 2004 reaching $99.4 million for Franklin D Raines, Fannie Mae?s former chief executive; J Timothy Howard, former chief financial officer; and Leanne G Spencer, former controller, it seems unlikely that the taxpayers will ever recover the money even if some or all of them are found liable. The three former executives were accused of a comprehensive accounting fraud that the company?s former regulator said was aimed at maximising their bonuses.

The inspector general?s report noted that the legal contracts could have been repudiated when the companies were taken over in September 2008. They were not, though, and taxpayers have covered the costs since then. Taxpayers are also bearing the cost of recent lawsuits by the SEC against the top executives who were running the mortgage companies when they failed.

Adding to the woes, a new plan says borrowers would begin paying slightly higher fees, helping private lenders compete.

Commercial & investment units: Volcker redraws line

Feb 22

The Volcker Rule, and its limitations on bank trading, may have the unintended effect of dividing the world back into investment banks and commercial banks. The unusual twist here is that Goldman Sachs and Morgan Stanley may end up stuck on the wrong side of the fence, treated under the law as commercial banks instead of the investment banks they once were.

The backdrop to this issue is that it is increasingly clear that banks are simply unable to make as much money from proprietary and other trading businesses as they did before the financial crisis. Take Goldman Sachs. In 2007, Goldman had revenue of $7.6 billion from traditional investment banking, but $31.2 billion in revenue from trading-related operations. Last year, Goldman had just $17.3 billion in revenue related to trading operations.

This is a trend likely to accelerate. Under the Dodd-Frank regulatory overhaul, derivatives are to be traded on central clearing agencies rather than between investment banks as before the financial crisis. Heightened bank capital requirements prevent warehousing large amounts of securities and increase the cost of financing. Then there is the Volcker Rule, which is likely to substantially reduce much of the banks? profits from their trading businesses.

Last week, Moody?s Investors Service put Goldman, Morgan Stanley and 15 other global banks on a ratings watch, saying that ?the combination of changed operating conditions and increased regulatory requirements and restrictions has diminished these firms? longer-term profitability and growth prospects.?

The Volcker Rule, to be sure, also has benefits for the large banks. The more complicated the Volcker Rule, the less regulators will be able to understand it, leaving the banks with more loopholes. In addition, the rule may pose a barrier to entry to some commercial banks that can?t afford the sophisticated regulatory apparatus to comply with the rule.

But given the sums involved, the question is whether we have reached a breaking point. How will Goldman, Morgan and the other banks that depend on trading revenue try to reclaim their profits? A possibility would be for the banks to stop being bank holding companies, a regulatory status they chose in order to survive the financial crisis.