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The Federal Housing Finance Agency’s Inspector General issued a report which says the managements at Freddie Mac and Fannie may have been paid too much. The FHFA should have been more transparent about the $35 million in compensation given to executives at the two defunct mortgage agencies.

The report focused on process more than pay results. The Inspector General wants more careful oversight of compensation and more rigorous criteria for pay packages.

What the report does not acknowledge is that based on the data, the heads of the two firms were probably paid less than if they had worked in the private sector. The CEOs at the two firms made as much as $6 million and CFOs as much as $3.5 million.

The operation of large complex financial firms such as Fannie Mae and Freddie Mac requires expertise in managing complex financial balance sheets and the ever-worsening state of the mortgage market. The Inspector General implies that because Fannie Mae and Freddie Mac have received almost $400 billion in government aid that their managements should be on different pay scales than people  with similar jobs outside the government’s purview.

The reaction to the report should be that the top managements of investment and money center banks often make tens of millions of dollars and are granted stock options as incentives for performance. Stock options in the essentially bankrupt Fannie Mae and Freddie Mac are not possible. That makes it likely that executives with the ability to run these companies are hard to find and hard to entice into what is essentially government service.

The Inspector General probably assumes that since he and his staff did not make millions of dollars that the heads of Fannie Mae and Freddie Mac should not receive this level of pay either. Perhaps he and his aides should try to run Fannie Mae and Freddie Mac and see how they do with the challenge of operating huge, complex, and troubled firms.

Douglas A. McIntyre