In extraordinary times, exceptional things are often asked of ordinary people.
There’s no doubt that Freddie Mac has been going through unimaginable changes in the past year that have put its officers and employees under tremendous pressure: an ongoing accounting investigation by regulators; the prospect of continued housing-related losses; and uncertainty about the long-term viability of the company.
That’s the environment into which David Kellermann was thrust when he was named interim-chief financial officer in September. And it was the world he left behind, along with his wife and young child, when he died Wednesday, hanged in his basement, an apparent suicide.
A self-described "financial services executive with close to 20 years of experience," including degrees from the University of Michigan and George Washington University’s Graduate School of Business, Kellermann was an expert in the complex mortgage-backed securities and derivatives that are clogging the nation’s home mortgage industry.
“With that critical experience, I have succeeded at an ever-increasing level of responsibility in managing a Company with $1 trillion-plus balance sheet,” Kellermann wrote in his profile on the LinkedIn social networking site. “My definition of success is the full utilization of my experience and abilities, and those of a carefully chosen and trained team along the lines of excellence.”
By all accounts, Kellermann was devoted to his job and to Freddie Mac’s mission of expanding homeownership to millions of American families. Neighbors said he also devoted himself to the American Dream that was Freddie Mac’s mission to advance.
“They described this family as a family that embraced life,” CNBC’s Hampton Pearson reported. “First on the block to put up Christmas decorations, that kind of thing, and participate in neighborhood functions going on.”
Word of Kellermann's death brought a series of condolences from government officials.
"Our deepest sympathies are with his family and his colleagues at Freddie Mac during this difficult time," said Treasury Secretary Timothy Geithner in a statement.
“David was a man of great talents,” said John Koskinen, Freddie Mac’s interim CEO, also in a statement. “He dedicated those talents to Freddie Mac for more than 16 years, serving in many business and finance capacities before recently taking the reins as acting chief financial officer. His extraordinary work ethic and integrity inspired all who worked with him. But he will be most remembered for his affability, his personal warmth, his sense of humor and his quick wit. David was a friend to many in the Freddie Mac family, and we mourn his passing.”
But the challenges the 41-year-old Kellermann faced in his job would test the most seasoned financial executives. Last September, after the falling home prices and the global financial panic sent mortgage giants Fannie Mae and Freddie Mac reeling, the government stepped in and nationalized the two quasi-independent agencies as the rising pace of foreclosures sent them reeling toward insolvency.
Last month, Freddie Mac announced it had lost more than $50 billion last year. Despite $44 billion in government loans and a $200 billion backstop in guarantees from the Treasury, Freddie and Fannie still face huge losses as home prices continue falling in many parts of the country.
“Freddie Mac, together with Fannie Mae, are going to be suffering huge losses,” said Peter Wallison, a fellow at the American Enterprise Institute and author of several books on Fannie and Freddie. “Many of these have already come to light. I expect many more to come to light.”
The company, which owns or guarantees about 13 million mortgages, is also the subject of ongoing investigations by both the Securities and Exchange Commission and the Justice Department, concerning accounting issues.
Freddie Mac is also undergoing an internal probe into a $2 million lobbying campaign aimed at quashing proposed new regulations on the company before the housing market collapsed, the Associated Press reported.
One of Washington's leading law firms, Covington & Burling LLP, spent more than a month interviewing current and former Freddie Mac employees and executives, the AP reported. The inquiry followed reports that the company had secretly hired Republican consulting firm DCI Group of Washington to stop a proposal in the Senate in 2005 sponsored by Sen. Chuck Hagel, R-Neb., who has since left the Senate.
The legislation would have forced Freddie Mac and Fannie Mae to sell hundreds of billions of dollars worth of assets from their portfolios of mortgages and mortgage-backed securities. At the time, the portfolios were highly lucrative, but their value plunged when the housing market collapsed.
The investigations into Freddie Mac's accounting and lobbying efforts are still under way. There is no evidence that Kellermann was personally responsible for any wrongdoing. As the CFO, though, he would have been a central figure in responding to regulators’ questions about the company’s operations.
The pressures have taken a toll on other managers and brought heavy turnover in Freddie Mac’s senior ranks. The company’s board of directors was replaced when the government seized the company last fall. Last month, the government-appointed chief executive David Moffett resigned five months after taking the job.
“Here is a guy (who in) the last five years has had six different bosses,” said Jeffrey Sonnenfeld, a professor at the Yale School of Management. “The turnover there has been quite great. This new board is very good, but you wonder who could this person reach out to if there was an issue — changing bosses, interim roles, the pressure there.”
For those executives who stayed, Congress has remained critical of some of the company’s decisions, including the round of bonus payments designed to stem the exodus of top executives like Kellermann. The AP reported that Kellermann got $170,000 and was expected to get another $680,000 over the next year.
Last month, House Financial Services Chairman Barney Frank, D-Mass., moved to cancel Freddie Mac's executive bonuses after the House voted to tax at 90 percent the $165 million in bonuses that American International Group doled out to employees.
Congress has been sour on the two government-owned mortgage companies since a 2003 accountant scandal that forced the company to restate $5 billion worth of past earnings. In November 2007, Leland Brendsel, Freddie Mac’s former chief executive, was forced to pay $2.5 million in fines to the government, give back $10.5 million in salary and bonuses to the company and waive claims against the company for compensation worth $3.4 million.
Critics say Fannie and Freddie’s problems were of their own making. As private mortgage lenders generated huge volumes of subprime loans from 2004-2007, Fannie and Freddie jumped into the market with both feet.
“They voluntarily undertook to buy very bad mortgages because, I believe, they were trying to prevent Congress from tightening their regulations after their financial crisis,” said Wallison. “I think they were hoping that by buying many subprime mortgages that they were demonstrating that they were essential to improved housing and homeownership and increasing the amount of homeownership.”
When the housing market collapsed, that strategy failed, leaving taxpayers on the hook for hundreds of billions of dollars in losses.
All of which has left the long-term future of these agencies in doubt. For now, Congress is focused on stabilizing the two companies to help revive the housing market. But many on Capitol Hill believe the solution to future failures is to dramatically shrink Fannie and Freddie, or replace them with new entities to promote mortgage lending.
Those may have been dire prospects for a man with a $900,000 home, a young child and a sense of mission at a company to which he devoted much of his adult life.