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Regulator: Nothing Wrong With Fannie and Freddie's Multimillion-Dollar Bonuses

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Call it sheer hubris or a woeful misreading of public sentiment: After Fannie Mae and Freddie Mac executives got slammed by Congress over news that they got $12.79 million in bonus pay last year, Edward DeMarco, their chief regulator as acting head of the Federal Housing Finance Agency, has come out to defend the bonuses paid out to the loss-making government-owned mortgage firms.
According to CBS News, DeMarco sent out a letter to lawmakers in Washington on November 10 justifying big compensation packages for executives by saying they were needed to attract and retain top talent. Wrote DeMarco:
I need to ensure that the companies have people with the skills needed to manage the credit and interest rate risks of $5 trillion worth of mortgage assets and $1 trillion of annual new business that the American taxpayer is supporting. I have concluded that it would be irresponsible of me to risk this enormous contingent taxpayer liability with a rapid turnover of management and staff, replaced with people lacking the institutional, technical, operational, and risk management knowledge requisite to the running of corporations with thousands of employees and more than $2 trillion in financial obligations each.
Yes, the big bonuses are necessary to attract the best management, like the kind that lost $5.1 billion in the third quarter for Fannie Mae and requested for $7.8 billion in bailout money, or the kind that lost $4.4 billion in the same quarter for Freddie Mac and asked for $6 billion in taxpayer money. The nearly $14 billion combined is on top of the two firms' request for $6.6 billion in bailout cash in the second quarter and, lest we forget, the $170 billion from their 2009 bailout. Yes, that kind of talent.
Rep. Patrick McHenry, Republican of North Carolina, summed it up succinctly to Politico: “Fannie and Freddie executives are being paid millions to manage losses. By these same standards, I should be the starting forward for the Lakers. It’s completely absurd.”
We hear this defense of obscene bonuses all the time: Talent is tough to come by, and so to stay competitive, one needs to pay the highest price. Often what's happening is CEO compensation packages are pegged to some percentile -- usually 75th -- of peer group salaries.
But as Peter Whoriskey of the Seattle Times pointed out, this practice is flawed:
If every company tries to keep up with or exceed the median pay for executives, executive compensation will spiral upward, regardless of performance. (After all,) few if any corporate boards consider their executive teams to be below average.
Former Federal Reserve chair Paul Volcker termed this phenomenon “Lake Wobegon syndrome,” for Garrison Keillor's fictional hometown, where "all the children are above average."
To be fair to our regulators, DeMarco points out senior executive compensation at Fannie and Freddie has been slashed 40% since the government bailed them out in 2009.
Also on the bright side, the Fannie and Freddie bonus flap has brought us a rare moment of bipartisanship in Congress. On Wednesday, Republican Senator John McCain of Arizona and Jay Rockefeller, the West Virginia Democrat, announced a planned amendment that would ban executive bonuses altogether for the two underwater mortgage giants so long as they're getting government bailouts.
POSITION:  No positions in stocks mentioned.