In order to reign in executive compensation for firms that were bailed out during the financial crisis, the Obama administration put a pay czar in place. But the government sponsored enterprises Fannie Mae and Freddie Mac were not a part of the main bailout, ordered by a bill passed by Congress. Consequently, they have been thus far exempt from its compensation rules. As a result, some of their top executives still earned multi-million dollar paychecks. But now that the firms are essentially government-owned, should their employees be paid like government employees instead?

In yesterday's fascinating House Financial Services committee hearing, this idea was proposed by two witnesses. Mark Calabria of the Cato institute called Fannie's $7 million annual pay "offensive." Anthony Randazzo of Reason Foundation agreed that GSE employees should be put on the federal pay scale.

But another witness, Sarah Wartell from the Center for American Progress, was worried about cutting their pay. She said:

Well, I think what is important for the GSEs is that, because they do represent a significant continent liability, potential liability for the taxpayers, it's very important that they be able to continue to attract the talent to manage their obligation. And I do, in their current situation, believe that it is difficult for them -- they're seeing a great deal of runoff already of their senior leadership into private institutions -- to have the ability to attract people, for example, to manage servicing and retain assets. So I don't have a position particularly on their current compensation packages. I understand the difficulty that they present, but I also think it's really important that we don't let them lose talent to manage and protect the taxpayers.

If you follow business news, then this argument should sound familiar. It's very similar to the one that Wall Street firms were using when the government reined in their pay after their bailout in late 2008. They said that, in order to retain their employees, they must be able to pay competitively. So here, Wartell is essentially just tweaking the argument Wall Street relied on at that time and applying it to Fannie and Freddie.

The problem is that the argument doesn't work as well for the GSEs for three reasons.

First, Fannie and Freddie received a very different kind of bailout. They were not left to continue to compete in the market. They were instead placed into conservatorship by the U.S. government. The objective of the bank bailout was not to nationalize or wind down all banks, but to prop them up until they were healthy enough again to function on their own. By placing Fannie and Freddie into conservatorship, the going assumption has been that these firms will either be wound down or drastically reformed. Neither option requires as much need to remain competitive.

Second, the GSEs don't really compete anyway: they currently easily own or guarantee more than 90% of the new mortgages created. They're the only option for banks that don't want to hold mortgage risk themselves. And considering how low the government's capital costs are, no other firms will ever be able to realistically compete unless some changes are made, like increasing guarantee fees. But unlike private firms, the GSEs ability to obtain business has little to do with the quality of their employees and much more to do with the government backing that they enjoy.

Finally -- and this gets more to Wartell's central point -- the sort of expertise needed to allow the GSEs to function properly does not warrant huge paychecks. We know this because other government agencies do essentially the same work, but pay government salaries. Mark Calabria argued this during the hearing:

Quite simply, if FHA can adequately manage its mortgage risk by paying its employees on the GS pay scale, then I see no reason that Fannie Mae and Freddie Mac cannot do the same.

Subcommittee Chairman Scott Garrett (R-NJ) echoed this point in response to Wartell, adding Ginne Mae to the list of similar firms with employees who are paid far less than Fannie and Freddie's employees. Treasury and HUD officials can oversee Fannie and Freddie, so high-priced executives are unnecessary.

Sometime this year, we'll likely see some legislation on the future of the GSEs. Through the hearing, it looks like a Republican-sponsored plan would call for putting the GSE employees on federal pay structures. Of course, that assumes that Fannie and Freddie survive reform efforts, and they may not.

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