CEO Picks Suggest Fannie Would Dominate in a Merger of GSEs

As wards of the same federal conservator, Fannie Mae and Freddie Mac rarely diverge these days, but when they do it speaks volumes about where the two companies are headed.

Fannie went in-house to recruit three of its last four leaders, including Timothy J. Mayopoulos, who was promoted to chief executive officer from general counsel last week. Freddie has taken the opposite tack, choosing three of its last four CEOs from outside its ranks.

These patterns support the widespread belief that the two GSEs will eventually merge as a prelude to winding them down, with Fannie as the dominant partner, according to more than a dozen veterans of the two companies. Both GSEs have suffered from massive employee turnover, so choosing someone from within the ranks was likely intended at least in part to shore up morale at Fannie, while recruiting from outside signals continued housecleaning at Freddie.

"Fannie is sending a message that they feel they have better people inside than outside," says Robert Wagner, a senior client partner at executive search firm Korn/Ferry International. "Fannie Mae probably recognizes that their image can't go much lower in the marketplace and they want to send a message to keep people there."

Freddie, on the other hand, is "being a little more competitive and forward-thinking by acknowledging they don't have all the answers, and they are bringing in a fresh perspective and best practices," says Barry Shulman, a principal at the San Francisco executive recruiting firm Shulman Associates.

Fannie reported a profit of $2.7 billion for the first quarter and for the first time since the 2008 government takeover said it would not require additional taxpayer aid. Freddie also posted a profit, of $577 million, but requested an additional $19 million in taxpayer funds.

As the larger GSE, with nearly double Freddie's guarantee volume, Fannie has a deeper management bench, some experts say, though others are quick to emphasize that a wind-down would take years and merger plans aren't in view any time soon.

The Federal Housing Finance Agency, which oversees Fannie and Freddie, says the number of senior executives has fallen to about 70 each, a 25% drop from before the government placed them into conservatorship in 2008.

"The problem with going outside is you have an organization that is already demoralized and the new person comes in with the idea of cleaning house, which means continued turmoil and roiling of the troops, and there's a magnifying effect on the internal sales force," says Wagner. "It's the message it sends to the public, the regulators on the one hand versus the troops on the other." Headhunters "know that the organizations are unhappy…and we know they're vulnerable to being raided."

Neither Fannie nor Freddie nor the FHFA would comment for this story.

To be sure, Mayopoulos, 53, has only spent three years at Fannie. His predecessor as CEO, Michael J. Williams, was a 21-year Fannie veteran. By picking its general counsel to fill the top spot, Fannie appears focused on managing risk and the myriad legal issues roiling the industry. Although the policy consensus is that the GSEs should be phased out, Washington continues to debate what should take their place, so the companies could remain in their limbo state for years.

A problem with trying to read the tea leaves involving the CEO picks is that both Mayopoulos and Layton are essentially caretakers with ultimate decision-making falling to Ed DeMarco, the acting head of the Federal Housing Finance Agency.

Although Fannie and Freddie still have their own boards, which hired search firms to recruit CEOs, the FHFA had final say over the appointments.