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FHFA Inspector General Evaluates Pay Structure for GSE Execs

In 2009 and 2010, the ""Federal Housing Finance Agency"":http://www.fhfa.gov (FHFA) approved salary packages totaling more than $35 million for executives at ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com.


The ""Federal Housing Finance Agency Office of the Inspector General"":http://www.fhfaoig.gov (FHFA-OIG) released a report detailing the compensation levels of Fannie Mae and Freddie Mac executives for the past two years, noting that the CEOs of Fannie and Freddie together made $17 million during that period.

The FHFA-OIG initiated the evaluation of executive compensation due to concerns about the high level of executive pay at companies that have received federal financial support.

""Some claim that prior to the conservatorships, the [GSEs'] compensation structures lacked transparency and encouraged executives to inflate the companies' reported earnings and manipulate their financial statements,"" the report said.

Indeed, federal regulators proposed a ""new rule"":http://dsnews.comarticles/regulators-propose-rule-to-link-executive-pay-risk-2011-03-30 on Wednesday that would require certain financial institutions, including Fannie and Freddie, to account for such risk as they develop compensation packages for executives.

Since Fannie Mae and Freddie Mac were placed under conservatorship, the executive compensation structures have continued as usual, and to date the U.S. Department of Treasury has invested more than $153 billion in the companies.

""Although the [GSEs] have lost billions of dollars and continue to depend on federal support to remain in business, their senior executives continue to receive multi-million dollar salaries,"" the report continued.


FHFA officials have publicly defended the high-paying salaries for executives, saying they are necessary to recruit and retain the kind of talent required to run Fannie and Freddie, and that the high salaries also provide incentives for the executives to meet performance goals.

The report found that ""FHFA lacks key controls necessary to monitor the [GSEs'] ongoing executive compensation decisions under approved packages. Specifically, FHFA has neither developed written procedures to evaluate the [GSEs'] recommended compensation levels each year, nor required Agency staff to verify and test the means by which the [GSEs] calculate their recommended compensation levels.""

The report also notes that the president of Ginnie Mae's compensation is less than $200,000 annually. And while the two companies do have significant differences in operations, the report points out that Ginnie Mae financed 29 percent of all newly-issued mortgage backed securities in the third quarter of 2010, which is approximately the same amount as Freddie Mac.

While the FHFA-OIG did not take a position as to whether the compensation of the two companies' executives should be the same, it did suggest that FHFA should examine the differences in compensation and decide if such a vast disparity is warranted.

FHFA did not agree to comply with that recommendation, however.

The agency said it would institute some measures recommended by the FHFA-OIG, including developing a practice of regularly monitoring and evaluating recruitment and retention of employees and considering appropriate compensation levels; and consider options to improve the transparency of the executive compensation programs.

“FHFA has a responsibility to Congress and taxpayers to efficiently, consistently, and reliably ensure that the compensation paid to Fannie Mae’s and Freddie Mac’s senior executives is reasonable,"" FHFA Inspector General Steven Linick said.

He continued, ""This is especially true when you realize that the U.S. Treasury has invested close to $154 billion to stabilize Fannie Mae and Freddie Mac, and the GSEs are spending tens of millions of dollars for executive compensation.”

About Author: Joy Leopold


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