Las Vegas Sun

March 28, 2024

Sun editorial:

Double whammy

Some criminal suspects in financial crisis could use public money in their defense

Executives associated with Fannie Mae and Freddie Mac might someday be prosecuted by the federal government — while simultaneously being defended by the federal government.

Only in the wacky world of bailouts could this happen.

Reacting to a fast-failing economy, the federal government took over both mortgage giants two months ago. It acted before examining employment contracts held by the executives.

The contracts stipulate that any legal fees incurred relating to the executives’ work will be fully covered by their employers. Oops.

The time to have rewritten those contracts was before the takeover, when the government had leverage. Now it appears that little can be done. If the government refuses to pay for legal fees in the event of federal prosecutions, it could be sued for breach of contract.

Either way taxpayers will almost certainly be out millions of dollars, probably tens of millions. Taxpayers are also on the hook now for paying legal fees if the executives are sued by shareholders.

When things were working properly, Fannie and Freddie bought mortgages from banks. This gave banks liquidity for making more loans, and it provided opportunity for investors to buy mortgage-backed securities from the trusted institutions. But everything went horribly — possibly criminally — wrong when the two companies dived into the subprime mortgage market.

When that market collapsed, banks’ access to ready cash dried up, investors were burned and the value of mortgages owned or guaranteed by Fannie and Freddie, once more than $5 trillion, became a big unknown, contributing mightily to a nationwide financial panic.

It is bad enough that taxpayers must come to the rescue with gargantuan bailouts. But it will be just outrageous if they also end up covering the legal costs for people who are possibly responsible for the mess.

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