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CEO Throws a Rope to Mortgage Behemoth
By Elliot Blair Smith, USA TODAY
As a young man, Freddie Mac CEO Richard Syron cat-footed atop Boston's rooftops as a TV antenna installer. Unafraid of heights, the skinny kid with bad eyesight enjoyed the steady pay and spectacular views. But it was no place for the faint of heart.
Today, Syron hastens to put Freddie Mac's house in order. Fifteen months after the mortgage-funding giant and government regulators began revealing a series of scandalous allegations about its accounting weaknesses, earnings manipulations, inept board and the machinations of former management, the new CEO recalls how he solved an earlier crisis.
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On a TV antenna installation job atop one of Boston's steep, slate rooftops, Syron says, his assistant, a heavyset cousin, froze with fear. Scrambling to the rescue, Syron tied a length of rope around the chimney, the other end around his cousin, and helped him to the ground.
What will Syron think of this time? Last week, Freddie Mac disclosed that the Securities and Exchange Commission had notified it of a likely enforcement action for securities fraud. In December, Freddie Mac's chief regulator, the Office of Federal Housing Enterprise Oversight, assessed the institution a $125 million penalty. Both scoldings relate to three years of false earnings reports in 2000 to 2002.
The mortgage behemoth also faces the prospect of congressional legislation to overhaul its government charter at a time when competitors have carved into its share of the home-mortgage market, second-largest to rival Fannie Mae.
Created by Congress in 1970, Freddie Mac purchases mortgages from lenders, packages them into securities, then sells them to private investors. This "secondary market" for mortgage loans keeps capital flowing back to lenders, which can then offer more mortgages. Last year, Freddie Mac funded a mortgage every 7 seconds. It owns 19% of the market.
However, Freddie and Fannie contend with a hornet's nest of critics in the banking industry and Congress, who, on principle, oppose the quasi-governmental institutions' participation in private capital markets. Freddie and Fannie are able to borrow near Treasury rates, a big advantage over competitors.
Irish battleship
Syron, 60, who joined Freddie Mac in December after a long career in public service followed by CEO posts at the American Stock Exchange and a publicly traded technology company, says he plans to lead an internal revolution. His objective: change Freddie Mac's "inbred" and "isolated" culture.
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Under former management's obsession with meeting Wall Street earnings targets, the institution drifted badly from its congressional mandate of advancing housing affordability for Americans, critics say.
On the first trading day after the scandal erupted, Freddie Mac's share price fell $9.38 a share, or 16%. After Syron's appointment as CEO, the stock has rebounded 22% to close Friday at $66.63 a share.
Symbolic of the big job Syron confronts, a huge construction crane is parked adjacent to the company's campus headquarters in McLean, Va. And an uncompleted overpass emerges from a glass-and-steel office tower without quite leading anywhere yet.
In his favor: Syron, a former president of the Federal Reserve Bank of Boston and a member of the Federal Reserve's monetary policymaking Open Market Committee from 1989 to 1994, is well regarded by regulators. He is respected by investment bankers, too, having led the merger of Amex with Nasdaq in 1999, and then, in his next job as CEO of Thermo Electron, transforming a rambling, money-losing conglomerate into a profitable company.
Syron speaks with a rich Boston brogue that exudes upper-crust money and class, neither of which would describe his hand-me-down youth.
He grew up in a cold-water flat on the top floor of a three-story tenement known euphemistically as an "Irish battleship." A different branch of the family lived on each floor, he says. His parents were working-class immigrants his father a Navy cook, his mother a maid who believed in better tomorrows.
"A lot of people have paid good money for this accent, and I'm not going to give up mine, which I got for free," Syron said over lunch recently at an expensive restaurant near Washington. He attacked his plate hungrily while a chauffeured limousine waited outside with "more phones than the house I grew up in."
During a two-hour conversation, Syron outlined his priorities for Freddie Mac:
1) Bring audited financial statements up to date and begin filing shareholder reports to the SEC in early 2005. (Freddie Mac recently disclosed full-year 2003 financial results, including a $4.9 billion profit, less than half its previous year's total despite the USA's record mortgage market. But Syron suspended quarterly filings until next year as he tries to unravel the mysteries of the institution's balance sheet.)
2) Repair congressional relationships and rebuild credibility with regulators. The cops on Freddie Mac's beat are OFHEO, an overmatched agency goaded into action by the company's earnings scandal, and the SEC, which in 2002 Freddie Mac agreed to begin voluntarily reporting to it hasn't yet despite the long-standing exemption Congress granted to securities of government-chartered corporations.
In undertaking reforms, Syron oversees "a veritable army" of special accountants, lawyers and consultants. He inherited them after the scandal erupted, and they pique his patience as they lumber forward. Their cost last year alone: $172 million.
