Shareholders in Fannie Mae and Freddie Mac saw the value of their stock nearly disappear Monday after the mortgage giants had been taken over by the federal government, but the companies' chief executives will leave after banking millions and taking millions more on the way out the door.
Fannie Mae's Daniel Mudd and Freddie Mac's Richard Syron stepped down but are helping with the transition of their companies into federal conservatorship under the Federal Housing Finance Agency. The agency has not said how much they will earn in their new roles.
Mudd earned $11.6 million last year, and Syron made $18.3 million. In both cases, a large portion of their pay packages included stock that was valued much higher at the end of 2007 than it was as of Monday, when it was trading at less than $1 a share.
By conservative estimates, Mudd, 49, and Syron, 64, will leave with an additional $7.3 million and $6.3 million, respectively, as part of a severance package, according to an analysis by Paul Hodgson at the Corporate Library.
"Had they left at the end of December, they both would have walked away with more than $20 million, but the drop in the stock price has had a dramatic impact," said Hodgson, a senior research associate. "It's still a substantial payoff for an executive who has managed a company so badly that the federal government has had to step in and save it."
Presidential candidate Sen. Barack Obama (D-Ill.), in a letter to Treasury Secretary Henry M. Paulson Jr. and James Lockhart, the housing agency director, urged them to void the "inappropriate" payments.
"Under no circumstances should the executives of these institutions earn a windfall at a time when the U.S. Treasury has taken unprecedented steps to rescue these companies with taxpayer resources," Obama wrote.
The amounts are much smaller than those earned by other CEOs fired recently after their companies stumbled. Stan O'Neal left Merrill Lynch & Co. with a retirement package worth more than $160 million, and Charles O. Prince, the head of Citigroup Inc., left with a $40-million deal.
Still, some market watchers think Mudd and Syron should leave with little more than the contents of their desks. "It's just another example of pay for failure," said Amy Borrus, deputy director of the Council of Institutional Investors.
Both Mudd and Syron were brought in to reform the troubled mortgage giants.
Fannie Mae fired its previous CEO, Franklin Raines, in December 2004 after accounting errors forced the company to restate profits by $9 billion. When Mudd, a former General Electric Co. executive who had served as Fannie Mae's vice chairman, took over that same month, shares were trading at about $70. On Friday, the day news of the possible takeover started to leak out, Fannie Mae shares were trading at $7.04. On Monday, the shares closed at 73 cents.
Freddie Mac had its own accounting problems when Syron took over in December 2003. The company was forced to admit that it had inflated its earnings by nearly $5 billion. Like Mudd, Syron, who had served as chief executive of Thermo Electron Corp. and the American Stock Exchange, pledged to fix the company and get it back on track. Freddie's shares, which traded for about $55 when Syron took over, dropped to $4.65 on Friday and then to 88 cents Monday.
Far from fixing them, both Mudd and Syron presided over major expansions of the companies' reliance on risky mortgages that ended up going into default over the last two years.
"How can we pay these people these exorbitant amounts of money when they brought us to the brink of financial disaster?" said Michael Greenberger, a University of Maryland law professor and former director at the Commodity Futures Trading Commission.
"The average working stiff is just worried about how he's going to pay his mortgage and put gas in his car. These guys make the situation worse and still make millions."
Shareholders will have little to say on how much the two pick up, and some experts said that was as it should be. Without the conservatorship, Fannie and Freddie could have gone bankrupt, causing further panic in the beleaguered housing and stock markets.
Analysts and investment advisors said Monday that the cost of paying Syron and Mudd to leave their posts was a blip compared with the damage that would have been done by a bankruptcy filing. With Fannie and Freddie, the nation's biggest mortgage buyers, out of business, foreclosures probably would have continued to climb at an even faster rate, analysts said, and home prices would have fallen further.
"This is what we needed to put a floor under the housing market," said Michael Nozzarella, managing director at the Tarbox Group, a Newport Beach investment advisor.