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Top executives at Fannie Mae and Freddie Mac defended their lucrative pay before a House panel on Wednesday, one day after lawmakers approved the suspension of top executive compensation packages and the moving of the companies' thousands of employees onto a pay scale that lines up with federal financial regulators including the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency.
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The uncertainty surrounding the timing and the form of government-sponsored enterprise reform makes it "very difficult to attract and retain employees with highly specialized skills and experience," said Michael Williams, chief executive at Fannie Mae, in defense of the high pay level that enraged lawmakers.
"This is particularly true as other financial institutions can offer long-term career opportunities and in many cases substantially more compensation," he added. "Attrition at our company this year has already doubled our historical experience. In the course of three months, I lost five senior vice presidents out of the company to financial services and other companies."
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Edward DeMarco, acting head of the Federal Housing Finance Agency, acknowledged that the compensation arrangements are "large," but warned that pay cuts "could disrupt the functioning of the companies and thereby add even greater losses on the American taxpayer."
"I need to ensure that the enterprises have people with the skills needed to manage the credit and interest rate risks of $5 trillion worth of mortgage assets and $1 trillion of annual new business that the American taxpayer is supporting," DeMarco argued. "Others may believe that this sort of talent is easily and quickly hired at compensation far below that of competing private firms, but I do not."
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On Tuesday, the House Financial Services Committee approved a bill by a vote of 52 to 4 to block future bonuses at Fannie and Freddie and suspend the pay packages for top executives at the firms.
"Awarding lavish pay packages to the heads of these companies that have accepted $170 billion in taxpayer cash can't be defended," said Rep. Spencer Bachus of Alabama, chairman of the panel.
The Senate is expected to take up a similar measure. Lawmakers said the legislation could be sent to President Obama by the end of the year.
The Troubled Mortgage Giants
Fannie Mae and Freddie Mac received the biggest federal bailout of the financial crisis. Since they entered conservatorship, the U.S. Treasury has provided $169 billion in aid, and the payouts are scheduled to continue with no end in sight. According to recent FHFA projections, Treasury assistance to the two troubled mortgage giants will total $220 billion to $311 billion by the end of 2014.
Just two weeks ago, Fannie Mae asked Treasury for an additional $7.8 billion in aid after reporting a third quarter loss of $5.1 billion. Freddie Mac asked for an additional $6 billion after reporting a $4.4 billion in net losses in its third quarter earnings.
Congressmen pointed out that such lucrative compensation packages may be appropriate for profitable companies in the private sector, but substantial questions exist whether they are appropriate for entities in taxpayer-funded conservatorship, especially those that are bleeding billions of dollars each quarter.
Filings show that Fannie Mae and Freddie Mac paid outside compensation consultants $655,000 in 2008 and $560,000 in 2009 to determine their own pay structure.
Fannie Mae CEO Michael William said following the change in pay structure, the company has slashed its target total compensations for executive management by over 50 percent, compared with the peak level prior to conservatorship, and reduced senior managers at the company by 30 percent. Meanwhile, compensation of Freddie Mac's senior team is down 40 percent from peak levels, said Charles E. Haldeman Jr., CEO of Freddie Mac.
