Heritage – November 16, 2011
House investigators are alleging a White House double standard in its rhetoric toward executive compensation for large financial institutions. The allegations appear in a report released in advance of a hearing on government-back housing giants Fannie Mae and Freddie Mac.
President Obama ramped up the populist rhetoric in 2009 with respect to bonuses for executives at private financial companies, but has been silent on comparably large bonuses for officials at Fannie and Freddie, according to the report, released Wednesday by House Oversight and Government Reform Chairman Darrell Issa (R-CA).
The double standard, Issa writes, “leaves the impression that the White House is disengaged from addressing the deficiencies of Fannie and Freddie.” Those deficiencies are numerous, and consequential, as Heritage’s David John has pointed out.
Issa’s report focuses on the toll Fannie and Freddie have taken on taxpayers:
Government ownership of Fannie and Freddie has easily turned into “the most expensive bailout of the 2008 financial crisis.” Since entering conservatorship, the Enterprises have taken$169 billion from the Treasury and still owe taxpayers $141 billion. Every quarter, the total continues to mount as the Enterprises keep posting net losses. Freddie recently asked Treasury for an additional $6 billion after reporting $4.6 billion in net losses in its third quarter earnings, and Fannie requested an additional $7.8 billion in aid after reported a third quarter loss of $5.1 billion. With FHFA’s projection that it will cost at least $51 billion more to support the Enterprises through 2014, the overall bill to the American taxpayers will not be cheap.”
Despite their lackluster performance, Issa writes, top executives at both firms continue to receive large payouts “for managing losses.”
That criticism is similar to White House rhetoric concerning compensation for large financial institutions that also received taxpayer support. Issa’s report recalls that rhetoric, and contrasts it with the administration’s response to executive compensation at Fannie and Freddie:
In 2009, President Obama called Wall Street bankers “fat cats,” saying that bankers “are drawing down $10, $20 million bonuses after America went through the worst economic year that it’s gone through in – in decades, and you guys caused the problem.” That same year, however, the White House declined to comment when Fannie and Freddie employees received a total of $210 million in bonuses. In January 2010, President Obama again criticized executive compensation at Wall Street firms as “massive profits and obscene bonuses at some of the very firms who owe their continued existence to the American people.” Yet, the White House has remained “largely silent” on the bonuses given to executives at Fannie and Freddie. White House Press Secretary Jay Carney dismissed any Administration concern over the compensation, saying “These entities are independent and therefore they are independent decisions. The White House is not involved, and nor should it be.
In fact, as the Daily Caller’s Mary Katherine Ham noted, average per-employee bonuses for executives at Fannie and Freddie were actually about three times the size of those given to top managers at American International Group (AIG), one of the firms singled out by the president for supposedly excessive benefit packages.
But the fact that, like AIG, the two GSEs have sustained losses does not mean that their executive pay was excessive or without merit. Compensation is a function of competitive market forces, as John noted when asked about Issa’s report.
Market-rate compensation for Fannie and Freddie execs is, in fact, justifiable, on the grounds that the two GSEs need to compete with private companies for skilled managers. Fannie and Freddie stand to lose even more taxpayer dollars if they do not have competent and experienced people at the helm.
John added, however, that private companies must do the same, and echoed Issa’s allegations of a double standard.
But of course private financial services companies need to compete with each other for those same managers. They don’t pay high salaries out of the kindness of their hearts. They recognize both that skilled managers are necessary to run a successful business, and that those managers do not come cheap.
The White House has criticized private companies for trying to secure those executives, but it’s been near-silent on GSE attempts to do the same. This suggests a profound double standard in the administration’s attitude towards the financial sector.
As frustrating as it may seem to watch top executives at government-backed firms take in millions in bonuses, in other words, the alternative is to limit those firms’ abilities to attract the best talent. The inevitable result is a crop of less-skilled managers, which put those companies at even greater risk of financial loss.
The Obama administration seems to understand that fact when it comes to Fannie and Freddie. But private firms that also try to attract the most skilled executives earn the White House’s ire. Expect Issa and others to focus on that double standard during Wednesday’s hearing.