TOPICS > Economy

Fannie Mae, Freddie Mac Executives’ Bonuses Draw Rebuke From Lawmakers

November 16, 2011 at 12:00 AM EST
The compensation practices at two government-controlled mortgage giants came under heavy fire on Capitol Hill on Wednesday. Margret Warner discusses what accounts for executive bonuses at Fannie Mae and Freddie Mac with Politico's Josh Boak and The Wall Street Journal's Nick Timiraos.
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JEFFREY BROWN: The pay practices at two government-backed mortgage giants came under heavy fire on Capitol Hill today.

NewsHour congressional correspondent Kwame Holman begins our coverage.

MAN: Please raise your right hands.

KWAME HOLMAN: The leaders of Fannie Mae and Freddie Mac were called to account today at a House hearing. They’re due to receive nearly $13 million in salary and bonuses this year. That’s on top of $35 million paid to the firms’ top six executives in the last two years, even as the companies were receiving federal bailouts.

Lawmakers from both parties, such as Ohio Democrat Dennis Kucinich, voiced outrage.

REP. DENNIS KUCINICH, D-Ohio: And if there’s a gap with tremendous pay being given to people at the top, and we don’t see enough sympathy for people who are losing their homes, that may mean that you just don’t get it. You’re too far removed.

KWAME HOLMAN: Freddie Mac CEO Charles Haldeman said his company actually has cut compensation for top managers by 40 percent in recent years, but he accepted the criticism.

CHARLES HALDEMAN, Freddie Mac: I understand totally why Congress and the American people are outraged about executive compensation at companies that have reached — received federal support, including Fannie and Freddie. We have 9 percent unemployment in our country, and there are millions of families at risk of losing their homes.

KWAME HOLMAN: The president and CEO of Fannie Mae, Michael Williams, insisted the extra compensation is crucial to attract and retain talented employees.

MICHAEL WILLIAMS, Fannie Mae: In the course of three months, I lost five senior vice presidents out of the company to financial services and other companies, where I can assure you they were making more money and had better career prospects as a result. These are challenging jobs and challenging circumstances, and we need to pay and reward the people who are doing the jobs.

KWAME HOLMAN: Republican Darrell Issa chairs the committee. He challenged Williams to justify the numbers.

REP. DARRELL ISSA, R-Calif., Oversight and Government Reform Committee chairman: You made $9.3 million the last two years while the president made $800,000. Do you think that’s — that’s OK?

MICHAEL WILLIAMS: Congressman, I have been brought in and asked to take on this role as CEO so that I can put in place a management team that can help achieve the goals of conservatorship, which has stabilized the company, provided liquidity to the market and helped…

REP. DARRELL ISSA: OK. But — but you’re still losing money.

KWAME HOLMAN: Fannie and Freddie are government-sponsored enterprises that package mortgages into securities with a guarantee against default. For years, they operated as private companies and made huge profits.

But when the housing meltdown hit in 2008, they suffered enormous losses. The Treasury Department stepped in to take over both Fannie and Freddie in September of 2008. Since then, the two companies have received nearly $170 billion in federal assistance.

Now the two firms are asking for more money to cover losses as the housing market’s troubles continue. In the last week, Fannie Mae announced it’s seeking nearly $8 billion in federal assistance. Freddie Mac is requesting another $6 billion.

Back at today’s hearing, the man who oversees Fannie and Freddie insisted they’re doing the best they can.

Edward DeMarco is acting director of the Federal Housing Finance Agency.

EDWARD DEMARCO, Federal Housing Finance Agency: I believe that we’re trying to strike a difficult balance between ensuring that these multitrillion-dollar companies have the appropriate expertise running them and that we are keeping these salaries as low as possible to make — while ensuring that we’ve got capable people and that the people that are there, from the CEOs on down, are focused on helping — helping homeowners.

KWAME HOLMAN: Amid the bonus firestorm, Republican presidential candidate Newt Gingrich acknowledged today his consulting firm was paid up to $1.8 million by Freddie Mac.

NEWT GINGRICH, (R) presidential candidate: I provided strategic advice to many large companies. I can’t verify to you a specific amount right now. We’re going to check and find out.

REP. PATRICK MCHENRY, R-N.C.: This committee stands adjourned.

KWAME HOLMAN: Meanwhile, Fannie and Freddie now face a move in Congress to block executive bonuses and limit pay to government pay scales. Bills are pending in both the House and Senate.

JEFFREY BROWN: And Margaret Warner picks up the story from there.

MARGARET WARNER: We take a closer look now at what accounts for the executive pay at Fannie and Freddie and the role these two companies play in the housing market.

Josh Boak is an economics reporter for Politico. He helped break the story on the executive pay. And Nick Timiraos covers housing and the mortgage industry for The Wall Street Journal.

Welcome to both of you.

Let’s begin with you, Josh Boak.

Explain what would be, I think, baffling to most Americans. What accounts for the fact that these huge compensation packages have been paid for, I think, three years now to top CEOs of these money-losing and government-supported industries — companies?

JOSH BOAK, Politico: Well, these executives really have in every sense of the world a custodial position. They have to deal with bad deals made from 2005 to 2008 and manage losses and maintain stability in the broader mortgage market for the good of the country.

MARGARET WARNER: But who decided they would make this amount of money?

JOSH BOAK: Their compensation packages were approved by the FHFA, of which Ed DeMarco is now the acting director.

And they basically decided them by comparing the compensation packages at banks and insurance companies. And then, as part of that, they have performance incentives. And one of those incentives is, did you help modify mortgages? One of the key things that lawmakers and President Obama want to do is get people out from bad mortgages. And the answer is, they got pretty — pretty nice compensation for not a lot of modifications.

