Few Stand to Gain on This Bailout, and Many Lose

Over the years, Fannie Mae and Freddie Mac showered riches on many winners: their executives, Wall Street bankers and Washington lobbyists. Now the foundering mortgage giants are leaving some losers in their wake, notably their shareholders, rank-and-file employees and, in the worst case, American taxpayers.

But even after the government seized the mortgage finance companies on Sunday and dismissed their chief executives, the companies’ outgoing leaders could see big paydays — a prospect that angers many investors, particularly because ordinary stockholders could be virtually wiped out.

Under the terms of his employment contract, Daniel H. Mudd, the departing head of Fannie Mae, stands to collect $9.3 million in severance pay, retirement benefits and deferred compensation, provided his dismissal is deemed to be “without cause,” according to an analysis by the consulting firm James F. Reda & Associates. Mr. Mudd has already taken home $12.4 million in cash compensation and stock option gains since becoming chief executive in 2004, according to an analysis by Equilar, an executive pay research firm.

Richard F. Syron, the departing chief executive of Freddie Mac , could receive an exit package of at least $14.1 million, largely because of a clause added to his employment contract in mid-July as his company’s troubles deepened. He has taken home $17.1 million in pay and stock option gains since becoming chief executive in 2003.

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Both executives stood to make millions more from restricted stock grants and options, but those awards are now worthless because of the plunge in the companies’ share prices. Even so, their past pay — and the idea that they might receive more — irks some investors.

“This is completely outrageous,” said Richard C. Ferlauto, the director of corporate governance and investment for the American Federation of State, County and Municipal Employees, a large pension fund. “It is really a slap in the face to shareholders and homeowners whose loans are at risk and taxpayers footing the bill for a bailout.”

Whether Mr. Mudd and Mr. Syron will collect their severance package is unclear. A spokeswoman for the Federal Housing Finance Agency, the companies’ primary regulator, declined to provide details about their exit packages. F.H.F.A. officials said the compensation of their successors, Herbert M. Allison Jr. and David M. Moffett, both longtime financial industry executives, would be “significantly lower” than that of the departing chief executives.

Fannie Mae and Freddie Mac have enriched their top executives for years. Mr. Mudd’s predecessor at Fannie Mae, Franklin D. Raines, took home more than $52 million while he was chief executive from 1999 to 2004, according to Equilar data.

Mr. Raines later agreed to forfeit several million dollars’ worth of stock and options to resolve personal claims over allegations that Fannie Mae had inflated its earnings to raise executive bonuses. Even though Fannie Mae was forced to restate its earnings, Mr. Raines walked away with at least $25 million in pension benefits, as well as stock options he did not cash in — many of which are now worthless.

Mr. Syron’s predecessor at Freddie Mac, Leland C. Brendsel, took home more than $28.4 million from 1993 to 2003, the only part of his pay package that was publicly disclosed during his 13-year tenure as chief executive.

The shareholders of Fannie Mae and Freddie Mac, including many employees, will not be so lucky. The companies’ share prices have plunged about 90 percent this year, wiping out about $70 billion of shareholder value. The shares are likely to be worth little or nothing under the government’s rescue plan.

As a result, Wall Street money managers and everyday investors alike stand to lose big. Bill Miller, the star mutual fund manager at Legg Mason, increased his bet on Freddie Mac even as the company’s shares plummeted this year. Last week, when Freddie Mac stock was trading at about $5, Legg Mason disclosed that it had bought an additional 30 million shares. Other value-oriented investors, including Rich Pzena, David Dreman and Martin Whitman, also placed big bets that the mortgage companies would recover. None of these money managers returned calls for comment.

“I am just shocked how they missed this, and why, when it became completely clear that the problem was snowballing, guys like Bill Miller doubled down,” said Douglas A. Kass, head of Seabreeze Partners and an outspoken short-seller.

For years, the shares of Fannie Mae, the larger of the two companies, have ranked among the most widely held stocks in America. Many ordinary investors believed that the company’s quasi-governmental status would insulate shareholders from big losses.

“People perceived they had government support of some sort,” said Byron Wien, the chief investment strategist at Pequot Capital. “The perception was they were more secure investments than they turned out to be.”

Members of the Fannie Mae and Freddie Mac rank-and-file were big shareholders, too. Stock and options could make up a fifth of employees’ total pay.

While those who bought the companies’ shares lost, short-sellers who bet against Fannie Mae and Freddie Mac won. So-called short interest in Fannie Mae and Freddie Mac stock soared in recent months as the companies’ troubles deepened.

Among the most vocal short-sellers betting against the companies is William A. Ackman, who runs a hedge fund called Pershing Square Capital. Mr. Ackman was among the earliest to warn of the credit crisis, and he is believed to have landed a windfall after shorting both companies, according to a person with direct knowledge of a recent investment letter.

Wall Street investment banks, meanwhile, are breathing a sigh of relief. Fannie Mae and Freddie Mac pay hefty fees to big Wall Street debt underwriters, and that is unlikely to change. Fannie Mae and Freddie Mac’s business was worth $1.5 billion in fees in 2007, according to a Sanford C. Bernstein report. Through the first six months of this year, that figure sank to $600 million.

Washington lobbyists, however, may be hurting. Over the last decade, Freddie Mac paid more than $94.8 million for lobbying services, in part to fend off attempts to tighten oversight, according to the Center for Responsive Politics; Fannie Mae spent about $79.5 million. The government plan will immediately eliminate that spending.

Some commercial banks and insurance companies that hold the companies’ preferred stock could suffer, too. Auditors may force those investors to mark down the value of the holdings. Sovereign Bancorp, a regional lender near Philadelphia, holds about $588 million of the securities, about 13 percent of its tangible capital, according to a research report by Keefe, Bruyette & Woods, a securities broker.

Midwest Banc Holdings, a community bank in Illinois, and Gateway Financial Holdings, which operates in Virginia and North Carolina, each have tens of millions of dollars of the preferred stock, representing more than one-third of their tangible capital, the report said. And federal banking regulators said in a joint statement that a “limited number” of smaller banks could need new financing.

The Treasury secretary, Henry M. Paulson Jr., urged those institutions to contact their regulator, which said it was “prepared to work with those institutions to develop capital-restoration plans” and other corrective actions.