September 12, 2008
The Honorable Henry M. Paulson, Jr.
Secretary United States Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Dear Secretary Paulson:
The government bailout of Fannie Mae and Freddie Mac that you announced on Sunday September 7, 2008 is still sending shockwaves through the financial world.
You said, “Since this difficult period for the GSEs began, I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers – both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure.”1 Unfortunately, these words will provide little comfort to the many common shareholders who have seen the value of their Fannie Mae and Freddie Mac stock collapse to pennies per share. Taxpayers are also wondering what the Fannie/Freddie debacle will end up costing them.
The New York Times reported:
[E]ven after the government seized the mortgage finance companies on Sunday and dismissed their chief executives, the companies’ outgoing leaders could see big paydays — a prospect that angers many investors, particularly because ordinary stockholders could be virtually wiped out. Under the terms of his employment contract, Daniel H. Mudd, the departing head of Fannie Mae, stands to collect $9.3 million in severance pay, retirement benefits and deferred compensation, provided his dismissal is deemed to be ”without cause,” according to an analysis by the consulting firm James F. Reda & Associates. Mr. Mudd has already taken home $12.4 million in cash compensation and stock option gains since becoming chief executive in 2004, according to an analysis by Equilar, an executive pay research firm. Richard F. Syron, the departing chief executive of Freddie Mac, could receive an exit package of at least $14.1 million, largely because of a clause added to his employment contract in mid-July as his company’s troubles deepened. He has taken home $17.1 million in pay and stock option gains since becoming chief executive in 2003.
Regardless of one’s views of the work done by Mr. Mudd and Mr. Syron, it is clear that allowing them to leave with millions in hand when so many pensioners and small shareholders are seeing their investments evaporate is unconscionable.
In a letter to you and the Federal Housing Finance Agency, Senator Barack Obama, D-IL, said failure by the government to use recently won authority to block the pay packages would be “a gross violation of the public trust.”
In a September 9, 2008 letter to James Lockhart, Director of the Federal Housing Finance Agency, Senators Charles Schumer (D-NY) and Jack Reed (D-RI) wrote:
The Federal Housing Finance Regulatory Reform Act of 2008 gave the FHFA authority over executive compensation and the ability to limit or fully withhold compensation and golden parachute payments to executives. We urge you to quickly review the compensation packages of the former CEOs, and where appropriate and in accordance with the newly enacted legislation, substantially reduce or eliminate them, so that taxpayer dollars are not utilized to enrich the same individuals who are responsible for preventable financial problems that have weakened Fannie Mae’s and Freddie Mac’s ability to weather the current crisis in the financial markets.
I and others have been telling members of Congress, government regulators and members of the media about the structural and operational problems of Fannie and Freddie for years. I have written many columns about the lack of proper regulation of Fannie and Freddie. I testified before Congress about the need to focus Fannie and Freddie on their public missions and my long-time associates Jonathan Brown and Jake Lewis have spent countless hours advocating that federal regulators push Fannie and Freddie to meet housing goals that would benefit under-served populations.
In 1991, lawyer Tom Stanton, a former colleague, warned about the risks and non-regulation of Fannie and Freddie in his prophetic book — A State of Risk (Harper Business).
In May of 1998, we even held a conference dedicated to Fannie and Freddie. In my welcoming statement to the conference participants, I noted that we would be discussing the adequacy of capital required of Fannie and Freddie and the efficacy of regulation of the two GSEs. I noted that both corporations had been enjoying good times. And, I cautioned that one of the unintended consequences of fat profits over a long period is the tendency of governments and private corporations to start believing in fantasies about living happily ever after in the glory of ever-rising profits.
In July of this year I lamented the fact that Fannie and Freddie have been deeply unregulated for decades which allowed their capital ratios to be lower — far lower — than they should have been.
Farcically regulated by the Department of Housing and Urban Affairs, Fannie and Freddie were run into the ground by taking on very shaky mortgages under the command of CEOs and their top executives who paid themselves enormous sums.
Secretary Paulson, it is incumbent on you to use your office to signal to already devastated common shareholders that their remaining tiny investments, now shrunken by some 98%, will not be further eroded or will have an opportunity to gradually recover and not be completely wiped out by administration actions. Otherwise what little confidence remains in both the financial markets and federal government will be severely shaken. Moreover, you need to take actions to ensure that the CEOs who presided over Fannie and Freddie are not unjustly enriched at the expense of the taxpayers or the shareholders.
Determining the future structure of Fannie and Freddie will require serious Congressional deliberation with broad input from community leaders, public interest advocates and scholars who have watched Fannie and Freddie deteriorate and who have urged Congress, this administration and previous administrations to act.
Please acknowledge receipt of this letter with whatever comment you choose to make. Thank you.
P.O. Box 19312
Washington, DC 20036
September 7, 2008, Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers http://www.ustreas.gov/press/releases/hp1129.htm
Few Stand to Gain on This Bailout, and Many Lose, By Eric Dash, New York Times, September 8, 2008, Section C; Column 0; Business/Financial Desk; Pg. 1
Obama joins critics of Fannie, Freddie pay packets, By Deborah Charles, Reuters, September 10, 2008, http://www.reuters.com/article/vcCandidateFeed2/idUSN0933123120080910