/ 14 September 2008

US terms set to review Fannie, Freddie exit pay

US financial regulators have decided how multimillion-dollar severance packages for the departing chief executives of mortgage giants Fannie Mae and Freddie Mac could be limited.

The Federal Housing Finance Agency (FHFA), which has taken over the two government-sponsored enterprises, said it could weigh a variety of factors, including whether the executives had committed fraud or insider abuse, according to a notice posted to the agency’s website on Friday.

The notice, which applies to any severed Fannie Mae or Freddie Mac employee, does not say whether FHFA director James Lockhart would actually take steps to limit the payouts.

Fannie Mae chief executive Daniel Mudd and Freddie Mac chief Richard Syron are entitled to combined pay and bonus packages worth about $24-million as part of the government’s plan to restructure the troubled companies.

The so-called golden parachute payments have drawn criticism from Democrats, including presidential contender Barack Obama who earlier this week said such a windfall was unacceptable and the government’s failure to block the packages violated the public’s trust.

Democratic Senators Charles Schumer of New York and Jack Reed of Rhode Island have also urged reconsideration.

Republican presidential nominee John McCain also opposes the severance packages, McCain’s chief economic adviser Douglas Holtz-Eakin said.

”They’re inappropriate,” he told Reuters.

In its notice, FHFA said its director could weigh whether the executives were ”substantially responsible for the insolvency” of the companies or their ”troubled condition”.

Lockhart could also look at whether the executives broke federal or state law as well as how long they were affiliated with the companies, among other criteria, the notice said.

While federal regulators usually issue a proposal and take public comment before issuing a final decision, the FHFA said Friday’s decision was immediately effective. It added members of the public could still submit comment.

The US government took over the two US mortgage giants last Sunday and replaced its management as part of a plan to recapitalize the two firms which own or guarantee about half of the nation’s $11-trillion outstanding home mortgages.

The government’s bailout of Fannie and Freddie is designed to support the US housing market which has seen house prices fall about 15% on average nationwide in the past year.

Defaults and foreclosures on US home mortgages in the past two years have risen, contributing to losses of more than $500-billion by banks worldwide, exacerbating the global credit crisis of the past year. – Reuters