Fannie Liquidates Three Bigshots

Fannie Mae this afternoon announced a major shakeup, disposing of its CFO, Chief Business Officer and Chief Risk Officer.

 

According to the release, two of the officers are leaving to pursue other opportunities and one is retiring.

 

But it’s unrealistic to expect any major change in the way risk is managed at Fannie. Since the government is still willing to guarantee its debt, there’s really no compelling reason for the company to change the way it does business. It’s like a lousy baseball team firing the manager.

 

Today’s release also said the company remains “firmly committed” to CEO David Mudd, for what that’s worth.

Freddie Muck

It’s been a rough week for shareholders of Freddie Mac and Fannie Mae. This morning, shares opened at 20-year lows for both companies.

 

Many are crediting this Barron’s article (subscription required) with sparking this week’s stampede towards the exits.

 

The strange part is there wasn’t any new information in the Barron’s piece. It was just laid out in an intelligent, succinct manner that crystallized the plight of the two GSEs.

Nice Work If You Can Get It

Ever since Merrill Lynch announced it had lured Thomas Montag to be its new head of sales and trading, we’ve been hankering to know just how much the former Goldman Sachs star will be paid for the last five months of the year.

 

Shortly after the hire, Merrill disclosed part of Montag’s compensation in this 8-K, which got a lot of press for the gaudy bonus.  

 

1. Bonus – A bonus for 2008 of no less than $39.4 million

 

2. Forfeiture compensation – Merrill agreed to compensate Montag separately for the equity compensation he walked away from at Goldman, “one-third of which will be paid in cash and the remainder of which will be granted as restricted stock units and nonqualified stock options” according to the company. Merrill didn’t provide any numbers for this pay component.

 

3. Salary – And finally, almost as an afterthought, an annualized salary of $600,000

 

For some time now, the ‘sphere has been curious about item 2, with some bloggers speculating it could push Montag’s compensation package north of $50 million. Those estimates, it turns out, were conservative.

 

Earlier this week, Montag’s first on the job, Merrill disclosed item 2 in this Form 4. The company granted Montag stock worth $27.7 million on the day of the grant and options on 2.45 million more shares.

 

Although options are notoriously difficult to value, we estimate their value at $21.5 million using a formula provided by David Schmidt, an executive compensation consultant at James F. Reda & Associates LLC in New York. Schmidt cautioned that his formula provides only a rough idea of what the options were worth at the time of the grant.

 

Of course, the stock and options are only two-thirds of Montag’s forfeiture compensation; the other third is due in cash. Extrapolating from Merrill’s previous 8-K, we find part 2 is worth approximately $73.9 million altogether.

 

So for five months of work from Montag, Merrill will shell out options, stock and cash totaling $113.6 million, or a little less than $1 million per working day.

Freddie Posts Huge Loss

Freddie Mac this morning reported a loss of $821 million, or $1.63 a share, much worse than analysts expected, according to Thomson Reuters estimates.

 

The company said it will cut its dividend to “5 cents or less” from 25 cents, a welcome development to Wonk the Plank, since we pay taxes.

 

Freddie’s regulatory core capital was $37.1 billion at the end of the quarter, about $8.4 billion above the statutory minimum requirement and $2.7 billion above the 20% mandatory target capital surplus set by the company’s regulator, the Office of Federal Housing Enterprise Oversight.

 

The company also said in its quarterly report that it could have trouble meeting the minimum capitalization requirements set by OFHEO. The agency already relaxed its standards earlier this year to 20% from 30%, according to the filing, but Freddie said:

 

“While we have historically met the risk-based capital standard, there is a significant possibility that continued adverse developments in relation to one or more of these underlying drivers could cause us to fail to meet this standard.”

 

The disclosure was a new addition since Freddie’s last filing.

 

Former Fannie CEO Franklin Raines must be feeling pretty foolish after what he published yesterday.  

Privatized Losses, Socialized Profits

Today Barack Obama announced an “Emergency Economic Plan” to give working families $1000 each, fully funded by a windfall profits tax on big oil.

 

“Obama simply asks that big oil companies contribute a reasonable share of the windfall profits they receive from high oil prices over the next five years to pay for emergency assistance for families right now,” the proposal says.

 

Checks could be mailed as soon as this fall, the proposal says, and they could pay for higher gas prices or heating bills.

 

The plan is an unabashed transfer of wealth from oil companies to citizens, and we think that undermines some very basic property rights. 

 

We don’t think anyone should be able to simply appropriate money from a wealthier party, no matter how great the disparity.

 

It will be interesting to watch McCain’s response to the plan. Earlier in the campaign, Obama successfully neutralized McCain’s “gas tax holiday” on the grounds that it was a “gimmick” voters could see right through.

 

McCain’s best bet is to use a similar strategy and paint the Obama statement as pandering masquerading as policy (which it most assuredly is).  We just wonder if someone without Obama’s silver tongue can successfully make that nuanced case.