WASHINGTON — The emergency backstop provided to the government-sponsored enterprises has put the top executives of Fannie Mae and Freddie Mac in the line of fire.
Critics, including some lawmakers, argue that management missteps necessitated the government rescue and should cost executives their jobs.
"The leaders who are running Fannie and Freddie should perhaps take a leave of absence from their positions," said Rep. Michele Bachmann, R-Minn., who sits on the House Financial Services Committee. "I don't believe that the taxpayers should be financing rich, millionaire bureaucrats at Fannie and Freddie who are in the process of ripping off the American people."
Sen. Chuck Hagel, R-Neb., who sits on the Senate Banking Committee, pressed for changes in a letter this month to Treasury Secretary Henry Paulson.
"Accountability was decisively taken with the management of Citigroup, Lehman Brothers, AIG, Merrill Lynch, Wachovia, UBS, Morgan Stanley, and MBIA," Sen. Hagel wrote, naming companies where top executives have resigned or been forced out. "Where's the accountability at Fannie Mae and Freddie Mac?"
So far there does not appear to be a substantial push — in Congress, at the regulatory level, or on the GSEs' boards of directors — to remove Daniel Mudd from Fannie or Richard Syron from Freddie. And the two chief executives have plenty of defenders.
Several observers argue that the two men had no control over the circumstances that led to the backstop plan, and that they have helped the GSEs recover from their massive accounting scandals. Many say Mr. Mudd and Mr. Syron are more valuable now as the GSEs attempt to restore public confidence.
The bill "adds to their task list and therefore at least temporarily increased their value to their respective organizations and all the government officials they have to work with," said Jim Vogel, the head of fixed-income research at FTN Financial Capital Markets Corp.
Even Mr. Paulson, part of an administration that has long held that the companies should be reined in, offered an indirect defense of Mr. Mudd and Mr. Syron two weeks ago during a hearing on the GSE backstop plan. Asked if it was management's fault that the plan was needed, Mr. Paulson said: "I'm not looking for scapegoats here. I'm grateful for the service that the board members are providing and that management's providing."
At another point in the hearing, Mr. Paulson said that both companies had worked with him "in a very constructive way," and that the GSEs' problems resulted not from poor underwriting standards, but from being constrained to a single business that has been hard hit by the housing crisis.
Still, some observers say that, given the type of companies Fannie and Freddie are, the executives are more culpable, not less.
Mistakes "can be traced much more directly to the CEOs of those two companies than others, because they're monoline companies," said Bert Ely, an independent analyst in Alexandria, Va., and a frequent GSE critic. "The key decisions are relatively few."
Others say executives were too focused on meeting immediate expectations and did not do enough to prepare the companies for what would prove to be severe problems. "Wall Street has short-term objectives," said Thomas Stanton, a fellow of the National Academy of Public Administration. "But a GSE is created to be there for the long term. It was the job of the CEOs to take a longer-term perspective than merely their quarterly reports. They had to do that because of their public charge … and they didn't take that longer-term perspective."
A Fannie spokesman said that Mr. Mudd is "working hard to serve the market and hasten the housing recovery."
"Dan and the management team have made critical progress in rebuilding the company, and they continue to focus on fulfilling our mission to provide liquidity, stability and affordability to the nation's housing market in good times and bad," he said.
A Freddie spokeswoman defended its CEO's performance.
"The fact of the matter is that Mr. Syron has accomplished everything he was recruited to do when he joined Freddie Mac and has positioned the company very well for the long term," she said. "He has overseen a dramatic improvement in the company's control environment and significant progress in financial reporting."
"Perhaps most importantly, he is leading the company through the current market crisis, ensuring that Freddie Mac remains adequately capitalized and highly liquid so that it can continue to play a major stabilizing role in the mortgage markets," she said.
In particular, Mr. Syron, and to a lesser extent Mr. Mudd, have been criticized for not bulking up on capital reserves.
"The key part of it is the decapitalization they did last year," Mr. Ely said. "They should have been shrinking their balance sheet."
As of March 31, Fannie held $42.7 billion of capital, giving it a $5.1 billion cushion over what the Office of Federal Housing Enterprise Oversight requires. Freddie held $38.3 billion, $6 billion more than the OFHEO mandate.
Mr. Syron has come under heavier scrutiny because Fannie raised more than $7 billion in capital in the second quarter, while Freddie has yet to come through on a pledge to raise $5 billion more. For both companies, however, the capital ratios are still lower than they are at banks.
Peter Wallison, a fellow at the American Enterprise Institute, said the necessity of a government rescue of the GSEs argues for their CEOs' removal.
"I don't think in these circumstances you have to provide a bill of particulars," he said. "The fact they are in circumstances where taxpayer funds have to be contributed is all you have to point out. This is not an indictment. It's simply a matter of good judgment."
The housing bill, which is expected to be signed by President Bush soon, gives Treasury the authority to offer an unlimited line of credit to Fannie and Freddie and take an equity stake in the GSEs.
Several sources said the timetable may be shorter for Mr. Syron than Mr. Mudd. Freddie has been ordered to split the chairman and CEO positions; Mr. Syron continues to hold both titles while a search is under way for someone to take over the GSE.
Though the CEOs' fate remains unclear, the prospect of executive pay cuts looms over both enterprises. The housing bill gives the new GSE regulator discretion over the compensation levels, which have become an annual target for GSE critics on Capitol Hill.
The Washington Post's annual compensation survey found that Mr. Syron ranked sixth and Mr. Mudd seventh among the highest-paid executives in the Washington area. Mr. Syron earned nearly $14.5 million in compensation last year, to Mr. Mudd's $14.2 million, the paper said.
It remains to be seen whether a new regulator will view those amounts as excessive. OFHEO's director, James Lockhart, who will head the new GSE regulator when the bill goes into effect, told Bloomberg Television last week that he realized compensation could not go too low.
"You want a pay scale that will attract new, high-quality executives," he said. "You wouldn't want to put the salary so low that you couldn't hire anybody."