U.S. pay czar Kenneth Feinberg said on Wednesday that mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE) are being discriminated, with respect to pay restrictions, from other companies receiving significant financial support from the government as they countenance a unique set of problems.
The pay czar, who decides compensation-packages for the highest-paid employees at all the firms that received bailout money and have not repaid yet, considers the situation of Fannie Mae and Freddie Mac unique as the future of these companies is uncertain.
After slashing 50% pay of the top 25 earners in October at seven firms that have received substantial support from the Troubled Asset Relief Program (TARP), earlier this month, the pay czar announced a new set of pay restrictions on top executives at four of those firms. The primary intention of the pay czar is to enable the bailed out firms to repay government money by controlling excessive pay. However, despite receiving substantial government support, Fannie and Freddie’s regulator, the Federal Housing Finance Agency (FHFA), did not impose any pay restrictions on top executives of these firms.
The pay czar views the decision of FHFA not to impose pay restrictions on the top executives of Fannie Mae and Freddie Mac as fair because: 1) there is no stock, so all of the compensation needs to be in cash and 2) the future of Fannie Mae and Freddie Mac politically remains very uncertain, and as a result it’s very difficult to convince employees to work for Fannie Mae and Freddie Mac.
The U.S. Treasury announced last week that it would offer significant new financial support to Fannie Mae and Freddie Mac notwithstanding their performance in the next three years. The move by the Obama Administration follows the recent repayment of bailout money by the nation’s biggest financial institutions.
To keep Fannie Mae and Freddie Mac afloat, the Treasury has removed the restrictions that capped the capital availability of the mortgage giants at $200 billion each. Already, taxpayers have provided $111 billion to the companies. According to the Treasury, losses of Fannie Mae and Freddie Mac are not expected to exceed the government’s estimate of $170 billion over 10 years.
Also, last week, Fannie Mae and Freddie Mac disclosed that their chief executives received $6 million as annual compensation as the mortgage giants try to attract and retain talent to support the U.S. mortgage market.
Fannie Mae and Freddie Mac have been among the firms hardest hit by the housing slump, credit crisis and ongoing recession. We anticipate losses to increase in the coming quarters and the conservatorship to continue for a long time, and thus see no value for the common shareholders.
However, we do foresee Fannie Mae’s and Freddie Mac’s increased participation in the Making Home Affordable Program, potentially lowering losses from foreclosures in the upcoming quarters.
Read the full analyst report on “FNM”
Read the full analyst report on “FRE”
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