FHFA’s DeMarco Defends GSE Compensation


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

In a press release
yesterday Committee Chairman Spenser Bachus (R-Al) announced the committee
would vote on the measure on November 15 and excoriated the GSEs, calling the
federal conservatorship “the biggest bailout in history” and the executive
compensation an added insult to taxpayers. 
 “The American
people should be outraged at the multi-million dollar taxpayer-funded bonuses
given to the executives of Fannie Mae and Freddie Mac. These organizations were
ground zero for the mortgage market meltdown, the catalyst for an economic
decline that has cost Americans more than seven million jobs.”   

In a letter to Bachus, Demarco pointed out that,
when FHFA put the Enterprises into conservatorship in 2008, the individuals
responsible to their failure were separated from the company and no severance
or golden parachutes were permitted.  The
senior compensation package developed by FHFA for new executives was 40 percent
below the one used pre-conservatorship
and over the ensuing two years FHFA has
reduced the number of top level positions and further reduced pay levels as
positions have turned over.

DeMarco pointed to the need to manage credit and
interest rate risks of $5 trillion in mortgage assets and $1 trillion of annual
new business and said, “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.”

GSE executives and staff have to face, he said, that
continued employment with an Enterprise risks substantial job and career opportunity
and they face considerable public scrutiny and criticism.  “At the same time, the taxpayer is backing
Enterprise financial commitments that have thirty year lives, and we will need
expert management of those guarantees for years to come.  Given the amount of money at risk here, small
mistakes can easily be amplified to losses far greater than the compensation
paid to Enterprise executives.”

DeMarco said he would be testifying on the
compensation to yet another congressional committee on the day of the vote but
would share his testimony with the Bachus committee afterward.   However, he said, he would submit that the
best assistance Congress could give FHFA on this matter is “to take action to
provide a clear path forward to end the conservatorships and reduce the
taxpayer exposure to the mortgage market.”

In light of Bachus’ earlier remarks, it seems
reasonable to point out that the Troubled Asset Relief Program (TARP)
authorized by Congress in 2008 put $700 billion at risk (although the ultimate
cost will be s fraction of this amount) and the savings and loan crisis in the
last 1980s cost taxpayers almost $400 billion after the bank insurance
fund became insolvent.  The dual
conservatorships of the GSEs have, to date cost taxpayers $141 billion.

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