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Fannie, Freddie Chiefs Still Get Big Paychecks

Friday, 08 Jan 2010 11:49 AM

As the nation's thoughts turned to eggnog and gift-giving on Christmas Eve, the news hit: "Fannie Mae, Freddie Mac executive compensation significantly reduced."

Better yet, the government said the pay would be more aligned with "taxpayer interests."

All this sounded like a reason for some holiday cheer. One might expect the government to keep pay under tight control at the mortgage giants, which have taken $111 billion in taxpayer money over the last year and just got a blank check for more.

Instead, the taxpayer got scrooged.

Left out of the government's news release were the numbers that really mattered — like the fact that Fannie and Freddie's CEOs could make at least $6 million all in cash for 2009, and possibly more. That puts them on track to make 15 times what President Barack Obama earns, who is technically their boss.

A year after Fannie and Freddie got bailed out and amid continued promises from the Obama administration to rein in executive pay, the plump pay packages — which were disclosed in the companies' securities filings — show not much has changed.

"This highlights the myth of pay reform out of Washington," said J. Robert Brown, a professor of business law and corporate governance at the University of Denver and expert on compensation issues. "This is a sign that the government isn't going to do much about the problems of pay."

This should have been an easy one for the government, which wields power at Fannie and Freddie unlike anywhere else. Both companies were taken over by regulators in the late summer of 2008 after being crippled by nearly $15 billion in losses as the housing market tanked.

Fannie and Freddie play a vital role in the mortgage market by backing three-quarters of all new residential mortgages. They purchase loans from lenders and sell them to investors with a guarantee against default.

Traditionally, the companies had backed loans to relatively safe buyers, but they lowered their standards during the housing boom by getting into risky mortgages. Not only are those loans defaulting at a record pace, but formerly reliable homeowners with good credit are also defaulting in increasing numbers now that one in 10 Americans is out of work.

As their losses mounted, Fannie and Freddie got another gift from U.S. taxpayers on Dec. 24: Now the government will cover any of their losses through 2012, lifting an earlier cap of $400 billion.

"On Christmas Eve, not only do they announce unlimited taxpayer exposure to losses, they also come out with big pay and bonuses for the executives," said Rep. Jeb Hensarling, a Republican from Texas who has called for congressional hearings on the matter. "This whole experience is surreal."

The government's move to back all losses at Fannie and Freddie raises more questions about their future. There have been calls from lawmakers and industry groups to transform or replace the mortgage giants, but the Obama administration has yet to lay out an overhaul plan.

The government makes a fair point that despite the companies' troubles, Fannie and Freddie play an integral role in the housing recovery and must be led by competent executives.

"The enterprises must attract and retain the talent needed to accomplish these objectives," said Edward DeMarco, the acting director of the Federal Housing Finance Agency, which regulates the mortgage companies. His comments came in a Dec. 24 statement announcing the agency's approval of the pay at both companies.

None of the regulators or companies would discuss the compensation beyond what they had already disclosed.

There isn't a right answer for how much Fannie and Freddie's executives should earn because there is no magic number that can be put on any executive's pay at any company.

The government's announcement made a big point about the pay packages for the CEOs at Fannie and Freddie being 40 percent less than what the top executives at those companies got before the government takeover.

That's fine, but let's remember that these failed companies are now owned by taxpayers. The government didn't have to offer them public-sector pay, but that doesn't mean they should be compensated at market rates for leaders of Fortune 500 companies.

Regulators consulted with the government's pay czar, Kenneth Feinberg, on how to design Fannie and Freddie's executive compensation. The FHFA said that the new pay packages use the "same general structure" as Feinberg implemented at the seven companies receiving the largest amount of bailout funds under the $700 billion Troubled Asset Relief Program, or TARP.

At companies including AIG and GMAC, Feinberg cut cash payouts and boosted stock compensation, most of which executives have to hold for at least two to five years.

Fannie and Freddie did something different. With the stocks of both companies nearly worthless, there was little choice but to pay their top executives in cash. Two-thirds of the 2009 pay isn't hinged on performance, but executives have to stay at the company to receive it.

According to securities filings, Fannie's CEO, Michael Williams, and Freddie CEO Charles "Ed" Haldeman Jr. each got $900,000 in salary for 2009. They also will get $3.1 million in what is known as "deferred salary" that will pay out in four cash installments over this year, corresponding with the quarter it was earned in 2009.

The CEOs then each stand to earn at least another $2 million in cash if they met certain 2009 performance goals. It can be higher than that if they exceed the goals. That compensation will be paid out in 2010 and 2011.

"This compensation is coming in the form of payments that they are more likely to get, without much risk," said Kevin Murphy, a professor at the University of Southern California who advised the Treasury Department on pay issues last summer.

There was a chance here for a break in the cycle of bloated executive pay. Instead, we got business as usual.

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As the nation's thoughts turned to eggnog and gift-giving on Christmas Eve, the news hit: Fannie Mae, Freddie Mac executive compensation significantly reduced. Better yet, the government said the pay would be more aligned with taxpayer interests. All this sounded like a...
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2010-49-08
Friday, 08 Jan 2010 11:49 AM
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