By Christopher Twarowski and Frank Ahrens
Washington Post Staff Writers
Monday, July 14, 2008
For years, Fannie Mae and its smaller rival, Freddie Mac, were destination workplaces in the Washington region. With a booming housing market and the implicit backing of the federal government, employees enjoyed high pay, bonuses and the promise of a prosperous retirement, thanks to the companies' high-flying stock prices.
Internally, it was considered near-betrayal for employees to sell their stock. A year ago, when both stocks were trading at about $60 per share, such loyalty made sense.
Today, it looks like a mistake.
After a month-long battering by a skittish Wall Street, worried that the twin mortgage giants might be running out of cash, employees of Fannie and Freddie have watched more than 80 percent of their stock value -- in concrete terms, their retirement funds -- evaporate since last July.
"For the long-termers, this is just horrible," said Thomas Lawler, Fannie Mae's former senior vice president for portfolio management, who retired in 2006. "This is something people are just . . . their mouths are just agape. As an existing shareholder, you're sad, depressed and possibly even [ticked] off."
It is a time of intense worry for District-based Fannie Mae's 5,800 employees, 4,775 of whom work in this region. The same is true for the 5,000-some worldwide employees of McLean-based Freddie Mac. Most of those interviewed for this article would not speak publicly on the record for fear of rebuke or because they have seen what negative media coverage has done to their companies in recent days.
Though both firms hold delinquent home mortgages that will lead to losses, regulators have said that neither faces a liquidity crisis. But when federal officials late last week sought to reassure Wall Street that backstop options might be available to Fannie and Freddie -- such as opening the Federal Reserve's "discount window," or lender of last resort -- the discussions were not enough to restore Fannie and Freddie stock, each of which fell about 45 percent last week alone.
Yesterday, the government announced broad measures to lend money to Fannie and Freddie and buy their stock if necessary. Fannie will find out quickly whether the government muscle has any effect: The mortgage giant faces a critical test of investor confidence today when it offers $3 billion of its securities in a previously scheduled sale.
"[Employees] feel that no matter what they do at this point, the situation may get out of control, and something needs to be done to clamp down" on unfounded rumors, one Fannie employee said.
"This is my family's financial future," said Lorrie Rudin, former director of executive compensation for Fannie Mae, who retired last year. "I worked there for 20 years, and I'm just absolutely devastated and terrified."
Employees cite Bear Stearns, the Wall Street bank made vulnerable by the credit crisis and ultimately brought down in March by, effectively, a run on the bank in which lenders refused to loan them money.
The venerable Arthur Andersen accounting firm suffered a similar fate in 2002, because of its ties to disgraced energy trader Enron. Federal prosecutors launched an aggressive investigation of Andersen that led to the dissolution of the nearly century-old accounting firm considered a rock in the industry.
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.