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The financial press this morning reports that Daniel Mudd, the retiring CEO of Fannie Mae, is leaving with a severance package of approximately $9.2 million. Richard Syron, the retiring CEO of Freddie Mac, is leaving with a severance package of approximately $14.9 million.
It would appear that the federal government intends to honor these contracts.
In these situations, observing when the federal government honors its contracts and when it does not often provides a clue to the deeper story.
For example, my company, Hamilton Securities Group, had a contract that the federal government canceled for convenience in 1997. At that time, the federal government owed us $2.1 million. Rather than honor their debts, they claimed the common law right to assert an “offset.”
The offset that they claimed was a theoretical opportunity cost. We might have made another $3 million in profits on two auctions that made several hundred millions in profit in a series of mortgage auctions that made $2.2 billion for the Federal Housing Administration. The auction recovery performances were significantly higher than what they achieved before they hired us and what they got after they fired us and canceled the auctions.
Sure enough, we were right that the government had to honor its contract. But it took seven years for a judge in the U.S. Court of Claims to remind the government that was so, and nine years to get paid. At that point, all the monies went to the lawyers and administrative costs of proving the point.
The Department of Justice was perfectly happy to argue their rights to assert common law right of offsets to abrogate government contractual obligations in court, year in and year out. They spent a great deal of time and money doing so — all about an issue for which the government’s own expert says there was no money lost.
This was not my first experience with the federal government abrogating contracts. Indeed, I had named my company after Alexander Hamilton, the first Secretary of the Treasury, known for his successful efforts to ensure that the federal government kept its word on financial matters. When I was Assistant Secretary in the first Bush Administration, my staff often referred to him as I spent day in, day out, doing everything I could to stop senior political officials from abrogating contracts because it with get us a great headline as being tough on financial fraud. We had programs marked by fraud that also involved honest companies and legitimate transactions. It was politically expedient to cancel things across the board, rather than take responsibility and clean up the real fraud.
I remember sitting in a meeting at HUD when the coinsurance program was being canceled. One senior official expressed concern when the general counsel suggested that we abrogate our contracts to companies that were performing well. His point was that the agency had legally valid and binding contracts with these companies. The general counsel said something like, “F*ck ’em. Let ’em sue us. By the time they win in court, we will be gone.”
So if Mudd and Syron are being allowed to keep their severance packages while thousands, if not millions, of Americans are losing their jobs and their homes, there is a reason. Given that Fannie Mae and Freddie Mac have now cost shareholders $100 billion, bankrupted households and communities through the country, terrorized investors globally and stuck the U.S. government with responsibility for $5.4 trillion in debt, you would think there would be a basis for a few offsets against severance agreement payouts.
Or…perhaps Mudd and Syron are being paid for a job well done, which would include remaining silent about what exactly that job really was.
Previous sections of this 6-part post: (I) (II) (III) (IV) (VI)
