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Mr. McCAIN. Mr. President, this bipartisan amendment is very simple. It would prohibit bonuses for senior executives at Fannie Mae and Freddie Mac while they are in a taxpayer-backed conservatorship. I am joined in this effort by Senators Rockefeller, Enzi, McCaskill, Johanns, Barrasso, Blunt, Graham, Coburn, and Thune.
Since they were placed in conservatorship in 2008, these two government-sponsored entities have soaked the American taxpayer for nearly $170 billion in bailouts. Recently Freddie Mac requested an additional $6 billion and Fannie Mae requested an additional $7.8 billion. That is $13.8 billion more coming out of the pockets of hard-working Americans, many of whom are underwater on their mortgages.
I wish to read an article from Politico from back in October entitled ``Fannie, Freddie dole out big bonuses.''
The Federal Housing Finance Agency, the government regulator for Fannie and Freddie, approved $12.79 million in bonus pay after 10 executives from the two government sponsored corporations last year met modest performance targets tied to modifying mortgages in jeopardy of foreclosure.
The executives got the bonuses about two years after the federally backed mortgage giants received nearly $170 billion in taxpayer bailouts--and despite pledges by FHFA, the office tasked with keeping them solvent, that it would adjust the level of CEO-level pay after critics slammed huge compensation packages paid out to former Fannie Mae CEO Franklin Raines and others.
Securities and Exchange Commission documents show that Ed Haldeman, who announced last week that he is stepping down as Freddie Mac's CEO, received a base salary of $900,000 last year, yet took home an additional $2.3 million in bonus pay. Records show other Fannie and Freddie executives got similar Wall Street-style compensation packages. Fannie Mae CEO Michael Williams, for example, got $2.37 million in performance bonuses.
Including Haldeman, the top five officers at Freddie banked a combined $6.46 million in performance pay alone last year, though a second bonus installment for 2010 has yet to be reported to the SEC, according to agency records. Williams and others at Fannie pocketed $6.33 million in incentives for what SEC records described as meeting the primary goal of providing ``liquidity, stability and affordability'' to the national market.
I think it is important to ask the question, is it necessary for these bonuses to be provided to these executives when we have men and women who are literally in harm's way, who are compensated far less? Is it possible that there aren't some patriotic Americans who would be willing to serve and head up these organizations and try to get them cleaned up?
The primary causes of the collapse of our economy still plague us to this day.
I ask unanimous consent that an article from Politico be printed in the Record.
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Mr. McCAIN. For decades, the American taxpayer has been the victim of outright corruption and blatant abuse at the hands of Fannie Mae and Freddie Mac. There have been countless warnings over the mismanagement of both Freddie and Fannie over the years. In May 2006, after a 27-month investigation into the corrupt corporate culture and accounting practices at Fannie Mae, the Office of Federal Housing Enterprise Oversight, the Federal regulator which oversees Fannie Mae, issued a blistering 348-page report which stated in part that ``Fannie Mae senior management promoted an image of the enterprise as one of the lowest-risk financial institutions in the world, as ``best in class'' in terms of risk management financial reporting, internal control, and corporate governance. The findings in this report show that risks at Fannie Mae are greatly understated and the image was false.
During the period covered by that report, Fannie Mae reported extremely smooth profit growth and had announced targets for earnings per share precisely each quarter. Those achievements were illusions deliberately and systematically created by the enterprise's senior management with the aid of inappropriate accounting and improper earnings management.
A large number of Fannie Mae's accounting policies and practices did not comply with generally accepted accounting principles. The enterprise also had serious problems with internal control and corporate governance. These errors resulted in Fannie Mae overstating reported income and capital by a currently estimated $10.6 billion.
By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received at the expense of the shareholders. Earnings management made a significant contribution to the compensation of Fannie Mae chairman CEO Franklin Raines, which totaled--Franklin Raines' bonus totaled over $90 million from 1998 through 2003. Of that total, over $52 million was directly tied to achieving earnings per share targets, which turned out to be totally false.
