FHFA's DeMarco Defends GSE Compensation

Edward J. DeMarco, Acting Director of the FederalrnHousing Finance Agency (FHFA) has responded to an announcement from the HousernFinancial Services Committee regarding HR 1221, The Equity in Government Compensation Act of 2011.  The bill would strip compensation packages ofrnsenior executives at Freddie Mac and Fannie Mae (the Enterprises), putting toprnexecutives on the federal government executive pay scale and other employees onrnthe General Schedule pay scale.   </p

In a press releasernyesterday Committee Chairman Spenser Bachus (R-Al) announced the committeernwould vote on the measure on November 15 and excoriated the GSEs, calling thernfederal conservatorship “the biggest bailout in history” and the executiverncompensation an added insult to taxpayers. rn “The Americanrnpeople should be outraged at the multi-million dollar taxpayer-funded bonusesrngiven to the executives of Fannie Mae and Freddie Mac. These organizations werernground zero for the mortgage market meltdown, the catalyst for an economicrndecline that has cost Americans more than seven million jobs.”   </p

In a letter to Bachus, Demarco pointed out that,rnwhen FHFA put the Enterprises into conservatorship in 2008, the individualsrnresponsible to their failure were separated from the company and no severancernor golden parachutes were permitted.  Thernsenior compensation package developed by FHFA for new executives was 40 percentrnbelow the one used pre-conservatorship and over the ensuing two years FHFA hasrnreduced the number of top level positions and further reduced pay levels asrnpositions have turned over.</p

DeMarco pointed to the need to manage credit andrninterest rate risks of $5 trillion in mortgage assets and $1 trillion of annualrnnew business and said, “I have concluded that it would be irresponsible of mernto risk this enormous contingent taxpayer liability with a rapid turnover of managementrnand staff, replaced with people lacking the institutional, technical,rnoperational, and risk management knowledge requisite to the running ofrncorporations with thousands of employees and more than $2 trillion in financialrnobligations each.”</p

GSE executives and staff have to face, he said, thatrncontinued employment with an Enterprise risks substantial job and career opportunityrnand they face considerable public scrutiny and criticism.  “At the same time, the taxpayer is backingrnEnterprise financial commitments that have thirty year lives, and we will needrnexpert management of those guarantees for years to come.  Given the amount of money at risk here, smallrnmistakes can easily be amplified to losses far greater than the compensationrnpaid to Enterprise executives.”</p

DeMarco said he would be testifying on therncompensation to yet another congressional committee on the day of the vote butrnwould share his testimony with the Bachus committee afterward.   However, he said, he would submit that thernbest assistance Congress could give FHFA on this matter is “to take action tornprovide a clear path forward to end the conservatorships and reduce therntaxpayer exposure to the mortgage market.”</p

In light of Bachus’ earlier remarks, it seemsrnreasonable to point out that the Troubled Asset Relief Program (TARP)rnauthorized by Congress in 2008 put $700 billion at risk (although the ultimaterncost will be s fraction of this amount) and the savings and loan crisis in thernlast 1980s cost taxpayers almost $400 billion after the bank insurancernfund became insolvent.  The dualrnconservatorships of the GSEs have, to date cost taxpayers $141 billion.</p

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