FannieMae, Freddie Mac And The Magical Piggy Bank

The sub prime mortgage crisis continues to get worse. It seems like every week that the federal government takes over another bank in the financial industry.

In addition, it was only six months ago, on a weekend, that Bear Sterns made international headlines as it became a J.P. Morgan entity backed by Government guarantees.

This last weekend it was government sponsored home mortgage lending giants FannieMae and Freddie Mac that became the recipient of federal government oversight. The government bailed out both financial institutions and the tab to that magical piggy bank known as the United States taxpayer may be as much as 200 billion dollars.

Meanwhile, the CEO's of these two failed home mortgage giants will not have to worry about their next meal any time soon. Fannie Mae CEO Daniel Mudd received $12.2 million in total compensation in 2007. Mudd's pay included his $990,000 salary, a $2.23 million bonus and a $9 million "long-term incentive" award. In 2006, Mudd received a $3.5 million bonus and a long-term incentive award of about $10 million. His total pay for 2006 was $14.45 million dollars.

Over at Freddie Mac, Chairman and Chief Executive, Richard Syron pocketed nearly $19.8 million in compensation in 2007, even though the mortgage company's stock lost half its value last year.

However, these salaries were apparently not enough reward for corporate failure. Daniel Mudd, the departing head of Fannie Mae, is expected to walk away with $9.3 million in pay and retirement benefits for 2008 under the terms of his contract.

Richard Syron, the departing chief executive of Freddie Mac, could walk away with $14.1 million. Mr Syron's larger payoff follows a clause added to his employment contract last summer when the first signs of the credit crunch began to emerge.

It certainly makes you wonder what the term pay for performance means in the business world today.

So, what happened? Why has the government gone from sponsoring these mortgage giants to owning them through a bailout that may cost the taxpayer as much as 200 billion dollars?

A financial audit by Morgan Stanley concluded that the accounting of the mortgage companies, (which represent nearly half of the entire mortgage market) while legal, enabled Freddie, and to a lesser extent Fannie, to overstate the value of their reserves.

Indeed, free-market advocates had warned of this impending disaster for years as Fannie and Freddie used an implicit government backing to borrow at will, with only a small mount of capital to protect them from nasty surprises like the recent sharp decline in housing prices and rise in foreclosures.

Look for the stock market to rally in relief since taxpayer dollars are being used to clean up our national mortgage mess. However, banks will continue to be seized and backed by taxpayer dollars. The 2008 Presidential election campaign will proceed with a never ending list of candidate promises backed by future taxpayer dollars.

Meanwhile, the current United States budget deficit is already projected to be over 480 billion dollars next year, and it still does not even fully reflect the total cost from the war in Iraq or smaller tax reciepts from an extended recession.

So, as corporate CEO's clean up financially and have no accountibility for their own failure, what will prevent executives from other financial companies to gamble even more recklessly in the future? After all, they will still get rewarded even if their gamble fails since the taxpayer now apparently assumes the risk of each financial company failure.

Indeed, it really is a house of cards that all depends on that magical piggy bank courtesy of the United States taxpayer. At some point it is destined to get very ugly when that magic finally wears off.