Brouhaha Over GSE Bonuses Gains Steam

A disclosure from Federal Housing Financy Agency director James Lockhart over bonuses set to be paid at twin mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE) may be set to become the next center of investor ire over a widening government bailout, with the Wall Street Journal reporting Friday morning that the GSEs will pay $210 million in retention bonuses to employees. The letter has not been publicly released or released to other media, but the office of Senator Charles Grassley (R-IA) leaked a copy to the Journal on Thursday evening. An emailed request to see the letter, made to Grassley’s office Friday morning, had not been immediately responded to when this story was published. Under the GSE bonus plan described in the letter, any individual executive’s bonus cannot exceed $1.5 million during the 18 months ending in early 2010, the Journal reported; $51 million of the $210 million in the bonus pool was paid out in late 2008 and the rest is set to be paid later this year and early next year. It’s worth nothing that this is not solely an executive bonus plan at either GSE: in Freddie’s case, the program involves 80 percent of the GSE’s headcount; at Fannie, 61 percent of employees. A few weeks ago, House Financial Services Committee chairman Barney Frank (D-MA) sent a letter to Lockhart, asking him to cancel planned bonuses to executives at both GSEs. See earlier story. “I remain very skeptical that retaining and rewarding people who made the mistakes that contributed to the unsatisfactory performance is a good idea,” he wrote in the letter. “Further, in this troubled economy, and in this job market, it is difficult to imagine that the companies would not be able to find competent and talented replacements for anyone who chooses to leave.” Lokchart has staunchly defended the bonus program, however, as a needed tool to retain top employees. “We started to design a retention plan with a compensation consultant even before the conservatorship because it was critical to retain their most important asset –- their employees — who are being asked to play a vital role in the nation’s economic recovery,” he has said in the past. Write to Paul Jackson at Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.

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