MARGARET WARNER: Nick Timiraos, weigh in here.

To what degree are these pay packages tied to performance, and are they typical of the mortgage finance industry, the argument they were making today?

NICK TIMIRAOS, The Wall Street Journal: Right.

Well, the pay packages are — they’re certainly generous. They certainly don’t look very good on paper. They are, as the report noted, down from what the company’s executives were making during the boom. And I think that’s one of the fair criticisms here, is, if you look at the performance targets that are being set, Fannie and Freddie compensation has always been tied in some way to performance.

Of course, when the companies had stock — today, the stock is nearly worthless, but when they had stock, they were mostly paid — or they were paid largely in stock grants. So that was one way to tie pay to performance.

I think one of the arguments you can make today is, whether or not you agree or disagree that this is too much money, you could say, look, are we setting the right performance targets? Modifications, for example, is one. The market share that these companies have is another.

Well, there really aren’t a whole lot of other actors right now in the mortgage market. It’s all Fannie, Freddie and federal agencies. So I do think it’s a fair question. Are we setting the bar so low here that you trip and you can still get over that bar?

MARGARET WARNER: Josh Boak, these — these packages were set a couple of years ago. They have not really been a secret. Why are we seeing this outrage on the Hill now?

JOSH BOAK: Well, I think we’re seeing it for a few reasons.

One, voters are upset and fed up. People from the Tea Party movement to ‘Occupy Wall Street’ see a high degree of inequality, and that’s reflected by what’s going on with Fannie and Freddie.

MARGARET WARNER: In other words, with all CEOs?

JOSH BOAK: Well, it’s not just that. It’s that everyone seems to be performing above average. They’re getting rewarded for less-than-stellar returns. And that fuels the degree of unfairness, in the minds of many.

MARGARET WARNER: Nick, go back to the question of the role they’re playing, because this came up at the Republican debate last week. One of the candidate, Michele Bachmann, said — she was talking about the need to wind them down, that before the meltdown, Fannie and Freddie were only underwriting or financing 50 percent of the mortgages in America, and now it’s 90 percent.

Is that true, and, if so, why?

NICK TIMIRAOS: Well, I think Congresswoman Bachmann used some selective math there.

I mean, certainly, it’s true that they were only 50 percent of the market in 2006, but that was largely because Wall Street and the private sector that was securitizing mortgages, they were doing a lot riskier loans. They were doing loans that ended up losing much more money.

And so, historically, Fannie and Freddie have always had a relatively large share of the market, certainly not as large as today. But the fact that you have federal agencies, Fannie and Freddie, all accounting for nine in 10 new mortgages today is really a reflection that nobody else is out there making loans on the kind of terms that would be enough to sustain a housing recovery.

Without Fannie and Freddie, the Federal Housing Administration in the market, we wouldn’t be seeing nearly the depressed level of sales that we had. It would be much, much worse. And so this is one of the challenges here. Congress likes to go on and on about the bonuses. And, certainly, there is a lot of unfairness here.

Both of the executives conceded that today. But Congress still has not decided what to do with Fannie Mae and Freddie Mac. And so you have this regulator DeMarco who’s really in a tough position, because Congress and the White House won’t tell him what to do. They won’t show him, here’s where we’re going to go, here’s what’s going to happen with Fannie and Freddie.

Instead, he just has to kind of stay in this holding pattern, running these companies, trying to prevent them from losing more money. And you end up with situations that are very awkward, like this one.

MARGARET WARNER: And — and back to you, Josh, is there any prospect that Fannie and Freddie will start turning a profit any time soon and start repaying the $170 billion bailout, the way, say, the auto companies did and a lot of the big banks?

JOSH BOAK: Well, like Nick said, these companies are really in a holding pattern.

And what a lot of people are telling me is, we don’t expect any progress in terms of meaningful reforms. We don’t expect the housing market to bottom out until 2015. And a lot of these decisions are really going to be made after the 2012 election.

So we have got at least another year of this kind of dialogue and conversation and heated debate in D.C.

MARGARET WARNER: But why are they — just briefly — I know this is a complicated picture — but why are they still losing money?

JOSH BOAK: Well, because you have deals that are still going south. The housing market…

MARGARET WARNER: And these are old deals?

JOSH BOAK: Exactly, from 2005 to 2008. It doesn’t look like the housing market has bottomed out yet. Many economists expect it to kind of reach the bottom by around 2015.

MARGARET WARNER: And, Nick, back to you.

Do you agree with Josh that there’s really no prospect for any change, at least in the structure of Fannie and Freddie, before the 2012 election?

NICK TIMIRAOS: I think that’s right on. I don’t think anybody realistically expects anything to happen between now and then.

The fact is, rearranging Fannie and Freddie, restructuring them, the more radical it is, the greater the chances that you raise borrowing costs for homeowners. And that’s fine, but you have — I think a lot of policy-makers are saying, do we really want to do that right now, when we’re still in the teeth of this housing depression?

And it’s ugly. Fannie and Freddie continue to lose money really as a result of decisions they made years ago. The loans that they have been buying and guaranteeing since 2009 are of a much higher credit quality. And, in fact, there are many concerns today that they may have overcorrected and that that is now hurting the housing recovery, because it’s now — it’s gone — the pendulum has swung the other way.

It’s gone from being too easy to get a loan to getting too hard. And, so, at a time when you do have all these foreclosures coming on to the market, and at a time when you do need more buyers, you actually have fewer.

MARGARET WARNER: Well, Nick Timiraos of The Wall Street Journal and Josh Boak from Politico, thank you both.

JOSH BOAK: Thank you.

NICK TIMIRAOS: Thank you.