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Fannie and Freddie Release Retention Bonus Details

Source: WSJ

Posted on 03 Apr 2009

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According to a letter to Senator Charles Grassle, regulator of mortgage companies Fannie Mae and Freddie Mac, are expecting to pay about $210 million in retention bonuses to 7,600 employees over 18 months.

The maximum retention bonus for any individual executive under the plan will total $1.5 million during the 18 months ending in early 2010, according to the letter, which provides previously undisclosed details about the bonuses. The regulator, James Lockhart, director of the Federal Housing Finance Agency, said in a letter to the Iowa Republican senator that about $51 million of the payouts were made in late 2008 and that the rest are to be made this year and early next year.

In the letter, a copy of which was made available to "The Wall Street Journal", Mr. Lockhart defends the bonuses as vital to retaining talent at the two companies, the main providers of funding for U.S. home mortgages. Fannie and Freddie, which reported combined losses of about $108 billion for 2008, are being propped up by capital infusions from the U.S. Treasury.

The retention-bonus plan has stirred controversy in Washington since it was highlighted in a "Wall Street Journal" article two weeks ago.

Freddie's retention bonus program involves 4,057 employees, or about 80% of the total head count, while Fannie is making the payments to 3,545 employees, or 61%.

During 2009, 92 Freddie employees are due to receive retention bonuses of $100,000 or more and one, who wasn't identified, will receive more than $675,000, the letter said. At Fannie, 121 employees will get bonuses of $100,000 or more this year, and the maximum payout will be $705,000.

Freddie hasn't yet made disclosures about bonus payments to its highest-paid executives. Fannie has disclosed that retention bonuses over the 18 months will total $1.3 million for Michael Williams, the company's chief operating officer; $1.1 million for David Hisey; and $1 million apiece for Thomas Lund and Kenneth Bacon. Messrs. Hisey, Lund and Bacon are executive vice presidents. Those payments are contingent on the executives' remaining in their posts.

Rep. Barney Frank, a Massachusetts Democrat who is chairman of the House Financial Services Committee, has called on Mr. Lockhart to cancel the bonus program. In a recent letter, Rep. Frank said he was "very skeptical that retaining and rewarding people who made the mistakes that contributed to the unsatisfactory performance is a good idea." He added: "In this troubled economy, and in this job market, it is difficult to imagine that the companies would not be able to find competent and talented replacements for anyone who chooses to leave."

Congress is considering legislation that would deter bonuses paid by companies that are major recipients of federal bailout money, including Fannie and Freddie.

Their regulator initiated the retention program last year in an effort to avoid departures of people considered critical to the companies, whose stock prices have collapsed, rendering stock options worthless, and whose regular bonus plans have been canceled.

"It is not realistic to expect that experienced and highly skilled employees will indefinitely continue to work as hard as they have if we do not provide reasonable incentives to perform," Mr. Lockhart wrote. He argued that the companies need "skilled and experienced staff" to manage safely their more than $5 trillion in debt and guarantees of mortgage securities.

"For personal privacy and safety reasons," Mr. Lockhart said, it wouldn't be appropriate to release the names of all employees receiving bonuses of $100,000 or more.