The list goes on and on. Mr. President, I recommend to my colleagues, before I go too much further, this book. The title is ``Reckless Endangerment,'' by Gretchen Morgenson, who happens to be a columnist and writer for the New York Times, and Joshua Rosner. ``How Outside Ambition, Greed and Corruption Led to Economic Armageddon.''
In this book it points the finger directly at Fannie and Freddie. I will quote one part of it:
Because bonuses at Fannie Mae were largely based on per share earnings growth, it was paramount to keep profits escalating to guarantee bonus payouts. And in 1998, top Fannie officials had begun manipulating the company's results by dipping into various profit cookie jars to produce the level of income necessary to generate bonus payouts to top management.
Federal investigators later found that you could predict what Fannie's earnings-per-share would be at year-end, almost to the penny, if you knew the maximum earnings-per-share bonus payout target set by management at the beginning of each year. Between 1998 and 2002, actual earnings and the bonus payout target differed only by a fraction of the cent, the investigators found.
Investigators uncovered documents from 1998 detailing the tactics used by Leanne Spencer, a finance official at Fannie, to make the company's $2.48 per-share bonus payout target. That year, Fannie Mae earned $2.4764 per share.
In a mid-November memo to her superiors, Spencer forecast that the company was on track to earn $2.4744 per share, just shy of what was needed to generate maximum bonus payments to executives. She described various ways she could juice the company's profits if need be.
It goes on and on, and then it says this:
That month, Thomas Nides, Fannie's executive vice president for human resources, warned a swath of top managers that earnings growth was coming in weak as the year-end approached.
``You know that as a management group member, you help drive the performance of the company,'' Nides wrote in a memo. ``That's why your total compensation is tied to how well Fannie Mae does each year.
In other words, he was jacking them up, telling them that they have to cook the books some more.
The memo achieved the desired result. Fannie Mae executives wound up exceeding their target in 1998 by accounting improperly for low-income housing tax credits the company received. The result: 547 people shared in $27.1 million in bonuses. This was a record--the bonuses represented 0.79 percent of Fannie Mae's after-tax profits, more than ever before in the company's history.
The list goes on and on. By the way, executive pay at Fannie Mae was a well-kept secret, and the company successfully blocked some in Congress, such as Congressman Richard Baker of Louisiana, from receiving information about salaries and bonuses paid by the company. It was only after Fannie was caught cooking its books that details of the lavish pay came out.
The accounting fraud went undiscovered until 2005, when an investigation by OFHEO unearthed it in a voluminous and detailed 2006 report. OFHEO noted that if Fannie Mae had used the appropriate accounting methods in 1998, the company's performance would have generated no executive bonuses at all. Although a highly kept secret at the time, Johnson's bonus for 1998 was $1.9 million. Investigators returned and it later emerged that the company made inaccurate disclosures when it said Johnson earned a total of almost $7 million in 1998. In actuality, his total compensation that year was more like $21 million.
None of these people, to my knowledge, have ever been punished--ever. It is one of the great scandals of our time. What steps were taken by Congress at that time to punish Fannie Mae? None.
According to published reports, including Fannie Mae's own news release, Daniel Mudd, the President and CEO of Fannie Mae at the time, was awarded over $14.4 million in 2006 and over $12.2 million in 2007 in salary, bonuses, and stock, and Fannie Mae continued their risky behavior, successfully posting profits of $4.1 billion in 2006.
Well, I fully understand that the corrupt individuals who cooked the books
in order to meet the targets necessary for maximum executive compensation are no longer in place at Fannie Mae and Freddie Mac. For that, we can be thankful. But let's be clear about one thing: the structure for executive bonuses remains in place. There is still
incentives for executives at Fannie and Freddie to meet certain goals in order to be rewarded with millions of dollars in bonuses.
I am not suggesting that either one of these GSEs is using fraudulent accounting methods, but the taxpayer remains at risk if an unscrupulous individual or a group of individuals decides to put their own self-interests above that of the American people. It has happened at Fannie and Freddie before, and it can happen again. It is unconscionable.