To complete the job, Syron is building his own executive team, capped by the appointment this month of former FleetBoston Financial president Eugene McQuade as Freddie Mac's president. McQuade is in line to succeed Syron when he retires in 2008. The transition may occur sooner if OFHEO follows up its threat to force Freddie Mac to separate the jobs of chairman and CEO, both of which Syron holds now.
Early in his career, Syron worked as a shade-tree mechanic while dreaming of economics and finance. College friends at Tufts University, where he earned master's and Ph.D. degrees, used to say of the student with the thick glasses and glazed expression, "That's Syron on the couch, and he's thinking about the economy." He met his wife, Peggy, in a bar but seemed bereft of traditional pickup lines. "I tried to graph our relationship," he says. A dedicated Bostonian, he winces upon mention of the perennially unlucky Red Sox.
From those modest beginnings, Syron has come to own a nine-bedroom, 19th-century residence on an acre lot near Boston that he recently put up for sale. Its assessed value is $1.7 million. He has at least two other expensive properties, several cars and a bank account fattened by about $11.3 million after he divested most of his stockholdings last year at Thermo Electron, according to Thomson Financial.
As Freddie Mac's CEO, Syron will be paid at least $2.4 million in salary and a guaranteed bonus this year to repair the scandal-ridden mortgage lender. He stands to benefit also from $8.8 million in restricted stock if he sticks around for at least three years.
That's no certainty. His December appointment made him Freddie Mac's third chief in just six months.
Criticized by investigators
"Steady Freddie" and Fannie Mae created the world's best-capitalized mortgage market. But Freddie's success spawned the staggering accounting fraud that cost the top three executives their jobs in June 2003 for orchestrating a scheme to hide $5 billion in profits for the years 2000, 2001 and 2002 so they could be tricked out in future years.
In the government's special examination of Freddie Mac released in December, investigators criticized the institution's longstanding "disdain for appropriate disclosure standards, despite oft-stated management assertions to the contrary, (that) misled investors and undermined market awareness of the true financial condition of the enterprise."
The controversy has moved to the federal courts, where regulators and two of the former executives wrangle over tens of millions of dollars in disputed compensation. Shareholder litigation is pending. Congress, the SEC and a rejuvenated OFHEO also are scrutinizing the chastened Freddie Mac.
"You've got a lot of masters," acknowledges former Korn/Ferry CEO Windle Priem, who recruited Syron to fill Freddie Mac's leadership gap in his final executive-search assignment before retiring last year.
Priem describes Syron as "driven" with a "vision." What distinguishes Syron from most big-company executives, Priem says and what may have given him the edge over four other finalists for the job is that he puts his company before himself.
"Most of the guys that are CEOs have enormous egos," Priem says. "(Syron's) not a big ego guy, but at the same time, he's a very forceful leader. At the end of the day, he gets the job done."
The alternative, as Syron knows, is failure and extinction. The self-described "industrial anthropologist" talks of traipsing through Pittsburgh's abandoned steel mills and recounts the fading history of Waterbury, Conn., where his wife grew up, once known as the "brass capital of the world."
Syron's policy views are shaped by his long career in key policy posts, including a job as aide to former Federal Reserve chairman Paul Volcker, who once taught him keen lessons on prudence and propriety. It was late in 1981 at Lausanne, Switzerland, Syron recounts, when the towering Fed chief began baying like a basset hound between confabs with foreign delegations at the sad shape of his wrinkled wardrobe.
Unwilling to pay hotel housekeepers $6 to iron his disheveled shirt, Volcker rebuffed his aide when Syron offered to press the great man's shirts for him. "No, Syron," Volcker told him, in the cigar-cured growl Syron delights in imitating. "They pay you to be my assistant, not to iron my shirts. I'll do it myself."
Conflicting demands
But what would Syron say today to his mother, the "Irish girl" who worked as a maid, and his father, the former restaurant dishwasher with bad teeth, if they came to him for a mortgage?
The question cuts to the heart of conflicting demands on Freddie Mac. Alan Greenspan has warned that Freddie and Fannie are so big that a default by either could wreck the financial system. At the same time, the Bush administration is urging both institutions to fund more mortgages for Americans with low incomes and sketchy credit.
"There's no nice, neat answer," says Syron, who thinks hard, these days, about Freddie Mac's mission and the related question of whether the congressional charters Freddie and Fannie enjoy unfairly skew capital markets and mortgage competition.
Whether or not Freddie Mac would fund his working-class parents' mortgage two families lived in the Syron house to make ends meet the CEO told Congress in February it was a VA loan after World War II that helped put the Syron family on its feet.
That kind of government hand-up, which facilitates free markets in ways that private institutions traditionally have been reluctant to pursue alone, has been working-class society's seed capital for decades.
It's what enabled his family of Irish immigrants to become Americans.
With the optimism that buoyed his youth, and steers his course at Freddie Mac, Syron says of that time, "There was this expectation largely fulfilled that things would be better than they are now."
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