Fannie Mae, Freddie Mac planning massive retention bonuses

Posted Apr 3rd 2009 12:30PM by Elizabeth Harrow
Filed under: Scandals, Federal Natl Mtge (FNM), Politics, Housing, Financial Crisis

According to a report today in The Wall Street Journal [subscription required], Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) -- those twin titans of mortgage mayhem -- are planning to dish out $210 million worth of retention bonuses over the next 18 months. James Lockhart, director of the Federal Housing Finance Agency, explained that $51 million in payouts were distributed in late 2008, with the rest of the bonuses to be disbursed through 2009 and into early 2010.

The news is already raising politicians' ire, since Fannie and Freddie are staying afloat only through the grace of government bailouts. The two lenders reported combined losses of roughly $108 billion in 2008, says the Journal, yet 80% of Freddie's employees and 61% of Fannie's payroll will score retention bonuses based on this bleak operating performance.

Lockhart, who serves as regulator for the troubled siblings, is already battling heat from Capitol Hill over the bonuses. "It is not realistic to expect that experienced and highly skilled employees will indefinitely continue to work as hard as they have if we do not provide reasonable incentives to perform," he wrote in a letter to Iowa Sen. Chuck Grassley.

Rep. Barney Frank, chairman of the House Financial Services Committee, isn't buying it. Frank, who has equated hefty Wall Street bonuses with "getting bribed to do your job," argued that, "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."

Investors are also having a hard time swallowing the news, as FNM and FRE are both trading significantly lower in today's trading. The two equities have been mired in penny-stock territory since last September, but it seems that many traders expect more losses, as short interest on the siblings has recently accelerated. The number of FNM shares sold short rose by 9% during the past month, while FRE's short interest swelled by 15%.

Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.

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