Assembling America's Mortgage Team

New Fannie Mae CEO Herbert M. Allison Jr., left, and his counterpart at Freddie Mac, David Moffett, are charged with an ambitious mission. (By Kevin Wolf -- Associated Press)

Allison and Moffett have taken comfort in this tabula rasa approach. "Jim and I have agreed that it's totally a blank slate," Moffett said. Allison said, "I've told everyone here that we can't do anything about past losses."

Although Fannie Mae and Freddie Mac are under government control, Lockhart said he wants them to remain competitive. Insomuch, he gives the companies loose guidelines, such as a quantity of mortgages to buy, and lets each firm's management decide how to do so. He then signs off on their plans.

And he keeps a close eye. In the first few weeks of government control, Lockhart assigned about 15 liaisons to be paired with each of the senior executives at the companies. Allison's liaison, Len Reid, a former director of supervision at FHFA's predecessor who was plucked out of retirement, sits in a conference room next door. Moffett is paired with Chris Dickerson, a senior FHFA officer who works in a room down the hall. The FHFA liaisons attend almost every key meeting, relaying information back to Lockhart, whom Allison and Moffett talk to every day or so.

Finding Leaders

The search for new chief executives began several weeks before the government's takeover. Lockhart, a longtime government official and financial services executive who joined FHFA's predecessor agency in 2006, worked with Ken Wilson, a Paulson deputy from Goldman Sachs, to generate a list of potential new chief executives to replace Daniel Mudd of Fannie Mae and Richard Syron of Freddie Mac. Lockhart scrapped a Nantucket vacation as government examiners poured through the companies' books. Moffett flew up from his home on Amelia Island, Florida, to talk to Lockhart about playing some role in Fannie Mae and Freddie Mac, but it wasn't clear what it would be.

On Friday, Sept. 5, as Moffett and Allison arrived in Washington, Paulson and Lockhart were sitting side by side at FHFA headquarters telling Mudd and Syron they would have to step aside and the government would take over the companies. Syron immediately complied; Mudd was reluctant but consented.

On Saturday, Moffett and Allison were ushered into meetings at Treasury and FHFA, a block from the White House. Lockhart explained the troubles of Fannie Mae and Freddie Mac and what they needed to do under new leadership. "It wasn't a balance-sheet discussion, but how could they continue the mission, how to securitize the mortgages, and keep that going," he said.

Lockhart told Allison and Moffett he wanted to give them independence in their new roles, but it was clear who was boss. "The authority was very clear to me . . . In the absence of a board, [Lockhart] serves as the board," Moffett said.

Retention Strategy

As Paulson and Lockhart gathered in the FHFA auditorium to announce the takeover Sunday, Sept. 7, Allison and Moffett began introducing themselves to senior executives. On Monday, they started work. By mutual agreement between Lockhart and the new chiefs, several executives, including the chief business officers and chief lobbyists at both companies, were soon let go.

At the same time, the men worked on a new retention strategy to try to ensure that the companies' employees, shocked by the stunning decline of the companies' share prices, would not leave en masse. FHFA hired a consultant to come up with suggestions, which included cash bonuses. Allison and Moffett thought the suggestions were a bit stingy and asked that the amounts be increased and the duration of the payments be decreased. Lockhart not only agreed, but pushed for an even more generous offer. In the end, some employees can receive up to 150 percent of what they would have gotten in the old Fannie Mae and Freddie Mac regimes, paid out over slightly more than a year.

Allison and Moffett held town-hall meetings with thousands of employees. Paulson attended as well. At Freddie Mac, Moffett was asked by one employee whether he plans to live in the Washington area. This was a sensitive question because Syron had commuted many weeks from his home in Massachusetts. Moffett said he did plan to move, and the employees thundered in applause. "I was surprised that there was such a big round of applause because I don't know any other way to do this, except to live here and be here all the time," Moffett said.

Since then, the new chief executives have been confronting less symbolic -- and more fundamental -- issues. Reviewing Fannie Mae's accounting, Allison decided the company had to be more forthright in how it reports information about the liquidity of certain assets.

In company disclosures, Fannie Mae made reference to about $90 billion in assets -- ranging from super-safe certificates of deposit to more risky unsecured corporate notes -- as "liquid investments," suggesting they could be easily bought and sold at the company's will. Allison decided it would be better to characterize these assets simply as "other investments."

"I felt that in the liquidity portfolio we should break out the various groups of assets, so readers could see what securities are truly sellable on short notice and which ones might take a little longer to trade," Allison said.

The chief executives and Lockhart still have much to work out at the companies and with their own relationship. "I'm getting fully immersed in the business. I'm in fact-finding mode. I've been in listening mode," Moffett said.

New Governance

Most members of the companies' boards have resigned, but Lockhart has hired new chairmen who are to recruit new board members. Fannie Mae's chairman is Philip A. Laskawy, former chief executive of big-four accounting firm Ernst & Young. Freddie Mac's is John Koskinen, a turnaround specialist, former deputy mayor of the District and former deputy director of the Office of Management and Budget.

Last week, FHFA lawyers huddled separately with Fannie Mae and Freddie Mac lawyers to figure out how to respond best to probes by the FBI, Justice Department and Securities and Exchange Commission. They wanted to find a way to cooperate fully without bringing business to a halt -- as they had been paralyzed by earlier accounting scandals.

Meanwhile, New York Stock Exchange officials visited FHFA headquarters for a meeting with Lockhart and Allison (Moffett phoned in from the West Coast). Even though the firms have been seized by the government, their shares are still outstanding and listed on the exchange. The exchange, however, has rules about financial reporting and board structure to remain listed, and it wanted to know whether FHFA and the companies planned to fulfill them. They said they did.