A Perfect Example of the Need for More Accountability

The takeover of Fannie Mae and Freddie Mac announced this weekend will have wide reaching consequences, most of them good. The expectation is that some confidence will be restored to the mortgage markets and interests rates, which have risen lately, will fall back some. However, that in itself, will not stabilize falling home prices, which no one expected anyway.
But if you are a shareholder of either institution you should be extremely angry. Of course, it is partially your own fault if you hung on in hopes of a turnaround at this point when none was coming. The stock today dropped to under $1 a share, where it is sure to stay. (Caveat: I was a stockbroker for a major retail brokerage firm for seven years prior to my incarceration and recommended Fannie Mae at a price in the neighborhood of $60.) That does not excuse what happened though. The government immediately dismissed the chief executives of both firms, but their ridiculously unearned severance packages may still be awarded to them. Daniel Mudd, outgoing chief of Fannie Mae stands to pocket $9.3 in severance pay. Richard Syron, chief of Freddie Mac has an exit package worth $14.1 million. The artice in the NYT does quote an official of a large union, and probably a large investor, expressing his outrage over this possible outcome.
It should not be allowed to happen. Mr. Mudd has already taken home $12.4 million in compensation. He doesn't deserve most of that. Mr. Syron has already been compensated to the tune of $17.1 million. Same with him. The money set aside for their golden parachutes should be taken and divided up among the employees whose retirements are now ruined as a result of their respective CEO's mismanagement. That would still be paltry compensation compared to what their bosses have made, but at least it would contain a measure of morality and justice, something that has completely disappeared from daily American life.
Let's do a little math. I know it's a bit of stretch to assume that both men still have all the money they were paid, so let's take a figure somewhere in the middle. Let's say they both have $6 million in investable assets, and further assume that they can invest those assets to earn 7%, not an unrealistic assumption in today's interest rate environment. Very simply, $6 million dollars invested at 7% yields an annual return of $420,000. That works out to $35,000 a month. Let me ask you a question. Do you have $35,000 a month to live on? When you stop laughing think about the fact that the severance package would triple that annual income. Do you smell something rotten in that possibility?
Of course, who can forget the top rogue in this entire fiasco, Franklin Raines. This guy made more than $52 million in a 5 year period when he ran Fannie Mae. Of course, he did forfeit some stock options when they nailed him trying to inflate his own pay by cooking the books. That seems fair doesn't it? Okay, I didn't mean to make you laugh again. This is a serious issue.
But the whole mess perfectly points out the need for the American people to speak up and tell their elected officials that this crap can't go on. I'm sure we all know who is going to foot the bill for the takeover of these poorly run, implicitly trusted institutions. And why? Because we sit back and take it. I can't start a one man revolution and I don't advocate the overthrow of the government, but clearly the voices of the people need to heard more often, so I am doing what I can to impel protest. The following two links will bring you to a form where you can e-mail New Jersey's two senators and tell them that you are not happy about what happened and ask them why they weren't more diligent in their oversight:

http://lautenberg.senate.gov/contact/

http://menendez.senate.gov/contact/contact.cfm

There is another side to this whole affair, which as a former stockbroker, I have to mention. It was recently disclosed that a portfolio manager named Bill Miller, from the Legg Mason family of funds, a well respected family of funds, upped his stake in Freddie Mac recently when the stock was trading at $5. I can't imagine how that kind of decision fits into any acceptable risk parameters for fundholder money. The logic behind that transaction needs to be examined, and the examination should go beyond what was on Mr. Miller's mind.


**Information for this post was taken from today's NYT online version.