July 22, 2008 -- WASHINGTON (AP) -- Democrats and Republicans queasy about a federal rescue of mortgage giants Fannie Mae and Freddie Mac are coalescing around the idea of letting the government slap limits on the multimillion-dollar pay packages of their executives.
Key lawmakers -- puzzling over how to explain to constituents why they voted to bail out the troubled government-sponsored firms -- see new curbs on compensation for the top officers as a crucial measure to cut down on the cringe factor.
At a time when Fannie Mae's and Freddie Mac's troubles have investors worried and the government ready to jump in with untold sums of cash, the lavish pay of the two companies' executives is increasingly difficult to defend, they say.
Sen. Bob Casey, D-Pa., says Fannie and Freddie "have had their hard-won credibility undermined in recent weeks," on the heels of major accounting scandals at the firms in 2003 and 2004.
"While the subprime mortgage crisis is hardly the fault of these companies, past practices of awarding huge bonuses and higher executive salaries calls into question the prudence of extending an unlimited credit line of taxpayer money to the companies whose management practices have been questionable over recent years," Casey said in a letter to Treasury Secretary Henry M. Paulson.
Casey called for capping the companies' executive pay "at reasonable levels" if they used the line of credit or need Treasury to step in and buy their stock. Casey also said their boards should sue to recover recent bonuses.
Last year, Freddie Mac paid Chairman and Chief Executive Richard Syron nearly $19.8 million in compensation even though the mortgage company's stock lost half its value. During the same period, Fannie Mae President and Chief Executive Daniel Mudd got compensation valued by the company at $12.2 million, including a $2.2 million bonus.
"I would like to know why taxpayers should extend Fannie and Freddie an unlimited line of credit at a time when their stock and investor confidence has fallen precipitously and their CEOs continue to make multimillion-dollar salaries and bonuses," Sen. Chuck Hagel, R-Neb., told Paulson in a letter last week.
Critics of Fannie Mae and Freddie Mac, including Republicans who question the very existence of government-sponsored mortgage companies, have long denounced the firms for richly compensating shareholders and executives in good times while relying on taxpayers and the government to prop them up should they falter.
With the request for a federal lifeline, though, even their biggest boosters are embracing the idea of scrutinizing pay packages.
Rep. Barney Frank, D-Mass., the House Financial Services Committee chairman, said a new regulator for Fannie Mae and Freddie Mac should have the power to approve executive compensation. Frank and Sen. Christopher J. Dodd, D-Conn., the Senate Banking Committee chairman, want to add the controls to a broad housing package that creates a new regulator.
The House could vote on the bill, which also includes a foreclosure rescue for 400,000 strapped homeowners, as early as Wednesday.
Fannie Mae and Freddie Mac together hold or guarantee $5 trillion in mortgages -- almost half the nation's total. Their stocks have plummeted on fears about their financial stability in a chaotic housing market where falling home values and rising defaults have contributed to large losses at the companies.
Paulson's request for a government lifeline to them has shone an uncomfortable spotlight on the workings of the companies. Both wield armies of lobbyists and shower lawmakers with campaign cash -- prompting critics to charge that their financial problems are of their own making.
Frank said the housing legislation already includes "any reasonable control over Fannie and Freddie," but that he now believes Congress should explicitly give the regulator power to approve pay packages.
The agency that oversees Fannie Mae and Freddie Mac already has the authority to bar them from awarding executives "excessive" compensation that's out of whack with what similar firms' top people receive. But the law expressly forbids capping Fannie and Freddie executives' compensation.
Both versions of the housing bill give the new regulator more latitude to decide what constitutes excessive pay, including taking into account wrongdoing by an executive. The Senate-passed bill also gives the government the power to limit or ban "golden parachute" payments for executives if either company becomes financially unstable, goes belly up or needed a federal bailout.