Another Swat for Fannie - This Time over Severance

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Compensation and benefits for outgoing Fannie Mae executives Franklin Raines and Timothy Howard startled observers, even as some said the company lowballed the true value of the benefits package.

Even in areas of relative certainty, Fannie's disclosure in a securities filing late Monday was far from forthcoming, critics said.

"Despite the terrible underperformance of this company, Fannie Mae's board had to be dragged kicking and screaming to fire Mr. Raines," and "its decision to award this severance package is another indication that this board sees stockholders as the enemy to be fleeced instead of the bosses and the owners of the company," wrote Richard Bove, an analyst with Punk Ziegel & Co., in a research note Tuesday. "Even if Fannie Mae's accounting was in picture-perfect condition, this board should have been pressuring Raines to perform for the stockholders or get out."

In the filing, Fannie said Mr. Raines' options would be worth $5.5 million if they were exercised at a recent market price of the stock.

Lucian Bebchuk, a finance and economics professor at Harvard Law School who has written about executive compensation, said, "There is no question that the values are substantially higher than the numbers one gets just from looking at the values if one were to exercise them - these are very long-term options." Fannie was "very careful not to say that this is the value of the options. They just give you the result of a numeric calculation."

A standard method of calculating options, Mr. Bebchuk said, would yield a far greater value.

In connection with Mr. Raines' Dec. 21 retirement, Fannie said it gave him options to buy 233,799 shares at an exercise price of $69.43 per share. It said in the filing that the market price of the shares as of Dec. 21 was $215,095 more than the exercise price.

But assuming 10% appreciation in Fannie's stock over the next year - a modest figure compared with the stock's annual return in the 1990s - those options alone would be worth $1.6 million.

"Retirement benefits often provide a value that is not clearly on investors' radar screen, because companies do not have to put a dollar figure on the monetary value of benefits," Mr. Bebchuk said. "What is happening here is a very good illustration of this point."

The value of other benefits was also uncertain. Mr. Raines walks away with options to buy about 2 million shares of Fannie's common stock, including those granted at retirement.

Mr. Howard, who did not receive additional options under the terms of his resignation, has options to buy 481,600 shares, which the company said would be worth $4.4 million if exercised at the Dec. 21 closing price.

The company will also pay Mr. Raines $1.4 million a year - payable until he and his spouse die - under a pension plan. Mr. Howard's annual pension is $433,000.

A deferred compensation plan had accrued $8.7 million for Mr. Raines as of Nov. 30 and $4 million for Mr. Howard.

In its filing, Fannie did not tally up the various components and provide a total dollar figure for the compensation packages. …