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Saturday, July 5, 2003
Business
At Freddie Mac, it helps to have contacts
Washington Post
WASHINGTON
-- During a chat at the White House in 1994, retiring Sen. Dennis
DeConcini, D-Ariz., recalls President Bill Clinton saying, "You've been
a great friend, Dennis, what can I do for you?"
"I
told him I wanted to be on the board of Freddie Mac or Fannie Mae,"
DeConcini said in an interview last week. A short time later, Clinton
granted the wish, naming the senator to the board of McLean, Va.-based
Freddie Mac, where DeConcini served for five years and earned tens of
thousands of dollars in cash, stock and stock options.
DeConcini,
now a Washington lobbyist, is one of many former White House aides,
defeated candidates, other former officials and leaders of minority
groups whom presidents have appointed over the years to the boards of
Freddie Mac and Fannie Mae, its larger D.C.-based rival in the home
mortgage finance business.
Now,
because of a shake-up in Freddie Mac's top management and questions
about its accounting practices, its corporate governance and the role
of its board are the subject of attention from congressional and
federal authorities.
The
structure of Freddie Mac and Fannie Mae have long made them oddities.
Although they are owned by shareholders, the two companies were
chartered by Congress to buy home loans from banks to ensure a ready
supply of mortgage money, so they have close ties to the government.
Because of their public missions, they each have five presidentially
appointed directors on their 18-member boards.
Some
corporate governance experts question the wisdom of using board seats
at two of the country's largest and most complex financial institutions
as a reward for political loyalists.
The
board seats are lucrative. The presidential appointees, like other
non-management directors, are eligible for a variety of payments,
including $35,000 a year in base fees, according to the two companies'
latest statements explaining executive and board compensation. New
directors also get stock grants -- worth about $130,000 at Freddie and
$65,000 at Fannie -- in their first year on the boards. At Fannie, the
stock becomes available for sale in increments over five years, but the
person must remain on the board for the stock to continue vesting. A
Freddie spokesman said its restricted stock also vests over five years.
New
directors also received options to buy at least $250,000 of company
stock at the share price on the date the option was granted, the
proxies said. That means board members can buy shares at the grant
price and resell them at current market prices, profiting on every
dollar the stock price has risen.
Peter
J. Wallison, who was White House counsel to Ronald Reagan and is now a
specialist in financial markets at the American Enterprise Institute, a
conservative think tank, said: "When the president appoints people to
the boards, it suggests to the market that the White House, the
president, is not going to question the basic structure of these
companies. There is, in effect, a conflict of interest."
Charles
Lewis, head of the Center for Public Integrity, said: "We can do
better. What is the president of the United States doing appointing
anybody to any corporation? I find it peculiar on its face. It just
underscores the political nature of these companies."
Others
say board members appointed by a president aren't likely to be less
independent than those appointed by a company's top management. Some
management-picked members of the two boards come from Wall Street,
which earns millions in fees from trading with the two institutions and
underwriting their sales of securities.
"A
part-political, part-commercial system of board appointment is no worse
than, say, letting the CEO pick all the directors, a system with its
own notable failures," said Nell Minow of the Corporate Library, a
governance research firm.
Clinton's
last appointees to the board of Fannie Mae, headed by his former budget
director Franklin D. Raines, included former White House counsel Jack
Quinn, who also was a lawyer for fugitive financier Marc Rich in a
last-minute pardon controversy, and Garry Mauro, who lost to Bush in
1998 for governor of Texas. Bush's new appointees include Victor Ashe,
a Yale classmate who is mayor of Knoxville, Tenn., and Molly H.
Bordonaro, a former congressional candidate from Oregon who was active
in his presidential campaign.