Commentary

Fannie and Freddie Executive Pay

There has already been a lot of noise made over the weekend following last Thursday’s FHFA Inspector General report on the high compensation packages for executives of Fannie Mae and Freddie Mac. Here is a quick break down from HousingWire:

The top six executives at Fannie Mae and Freddie Mac made a combined $35.4 million in 2009 and 2010, but they could have made more had they reached levels set by the Federal Housing Finance Agency. […]

Compensation was set up so that the GSEs would have to meet certain goals. Fannie had to maintain its single-family credit expenses, including foreclosure costs, at $45.5 billion. In 2010, the GSE cut it to $26 billion. Freddie had to maintain a retained mortgage portfolio of $810 billion or less, which it did. FHFA Acting Direct Edward DeMarco said in testimony before Congress Thursday that Freddie’s portfolio was at $697 billion at the end of 2010.

Fannie Mae CEO Michael Williams took the position in 2009, and earned $9.3 million for 2009 and 2010 combined. Freddie Mac CEO Charles Haldeman who also took the job in 2009, earned $7.8 million in both 2009 and 2010. But according to the FHFA, the compensation packages for both positions could have gone as high as $6 million per year per person.

Let’s point one thing out, this is compensation for leading a failed company. Not failing. Failed. The GSEs would be shattered into a million pieces right now if not for their federal bailout.

Now, I will be the first to admit that it would be hypocritical of me to sit here and say what I think the GSE CEOs should be paid to the dollar. When private compensation packages were being attacked in the past couple years I argued that we can not know what the CEO of Goldman or J.P. Morgan Chase should make—it is a decision for their shareholders to make, since they are a private company. And furthermore, any opinion on whether they should make $1 million or $5 million or $50 million is based on arbitrary standards.

So here is the difference with the GSEs. They are not private companies. They are failed companies under federal conservatorship. And guess who their real shareholders are: the U.S. taxpayers. We fund their business, so it is only right that we have a say over what their pay would be.

The easiest measure would be to put them on the federal pay scale. I don’t know whether Fannie’s CEO should make $10,000 or $1 million, but I do know that they are in effect federal agencies, so their pay should be determined as such. There is a standard scale for determining what various federal workers get paid—the General Schedule—and that would be an appropriate pay scale. An alternative would be to pay GSE staff the same as FDIC staff, which have a special pay scale, along with the OCC and NCUA (basically banking regulatory staff pay levels).

Thankfully there is a bill in Congress right now (which I discussed briefly before), introduced by Rep. Bachus, that would put the GSEs on the federal pay scale.

Some people criticise this approach as dangerous to the stability of the GSEs as it would cause a stream of top level staff to stream out of the companies, leaving them poorly managed. This is a weak argument since there is little intellectual capital in the GSEs, most of it is in the private sector. But there is something to be said for properly aligned incentives in running a company well. They are a $6.5 trillion double headed monster. So if the GSEs on federal pay scale bill runs into trouble, a good secondary approach would be to lower their pay substantially anyway, but assign bonuses for the successful wind down and elimination of the the companies.

In short, we should pay people to end their own jobs by effectively getting rid of the GSEs within five years. FHFA would have to make decisions on what those bonuses would be, but it would certainly be worth it to have a private mortgage market free of the shackles of Fannie and Freddie.

Anthony Randazzo

Anthony Randazzo is director of economic research for Reason Foundation, a nonprofit think tank advancing free minds and free markets. His research portfolio is regularly evolving, and he maintains a wide interest in economic policy at both a domestic and international level.

Randazzo is also managing director of the Pension Integrity Project, which provides technical assistance to public sector retirement system stakeholders who are seeking to prevent pension plan insolvency. His research focus on the national public sector pension crisis has a dual focus of identifying the systemic factors that cause public officials to underfund pension obligations as well as studying the processes by which meaningful pension reform can be accomplished. Within the Project he leads the analytics team that develops independent, third party actuarial analysis to stakeholders considering changes to public sector retirement systems.

In addition, Randazzo writes about the moral foundations of economic theory, and is currently developing research on the ways that the moral intuitions of economists influence their substantive findings on topics like income inequality, immigration, or labor policy.

Randazzo's work has been featured in The Wall Street Journal, Forbes, Barron's, Bloomberg View, The Washington Times, The Detroit News, Chicago Sun-Times, Orange-County Register, RealClearMarkets, Reason magazine and various other online and print publications.

During his tenure at Reason he has published substantive research on housing finance, financial services regulation, and various other aspects of economic policy at the federal level. And he has written regularly on labor economics, tax policy, privatization, and Turkish-U.S. political and economic issues.

Randazzo has also testified before numerous state and local legislative bodies on pension policy matters, as well as before the House Financial Services Committee on topics related to housing policy and government-sponsored enterprises.

He holds a multidisciplinary M.A. in behavioral political economy from New York University.

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