Risky Buys Were Not Fannie CEO's Fault (Though He Got $38 Million for His Efforts)?

by Deb Cupples |  Saturday, the New York Times ran a story about ex-Fannie Mae CEO Daniel Mudd.  The headline reads "Pressured to Take More Risk, Fannie Reached a Tipping Point."  The quote just before the first paragraph is from Mr. Mudd, himself:

"'Almost no one expected what was coming. It's not fair to blame us for not predicting the unthinkable.'"

 The impression that people who merely glanced at the beginning of The Times article would get is that it was not Mr. Mudd's fault that he pressured or allowed underlings to spend truckloads of Fannie's money on risky mortgages -- even while the housing bubble was obvious to us ordinary Americans. 

In short, blame for Fannie's requiring a bailout in July (and a Government takeover in September) lies at the feet of The Agents of Pressure.

The Times' first paragraph states that Mr. Mudd took the job with Fannie Mae, because he wanted to work for an "altruistic" business.  That paragraph is the logical place to insert details about how many millions of dollars Fannie paid Mr. Mudd to altruistically show up for work.

Instead, The Times waits until paragraph 18 to mention Mr. Mudd's compensation -- and uses the technically accurate but misleading statement that Mr. Mudd "collected more than $10 million in his first four years at Fannie."

In fact, Fannie Mae paid Mr. Mudd roughly $38 million (combined) from 2005-2007.  Here's the breakdown:

	Base Salary	Bonuses	Restricted Share & Other Compensation	Total
2007	$990,000	$2,230,000	.......$9,900,000	$12.2 million
2006	$950,000	$3,500,000	.....$10,000,000	$14.4 million
2005	$908,000	$2,600,000	.......$8,000,000	$11.5 million

Mr. Mudd's bonuses were more than twice as big as his base salary, and the other compensation is roughly 10 times bigger.  Is it possible that Mr. Mudd's potential bonuses and non-salary compensation were Agents of Pressure?

I haven't read Mr. Mudd's employment contracts, but most big companies give executives bonuses  based on company performance -- which is often tied to company stock prices or (the appearance of) profitability.

If that were the case at Fannie Mae, then is it possible that Mr. Mudd had personal-financial incentives to order Fannie's employees to buy risky mortgages whose then-over-stated value might make Fannie appear more profitable?

Because most of Mr. Mudd's pay was in the form of Fannie Mae stocks, it certainly could be argued that Mr. Mudd had incentives to ensure that Fannie's stock prices were high.

Personal desires to pump stock values, meet quotas, or get bonuses had likely spurred many  executives and employees to buy risky mortgage-backed securities for those companies that are now listing huge losses on those securities.

So huge were those companies' losses, that our politicians committed 700+ billion tax dollars to buying those toxic securities -- so that the losses would disappear from those companies' books (and reappear on the taxpayers' books).

Oddly, the New York Times does not list Mr. Mudd's personal-financial incentives as a potential Agent of Pressure.  Instead, The Times largely focuses on outside forces -- some of which seem questionable.  For example, The Times states:

"But by the time Mr. Mudd became Fannie€'s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans....

Dozens of interviews, most from people who requested anonymity to avoid legal repercussions, offer an inside account of the critical juncture when Fannie Mae's new chief executive, under pressure from Wall Street firms, Congress and company shareholders, took additional risks that pushed his company, and, in turn, a large part of the nation’s financial health, to the brink."

On one hand, I find it hard to believe that Congress, in 2004, cooperatively unified to formally urge Mr. Mudd to spend billions buying risky mortgages assumed by low-income folks, because Republicans controlled the House that year.

I find it hard to believe that Congress, in 2005 and 2006, pressured Mr. Mudd to buy risky mortgages assumed by low-income folks, because Republicans controlled both houses of Congress in those two years.

On the other hand, The Times inserted the following paragraph into the article -- eight paragraphs after the paragraph that blames Congress for pressuring Mr. Mudd:

"Whenever competitors asked Congress to rein in the company [Fannie Mae], lawmakers were besieged with letters and phone calls from angry constituents, some orchestrated by Fannie itself. One automated phone call warned voters: 'Your congressman is trying to make mortgages more expensive. Ask him why he opposes the American dream of home ownership.'”

In other words, Fannie Mae -- while Mr. Mudd was at the "helm" -- pressured Congress into pressuring Mr. Mudd to continue buying risky mortgages.

Why would Mr. Mudd allow his underlings to help create such pressure on himself?  Were his future bonuses and the value of his Fannie Mae stocks part of the incentive?

Another problem with The Times' article: the first few paragraphs blame Congress as an Agent of Pressure but not the White House.  One has to scroll down about 48 paragraphs to see this morsel:

"The White House also pitched in.  James B. Lockhart, the chief regulator of Fannie and Freddie, adjusted the companies'€™ lending standards so they could purchase as much as $40 billion in new subprime loans."

Then there's the issue of Wall Street firms acting toward Fannie Mae as Agents of Pressure.  The Times cites the example of Countrywide:

"Shortly after he became chief executive, Mr. Mudd traveled to the California offices of Angelo R. Mozilo, the head of Countrywide Financial, then the nation'€™s largest mortgage lender. Fannie had a longstanding and lucrative relationship with Countrywide, which sold more loans to Fannie than anyone else....

"Mr. Mozilo, who did not return telephone calls seeking comment, told Mr. Mudd that Countrywide had other options. For example, Wall Street had recently jumped into the market for risky mortgages. Firms like Bear Stearns, Lehman Brothers and Goldman Sachs had started bundling home loans and selling them to investors — bypassing Fannie and dealing with Countrywide directly.

€"'You're becoming irrelevant,' Mr. Mozilo told Mr. Mudd, according to two people with knowledge of the meeting who requested anonymity because the talks were confidential. In the previous year, Fannie had already lost 56 percent of its loan-reselling business to Wall Street and other competitors."€

Given that our nation was in a housing bubble -- given that many adjustable-rate mortgages would likely end in foreclosure after the monthly payments skyrocketed -- any sophisticated executive should have known that many mortgage-backed securities would ultimately lose value as the bubble deflated.

That said, it seems to me (an unsophisticated non-executive) that the prudent course of action for Mr. Mudd would have been sit back and watch Fannie Mae's competitors buy up risky mortgages.

Instead, Mr. Mdd reportedly caved under pressure from companies like Countrywide, which benefited from selling risky mortgages to Fannie Mae.

Though I can't quite put my finger on it, something seems amiss.  Fortunately, Congress has already started looking into what went wrong -- not just at Fannie Mae, but at other companies whose practices sent our nation's economy toward the cliff's edge. 

The House Oversight Committee has scheduled hearings about Lehman Brothers on October 6 (today) and about AIG on October 7.

Memeorandum has commentary.

Other buck Naked Politics Posts:

* Execs Pocketed Millions While Driving Companies (and Our Economy) into Ditch

* Federal Government Rescues Fannie Mae and Freddie Mac

* AIG Spent $61 Billion of Bailout Money and Plans to...

* VP Debate Success: Palin Avoids Looking 100% Moronic

* Bush Signs Bailout Bill, Taxpayers Say Hail Marys

* Nation Lost 159,000 jobs in September

.

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