Worker Assets Shrink at Fannie and Freddie

Fannie Mae’s workers had $116 million in the employee stock ownership plan at the end of 2006. Today, it’s more like $17.5 million. Ouch.

The employees of Fannie Mae, and those of its counterpart Freddie Mac,
are reeling from financial blows themselves as the mortgage finance
companies lurch toward what could be a government bailout. Both firms
ladled out hefty servings of stocks and options to reward and
compensate employees — making them popular employers for years.

The
top executive of Freddie Mac, Richard F. Syron, for instance, made
about $18.3 million last year, two-thirds of that in stock and options
that are worth a lot less today. His counterpart at Fannie Mae, Daniel
H. Mudd, made $11.6 million, also much of it in stock.

But
midlevel employees were paid in stock, too. Stock and options could
account for a fifth of their total compensation, according to former
employees and financial planners. Their ability to sell and diversify
was often limited by restrictions on the grants, the terms of the
specific plans and tighter rules on selling by employees while they
addressed years-earlier accounting scandals.

For decades, both
companies offered lush benefits, with traditional pension plans,
401(k)s, stock plans and other niceties, like child care plans. That
means many employees still have a safety net, though their savings have
declined, drastically in some cases.

“If it can happen to Fannie
or Freddie, it can happen anywhere,” said Marjorie L. Fox, a certified
financial planner in Reston, Va. “This is a cautionary tale you better
pay attention to.”

For those people participating in the employee
stock ownership plans, known as ESOPs, at Fannie Mae — Freddie Mac did
not have one — they could do little but watch this year as the stock
lost more than three-quarters of its value. In a lament echoing the
fallen share prices at other firms like Bear Stearns,
employees discovered their stock was essentially locked up. The Fannie
Mae plan, to which the company stopped making contributions last year,
invests in company stock, allowing diversification to begin only at age
55.

Still, former employees and financial planners say workers
have probably been hurt more severely by their holdings of stock and
options outside of retirement plans.

Richard K. Green, who was
a principal economist and a director of financial strategy and policy
analysis at Freddie Mac from late 2002 to early 2004, said that about
20 percent of his total compensation was in stock options.

“It’s my understanding that for a fair number of people, it was an
important part of their retirement planning,” he said. “If you joined
in the ’80s, you did fairly well. But if you joined in the last 10
years or so, those options wouldn’t be worth a whole lot to you.”

Furthermore,
both companies tightened restrictions on trading of company stock by
employees while working to correct a series of accounting
misstatements. Fannie Mae barred employees from selling shares — or
buying them — from April 2005 to November of last year.

Freddie
Mac limited employee trading of its stock beginning in June 2003,
periodically allowing workers to sell shares during brief windows.
Those restrictions were relaxed in March for most workers, but trading
by many executives is monitored and more limited, a company spokeswoman
said.

There are other financial disappointments for employees as
well. Fannie Mae’s traditional retirement plan has been frozen, like
its stock ownership plan, meaning no additional benefits will accrue.
That leaves employees at Freddie Mac to wonder if such a cutback is in
store for them. Freddie Mac says it has no plan to freeze the pension.

Though
it did not have an ESOP, Freddie Mac did have a stock purchase plan
that allowed employees to buy company shares at a discount. Alas, some
employees were buying all the way down.

The shares of both
companies have rallied this week after they raised money in the credit
markets at somewhat improved levels and after some analysts suggested
they might be able to avoid a capital injection from the federal
government. Shares of Freddie Mac have almost doubled so far this week,
to $5.28, and shares of Fannie Mae have jumped nearly $3 so far this
week, to $7.95.

Still, the shares remain more than 80 percent below their closing price at the end of last year.

Many investors and policy makers remain concerned that the companies,
which own or guarantee nearly half of the mortgages in this country, do
not have enough capital to withstand rising losses from defaults by
homeowners. Last month, Congress authorized the Treasury Department to
pump billions of dollars into the companies, if needed.

Created by the government and operated as hybrid public-private
entities, Fannie Mae and Freddie Mac were long viewed by prospective
hires as both incredibly stable and tremendously profitable. Fannie
Mae, for instance, has appeared on Fortune magazine’s list of best
places to work. Each company has just under 6,000 employees.

When
Fannie Mae froze its pension plan to new employees and certain younger
workers late last year, it increased its contributions to the 401(k),
which has no company stock.

Along with its pension, Freddie Mac
has a 401(k), which eliminated company stock as an investment option in
late 2006. Workers were forced to sell any company stock in the plan by
the end of last year, according to a company spokesman.

For a
long time, Freddie Mac’s stock purchase plan was quite attractive,
allowing employees to buy company shares at a 15 percent discount. At
the end of 2007, that plan had $24 million in stock that if held today
would be worth about $3.7 million.

Ms. Fox, the financial planner
in Virginia whose office is near the headquarters of Fannie Mae in
Washington and Freddie Mac in McLean, Va., said she recently fielded a
call from a client who is a Freddie Mac employee. The client wanted to
know if it was prudent to keep buying shares through the stock purchase
program.

“They had been doing this religiously over the years,
adding between $500 to $1,000 a month, and they’ve seen the value of
what they purchased slip to next to nothing,” Ms. Fox said. “It’s
almost unfathomable.”

Luckily, the client had diversified much of
the family’s Freddie Mac stock holdings, selling about 3,000 shares in
2006 for about $200,000 when the stock was trading in the mid-$60s. But
the client held on to about 1,000 shares. Those have fallen from about
$65,000 in 2006 to just $5,300 today.

The same client has
unexercised stock options that are worthless because the strike price
is well above the market price. There is also restricted stock and
other equity worth much less than when granted. Still, the client’s
family has a net worth of $2 million, putting it in better financial
health than most Americans.

Compensation experts say employees
and employers have learned from the painful stock losses by employees
at technology firms and companies like Enron
and WorldCom. But the problems at Fannie Mae and Freddie Mac show that
many employees, and employers, have not fully appreciated the risks of
having so much of their savings tied to a single employer.

“If
you are going to invest in a single security, employer stock is a
particularly stupid one to invest in because your human capital is tied
up with your financial capital,” said Norman Stein, a professor at the University of Alabama Law School and a specialist in pension and employee benefits law.

Employee
stock ownership plans, which many companies have embraced for their tax
benefits, can be particularly dangerous if workers do not have
diversified investments elsewhere.

At Fannie Mae, the stock
ownership plan, which has 7,900 participants, is merely a supplement to
other retirement plans. According to a securities filing by Fannie Mae,
employees can diversify once they are 55 years old and have
participated in the plan for at least 10 years. Companies can let
employees diversify earlier, but federal law doesn’t require it,
according to Loren Rodgers, project director at the National Center for
Employee Ownership.

Participants have previously challenged the
company over this plan. In 2004, Fannie Mae was sued by former
employees who claimed the company had violated its fiduciary duty to
members of that plan under the Employee Retirement Income Security Act,
citing corporate accounting misstatements. Fannie Mae rejects those
allegations. That case is pending in United States District Court in
Washington.