Fannie, Freddie CEOs Took Millions, Far More Than Gingrich
Executive compensation at the mortgage giants is the real scandal.
November 20, 2011 - 12:00 am
Fannie Mae and Freddie Mac are back in the news, as it was recently revealed that Freddie Mac paid over $1 million to presidential candidate and former Speaker of the House Newt Gingrich to be a consultant.
Gingrich maintains he simply gave advice to the company, which was not followed — this is not illegal. As Bryan Preston points out, Gingrich is merely guilty of feeding at the government trough. While troubling, this is hardly a matter comparable to that of top executive compensation at Fannie and Freddie: they took millions, while taxpayers shoveled out billions to try to rescue the giants.
Rep. Darrell Issa (R-CA), chairman of the House Committee on Oversight and Government Reform, released a report on their compensation just prior to a November 16 hearing on executive salaries at the mortgage giants. The testimony was rather interesting: Issa asked several questions of both Fannie Mae CEO Michael Williams and Freddie Mac CEO Ed Haldeman regarding their compensation. They didn’t seem to be able to remember how much money they’d made in recent years.
Williams has been with Fannie for decades. He could remember how much money he’d made in 1991 when he started — $115,000 — but not how much he made the year before he became CEO, nor the first time he made more than $1 million in a year. Such a thing should be memorable, as Issa noted.
Meanwhile, Haldeman — who made roughly $9 million over the last two years at Freddie — couldn’t remember how much money he’d made his last year in the private sector.
According to the report, the actual numbers are staggering:
In 2009 and 2010, the Enterprises’ (ed. note “Enterprises” is Fannie and Freddie) top six officers were given a total of more than $35 million in compensation. Of that amount, a total of $17 million in compensation was given to the CEOs of the Enterprises.
Government ownership of Fannie and Freddie has easily turned into “the most expensive bailout of the 2008 financial crisis.” Since entering conservatorship, the Enterprises have taken $169 billion from the Treasury and still owe taxpayers $141 billion. Every quarter, the total continues to mount as the Enterprises keep posting net losses. Freddie recently asked Treasury for an additional $6 billion after reporting $4.6 billion in net losses in its third quarter earnings, and Fannie requested an additional $7.8 billion in aid after reported a third quarter loss of $5.1 billion. With FHFA’s (Federal Housing Finance Agency) projection that it will cost at least $51 billion more to support the Enterprises through 2014, the overall bill to the American taxpayers will not be cheap.
Of that $35 million in total compensation, nearly half was salaries and bonuses for Williams and Haldeman:
The total approved compensation for the top six executives at Fannie and Freddie for 2009 and 2010 totaled more than $35.4 million. The Enterprises’ two CEOs received approximately $17 million. In 2010, Ed Haldeman, Freddie Mac’s CEO, received a base salary of $900,000, and took home an additional $2.3 million in bonus pay. Haldeman stands to make as much as $6 million in 2011. Meanwhile, Michael Williams, Fannie Mae’s CEO, took home $900,000 in base pay in 2010, along with an additional $2.37 million in performance bonuses. Williams also may take home as much as $6 million in 2011. One Fannie Mae executive, Susan McFarland, received a $1.7 million signing bonus upon joining Fannie in June 2009. In contrast, FHFA Acting Director Edward J. DeMarco — the Enterprises’ conservator — earns only $239,555 a year.
The report goes on to note that overall compensation is down 40 percent from before the companies were placed in conservatorship, and FHFA has taken steps to address executive pay. But the changes are small-scale and “are insufficient to stem taxpayer-funded losses at Fannie and Freddie.” In fact, the FHFA’s Office of Inspector General said the executive pay structure at Fannie and Freddie “will likely continue to generate significant controversy.”
More troubling still, it seems executives at Fannie and Freddie had a say in determining their own pay scales:
When FHFA established the Enterprises’ overall executive compensation packages in 2009, it did not act alone. FHFA consulted with the Treasury Special Master for TARP Executive Compensation, Kenneth R. Feinberg, and outside compensation consultants hired by the Enterprises and FHFA. Additionally, senior executives from the Enterprises themselves were closely involved in the decision-making process It remains unclear what role executives at the Enterprises have played in determining their annual pay since, but their influence on the pay packages in the first place raises questions about the process by which executive compensation is set at the Enterprises. These annual targeted compensation processes will remain in place indefinitely, unless they are modified by FHFA. However, FHFA has shown no willingness to take action to change them.
Not only did the execs help decide what they were going to get paid, but the bonus structures were based on profitable companies, and not ones which were a key cause of the current economic meltdown:
The Enterprises paid outside compensation consultants $655,000 in 2008 and $560,000 in 2009 to determine their own pay structure. To arrive at salary levels, the consultants assisted the Enterprises in identifying compensation at “comparable” firms. However, instead of looking to truly similar institutions like Ginnie Mae, FHFA, or the Federal Housing Administration (FHA), the institutions that the consultants identified — large banks and insurance companies like Bank of NY Mellon Co., MetLife, Inc. and Capital One Financial Co. — were anything but comparable to Fannie and Freddie. If these private sector institutions were not profitable by themselves, as is presently the case with the Enterprises, instead of being handsomely rewarded with bonuses, their executives would likely be fired.
Worse, apparently FHFA doesn’t even have the tools needed to keep control of compensation at Fannie and Freddie, according to the IG:
FHFA-OIG found that FHFA’s executive compensation “oversight processes lack a number of key controls necessary to ensure their effectiveness.”
The congressional report’s conclusions were damning as well:
As Fannie and Freddie enter year three of their conservatorship, little progress has been made to wind them down. The Enterprises continue to lose billions of dollars and continue to milk the American taxpayers for more and more financial support. Meanwhile, executives at Fannie and Freddie, influenced by perverse incentives and rewarded by questionable performance criteria, continue to receive enormous compensation packages.
The left has complained about executive pay for several years now, and Obama himself in 2009 capped executive salaries at $500,000 for companies receiving “exceptional bailout assistance.” He said at the time:
This is America. We don’t disparage wealth. We don’t begrudge anybody for achieving success. But what gets people upset — and rightfully so — are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers.
Billions in losses and payouts from the Treasury would certainly seem to be “exceptional assistance.” Moreover, any CEO at a private company taking these kinds of losses year after year would be “invited to resign” if he wasn’t fired outright. So why are these two, indeed these six, still employed?
This would seem to be a larger issue than one presidential candidate being paid for his advice when he was a private citizen.