Printer Friendly

Saying goodbye to Mr. Birk.

Saying Goodbye to Mr. Birk

Roger Birk played the perfect "operation guy" to David Maxwell's role as "architect" of policy. So you'd expect that a good deal of the credit should go to him for Fannie Mae's string of record quarterly earnings - 14, in fact, by the time we caught up to Birk in mid-July of last year in San Francisco.

But if you think it should be relatively easy getting him to take the credit for such a record, you haven't met him and tried to give it to him.

Birk explains that his management style is to build strong accountability into the senior management posts directly under him. Then, if his managers make the right decisions, the credit also goes to them and not himself. Of course, bad decisions and blame are another story.

Birk says he hasn't lost a lot of top managers during the time he spent at Fannie Mae or during his long successful tenure at Merrill Lynch & Co., Inc. - a firm he joined in 1954 and left as chairman and CEO in July 1984. The word inside Fannie Mae is that he is "extremely well-liked" at all levels of the company - with his trademark sarcasm that is reportedly always on. Another feature that is pure Birk is that "His B.S. barometer is unbelievable. You cannot B.S. him," reports someone who has seen him in action.

Birk was drafted off Fannie Mae's board, basically out of semi-retirement in August 1987, to fill the vacuum left by the revolving door arrival and departure of a string of Fannie Mae presidents. Birk had served on Fannie Mae's board of directors since May 1985. Press reports before Birk was given the job were full of talk that it might be tough to find a strong executive that could work harmoniously with then Fannie Mae Chairman and CEO David Maxwell.

The departure that left the president's job vacant once again immediately before Birk was recruited was Frank Cahouet - an admired executive who, roughly nine months after he signed on at Fannie Mae, left to become chairman, president and CEO of Mellon Bank Corporation, Pittsburgh. And Birk, who was already financially secure from his Wall Street career, and who had already enjoyed the full lime-light of the top job as Merrill chairman for three and one-half years, could easily work in a lower profile operations job with no greater ambitions than running the corporation.

Immediately before being recruited to fill the president's post, Birk was chairman and a board member of the International Securities Clearing Corporation. But it was during his long, 30-year tenure at Merrill that he rose to the top of the heap. Some of what he saw on Wall Street strongly shaped his approach to running Fannie Mae. He was head of perhaps the most powerful firm on the street when the securities markets encountered severe troubles in the 1960s and the back-office paper crunch threatened the industry.

He has been described by one who observed him closely at Fannie Mae as a "great chief operating officer." The ultimate tribute was that in a period where there was roughly a "several hundred percentage point increase in profits, there was less than 5 percent increase in the head count. That was Roger."

An analyst who has followed Fannie Mae stock for 30 years says Birk "picked a great time to come in." The stock price runup achieved during Birk's tenure certainly left an enviable record for a chief operating officer. Elliot Schneider, of Gruntal & Co., Inc., New York, has posted on his office wall a chart showing a history of the trading price of Fannie Mae stock. Between the time the board gave Birk the nod and the time he came officially on board in November 1987, Fannie Mae's stock was trading in the range of $25 to $30 per share. But, Schneider says, the current price of roughly $60 a share represents a climb from more like $10 a share because the stock did a three-for-one split after Birk joined up.

But Schneider, who admits to only following the stock and not being an expert on inside operations, says no one Fannie Mae executive should be singled out for all of the credit for the amazing performance of this stock. Schneider says, "A whole lot of events happened and singling out credit to nonsense. Even giving credit to Maxwell solely would be nonsense."

One thing Schneider does credit Birk for is the systems-development strides that Fannie Mae made during his tenure. This was a major achievement because it really positioned the company to do business in a financial world that was demanding finer and finer cuts of management and securities information. Prior to Birk, Fannie Mae had been struggling unsuccessfully to implement an earlier system called "Laser" that missed a long string of implementation deadlines. As Schneider puts it: "On his [Birk's] watch they finally got MORNET in place. It took them 10 bloody years to put the damn computer in."

Despite those delays, the long-time analyst has been high enough on the stock to have bought what he terms "an unconscionable interest" in it given the size of his assets.

In mid-July, when Mortgage Banking interviewed Birk, it had been roughly a month since his prospective retirement from Fannie Mae was announced. Birk officially departs the president's job at the end of January to be replaced by Lawrence Small, formerly vice chairman of Citicorp/Citibank.

At the time of the interview, some critical legislation to revamp the regulation and oversight of both Fannie Mae and Freddie Mac had begun to move through the Congress. The legislation was making headway in the House this summer and there seemed to be a solid chance it would pass before the end of last year. Birk himself, in a speech to the Western Secondary Mortgage Market Conference in San Francisco, put the odds at a "little better than 50-50" that Congress would do something before year-end 1991.

The key focus last summer was on establishing prudent capital requirements for the two agencies and adopting appropriately sensitive stress tests to gauge if the capital cushions were sufficient to withstand bolts and dives in interest rates. Another issue that Birk talked about in his speech was splitting regulatory authority between a mission regulator and a safety-and-soundness regulator. There was some concern from early proposals that any new programs would get caught up in seeking separate go-aheads from the split regulatory entities. Birk's humor was apparent when he sized up the impact of such a proposal to the conference: "What we have now is a dependable and very agile system. The last thing anyone wants to do is tie its shoelaces together in the name of keeping its feet on the ground."

