Severances assailed for Fannie, Freddie

The executives who managed Fannie Mae and Freddie Mac over the past decade as the mortgage giants teetered toward collapse collected tens of millions of dollars in compensation, and some walked away with what critics now consider to be comparatively small punishments for leaving behind a mess for taxpayers.

As the fallout from the government’s emergency takeover of the two companies continues, lawmakers, presidential candidates and shareholders are now examining the large compensation and severance packages for the top executives and the allegations of abuse that led to what many expect to be the largest financial bailout in U.S. history.

In a letter this week to James Lockhart, director of the Federal Housing Finance Agency (FHFA), asking for a review into pending plans for a proposed $24 million severance payout to the outgoing CEOs of the two mortgage firms after the takeover, Democratic Sens. Charles E. Schumer of New York and Jack Reed of Rhode Island called the pay and bonus packages “way out of line.”

“In our capacity as members of the Senate banking committee, we write today to urge you to exercise your authority … to review the compensation packages awarded,” they said, noting that Mr. Lockhart is the new conservator of Fannie Mae and Freddie Mac.

“We find it way out of line that these two executives will be rewarded with millions of dollars in bonus compensation at a time when taxpayer dollars may have to be deployed to cover any financial losses caused by errors in management,” they said, adding that they wanted to ensure that “taxpayer dollars are not utilized to enrich the same individuals responsible for preventable financial problems that have weakened Fannie Mae’s and Freddie Mac’s ability to weather the current crisis in the financial markets.”

Richard Ferlauto, director of corporate governance at the American Federation of State, County and Municipal Employees union, a large pension holder, said the “extreme pay” received historically by executives at Freddie Mac and Fannie Mae “were really the precursors to the problems that the companies ran into.”

“The perverse system of pay we’ve got in this country provided some motivation for the CEOs to take extreme risks, knowing that they were going to get their payday, no matter what happened to the shareholders,” said Mr. Ferlauto.

A frequent critic of the Freddie Mac and Fannie Mae pay packages, he noted that while it was unlikely several of the large public pension funds heavily invested in the companies would bring lawsuits against the federal government, they could sue the outgoing management on issues of transparency, incorrect guidance, fraud and market manipulation.

In taking over the companies, Treasury Secretary Henry M. Paulson Jr. said his immediate goal simply is to preserve Fannie and Freddie largely in their current form as quasi-governmental agencies and keep them solvent until Congress and a new president can decide how to reshape and resize them.

Former top executives such as Franklin Raines of Fannie Mae and Leland Brendsel of Freddie Mac received huge annual paychecks in the millions of dollars but faced far smaller penalties, critics point out.

Mr. Raines, for instance, collected $90.1 million in salary, bonuses and stocks over his last six years at Fannie Mae - also known as the Federal National Mortgage Association - and was ousted in December 2004 during an investigation into whether accounting irregularities allowed him to qualify for larger bonuses.

In April, he settled a civil lawsuit with the Office of Federal Housing Enterprise Oversight (OFHEO) - now known as the FHFA - and was fined $24.7 million.

Mr. Raines has not been available for comment, but in a statement at the time of the OFHEO settlement, he said that while he had accepted managerial accountability for any errors committed by subordinates while he was CEO, “it is a very different matter to suggest that I was legally culpable in any way.

“I was not. This settlement is not an acknowledgment of wrongdoing on my part, because I did not break any laws or rules while leading Fannie Mae,” he said.

But Jill E. Fisch, professor of business law at the University of Pennsylvania, described the settlement as “pretty small,” adding that Congress tried to curb accounting fraud with the Sarbanes-Oxley Act of 2002. The sweeping accounting law, in part, targeted executives accused of misstating their earnings, calling for them to forfeit bonuses tied to the inflated earnings.

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