Fannie and Freddie don't need Wall Street pay to run

November 21, 2011|Jay Hancock

Who says Democrats and Republicans can't agree on budget cuts? The supercommittee charged with reducing the deficit by more than $1 trillion by Wednesday seems to have failed.

But both parties apparently agree that the chopping should start with tens of millions of dollars that continues to be paid to executives at Fannie Mae and Freddie Mac, the disgraced and bleeding mortgage giants.

Last week the House Financial Services Committee voted, 52-4, to start paying Fannie/Freddie employees at more or less the same rate as other federal workers, which is essentially what they are.

Alabama Republican and committee Chairman Spencer Bachus put it well, calling the pay "unfair, unreasonable and unjust to the taxpayers, whose assistance is the only thing keeping Fannie and Freddie afloat."

He forgot to mention that similar arguments could be made about gigantic compensation at Citigroup, American International Group and other financial companies saved by the government. But never mind.

Fannie and Freddie, with their quasi-governmental status, have always been even more objectionable founts of executive enrichment than their Wall Street counterparts. Now that they're government agencies in everything but name, it's no more justified for the Fannie CEO to draw millions in compensation than it is for the education secretary or the budget director to do so.

One thousand dollars invested in Fannie stock in 1980 was worth $100,000 by 2005, before everything went kablooey. Freddie shareholders made similarly improbable profits, based on the companies' ability to borrow at cheap, government-guaranteed rates and finance mortgages at market rates.

But few did better than the insiders who ran these rackets. Political servants and politicians' relatives from both parties would seek velvet-lined refuge at Fannie and Freddie between government jobs. Democrat Franklin Raines, President Bill Clinton's budget director, went on to collect scores of millions of dollars as the CEO of Fannie Mae.

Republican Newt Gingrich, former speaker of the House, collected at least $1.6 million in "consulting" fees from Freddie Mac, according to a report last week by Bloomberg News.

But, as at other big financial companies, the party at Fannie/Freddie didn't stop when the economy crashed. (Raines and Gingrich got their dough before the housing crisis.) The top dozen Fannie/Freddie execs pulled down about $35 million in 2009 and 2010, according to news reports.

That's less than what top bosses there were making before Fannie and Freddie blew up in 2008. And the people running the show now weren't responsible for the damage. However, the salaries are far beyond anything listed in the General Schedule for even the brightest and most senior federal employees.

The Fannie/Freddie frosting could get a lot less creamy. The House bill would drastically cut pay for top bosses to no more than about $250,000 per year. The Senate is expected to consider its own bill.

If the legislation passes, it'll be a prominent test of the idea that organizational success depends on paying top dollar to the people at the apex of the pyramid. I predict that Fannie/Freddie, which have cost taxpayers more than $150 billion so far, would continue operating pretty much as before, financing mortgages, working out soured loans and running like any other agency or company.

This isn't what you hear from Fannie/Freddie execs and their captive regulators.

"These are challenging jobs under challenging circumstances, and we need to pay and reward the people who are doing the jobs," Fannie CEO Michael J. Williams told the House Oversight Committee last week.

The implication is that anybody not making $500,000 or $1 million or $5 million a year does not have a challenging job.

Edward DeMarco, acting head of the Federal Housing Finance Agency, which oversees Fannie and Freddie, said the companies' pay scales needed to be far higher than those for federal employees. "I need to have qualified and experienced counsel" for lawsuits against banks, he said.

Apparently government lawyers at Treasury, State, Justice and Transportation, making only $120,000 a year or so, are not qualified and experienced. How alarming.

Even the $250,000 in Fannie/Freddie pay allowed under the House bill is more than what's allowed in normal federal pay schedules. But it's permitted under the Financial Institutions Reform, Recovery and Enforcement Act of 1989.

Remember FIRREA? It was passed to deal with the last credit catastrophe, the savings and loan meltdown of the 1980s. FIRREA created the Resolution Trust Corporation, the agency that sold off soured mortgages and commercial property and tried to reap as much value from toxic S&L assets as possible for the U.S. taxpayer.

Sound familiar? The RTC was somewhat similar to today's Fannie and Freddie, managing the workout of troubled assets. Widely praised as one of the most successful programs of its kind, the agency salvaged billions in value for the U.S. government.

And it did it all without Wall Street pay. Fannie and Freddie can profit from the RTC's example.

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