The AIG Bonuses, Part 8:
The government defends similar bonuses for employees of Fannie Mae and Freddie Mac
4 Apr 2009 in Regulatory Economics, Regulatory Policy, Legislation
AIG has been criticized for paying approximately $165 million on contractually obligated retention bonuses after receiving about $175 billion in government capital injections We've blogged a half dozen times on the subject.
The Wall Street Journal reports that Fannie Mae and Freddie Mac are contractually obligated to pay $210 million in retention bonuses. Both government-sponsored enterprises have been placed in conservatorship. Members of Congress have demanded that these bonuses be rescinded along with those due to AIG employees.
H.R. 1664, the second bill passed by the House to regulate compensation received by employees of firms receiving government capital injections, would prohibit these retention bonuses. Compensation would be limited to salary and "performance-based" bonuses, a term that the bill would direct the Treasury Department to define by regulation.
Today's Journal story reports on a letter send by the government's senior regulatory official for GSEs defending the Fannie Mae and Freddie Mac retention bonuses, reiterating a statement he issued on March 18th. This places him at odds with both H.R. 166 and the the Obama administration, which has demand that retention bonuses not be paid, be rescinded, or be returned.
The WSJ's James R. Hagerty writes:
The regulator, James Lockhart, director of the Federal Housing Finance Agency, said in the letter that about $51 million of the payouts were made in late 2008 and the rest are to be made this year and early in 2010.
In the letter, a copy of which was reviewed by 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 use of retention bonuses was an explicit element of regulatory policy after Fannie Mae and Freddie Mac were placed in conservatorship, as noted in a statement published by Lockhart on March 18:
Fannie Mae and Freddie Mac were placed into conservatorship to ensure they could fulfill their extremely important mission of providing liquidity, stability and affordability to the very troubled mortgage market. They continue to serve this mission. We started to design a retention plan with a compensation consultant even before the conservatorship because it was critical to retain their most important asset – their employees – who are being asked to play a vital role in the nation’s economic recovery. As we made clear in congressional testimony last September, FHFA worked with the new CEOs to establish employee retention programs for both senior managers and rank-and-file employees.
As the previous senior management teams left, it would have been catastrophic to lose the next layers down and other highly experienced employees. Fannie Mae and Freddie Mac purchased 73 percent of all mortgages originated last year and are the key players in the Making Home Affordable plan designed to help millions of homeowners. Many employees have received significant pay reductions, with no bonuses for 2008 performance and all past stock grants are virtually worthless. This retention program is pay for specific efforts underway now to meet national goals.
Federal Reserve Board Chairman Ben Bernanke has testified that retention bonuses for similarly situated AIG employees should not have been paid, and was chagrined to learn that they could not be blocked:
My reaction upon becoming aware of these specific payments was that, notwithstanding the business purposes that might be served by this action, it was highly inappropriate to pay substantial bonuses to employees of the division that had been the primary source of AIG’s collapse. I asked that the AIG-FP payments be stopped but was informed that they were mandated by contracts agreed to before the government’s intervention. I then asked that suit be filed to prevent the payments. Legal staff counseled against this action, on the grounds that Connecticut law provides for substantial punitive damages if the suit would fail; legal action could thus have the perverse effect of doubling or tripling the financial benefits to the AIG-FP employees. I was also informed that the company had been instructed to pursue all available alternatives and that the Reserve Bank had conveyed the strong displeasure of the Federal Reserve with the retention payment arrangement.
Bernanke clearly believes that the AIG retention bonuses were "excessive" but he sheds no light on the criteria he used to reach this judgment. He has not commented on whether he believes the Fannie Mae and Freddie Mac retention bonuses also are (or aren't) "excessive." How the facts associated with AIG retention bonus contracts differ from those of the Fan and Fred bonus contracts has not been made clear. It is possible that the Fan and Fred bonuses are not "unreasonable and excessive." It also is possible that AIG is being held to a stricter standard than Fan and Fred.
Lockhart defended the use of retention bonuses on economic grounds similar to those we raised in our initial post. Also, he defended keeping the information confidential:
"For personal privacy and safety reasons," Mr. Lockhart said, it wouldn't be appropriate to release the names of all those receiving bonuses of $100,000 or more.
Lockhart's position may conflict with demands made by the Obama administration that retention bonuses to AIG employees not be paid, be rescinded, or be returned. These demands have been directed at AIG and other firms that, unlike Fan and Fred, used to be fully private and never had a line of credit at the Treasury Department. It also conflicts with the demands of some Members of Congress, who have not drawn as clear an implicit distinction between the employees of private and quasi-public corporations that have become insolvent due to the financial crisis. Finally, Lockhart's concerns about employee privacy also do not seem to be shared by Members of Congress and state attorneys general.
A formal Statement of Administration Position has not been issued with respect to H.R. 1664 or H.R. 1586, the confiscatory tax bill previously passed by the House. Before the Senate gives serious consideration to either bill, its Members will expect to see the Administration resolve these policy differences and take a position on the issue of retention bonuses, and whether there is a rational basis for distinguishing employees of Fannie Mae and Freddie Mac from the employees of other firms receiving federal bailout money. Thus far, it does not appear that the personal culpability of an employee is a factor in this debate.
