Outraged About Fannie and Freddie's Legal Bills?

The consequences of Fannie Mae and Freddie Mac's bailout continue to get uglier and uglier. We already know taxpayers will be on the hook for at least $150 billion of losses that the mortgage companies have incurred. Now we learn of another messy outcome: Americans are also on the hook for Fannie and Freddie's still growing legal bills. And their cost is already in the hundreds of millions of dollars. The natural reaction to this is outrage, but how angry should we be?

Gretchen Morgenson of the New York Times provides the numbers. She says taxpayers are on the hook for around $160 million in legal bills so far. A large portion of this total went to pay for litigation surrounding accounting manipulation by Fannie Mae prior to the mortgage crisis taking hold. Millions of dollars have also been spent since, as suits continue to be brought against the companies.

Why Bailouts Are Bad

The first sort of glaringly obvious lesson here is that bailouts are bad. When the government took over Fannie and Freddie it agreed to also cover all of its legal expenses. That created a very strange circumstance in some cases. For example, some of the lawsuits regarding the accounting manipulation were brought by government oversight offices. So that means the government is paying for both sides of the litigation now, since it's covering the defendants' bills and obviously its own.

Bailouts Are Messy

Something else we probably could have predicted: bailouts are very messy. If a firm needs a massive bailout, chances are pretty good that some shenanigans took place somewhere along the way that led to its collapse. If the government takes it over and becomes responsible for its legal fees, then it shouldn't be too surprised when the bills start stacking up. That will leave taxpayers will be on the hook for those legal expenses.

Do We Need Rulemaking On Bailouts?

In theory, bailouts shouldn't happen anymore. The non-bank resolution authority was created to prevent the government from ever having to take over a company again. Of course, this assumes that the new regulatory tool will work. Financial reform didn't explicitly tackle situations where the government finds itself in a situation where it feels forced to take over a firm going forward -- it just assumed that would never happen again. This assumption isn't enough. If Congress passes rules surrounding things like legal bills and executive compensation, then this could make such bailouts a little easier to stomach. For example, one rule could be that executives must be responsible for their own legal expenses whenever a firm is rescued. Even though we hope to never see another bailout, there is some value in being practical about the matter.

A Drop in the Bucket?

Finally, this news should definitely outrage taxpayers. At $160 million, every man, woman, and child in the United States would have to pay 50 cents to cover Fannie and Freddie's legal bills. And yet, compared to the full bailout cost for Fannie and Freddie, this is actually a drop in the bucket. If you consider the bailout's still growing $150 billion cost to taxpayers thus far, then these legal bills amount to one-tenth of one-percent, or 0.1%, of the total. So while we shouldn't shrug this problem off, we also shouldn't lose site of the bigger issue: that the government backing of the mortgage market resulted in a cost of at least $480 for every one of the 311 million people living in the U.S.