Taking stocks: Finance chiefs have a lot to answer for

Image: David Lyttleton

Fannie Mae
The rescue of Fannie Mae and Freddie Mac was unquestionably the single biggest indication that the credit crunch was going from bad to appalling. The two organisations ­ mandated by Congress to support the US mortgage market and yet having their own Wall Street listings ­ were not without their own chequered history.

Taken into conservatorship early this September, Fannie Mae was effectively nationalised by the US government. The previous month the business declared a dividend of five cents a share, down from 35 cents so as to conserve almost $2bn of capital.

Fannie Mae’s CFO at the time of the crunch was (and still is) Stephen Swad. Aged 46, he became CFO just over a year ago. He had previously been CFO at AOL for four years, which must have given him plenty of experience in the business of difficult markets. Swad also has finance function experience with Turner Broadcasting and Time Warner. His proving ground for his accountancy skills was at KPMG and the Securities and Exchange Commission, where he served as deputy chief accountant.

Swad received a $500,000 signing-on bonus when he joined Fannie Mae. On top of a base salary of $650,000 last year, he also earned a $955,000 annual bonus and a long-term incentive award worth $3.2m.

Sounds great, but Swad joined an organisation that had been through a hell of a time. An interim CEO and an interim CFO, Rob Levin, were appointed at the end of 2004 after it was revealed that Fannie Mae’s accounts and controls weren’t up to scratch. In fact, the business was forced to withdraw its accounts for the period 2001 to 2004 and was declared to be “significantly undercapitalised” by one of its most important regulators. Levin stepped into a different role in January 2006 and was succeeded by Robert Blakely, CFO of MCI. But Blakely stepped down the following year and was succeeded after a transition period by Swad. By the time Fannie Mae published its 2006 annual report, the accounts had been restated, the controls tightened and the balance sheet significantly strengthened ­ but Fannie Mae was getting onto its fourth FD in as many years. What role did such a high level of churn in the finance department play in the organisation’s downfall?

Freddie Mac
The chief financial officer of Freddie Mac was Anthony Piszel, 53, known as ‘Buddy’, and was an accountant right down to his MBA degree from Golden Gate University. A former audit partner with Deloitte & Touche, he also served with the Financial Accounting Standards Board. He spent more than a decade in the finance department at Prudential Financial before joining healthcare group Health Net Inc in 2004.

Barely two years later, however, he joined Freddie Mac as CFO, receiving a $2.5m golden hello. Piszel introduced greater disclosures, including a new non-GAAP financial measure called ‘adjusted operating income’.

Piszel earned a salary of $650,000 in 2007 plus a bonus of $1.35m ­ about 35% higher than target ­ plus another $200,000 in restricted stock units and $3.2m in a long-term equity award. His performance that year was deemed to be “above plan” in the realm of accounting and controls and in putting Freddie Mac in a position to resume quarterly reporting, a practice it had suspended several years earlier. Results for 2001 through to 2002 had had to be restated, and the group was late in reporting for years after that.

Internal controls were in an unacceptable state and it took years to sort them. While work on that score had already been taking place when Piszel arrived, his skills were said to provide the finishing touch.

Piszel was fired, however, barely two weeks after the bail-out in September. While the sacking was reported to be “without cause”, Freddie Mac’s regulator said that severance payments totalling more than $4m should not be paid.

Piszel was the third FD to leave the company in five years, and was the fourth in eight years. He was replaced by Freddie Mac’s controller and principal accounting officer, David Kellermann, but even he won’t necessarily have the job for long as he takes on the role on an interim basis until a permanent successor is appointed. Kellermann has been with the mortgage firm for 16 years and has a masters in finance and a bachelors degree in political science and accounting ­ a good if unusual combination, perhaps, for the government-supported organisation.

Lehman Brothers
A fawning profile in The Wall Street Journal last May drew attention to CFO Erin Callan, a tax lawyer-turned-investment banker who had been promoted as recently as December 2007 to the CFO role without having been in any way encumbered by such a thing as experience in accounting, or even the finance department.

The 42-year-old was said to prefer a slimmer volume of daily reports than did her predecessor, which presumably left her more time to (again, as The Wall Street Journal put it) “embrace” television, making frequent appearances on CNBC and the like. In January this year, she forecast the bank would make a return on equity in the mid-teens percent. By May, ROE was around 9%. “Sometimes,” she said, “in hindsight, your forecast will not have been accurate based on the real world outcome.”