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.