Top level changes at Fannie Mae

Fannie Mae Chief Executive Officer Daniel Mudd replaced three top deputies in an effort to restore investor confidence after record losses and a 90 per cent 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, Washington-based Fannie said in a statement yesterday. Peter Niculescu, 48, will take over from 52-year-old Chief Business Officer Robert Levin. The head of risk management, Enrico Dallavecchia, 46, will also leave.

Mudd is shaking up Fannie’s management 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 US Treasury Secretary Henry Paulson to forge a rescue package for the company and smaller competitor 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 was little changed in Europe, dropping 1 cent, or 0.2 per cent, to $6.47 by 11:19 a.m. in Frankfurt. The stock rose 15 per cent in New York Stock Exchange composite trading yesterday before the announcement. Freddie gained 5 cents, or 1.1 percent, to $4.80, after yesterday rising 20 percent in New York.

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 as part of a management sweep following a $6.3 billion earnings restatement. His replacement Hisey, previously a managing director at BearingPoint Inc. and an audit partner at KPMG LLP, was hired as controller in 2005.

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. As his replacement, Niculescu 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: Freddie may also have to make management changes following Fannie’s announcement, said Joshua Rosner, an analyst with Graham Fisher & Co. in New York.

Freddie is 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 borrowing cost 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 if needed.

Fannie Mae and Freddie Mac yesterday sold $3 billion of short-term notes at yields that suggest the 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.”