Obama joins critics of Fannie, Freddie pay packets (Reuters)
10.09.2008 02:25 Finance
The government decision on Sunday to take control of the two companies had sparked a big rally on Wall Street on Monday as investors saw the move as helping to pave the way for a recovery for the slumping housing market.
U.S. stock markets, however, reversed course on Tuesday as the euphoria gave way to renewed worries about the financial sector on concerns about investment bank Lehman Brothers' ability to raise capital to cover mortgage-related losses. The Dow Jones industrial average closed down 280 points, a near-complete reversal of Monday's gain.
On the campaign trail, Obama focused his sights on reports that the departing chief executives of Fannie Mae and Freddie Mac, ousted as part of the government takeover, could receive multi-million dollar severance packages, which also drew fire from other powerful Democrats on Capitol Hill.
"It would be unacceptable for executives of these institutions to earn a windfall at a time when (the) U.S. Treasury has taken unprecedented steps to rescue these companies with taxpayer resources," the Illinois senator said.
In a letter to Treasury Secretary Henry Paulson and the companies' regulator, the Federal Housing Finance Agency, Obama said failure by the government to use recently won authority to block the pay packages would be "a gross violation of the public trust."
Democratic Senators Charles Schumer of New York and Jack Reed of Rhode Island told FHFA in a separate letter the combined pay and bonus packages of about $24 million should be revised.
On Sunday, Paulson and FHFA Director James Lockhart placed Fannie Mae and Freddie Mac in a conservatorship and unveiled other steps, including having the government take an equity stake in the companies that could result in providing each with up to $100 billion in capital.
The steps included replacing Fannie Mae Chief Executive Daniel Mudd and Freddie Mac chief Richard Syron.
Lockhart said on Public Broadcasting Service's "Nightly Business Report" on Monday night that the severance packages would be reviewed but gave no indication whether they will be cut.
REMAKING THE FIRMS
The government's intervention reflected worries that mounting losses on home loans were rapidly depleting reserves at the companies, which back about half of the country's $12 trillion in mortgages. Should either fail, the economic shockwaves would be intense.
The eventual fate of the firms, which are shareholder-owned but government-chartered to support the housing market, will be left to the next president and Congress. The No. 2 official at the International Monetary Fund, John Lipsky, said it was essential to remake the firms to cut the risk that they could spark a systemic financial crisis.
Obama has said it will be necessary to clarify whether they are truly public companies, subject to market discipline, or special entities that investors feel they can put money in risk-free. His Republican rival, ArizonaSen. John McCain, believes they eventually need to be privatized.
Democratic concern was evident on Tuesday that the move to support the companies might be a back-door bid to fully reshape them. House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd both made clear they want the companies to have a continuing mission as generators of profit that can subsidize lower-income housing.
"I certainly don't want to see their roles diminished right now," Frank said on CNBC television, arguing the battered housing sector would be in even worse shape if they weren't buying mortgage loans and packaging them into securities.
Dodd complained in a National Public Radio interview that he received scant notice of last weekend's drastic move and said it ran counter to repeated claims by Paulson that he didn't foresee using powers given to Treasury in July for the government take an equity stake in Fannie Mae and Freddie Mac.
"I'm not suggesting that Hank Paulson wasn't telling me the truth and that circumstances may radically have changed," Dodd said. "I'd just like to know what's happened, what's caused this and where are we going with all this."
Dodd's committee will hold a hearing with Paulson and Lockhart on September 16 to explore the rescue.
"There have been those for years who just want to get rid of these government-sponsored enterprises," Dodd said.
PAULSON PAYS A VISIT
Paulson on Tuesday visited the McLean, Virginia, headquarters of Freddie Mac and addressed employees at a town-hall style meeting that one employee called "sort of a pep talk." He speaks to Fannie Mae employees on Wednesday.
Examiners from the Federal Housing Finance Agency are shadowing senior executives of the companies to better understand some of their routines and responsibilities.
There were early signs that the private sector was benefiting handsomely from the government's action. The world's biggest bond fund, Pimco's Total Return Fund, had its best ever day on Monday relative to its benchmark index as prices of mortgage-backed securities rose, the company told Reuters.
(Additional reporting by John Poirier, Kevin Drawbaugh, Patrick Rucker, Tim Ahmann and Glenn Somerville in Washington, Jennifer Ablan and John Parry in New York, and Iain Rogers in Berlin; Writing by Glenn Somerville and Tim Ahmann; Editing by Leslie Adler)
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