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Wall Street Journal, September 10, 2008 article


The Wall Street Journal

September 10, 2008


Obama Seeks Review of CEO Exit Pay

September 10, 2008; Page A5

Presidential contender Sen. Barack Obama and two senior Democratic lawmakers have asked the government to review exit-pay plans for the departing chief executives of Fannie Mae and Freddie Mac, increasing pressure on the executives to give up part of their multimillion-dollar payouts.

In two letters, one from Sen. Obama and a joint letter from Sens. Charles Schumer (D., N.Y.) and Jack Reed (D., R.I.), the senators requested that Fannie and Freddie's regulator review the compensation plans using new authority it received as part of this year's housing bill. The letters come as Democrats and Republicans have begun trading shots over who deserves blame for the conditions that led to the government takeover of the two mortgage companies.

Freddie Chief Executive Richard Syron, a former official with the Federal Reserve who joined the mortgage company five years ago, is expected to forfeit some of his estimated $14 million pay package, according to a person close to him.

In a statement, a spokesman for Mr. Syron said, "Mr. Syron is not seeking a windfall. It is important to him that our country have a strong mortgage finance system that provides affordable mortgages for homeowners and reliable liquidity for lenders -- and he is helping in every way he can with the transition."

Fannie Mae CEO Daniel Mudd is expected to walk away with $9.2 million, including some stock he already owns. An attorney for Mr. Mudd said Mr. Mudd is considering a request to stay for a transition period. The attorney declined to comment on whether Mr. Mudd intended to return any of his exit package.

Persuading executives to fork over pay is difficult, and companies often are bound by executive-employment contracts.

During the past few years, companies have been trying to make it easier to get back money by adding "clawback" provisions to executive-employment or pay agreements. Such provisions stipulate conditions under which companies can take back executive pay - most often when executives are responsible for errors that led to accounting restatements.

In 2006, the latest figures available, 42.1% of Fortune 100 companies had adopted clawback provisions, compared with 17.6% in 2005, according to pay-tracker Equilar Inc. Last year, the percentage was likely to top 50%, Equilar said. Few companies have used the provisions.

In a letter dated Sept. 9 to Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart, Sen. Obama urged the officials to make sure the government deal to take over the mortgage companies "voids any such inappropriate windfall payments to outgoing CEOs and senior management." Citing the new housing bill, Sen. Obama said FHFA could block any payments that were contingent on termination and said to not do so would be a "gross violation of the public trust" as taxpayers will need to foot the bill.

The housing law, passed in July, gave the FHFA the authority to approve pay packages and prohibit or limit severance pay, known as golden parachutes, to executives who leave as part of a change of control or other circumstances. Among the conditions FHFA would consider, according to the law, is whether the executive "is substantially responsible for the insolvency of the regulated entity, the appointment of a conservator or receiver for the regulated entity." It isn't clear if the law would apply to Fannie's and Freddie's current chief executives, whose play plans were in place before the law.

On Sunday, when the Treasury Department and FHFA announced the plan to put the companies into conservatorship, Mr. Paulson said he blamed the government-sponsored entities' "flawed business model" and the housing-market crunch. "Managements and their boards are responsible for neither," Mr. Paulson said.

It isn't clear if Treasury would support moves to cut the executives' pay. A Treasury spokeswoman declined to comment on the letters.

Sens. Schumer and Reed, senior members of the Senate Banking Committee, said in their letter to FHFA Tuesday that for the executives to receive millions of dollars in pay was "way out of line." The letter asked FHFA to review the exit-pay packages and "where appropriate" to "substantially reduce or eliminate them."

In an interview with the PBS "Nightly Business Report" on Monday, Mr. Lockhart said, "We're not going to try to get part of the money back."

Mr. Lockhart added: "The new CEOs will have salary and benefits significantly lower than the old CEOs." A spokeswoman for FHFA said Tuesday, "We are working through the compensation issues and have nothing more to say at this time."

Write to Kara Scannell at kara.scannell@wsj.com1 and Phred Dvorak at phred.dvorak@wsj.com2

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