Fannie Mae & Freddie Mac Run like Government? Then Pay CEOs like Government: Congress by Amanda Maher
The days of multi-million dollar salaries are moving farther in to the review mirror for the CEOs of Fannie Mae and Freddie Mac. The House is excepted to vote on a bill later this week that would cap these CEO salaries at $600,000 per year, just as the Senate voted to do in mid-September.
The effort to cap Fannie Mae and Freddie Mac CEO pay comes in response to Federal Housing Finance Agency Director Mel Watt’s authorization earlier this year to re-evaluate the executive compensation framework. Watt’s proposal would have allowed the CEOs to earn as much as the top 25th percentile of the market, or roughly $7.26 million per year.
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The compensation framework was later revised, and FHFA agreed to boost CEO pay to $4 million annually. Watt said this proposal “defers significant compensation to ensure retention, is based on performance, does not include a bonus and is consistent with FHFA’s statutory responsibilities to ensure safety and soundness and a liquid national housing market.”
Lawmakers weren’t convinced.
“Giving massive taxpayer-funded pay raises to Fannie Mae and Freddie Mac isn’t just out of touch – it’s downright offensive,” said Senator David Vitter, a Louisiana Republican. Vitter teamed up with Senator Elizabeth Warren (D-MA) – an unlikely pair – to sponsor the Senate’s bill limiting GSE CEO pay to $600,000. The Senate unanimously approved that bill.
The House’s Equity in Government Compensation Act, sponsored by Rep. Ed Royce (R-CA), is expected to pass with similar ease. The House Financial Services Committee already passed a version of the bill in July with a 57-1 vote. The Obama Administration has indicated the President will readily sign the bill in to law.
Watt has argued that increasing pay will draw the most talented executives from the private sector. Yet the effort to cap GSE CEO pay comes just days after the federal government decided not to “recap and release” Fannie Mae and Freddie Mac, instead keeping the GSEs under conservatorship and essentially running the corporations as government entities. As long as the GSEs are run as government entities, leadership should be paid government salaries.
Much of Capitol Hill’s resentment toward Fannie Mae and Freddie Mac stems from former CEO’s abuse of the corporations for personal gain—including Fannie and Freddie each deliberately overstating their profits by $6.3 billion and $7 billion, respectively, leading up to the financial crisis. Former Fannie Mae CEO Franklin Raines was eventually forced out in December 2004, but was earning upwards of $20 million when he left. He managed to negotiate a severance package that included $8.7 million in deferred compensation, stock options to the tune of $5.5 million and a monthly pension of nearly $115k for the rest of his life (or his spouse’s, should she outlive him). Freddie Mac’s CEO, Richard Syron, did nearly as well, earning $19 million in 2007 before his position was terminated in 2008 as a term of the conservatorship.
Conservatorship was supposed to usher in a new era of reform for the GSEs, but spectators are still waiting to see what the reform entails. The salary cap was a relief for those concerned that CEO pay would spiral out of control yet again, but this is only one of many larger issues facing FHFA—who on any number of occasions has taken seemingly unilateral decisions about the GSEs fate. Notably, the federal government continues to insist that Fannie Mae and Freddie Mac surrender all dividends in perpetuity, despite the taxpayers having been repaid nearly $240 billion on the $187.5 billion the GSEs borrowed as part of their 2008 bailout.
FHFA can’t have it both ways: GSEs run as government agencies but headed by CEOs earning private sector compensation. Reform is needed at multiple levels in order to address the inefficiencies in the existing system. An importantly, before FHFA determines to increase compensation for Fannie Mae and Freddie Mac’s CEOs, it needs to have a plan for how it will begin compensating the investors who are losing out just as badly.