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From Banking and Finance Law Daily, July 2, 2015

GSE pay hikes raise legislator ire over ‘crony capitalist empire’

By Katalina M. Bianco, J.D.

The recent jump in compensation for Fannie Mae and Freddie Mac chief executives has spurred a bipartisan backlash from outraged members of both the Senate and House. The CEOs of the government sponsored enterprises will each get a raise of $3.4 million, bringing their total annual compensation to $4 million, up from $600,000 each of the two previous years.

The Federal Housing Finance Agency, led by FHFA Director Mel Watt, approved the pay hike, and has filed a Form 8-K for Fannie and Freddie with the Securities and Exchange Commission. A Form 8-K is a report that public companies are required to file to apprise major shareholders of significant company events.

Washington cronyism. Speaking out on the hike in compensation, Rep. Scott Garrett (R-NJ), Chairman of the House Financial Services Capital Markets and Government Sponsored Enterprises Subcommittee, blasted the FHFA for the move. “On the same day that the Ex-Im Bank expires, the crony capitalist empire strikes back at the FHFA,” said Garrett. “Fannie and Freddie have been bailed out by American taxpayers to the tune of $188 billion, yet Director Watt is handsomely rewarding the executives of these failed institutions. Today's announcement is yet another reminder that Washington cronyism is alive and well.”

Bailout a source of animosity. The GSEs were bailed out by taxpayers to the tune of $188 billion in 2009, and, as noted by Sen. Bob Corker (R-Tenn), a member of the Senate Banking Committee, an April stress test conducted by the FHFA showed that Fannie Mae and Freddie Mac could require a $157 billion taxpayer bailout to keep them afloat during a future crisis.

“I understand that Fannie Mae and Freddie Mac want to offer competitive salary and bonus packages to attract and retain talent, but because it appears that FHFA is ready to unilaterally drive the GSEs back to the failed model of private gains and public losses, this decision is just one more reason Congress must act to reform our housing finance system,” Corker said.

Legislative reform. “This decision by the Federal Housing Finance Agency to dramatically boost the salaries for the CEOs of Fannie and Freddie would appear to signal a return to business as usual,” said Sen.Mark R. Warner (D-Va), a member of the Senate Banking Committee and Ranking Member of the Banking subcommittee overseeing the secondary mortgage market. Warner also noted the taxpayer bailout of the GSEs and added that “the Senate Banking Committee last year voted in support of bipartisan reforms to fundamentally restructure the federal role in mortgage finance. These extraordinary pay raises fly in the face of the legislative intent.”

The legislation referred to by Warner is the Housing Finance Reform and Taxpayer Protection Act of 2013, S. 1217, which would wind down and eliminate Fannie Mae and Freddie Mac and establish the Federal Mortgage Insurance Corporation as an independent federal agency (see Banking and Finance Law Daily, May 15, 2014).

GSE compensation reform. After the announcement that Watt had directed Freddie Mac to propose executive compensation for its CEO that could be as high as the “25th percentile of the market,” Rep. Ed Royce (R-Calif) a member of the House Government Sponsored Enterprises Subcommittee, introduced legislation to block the proposed hike in pay (H.R. 2243, the Equity in Government Compensation Act of 2015).

“We appear to be tip-toeing back to a permanent quasi-state for our secondary housing market with private market compensation levels backed by taxpayers,” Royce said. His intention is to advance the legislation introduced last month. “I look forward to working with Chairman Hensarling to legislatively rein in executive salaries at these government-backed monopolies, a proposal that has won bipartisan support in the past."

Companies: Fannie Mae; Freddie Mac

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