Fannie and Freddie's Bonuses Versus AIG's Handouts

One of the brilliant minds at Fox News is James Farrell, an analyst here who tracks and dissects the most complicated business stories.

I'm giving Farrell the floor today because he has insightful, sharp and smart things to say on the news that Fannie Mae (FNM) and Freddie Mac (FRE) will pay retention bonuses to its employees like the ones criticized by lawmakers for employees at AIG (AIG).  

Like AIG, Fannie and Freddie were taken over by the US government last year after posting massive losses. Fannie in particular has been plagued by accounting controversies through the years. And in 2008, Freddie lost $50.1 bn - more than the approximately $42 bn the company made between 1971 through 2006, notes economist Edward Yardeni.

Some AIG employees have returned bonuses amid the public clamor. Among them was Douglas Poling, who received the richest payment of more than $6.4 mn. The move comes amidst news that U.S. House Democratic leaders have set a vote for today on a proposed 90 percent tax on executive bonus payments by companies receiving more than $5 bn in federal bailout funds.

Facing mid-term elections in 2010, the legislation is an attempt to calm taxpayer outrage over the fact that AIG paid $165 mn in bonuses to 4,600 employees, including many in the financial products unit that lost $40.5 bn last year and whose derivatives caused AIG's collapse.  

I'm still wondering when US companies will use Credit Suisse's example and pay their worker bonuses in the same toxic debt instruments they cooked up. Or in their company's own stock.

Anyway, I yield the floor to Farrell:

Although the numbers are lower for Fannie ($470,000 to $611,000), one of the interesting things to note is that Fannie's chief operating Michael Williams is scheduled to get $611,000 this year this year to stick around (this is atop a similar award of $260,000 in 2008 and his base salary of $676,000 a year).

There are a couple of points of potential interest when comparing the Fannie-Freddie bonuses to the AIG handouts:

1. At AIG, the senior executive officers (the top decision-makers) took a $1 salary and no bonus for 2008 and 2009.  In contrast, the government entity in charge of the receivership of Fannie and Freddie told lawmakers in September 2008 that the CEOs of Fannie and Freddie would likely get in excess of $1 mn ($900K in salary plus bonus).  According to the Washington Post, Rep. Frank, who was the committee chairman when the Fannie and Freddie compensation was disclosed, was a no show at the hearing.   

2. The compensation limits that were imposed on TARP recipients by the Obama administration (including AIG) related only to a select group of senior executive officers.  This is why the retention payments to the AIG employees are not implicated by the limits imposed under the March 2, 2009 agreement with AIG.  The retention payments to Fannie's COO (Michael Williams) would have been covered but the Treasury regulations do not apply to Fannie and Freddie.  Why impose compensation restrictions on bank recipients of TARP funds, but allow a government receiver to permit much higher salaries for failed entities that required a wholesale takeover by the federal government?  

3. It will be interesting to see if Rep. Barney Frank excoriates the Fannie / Freddie employees the way he did the AIG employees, especially because it can be argued that Fannie and Freddie were even more damaging to US taxpayers.   

             a. Fannie and Freddie collectively received more government assistance than AIG (more than $200 bn committed to each GSE versus approximately $173 bn committed).

            b. The CBO estimated in January 2009 that the governments' takeover of Fannie and Freddie had a present value cost to the US taxpayers of approximately $240 bn.  This was before the Obama administration further expanded the role of the GSEs in the housing market (arguably creating even more risk to the taxpayers by expanding the limits of lending by these entities to the same type of crummy borrowers who caused the entities to have to go into government receivership in the first instance).     

Taxing the Bonuses

As noted, in one of the strangest bits of after-the-fact refereeing, some members of Congress now want to enact legislation to tax bonuses. Fox News's Farrell had this to say:

1. Which company workers get hit by this legislation? All TARP recipients over $5 bn--this gets all the big companies, including the ones that had to take the money at gunpoint from the Treasury, for example,  JP Morgan Chase (JPM) and Wells Fargo (WFC).  Winners are American Express (AXP) and Chrysler who are currently at approximately $4 bn, while GM employees would get hit with this tax. 

2. It's limited to TARP, so it does not get Fannie and Freddie (the receiver told Congress in September that their CEOs are getting about $1 mn a year and they will be giving out retention bonuses). If it is a waste of taxpayer money to pay TARP recipients over $250K a year, why is it not a similar waste of taxpayer money to pay the officers at Fannie and Freddie big salaries?

3. OneUnited Bank--an Internet bank in Massachussetts which got $12 mn in TARP funds after the intervention of Reps. Frank and  Maxine Waters--has a CEO who was sanctioned by the bank's regulator for excessive compensation and using bank money for his personal gain (a Porsche, lush property in California, etc).  We are going to tax CEOs of some TARP recipients if they get over a certain amount, but give TARP money to CEOs that have a history of excessive compensation to themselves.