Paulson Taps Allison, Moffett to Run Fannie, Freddie

By Christopher Condon

Sept. 8 (Bloomberg) -- Herbert M. Allison Jr. and David M. Moffett, picked to run Fannie Mae and Freddie Mac, face an uphill battle in bringing the mortgage-finance companies back from the brink of collapse.

Allison, 65, the former head of retirement-plan manager TIAA-CREF, was named chief executive officer of Washington-based Fannie. Moffett, 56, a Carlyle Group executive who was once vice chairman of U.S. Bancorp, will head McLean, Virginia-based Freddie. Treasury Secretary Henry Paulson yesterday put the companies into conservatorship and ousted their CEOs to avert ``systemic risk'' to financial markets.

Allison and Moffett are stepping in where their predecessors failed. Fannie CEO Daniel Mudd and Freddie's Richard Syron, both hired in 2004 to help the companies recover from accounting scandals, led the firms into riskier investments, moving well beyond their public mission of housing affordability, and then failed to react quickly enough when the subprime-mortgage market began to deteriorate in 2007.

``Daniel Mudd and Dick Syron, have been very slow to recognize the depth of the problems or to raise enough capital to deal with it,'' said Paul Miller, an analyst with Friedman Billings Ramsey & Co. in Arlington, Virginia. ``The government wasn't going to allow them to muddle through this mess.''

Moffett brings his history in risk management and analysis having served as chief financial officer at U.S. Bancorp in Minneapolis from 2001 until early 2007. Allison's experience in the 1998 bailout of hedge fund Long Term Capital Management while president of Merrill Lynch & Co. may help the Treasury in its efforts to round up private-sector support for Fannie.

Lower Pay

``If he's there to run the basic business of buying and repackaging mortgages, that's probably something that Allison is very capable of doing,'' Geoff Bobroff, a former Securities and Exchange Commission lawyer who is now an investment consultant in East Greenwich, Rhode Island, said in an interview.

Paulson this weekend took unprecedented measures to end the crisis of confidence in Fannie and Freddie, which account for the majority of new mortgages and own or guarantee almost half the $12 trillion in home loans already outstanding. Mudd and Syron, who received almost $30 million in combined compensation last year, will serve in a transition period as paid consultants.

Pay for Allison and Moffett ``will be significantly lower than the outgoing CEOs,'' Federal Housing Finance Agency Director James Lockhart, the companies' regulator, said in a statement yesterday.

A Controversial Figure

Allison, who served as national finance chairman on John McCain's unsuccessful 2000 presidential campaign, headed New York-based Teachers Insurance and Annuity Association - College Retirement Equity Fund for five, sometimes controversial, years.

Allison created TIAA-CREF's wealth-management division and increased its total assets by 68 percent to $435 billion at the end of 2007 as the company stepped up marketing to investors beyond its base. He faced criticism from clients for bringing Wall Street practices, including job cuts and higher fees, to an institution that manages savings for teachers and academics.

``Allison basically took an organization that had styled itself as a Mother Teresa organization and put it in a more business-like setting,'' Burton Greenwald, a mutual-fund consultant in Philadelphia, said in an interview at the time of Allison's departure from TIAA-CREF in April.

Long Term Capital Management

A philosophy major at Yale, Allison spent 28 years at New York-based Merrill, rising from a junior employee to president and chief operating officer. He quit in 1999 after losing out on getting the top job to David Komansky, who retired in 2003.

Allison played a key role in the negotiations that led to LTCM bailout. Allison is quoted in the 2005 book ``What Goes Up, The Uncensored History of Modern Wall Street,'' by Eric Weiner, as saying ``the best idea was to take an approach that was deliberately crude.''

Allison said he and other bailout supporters threatened other large banks with the potential public fallout if they let the fund fail.

``Herb Allison is a proven leader in overseeing complex and challenging financial matters and is well-suited to leading Fannie Mae forward,'' Roger W. Ferguson, TIAA-CREF president and CEO, said in an e-mailed statement.

Bobroff said Allison wouldn't be especially qualified to lead Fannie from a risk-management perspective.

``I don't know what Paulson envisions for these individuals to do, but Allison doesn't have the background for risk management,'' Bobroff said. ``He would need others around him.''

Risk Manager

Moffett, by contrast, has extensive experience in risk management and financial analysis.

He stepped down at U.S. Bancorp in February 2007 as the company shifted away from mortgages and consumer loans to build fee-based businesses. Washington-based Carlyle, headed by David Rubenstein, started a financial-services group that year and brought in Moffett and other executives to work in the group.

Rubenstein declined to comment through Carlyle spokesman Chris Olman. ``We wish him well,'' Olman said.

Moffett got a bachelor's degree in economics from the University of Oklahoma in Norman in 1974 and a master's degree in economics the following year from Southern Methodist University in Dallas.

Moffett joined U.S. Bancorp predecessor Star Banc Corp. in 1993 after leaving Bank of America, where he was a senior vice president. He was named to the board of directors of Armonk, New York-based MBIA Inc., the troubled bond insurer, in May 2007.

Accounting Restatements

Mudd, a one-time Marine and the son of former CBS Evening News reporter Roger Mudd, ran General Electric Capital Corp.'s Asian businesses during the region's slump in 1998. In 2004, four years after joining Fannie as chief operating officer, he took over for CEO Franklin Raines as the company tried to recover from an $11 billion accounting restatement and securities fraud charges.

Syron, a former head of the American Stock Exchange, was hired by Freddie in 2004 to help the company move on from a $5 billion accounting restatement and restore investor confidence. A native of Watertown, Massachusetts, Syron did just that as CEO and of industrial instrument maker Thermo Electron Corp.

He consolidated operations at that company, now called Thermo Fisher Scientific Inc., spinning off units and turning it into the largest maker of laboratory instruments.

`They're Not Victims'

Fannie has lost 88 percent of its market value since Mudd was elevated from his interim post as CEO in June 2005. The stock, which was near $60 a share at the time of his promotion, reached a closing high of $69.49 in June 2007 before beginning a freefall to $7.04 on Sept. 5 in New York.

Freddie followed a similar pattern, starting out near $60 at the time of Syron's hiring, peaking at $73.70 in 2004, then beginning a drop in 2007 to $5.10 three days ago. As of the end of last week, shareholders had lost about 91 percent during Syron's tenure.

Fannie plunged 49 percent in European trading today and Freddie dropped 50 percent as common and preferred shareholders will bear losses ahead of the government. Fannie fell $3.47 to $3.57 by 10:24 a.m. in Frankfurt, and Freddie slipped $2.55 to $2.55, according to data compiled by Bloomberg.

The Treasury's takeover yesterday is primarily a ``stopgap to try to prevent the mortgage market from falling apart,'' former Federal Reserve Bank of St. Louis President William Poole said on Bloomberg Radio.

The takeovers bring Fannie, formed after the Great Depression and spun off in 1968, and Freddie, created in 1970, back into the government fold. It's the biggest step yet in officials' efforts to grapple with a yearlong credit crisis that has caused more than $500 billion of losses and writedowns.

``The statements by Paulson and Lockhart that this is nobody's fault, just a flaw in the business models and the housing downturn, that's ridiculous,'' said Armando Falcon, Fannie and Freddie's former government supervisor from 1999 through mid-2005. ``These companies made a conscious decision to take on excessive risk in order to maximize profits and bonuses. They're not victims.''

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net