By David S. Hilzenrath
Washington Post Staff Writer
Tuesday, September 9, 2008
The new regulatory agency that seized control of the mortgage-funding giants and forced out their chief executives Sunday has broad but untested power to prohibit severance payments. Under federal law, it could do so on a variety of grounds, including if it found that the former executives were responsible for the companies' financial troubles.
"We are working through the compensation issues and have nothing to say at this time," Federal Housing Finance Agency spokeswoman Corinne Russell said by e-mail yesterday.
The severance packages could be worth as much as $14.9 million for Richard F. Syron, the former Freddie Mac chairman and chief executive, and as much as $9.8 million for Daniel H. Mudd, the former Fannie Mae chief executive, said David M. Schmidt, a senior consultant for the executive pay consultancy James F. Reda & Associates.
However, those estimates included multimillion-dollar bonuses for the two executives that are difficult to predict. Mudd is represented by Washington lawyer Robert Barnett, whose clients include many of Washington's political and media elite. "We are discussing matters with the government," Barnett said by e-mail.
Asked for Syron's perspective, Freddie Mac spokeswoman Sharon McHale declined to comment.
For years, Syron and Mudd were among the highest-paid executives in the Washington area. Even in good times, their pay was a target of criticism from members of Congress and others. Mudd's compensation last year totaled $11.6 million, and Syron's came to $18.3 million, as measured in the companies' annual pay disclosures. However, the near evaporation of their share prices has diminished the value of the stock awards, a major component of compensation and potential severance.
Still, an unusual provision in Syron's employment contract could protect him. Syron was entitled to an equity grant this year valued at $9.4 million, of which $8.8 million was guaranteed, Freddie Mac said in a report to shareholders this year.
When the contract was drawn up, the severance arrangement was reviewed by the Office of Federal Housing Enterprise Oversight, predecessor to the new regulator, Freddie Mac reported.
Another compensation consultant, Brian Foley of Brian Foley & Co., said he didn't think the executives' contractual rights should survive the bailout.
"The taxpayers are going to foot a huge bill here. I would expect there to be a lot of heat if it turns out these guys are walking away with any kind of substantial money," Foley said. Similar sentiments inspired a former Fannie Mae employee to create a page on the Facebook social networking site with a blunt message: "Not One Red Cent For Fannie Mae and Freddie Mac CEO's."
"If it was up to me, I would say that, hey, you guys were given tons and tons of money, and look at the end result here," said Shaun Dakin, the former employee. "How about giving some of that money back to the American taxpayer who's now going to be funding your folly?"
Treasury Secretary Henry M. Paulson Jr. said Sunday that managers of the companies were not responsible for the main causes of the government's action, which he identified as conditions in the housing market and an inherent conflict in the companies' business model. As federally chartered but shareholder-owned firms, they were required to balance a profit motive and a public-service mission.
Under the former chief executives' contracts, the severance packages would vary depending on how their departures are formally classified. For example, if Mudd were dismissed "without cause," as Schmidt's analysis assumed, he would be entitled to two years of salary, a prorated bonus for this year, a prorated portion of other incentive awards, and immediate vesting of outstanding stock and option grants. He also would be entitled to full payment of his family's medical and dental premiums for two years.
If Mudd were fired "for cause," he would get his last paycheck. Few chief executives are fired for cause, and Mudd's contract defines the term in typically narrow fashion. Possible causes are being convicted of or pleading no-contest to a felony, gross negligence, dishonest or fraudulent behavior, or willful misconduct. If Syron were fired for cause, as of December 31, he would have had to repay $1.25 million to Freddie Mac, the firm reported this year.
Since becoming chief executive of Freddie Mac at the end of 2003, Syron has taken home $17.1 million in compensation, said Alexander Cwirko-Godycki, research manager for Equilar, an executive pay research firm. That figure does not include stock and option awards that Freddie Mac valued at $45.1 million when they were issued, and it appears that he has not liquidated any of those, Cwirko-Godycki said.
Since 2000, Mudd has taken home $28.3 million. That does not include equity awards that Fannie Mae originally valued at $45.2 million. Based on readily available data, Mudd appears to have cashed in no more than $1.7 million of those since 2003, Cwirko-Godycki said.
With shares of each company trading for less than $1, the former executives' options to buy stock at set prices are, for the time being, essentially worthless.