Fannie's Mudd Shakes Up Management to Boost Investor Confidence

By Dawn Kopecki and Jody Shenn

Aug. 28 (Bloomberg) -- Fannie Mae Chief Executive Officer Daniel Mudd replaced three top deputies in an effort to restore investor confidence after record losses and a 90 percent drop in the shares.

Chief Financial Officer Stephen Swad, 47, hired less than two years ago to help the government-chartered company complete an accounting overhaul, will be replaced by Controller David Hisey, 48. Chief Business Officer Robert Levin, 52, and the head of risk management, Enrico Dallavecchia, 46, will also leave, Washington-based Fannie said in a statement yesterday.

Mudd is seeking to show investors the company is taking action after $9.4 billion of losses the past four quarters eroded capital and sparked concern the company may not weather the worst housing slump since the Great Depression. The decline prompted U.S. Treasury Secretary Henry Paulson to forge a rescue package for the company and smaller rival Freddie Mac.

``It's like sports, when the team is losing, everyone wants to see a new coach come in,'' said Len Blum, managing director at Westwood Capital LLC, a New York-based investment bank. ``I'm not that moved by it. The real issue is they don't have that much capital, not that they need three new managers.''

Fannie fell 11 cents to $6.37 at 6:05 p.m. in after-hours trading. The stock rose 15 percent in New York Stock Exchange composite trading yesterday before the announcement. Freddie rose 20 percent in normal trading to $4.75 and slid about 10 cents after the close.

Still in `Limbo'

``The market will probably receive it well that Fannie's doing something, but the focus will inevitably shift back to the capital injection,'' said Ajay Rajadhyaksha, the head of fixed- income strategy at Barclays Capital in New York. ``Investors care most about whether there's clarity on a Treasury injection or not and under what terms that would happen. Until that happens, we remain in limbo.''

Fannie and Freddie have reported $14.9 billion in net losses for the past four quarters as loan delinquencies rose. Freddie as of June 30 was about $2.7 billion away from breaching capital requirements set by its regulator because of those losses and a delayed equity sale. Fannie had a cushion of about $9.5 billion. Missing the targets would lead to tighter government controls.

``As we move through the bottom of this cycle, maintaining capital, managing credit and driving revenues are the priorities,'' Mudd, who turns 50 today, said in the statement. ``We have to organize and staff accordingly.''

Promotions

Swad was recruited from Time Warner Inc.'s AOL division a little over a year ago as part of a management sweep following a $6.3 billion earnings restatement. His replacement Hisey was hired as controller in 2005. Hisey previously worked as a managing director at BearingPoint Inc. and an audit partner at KPMG LLP.

Levin had been at the company since 1981. He temporarily served as CFO after the board ousted former CEO Franklin Raines and CFO Timothy Howard in late 2004. He will be replaced by Peter Niculescu, 48, who will oversee Fannie's three divisions, single-family mortgage guarantees, capital markets and housing and community development.

Niculescu ran the company's mortgage purchases through the housing boom and bust. Before joining Fannie in 1999, he was co- head of fixed-income research at Goldman Sachs Group Inc.

Dallavecchia, part of the executive team that helped steer Fannie out if its accounting troubles, will be replaced by Michael Shaw, 61.

Freddie Mac CEO

Fannie's announcement may add pressure to Freddie to institute changes, said Joshua Rosner, an analyst with Graham Fisher & Co. in New York.

Freddie is also searching for a replacement for CEO Richard Syron, 64. Syron, who was hired in 2004, was supposed to name a successor within three years.

``It highlights the fact that Freddie still has not addressed the weakness of its management bench,'' Rosner said.

Fannie and Freddie, created to boost homeownership, own or guarantee at least 42 percent of the $12 trillion in U.S. residential-mortgage debt outstanding. They make money by buying home loans and mortgage securities, profiting on the difference between their cost to borrow and the yield on the debt. They also guarantee and package loans as securities, charging a fee.

Paulson last month was granted the authority to inject unlimited amounts of money into the companies should they need it.

Fannie Mae and Freddie Mac yesterday sold $3 billion of short-term notes at yields that suggest companies are still capable of financing their businesses without government assistance. The yields on the debt relative to benchmark rates, while higher than in sales earlier this month, remain lower than a year ago, data compiled by Bloomberg show.

``The real problem at Fannie Mae is that they didn't have enough capital going into this crisis, that's more the fault of our government than the executives,'' Blum said. ``The capital is inadequate, changing management doesn't fix the problem.''

To contact the reporters on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net.