By Zachary A. Goldfarb and Kendra Marr
Washington Post Staff Writers
Monday, September 8, 2008
The government's takeover of District-based Fannie Mae and Freddie Mac of McLean was for some employees the painful conclusion of several difficult years that seemed to reduce the status of two firms that once dominated the local business and philanthropic scene.
The mortgage finance goliaths were not only Washington's largest public companies, but they were central figures in the region's once-promising financial sector. Together with private-equity giant Carlyle Group, credit card issuer Capital One, student loan company Sallie Mae, the investment house Friedman, Billings and Ramsey, and many others, Fannie and Freddie helped diversify a Washington economy historically tied to the government.
All have suffered hits during the recent credit meltdown, echoing the bust several years ago of the local telecommunications sector. But unlike that crash, which saw the departure of such names as MCI and PSINet, the government's takeover seemed to assure that Fannie and Freddie would remain part of the local scene, if in diminished form.
Jim Dinegar, president and chief executive of the Greater Washington Board of Trade, noted that Fannie Mae and Freddie Mac were major employers locally and that the change of control creates some uncertainty for their workforces.
"When such a significant change happens to major employees in any region, it has reverberations throughout the local economy," Dinegar said. "I cannot predict what will happen. But we will be keeping our eye on their collective workforce, being especially sensitive to the employees' personal financial situations."
In a memo to Fannie Mae employees yesterday, James Lockhart, director of the Federal Housing Finance Agency, sought to reassure employees: "Your jobs are secure. There will be no change in your employment status with Fannie Mae as a result of the conservatorship. Your jobs, compensation and benefits will continue without interruption."
The government takeover follows years of troubles at the companies, starting with twin accounting scandals beginning in 2003. No sooner had the companies announced that they had cleaned up their books than the credit markets began to falter.
The bailout evokes a "deep sense of sadness and a broken heart," said Paul Weech, who retired from Fannie Mae in August after spending 10 years there working on affordable-housing issues. "The many years I was there, I could feel I was going to work for an employer that had a good role to play in the economy."
The takeover brings Fannie Mae full circle. It began as a government agency in 1938, as part of President Franklin Roosevelt's New Deal, to provide financing to the mortgage market. In 1968, Congress converted Fannie Mae into a public company to remove its activities from the federal balance sheet and balance the budget. Two years later, Congress created Freddie Mac to provide some competition in the secondary mortgage market.
For many years, the two companies used their special status as government-sponsored entities to build their businesses, enriching executives and becoming financial forces in the national mortgage market. Today, they touch about 80 percent of all new mortgages. They also became two of the region's largest corporate givers.
By its account, Freddie Mac, along with its foundation, has invested more than $348 million in the community to date. Last year its annual Hoops for the Homeless campaign, a celebrity-studded basketball tournament to fight family homelessness, raised $900,000 for six local nonprofits that included Hannah House and So Others Might Eat.
Last year Fannie Mae dissolved its foundation -- an organization that has put more than $1 billion into education, affordable housing, education and economic development programs since 1979. The company said its philanthropic activities would be handled in-house, and it continued to give to local organization and initiatives. Among its 2007 programs, the company pledged $10 million to improve infrastructure in D.C. schools and $1 million in grants to help revitalize D.C. neighborhoods. Its annual Help the Homeless walkathon raised more than $7 million last year to support 175 local homeless service providers, such as Reston Interfaith, last year.
There was hardly any mention of mortgage giants' philanthropy at yesterday's news conference, only that government "will review the charitable activities."
But Bo Sims, a staff member at DC Central Kitchen, feared the worst. "I don't suspect the government will take up their slack."
DC Central Kitchen prepares 4,500 meals a day for distribution to about 100 agencies, including emergency shelters and job training programs. Jodie L. Kelley, a Fannie Mae vice president and deputy general counsel, sits on its board of directors.
The threat of cutbacks could be another blow to local nonprofits already struggling to secure corporate funding in this weakened economy, Sims said.
"We are going to hurt unless we find someone to supplement that loss," Sims said. "But that's not going to be easy."
Fred Malek, chairman of Thayer Capital, a private-equity firm that invests in the hotel industry, said the companies' philanthropic activities were probably their greatest contribution to the local scene. "It remains to be seen whether under the current state of duress, any of that will or should continue."
In a farewell message to Fannie Mae employees Sunday, chief executive Daniel H. Mudd wrote: "There are still millions of homeowners in pain, families with a dream of owning a home, and investors depending on you. Please give your colleagues and my successor your full support."
For now, current and former workers are worried about their own welfare.
Fannie Mae for many years granted stock options to all sorts of employees, from cafeteria workers to senior executives. Those options gave people a right to buy shares at a set price on a given date, much of which are for prices far above what the stock trades for now.
Bill Maloni, who worked at Fannie Mae for 20 years, most recently as the senior lobbyist, received a letter from the company's investment plan last week saying he has stock options that are about to expire at $69 per share. The company's shares closed at $7.04 on Friday.
"People have been seeing whatever part of their net worth expressed by Fannie Mae shares fall mightily over the past year," Maloni said.
Maloni said former longtime employees are asking questions about whether the government intervention makes sense given that Fannie Mae seemed to be doing what it needed to do to strengthen its financial position. "The place has been dragged through the mud," he said.
Staff writer Thomas Heath contributed to this report.