The regulator of government-controlled Fannie Mae and Freddie Mac has softened his stance on executive compensation at the two secondary lenders and agreed to significantly cut the maximum compensation that top management can receive. Meanwhile, the latest request for taxpayer assistance pushes total bailout costs for the pair to nearly $190 billion so far.
The Federal Housing Finance Agency’s approval last year of $12.8 million in bonuses to 10 executives at Fannie and Freddie drew sharp criticism from the media and politicians.
Sen. John McCain (R-Ariz.) and Jay D. Rockefeller (D-W.V.) were among seven legislators to sign on to a planned amendment that would prohibit such bonuses while the two companies are being kept on life support by the U.S. government.
FHFA Acting Director Edward J. DeMarco responded by noting that the companies’ executives have the skills necessary to manage the credit and interest rate risks on $5 trillion in mortgage assets.
“I have concluded that it would be irresponsible of me to risk this enormous contingent taxpayer liability with a rapid turnover of management and staff, replaced with people lacking the institutional, technical, operational and risk management knowledge requisite to the running of corporations with thousands of employees and more than $2 trillion in financial obligations each,” DeMarco said at the time.
But the regulator issued a notice Friday indicating that new executive compensation programs for 2012 slashed the pay for the top five executives at each firm by nearly 75 percent. The caps place the executives’ pay at 30 percent less than the median for all executives in comparable positions at other companies.
The plan also eliminates bonuses and establishes a target for new chief executive officer pay at $500,000, leaving the CEOs at more than 50 percent below the median pay for comparable CEOs. FHFA said the limitations are even more restrictive than those imposed on financial institutions that participated in the Troubled Asset Relief Program.
However, DeMarco noted that any further cuts could impair the enterprises’ safety and soundness.
“I believe the new compensation program strikes the balance between prudent executive pay including the elimination of bonuses, with the need to safeguard quality staffing in order to protect the taxpayers’ investment and achieve the objectives in the conservatorship scorecard,” DeMarco said in the statement. “A sudden and sharp change in pay from these levels would certainly risk a substantial exodus of talent, the best leaving first in many instances.
“A significant increase in safety and soundness risks and in costly operational failures would, in my opinion, be highly likely.”
The FHFA chief said that the number of senior executives at Fannie and Freddie have been reduced to 70 from 91 before they were taken over by the government. More than 80 percent of the remaining top managers earn less than the median for their counterparts at other organizations.
Among just the top 15 executives at each of the government-controlled enterprises, target pay has been reduced by 63 percent this year compared to before Fannie and Freddie were thrown into conservatorship.
FHFA said that pay has been frozen for two years for mid-level managers and rank-and-file staff, while expenses have been reduced as a result of attrition and layoffs.
Other limitations built into this year’s compensation program include a restriction on retirement plans, a prohibition against grossing up expense reimbursements and the possibility of claw backs for “gross misconduct, gross negligence, conviction of a felony or erroneous performance metrics.”
The reductions have come even as the market’s reliance on Fannie and Freddie has grown.
But staffing has been increased in loss mitigation and support for the Home Affordable Modification Program — two areas “critical to the success of the conservatorships.”
McLean, Va.-based Freddie reported Friday a 2011 net loss of $5.3 billion, prompting a request for a $146 million draw from the Department of the Treasury. Including the latest request, but excluding $7.2 billion in dividends paid by Freddie, the Treasury’s has forked over $72.3 billion in support for Freddie so far.
Including a request for $4.6 billion request from Fannie for its fourth-quarter deficit, but not including $19.8 billion the Washington, D.C.-based company has made in dividend payments, the Treasury has distributed $117.1 billion to Fannie.
