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

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.