Freddie Mac Differs With Regulator on 2007 Results

By David S. Hilzenrath
Washington Post Staff Writer
Wednesday, April 30, 2008

Explaining its executive pay for 2007, Freddie Mac yesterday put a markedly different spin on the company's performance last year from the assessment of a federal regulator in a recent report to Congress.

The compensation committee of Freddie Mac's board listed a variety of "notable accomplishments . . . that have better positioned the company," including its "market-leading response to early signs of the subprime crisis."

In a report to shareholders that detailed multimillion-dollar pay packages for top executives, the compensation committee also cited a "successful offering of $6 billion in preferred stock in December 2007, which substantially strengthened our capital position."

The regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), had a different take on those developments two weeks ago in an annual report to Congress. It discussed, among other things, why it believes Freddie Mac remains "a significant supervisory concern."

Freddie Mac, which was chartered by the government to support the mortgage market, lost $3.1 billion in 2007, the first annual loss in the McLean company's history.

OFHEO blamed the company's trouble in part on its purchase of loans "with weak underwriting" and a "strategic decision" to take on riskier loans in 2006 and 2007.

The compensation last year for Freddie Mac's chairman and chief executive, Richard F. Syron, included a $1.2 million salary, $3.5 million in bonuses, $8.3 million in stock awards and $771,585 in perks and benefits.

The $6 billion December preferred stock offering that Freddie Mac directors cited as a success was a costly response to serious trouble. In November, Freddie Mac became undercapitalized; that is, its financial cushion fell below the level OFHEO requires it to maintain to reduce its risk of failing.

The company's need for additional capital was at least partly the result of poor planning by Freddie Mac, the regulator suggested. In retrospect, Freddie Mac's decision to spend money earlier in the year raising its dividend and buying back its own stock was "mistimed," OFHEO wrote.

"Freddie Mac's expensive emergency corrective action in the fourth quarter emphasizes the need for more permanently heightened attention to income forecasting, and more prudent capital management generally," OFHEO wrote.

Syron has expressed regret that Freddie was forced to issue the additional stock and cut its dividend late last year. "We wanted to dilute the common shareholders like we wanted to shoot ourselves in the head with a gun," Syron told investment analysts in December.

The compensation committee credited Syron with "leading the home mortgage industry through the subprime crisis."

Freddie Mac spokeswoman Sharon McHale explained that the company tightened certain lending standards in February 2007, ahead of other businesses. The company has since tightened standards further.

In a December interview, Freddie Mac executives described the company as having deliberately followed the industry into a loosening of lending standards to preserve market share. That loosening went beyond subprime loans to other types of mortgages.

"I think what happened over time is, we found that our own caution was making us less and less relevant, and we weren't sure, quite frankly, that our competitors, you know, on the street were being crazy," said Anthony S. "Buddy" Piszel, the chief financial officer.

"Could we have run for the hills and said we're not going to do any of that?" Piszel asked. "What if things didn't go down? We would basically be just taking our whole future and giving it away."

In yesterday's report, the compensation committee noted that Syron had effectively been doing an extra job since the company's chief operating officer announced in May that he was leaving the company.

OFHEO told Congress that Freddie Mac's board has been slow to replace the former chief operating officer. It also faulted Freddie Mac for failing to separate the positions of chairman and chief executive as it agreed to do in 2003. The chief operating officer who announced a year ago that he was leaving was Syron's heir apparent as chief executive.

Freddie Mac spokeswoman Sharon McHale said Syron's performance-related cash bonus of $2.2 million for 2007 was only 66 percent of his target amount because "Freddie Mac's financial performance in 2007 was not good."

He also received a $1.25 million as the first installment of a "special extension bonus" potentially worth $3.5 million for agreeing to stay at Freddie Mac through 2009.

Freddie Mac board members were advised on executive pay decisions by a compensation consulting firm, Hewitt, that also did consulting work for Freddie Mac management. Hewitt's $280,000 of fees and expenses for advising management exceeded the $230,000 it received for advising the board, according to the report Freddie Mac issued yesterday.

The board approved Hewitt's work for management and believes those activities "do not present a conflict of interest," McHale said.

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