Back to school with Fannie and Freddie…

September 10, 2008

The Fannie/Freddie debacle provides many “teachable moments.” One of the classes we can sign up for is “what’s wrong with corporate employment contracts” – or what’s right with them, if you happen to be the executive who’s got one.

As Michelle noted yesterday, the feds said they wouldn’t try to recover compensation from departing Fannie CEO Dan Mudd or Freddie CEO Dick Syron. And while the severance figures floating around for these guys – over $9M for Mudd and $14M for Syron – are probably overblown (the $5M to $6M estimate for Mudd in this WSJ article seems more realistic), each is contractually entitled to multiple millions for walking out the door.

I’ll just cover Mudd here. (Hey, the “Fringe” pilot was on last night so who had time to read two contracts?)

Mudd’s contract, like countless other CEO deals, says that the only way to dump him without his full severance package is a termination for “cause.” In Mudd’s case, as is common in CEOLand, “cause” means dishonesty, willful misconduct, gross negligence or a felony conviction.

Some say Mr. Mudd has made rather a hash of things. But he’s not necessarily guilty of any of the above sins. CEOs negotiate for terms like “willful misconduct” and “gross negligence” because they set the behavior bar so low; generally speaking, you have to have bad intentions or show reckless disregard for the consequences of your actions. If you were merely incompetent, clueless, or inattentive, that’s usually not “cause.”

FHFA director Lockhart’s statement merely said that “the present CEOs will be leaving,” thus keeping things vague. But the various experts providing the press with severance estimates clearly assume these are non-cause terminations. (BTW, Mudd’s agreement has a handy provision that looks to have the company paying his lawyers to negotiate the terms of his departure.)

As of now (lawsuits aside), it appears Mudd and Syron will get sizeable severance packages, while we taxpayers get some preferred stock and a bunch of teachable moments.

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