It has been proven time and again that Fannie Mae and Freddie Mac are synonymous with mismanagement, waste, and outright corruption and fraud, and their Federal regulator had the audacity to approve $12.8 million in executive bonuses to people who make $900,000 a year. This body should be ashamed if we let this happen again, especially in these tough economic times.
Every day more and more Americans are losing their jobs and their homes, and we are allowing these people to take home annual salaries of $900,000 and bonuses of $12.8 million, all while they ask the taxpayers for $6 billion more in bailout money.
Many of my colleagues sent a letter to Edward DeMarco, the Acting Director of the FHFA, asking for an explanation for his decision to award millions in bonuses to executives at Fannie and Freddie. In his response, Mr. DeMarco echoed what has become an increasingly popular theme used to defend the big payouts. Essentially, Mr. DeMarco argues that in order to get the best people in place, we need to pay them outrageous amounts of taxpayer dollars. Well, I don't buy that argument.
It is ridiculous to tell the American taxpayer: Look, we lost hundreds of billions of your money, so we need to pay these smart guys millions of dollars of your money so that we don't lose the rest of your money. The American people are smart enough to see through that sham logic and they are angry.
As I have previously stated on the Senate floor, I find it hard to believe that we cannot find talented people with the skills necessary to manage Fannie and Freddie for good money--$900,000--without the incentive of multimillion-dollar bonuses. There are many examples of intelligent, well-qualified, patriotic individuals working in our Federal Government who make significantly less than the top executives at Fannie and Freddie, with just as much responsibility.
For example, the basic pay for a four-star general is $179,700. Including the basic allowance for housing, that figure rises to $214,980. Chief Justice Roberts makes $223,500 a year. The President's Cabinet Members make $199,700 a year. Today, to add a little insult to injury--or a lot of insult to injury--here is today's story from NPR.
Freddie Mac, the taxpayer-owned mortgage giant, has placed multibillion-dollar bets that pay off if homeowners stay trapped in expensive mortgages with interest rates well above current rates.
This is the same outfit we are paying all this money to in these bonuses; so they decided to bet against the homeowners of America.
Freddie began increasing these bets dramatically in late 2010, the same time that the company was making it harder for homeowners to get out of such high-interest mortgages.
No evidence has emerged that these decisions were coordinated. The company is a key gatekeeper for home loans but says its traders are ``walled off'' from the officials who have restricted homeowners from taking advantage of historically low interest rates by imposing higher fees and new rules.
Freddie's charter calls for the company to make home loans more accessible. Its chief executive, Charles Haldeman, Jr., recently told Congress that his company is ``helping financially strapped families reduce their mortgage costs through refinancing their mortgages.''
But the trades, uncovered for the first time in an investigation by ProPublica and NPR, give Freddie a powerful incentive to do the opposite, highlighting a conflict of interest at the heart of the company.
Do we need this company around? Can't we find something better?
In addition to being an instrument of government policy dedicated to making home loans more accessible, Freddie also has giant investment portfolios and could lose substantial amounts of money if too many borrowers refinance. ..... Freddie Mac's trades, while perfectly legal, came during a period when the company was supposed to be reducing its investment portfolio, according to the terms of its government takeover agreement. But these trades escalate the risk of its portfolio, because the securities Freddie has purchased are volatile and hard to sell, mortgage securities experts say.
The financial crisis in 2008 was made worse when Wall Street traders made bets against their customers and the American people. Now, some see similar behavior, only this time by traders at a government-owned company who are using leverage, which increases the potential profits but also the risk of big losses, and other Wall Street strategums. ``More than three years into the government takeover, we have Freddie Mac pursuing highly levered, complicated transactions seemingly with the purpose of trading against homeowners,'' says Mayer. ``These are the kinds of things that got us into trouble in the first place.''
You can't make it up. So it seems to me that the first thing we ought to do, as I and others have recommended, is get these GSEs on the track to going out of business as quickly as possible. Their track record is outrageous. The second thing, let's not give millions of dollars in bonuses to people who are betting against the homeowners of America.
I yield the floor.
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