WASHINGTON (CNNMoney) -- Executives at Fannie Mae and Freddie Mac need big pay packages to protect taxpayers from losing more of the billions spent to rescue the mortgage finance companies, according to the head of the agency that sets pay at the beleaguered firms.
"Taxpayers. . . would not be better off if we provoke a rapid turnover of senior management by further slashing compensation," said Edward DeMarco, acting director of the Federal Housing Finance Agency, in testimony Tuesday before the Senate Banking Committee. He said pay cuts and senior management turn-over could "increase the risk of higher losses," he added.
The net cost of the taxpayer bailout of Fannie Mae and Freddie Mac is about $124 billion -- dwarfing bailouts to any other financial firm. Those firms bought up many of the bad and underwater mortgages from Wall Street banks -- such as Bank of America ( , Fortune 500), Citigroup ( , Fortune 500) and Goldman Sachs ( , Fortune 500) -- during the height of the financial crisis.
DeMarco added that executives who work at Fannie Mae and Freddie Mac, regardless of how well they perform their duties, "risk tarnish to their reputations" just by working at the firms.
Fannie Mae and Freddie Mac received the biggest federal bailout of the financial crisis, topping $124 billion. And $95 million of those tax dollars went to lucrative pay packages for top executives, filings show.
Reports on salary were made public by the companies earlier this year, but received little attention until a recent report by Politico, the political news website, which highlighted about $12.8 million in bonuses the executives received last year. Lawmakers in both parties are enraged.
While DeMarco was grilled in the Senate, the House Financial Services Committee passed a bill to suspend executive pay packages at Fannie Mae and Freddie Mac with an overwhelmingly bipartisan vote of 52-4.
"Never again should Americans be forced to send their hard-earned tax dollars to be wasted on multi-million dollar pay packages for Fannie and Freddie executives," said that committee's chief Rep. Spencer Bachus, an Alabama Republican.
The Federal Housing Finance Agency set executive pay at the firms in consultation with the Treasury Department. The agency talked to the executive compensation czar for bailed-out banks, Ken Feinberg, when setting pay.
DeMarco stressed that good pay is needed to keep and retain executives who can manage tens of thousands of employees and some $5 trillion worth of mortgage assets.
But lawmakers said they were unmoved by such arguments.
"There's a big difference" between private financial firms and Fannie Mae and Freddie Mac, said Sen. Jon Tester, a Montana Democrat, criticizing the argument that mortgage finance firms compete with the likes of Wells Fargo (Fortune 500) for executives. "These companies (banks) are profitable and solvent, and they don't rely on taxpayer funds to keep their lights on," he said.,
DeMarco said that executives didn't get bonuses or incentives in 2008, when the federal government took over. But senior management has since turned over since then. He also said that pay had been cut by 40% in the years that the federal government had taken over the firms.
Fannie CEO Michael Williams and Freddie CEO Charles Halderman each received about $5.5 million in pay for last year, and they could receive more when their final deferred compensation for 2010 is set. All the executives receive a significant portion of their pay in the year or years after they earn it.
The CEOs' pay targets for 2011 are about $6 million a piece -- though Halderman might not get much of that money since he's announced plans to leave Freddie sometime in 2012. He must still be at the company in order to receive the deferred compensation. His base pay for 2011 is $900,000, with most of the rest of his compensation coming in deferred payments.
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