Human Capital & Careers

Fannie and Freddie’s New Worry: Exec Pay

Federal lawmakers target "excessive" salaries and bonuses, even though there's a big management job ahead for the two troubled lenders.
Roy HarrisJuly 22, 2008

As the challenges to Fannie Mae and Freddie Mac continue to be severe — based on new estimates of exposure to fair-value losses in their investments — the next hurdle may be finding a way to compensate top executives trying to lead the mortgage companies out of the wilderness.

Democratic and Republican lawmakers are beginning to see curbs on executive pay at the two quasi-government institutions as necessary to reduce constituent objections to any rescue plans, according to an Associated Press report.

Senator Bob Casey, a Pennsylvania Democrat, said in a letter to Treasury Secretary Henry Paulson that “past practices of awarding huge bonuses and higher executive salaries call into question the prudence of extending an unlimited credit line of taxpayer money to the companies whose management practices have been questionable over recent years.” He called for capping executive pay “at reasonable levels” for the two firms. He added that he believed the company boards should sue to recover earlier bonuses paid.

Fannie Mae’s president ahd chief executive, Daniel Mudd, received compensation valued by the company at $12.2 million last year, including a $2.2 million bonus, according to the AP.

The wire service noted that Fannie Mae and Freddie Mac’s critics, including both Republicans and Democrats, have often complained about rich compensation during good times, as well.

Meanwhile, the regulator for Fannie and Freddie, the Office of Federal Housing Enterprise Oversight (Ofheo), said the two mortgage companies might have to add to writedowns to reflect expanded purchases of non-guaranteed subprime and other mortgage securities in 2004 and 2005, while other investors were fleeing to safer investments, Bloomberg News reported.

In its annual mortgage market report, Ofheo said that $217 billion worth of the non-agency securities had been hit with falling values, forcing other financial firms to write down their holdings. The non-guaranteed subprime securites made up 9.2 percent of the companies’ combined portfolio, the Ofheo report said.

“To the extent that those institutions recognize fair value losses on their private-label portfolios under GAAP, Fannie Mae and Freddie Mac may have to do so as well,” the Ofheo report said.