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.
"The idea was to take away the incentive to engage in earnings mismanagement," Ms. Fisch said.
Fannie Mae and Freddie Mac registered in 2003 and July of this year, respectively, with the Securities and Exchange Commission, making them subject to Sarbanes-Oxley.
In Mr. Raines' case, the OFHEO accused him, along with Fannie Mae Chief Financial Officer J. Timothy Howard and Controller Leanne Spencer of altering earnings over six years, failing to uphold internal regulations and releasing misleading financial reports.
Mr. Howard - who collected $30.2 million in salary, stocks and bonuses over the past six years of his employment at Fannie Mae, according to OFHEO - was fined $6.4 million. Ms. Spencer, who made $7.3 million in her last six years as the company's comptroller, was fined $275,000.
Steven Salky, Mr. Howard's attorney, said in a statement at the time that the settlement was "a capitulation by OFHEO, reflecting that its concocted claims never had an ounce of merit." He said Mr. Howard was "justifiably proud of his 23-year record of accomplishment at Fannie Mae."
David S. Krakoff, attorney for Ms. Spencer, said his client "devoted herself to Fannie Mae's mission of providing affordable housing to millions of Americans" for 15 years and was recognized as an "outstanding controller for Fannie Mae, where she conducted her duties with the highest integrity."
Mr. Raines and others kept their pension plans and some stock options, although their stock was likely to be worth very little after the government conservatorship.
Freddie Mac, the Federal Home Loan Mortgage Corp., has faced scandals of its own.
Mr. Brendsel, who was the company's chief executive officer from 1987 to 2003, made at least $7.4 million in 2002 alone, according to the company's proxy documents. He brought in $33.1 million in his last six years at Freddie Mac, where he worked from 1985 to June 2003.
He was accused in 2003 of misconduct, allowing improper earnings management and failing to follow internal controls. The OFHEO wanted to fine him $33.9 million in losses, but Mr. Brendsel was fined just $13 million in 2007.
Kevin M. Downey, Mr. Brendsel's attorney, said in a statement that while his client and OFHEO "disagree strongly about what happened in the past at Freddie Mac," Mr. Brendsel agreed to a settlement because "it requires that most of the money paid will be used to assist families who are threatened with the loss of their homes in the current mortgage credit crisis."
Mr. Downey noted that Mr. Brendsel "did not admit and specifically denies any liability in connection with the matters alleged by OFHEO."
David Glenn, the company's former president and chief operating officer, was fired in June 2003 for interfering with an accounting investigation. He told special counsel that he altered a spiral notebook of notes handed over in the investigation.
Mr. Glenn, who earned $18.4 million in his last five years at the company, agreed in late 2003 to pay a $125,000 fine and cooperate with the investigation. He was also denied about $13 million in severance pay.
"David Glenn has settled all matters with OFHEO, and in doing so and providing his full cooperation, continues to demonstrate his strong belief that, at all times, he acted properly and in the best interests of Freddie Mac and its shareholders," Mr. Glenn's attorney, Thomas Vartanian, said in a statement at the time.
Executive salaries, bonuses, stock options and severance packages have long been a source of criticism in corporate America, particularly in cases where executives have run a company into the ground but still make out with a "golden parachute" in the form of millions of dollars in severance pay.
Members of Congress and the banking industry have already called for severance packages to be cut for Daniel Mudd, chief executive at Fannie Mae, and Richard F. Syron, chief executive at Freddie Mac.
Sen. Jim Bunning, Kentucky Republican, introduced a bill Tuesday that would prohibit the former executives at Fannie and Freddie from receiving their severance pay. Estimates of the packages vary, but some say they could reach $9 million for Mr. Mudd and $14 million for Mr. Syron.
Presidential nominees Sens. Barack Obama and John McCain have called for the executives' severance pay to be withheld.
Mr. Syron took in $18.3 million in salary, bonuses and stock awards last year, representing a 24 percent raise from the previous year.
Mr. Mudd took in $11.6 million last year, just a 3 percent increase from 2006.
Mr. Syron and Mr. Mudd have hired attorneys to represent them in any pending government negotiations.