Workers Shaken by Fannie, Freddie Woes

Fannie and Freddie employees interviewed also are upset that senior management, such as Fannie chief executive Daniel H. Mudd, have not publicly defended the firms or tried to bolster morale more aggressively.

On Thursday, Fannie Mae Chief Financial Officer Stephen M. Swad posted a letter to employees on the company's internal Web site, seeking to recount the market's manhandling of Fannie stock. The letter was characterized by one employee as "not reassuring."

Mudd declined an interview request for this article. In a statement yesterday, Mudd said Fannie holds "more than adequate capital reserves."

"Coming out of an era where Fannie Mae was very aggressive with its media policy and with its congressional relations activities, I don't understand how the current Fannie Mae management chooses not to be as aggressive in either area . . . especially when your fate is subject to political decisions," said William R. Maloni, Fannie's former head of government and industry relations, who retired in 2004. "You need to try and help shape those opinions through lots of direct contact and, ideally, positive media."

One ex-senior Fannie Mae employee was told there was a "raging debate" at the senior levels of Fannie on Thursday and Friday as to whether the company should actively defend itself. Fannie Mae decided against it, saying such an action could make the company "look weak," said the source, who spoke on the condition of anonymity because of an ongoing relationship with one of the companies.

Yesterday, Fannie Mae spokesman Brian Faith said: "Obviously these have been trying times, but everyone is keeping their head up and concentrating on the job we have to do. Our employees have a very strong commitment to the company and our mission, and they have really rallied."

Current and former employees are angry at what investor perception has done to their retirement funds and the public view of the two housing giants, which own or guarantee $5.2 trillion in mortgages.

The former senior Fannie employee said Fannie's lawyers are warning executives to be cautious about making public assurances, noting that two former Bear Stearns officials who did the same thing last summer were eventually arrested.

"But you can go out in public and talk about facts," said the source. "You can go out and say, 'Fannie and Freddie have three possible capital classifications. We're at the highest one. To go into conservatorship, you have to be at the lowest one.'

"Two capital downgrades would have to happen from our regulator before we could even talk about going into conservatorship," the source said. "You could go out in public and talk about those kinds of things and not look weak."

In 2006, a $10.6 billion accounting scandal was revealed at Fannie that led to earnings restatements, which prevented virtually all Fannie employees from buying or selling company stock. The ban that was lifted in November, when Fannie started filing SEC reports again.

"It's hard to overstate how -- and I don't mean this in a weird, Waco, Texas, kind of way -- Fannie and Freddie are kind of cultish companies," said the former senior Fannie employee. "True believers [are] gung-ho and work like crazy, and they believe in what they're doing and believe in their companies' mission. . . . And Fannie is chock-full of people like that. Just chock-full of true believers."

Staff writers Simone Baribeau, Thomas Heath, David S. Hilzenrath and Anita Huslin contributed to this report.