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Corporate Governance

: The Race to the Bottom

Fannie Mae, Freddie Mac and the Problem of Assigning Government Regulation to "For Profit" Businesses

By J. Robert Brown

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The government has seized control of Fannie Mae and Freddie Mac, with both having gotten themselves into serious financial trouble during the current crisis in the financial markets. The decision by the government to seize control of Fannie Mae and Freddie Mac eliminates an uncomfortable fiction. The two companies were garbed in private sector clothing, with shareholders, boards of directors and, most critically, an obligation to profit maximize.

Lets take a look at the proxy statement for Fannie Mae. The directors weren't paid at Goldman Sachs rates, but they did do nicely. In 2007, the Fannie Mae board met 22 times. See 2007 Proxy Statement , at 23 ("The Board of Directors met 22 times during 2007. During 2007, each of our current directors attended at least 75% of the total number of meetings of the Board of Directors and Board committees on which he or she served."). They earned, in general, somewhere in the vicinity of $200,000 each. Admittedly, they had to work harder for the pay than most other boards.

2007 Non-Employee Director Compensation Table


	Fees Earned or		Stock			Option		All Other
Name	Paid in Cash ($)⁽¹⁾		Awards ($)⁽²⁾			Awards ($)⁽³⁾		Compensation ($)⁽⁴⁾		Total ($)

Stephen B. Ashley	$	500,000	$	21,802		$	17,732	$	20,125	$	559,659
Dennis R. Beresford		138,300		13,980			?		40,115		192,395
Kenneth M. Duberstein⁽⁵⁾		17,100		(26,090	)		24,762		413,327		429,099
Louis J. Freeh		57,833		?			?		17,099		74,932
Brenda J. Gaines		109,567		20,317			?		20,209		150,093
Karen N. Horn		132,500		20,317			?		27,732		180,549
Bridget A. Macaskill		110,500		8,595			?		21,303		140,398
Joe K. Pickett⁽⁵⁾		119,500		21,802			17,732		15,889		174,923
Leslie Rahl		127,800		22,510			17,732		20,310		188,352
John C. Sites, Jr.		23,833		?			?		19,014		42,847
Greg C. Smith		136,300		32,926			2,491		20,209		191,926
H. Patrick Swygert		117,100		21,802			17,732		39,549		196,183
John K. Wulff		129,800		18,253			9,038		25,052		182,143

So the directors won't paid excessively by public company standards but they were certainly well paid by government standards. How about the CEO of the company? How well was he paid? Total compensation was over $12 million, with almost a million in salary, $2.2 million in "performance" bonus and $9 million in long term incentive awards.

Compensation Paid or Granted for 2007


							Total of 2007		Total of 2006
							Base Salary,		Base Salary,
							Bonus and		Bonus and
			2007 Annual		2007 Long-Term		Long-Term		Long-Term
	Base Salary as		Incentive		Incentive		Incentive		Incentive		% Change
Named Executive	of 12/31/07⁽¹⁾		Plan Bonus		Award⁽²⁾		Stock Award		Stock Award		from 2006

Daniel Mudd	$	990,000	$	2,227,500	$	9,000,000	$	12,217,500	$	14,449,947		(15.4	)%
Stephen Swad⁽³⁾		650,000		955,500		3,200,000		4,805,500		?		N/A
Robert Blakely⁽⁴⁾		663,000		1,113,840		?		1,776,840		5,239,936		N/A
Robert Levin		788,000		1,477,500		6,200,000		8,465,500		9,504,354		(10.9	)
Peter Niculescu		585,000		889,199		2,625,000		4,099,199		4,408,982		(7.0	)
Michael Williams		676,000		1,189,760		4,784,000		6,649,760		7,527,643		(11.7	)

In other words, Fannie Mae (and presumably Freddie Mac) were set up with all of the flaws associated with Delaware corporations. The directors received lucrative amounts and so did the top officers they were responsible for supervising. At the same time, the financial giants had an incentive to maximize short term profits for shareholders, something that no doubt contributed to the decision, as the WSJ descirbed, to "expand[] their exposure to riskier loans." In other words, while some government responsibilities can be offloaded to the private sector and improved with a healthy dose of profit maximizing behavior, some cannot. This is one of them.

Are there other entities garbed with regulatory or public sector responsibilities that are now engaging in profit maximizing behavior? Nasdaq and the NYSE.

Full post as published by The Race to the Bottom on September 08, 2008 (boomark / email).