The issue was, and still is, occupying much of the time of senior management and others at Fannie Mae. But even though this major legislation was moving down the pike requiring high-level attention from Fannie's senior managers, the record earnings reports still were coming in like clockwork.

Roughly a week before we sat down to talk with Birk, a Fannie Mae release announced the 14th consecutive quarter of record earnings. For the second quarter of 1991 Fannie Mae reported net income of $331.5 million or $1.21 per share fully diluted. That was up from the prior quarter's record $320 million in earnings.

Here are a few observations from Roger Birk about management practices, Fannie Mae's strengths and how to size up earnings records.

MB: I wanted to get some of your reflections on what its been like running this corporation. What stands out is the second quarter earnings representing the 14th consecutive quarter of record earnings. How remarkable an achievement is that? How many companies perform that well?

BIRK: I wouldn't put the emphasis on the 14 consecutive. Going back to my time on Wall Street, I think companies try to put strings of back to back quarters together, and in some cases when it goes for a long time, it raises the question of whether or not people are trying to manage earnings. I think in our case it's simply a fact of life of where we came from - from a lack of profitability or break-even point - at least when I was on the board in 1985 and 1986. It was an outgrowth of matching the portfolio. Of course, in this business, kind of unlike my prior life, once you get that done right, when January 1st starts, you have a pretty good idea of where you might be. It helps your planning mode. So I think it's coincidental rather than planned. We simply do not have a corporate philosophy that every quarter has to exceed the previous quarter, but it's been nice.

MB: There has been a rather enviable march of earnings, and the performance statistics have been strong. How much of this can we credit to a favorable interest rate environment, and how much to risk-based capital rules, and how much to favorable demographics and how much credit to you?

BIRK: Well, I don't know that you give much credit to me. I remember when I first met David Maxwell, after I came here, I said, "Well, how do we divide up the responsibilities?" He said, "Well, we have eight senior executives. You have them all." That was the end of that conversation. So I guess if it had gone the other way, I'd be sitting here telling you why it's all my fault. But having said that, David, of course, is the architect.

Going back to the reasons for profitability, the most significant reason was our own duration matching of our portfolio, which was well underway before I got there. If anyone gets credit for that it's Tim Howard, currently the chief financial officer, who led that activity before we really identified it as a specific activity. And that is the most significant thing that was done, I think, early on. Some general direction of rates certainly helped, but frankly we would have had great results anyway once we got those mismatches out of the way; once we got certain parts of the portfolio sold or collected. But I think that was clearly the most significant.

MB: How closely is the portfolio matched now?

BIRK: It's remarkably well-matched and we spend an enormous amount of time making sure that it is. So that if you had a move in rates of 200 or 300 basis points - the effect on our earnings would be virtually nil, maybe 5 percent. It's a rather enormous thing. Now, we could have reported more [in earnings] had we taken more risks in financing. We could have shown even stronger earnings, but we fully believe that we should match assets and liabilities to the extent possible. It doesn't mean we don't take prudent risks here and there, but that's been our thrust. It really has. We spend enormous time with very smart people on all scenarios. We have 400 or 500 different kinds of interest rate scenarios combined with credit situations, which lead us to conclude how we're going to do this. Now, we also have the benefit, let me be the first to say, that we can finance virtually anyplace on the interest rate curve.

But like I said, this mourning [in his speech to the Western Secondary Mortgage Market conference] with respect to the [government-sponsored enterprise (GSE)] legislation, we really invented this callable debt activity with respect to Fannie Mae, and the market wasn't there. When we started there were some shots at us about how this market wouldn't work. Creating the callable debt market really has given us an opportunity to match even more, because if rates go the other way, you will see some debt calls. Which people expect us to do. So if rates go one way or we lose assets, we can call the other side of it.

MB: During your tenure as president and COO, what earnings record or performance statistic for Fannie Mae are you most proud of, and why?

BIRK: I don't know without thinking a lot about that which it would be. But let me say that when you come from a flat or zero [profit] position and five years later you're earning $1.15 billion after taxes, there is a great inclination to spend money freely. I think our record, which is a tribute to the people we have there, on controlling cost while witnessing prosperity is an enviable one. If you go back five years ago our cost of doing business, that is all our personnel costs, all our own facilities costs, everything included, was around 9 basis points of our outstandings. It's now around 6 1/2 basis points. We actually implemented, since I was there, a feature of the senior executive compensation plan where they get paid more if expenses don't go up at a predetermined rate.

But especially for business that are cyclical, it's amazing how expenses go up very rapidly after profitability sets in. Everybody can think of all kinds of reasons why you should have a 38-person strategic planning effort. Sure, I think that's part of that. But frankly, our own people, our own senior management people, recognized the importance of this [containment of costs.] It's also a little unusual in Washington, D.C. and we wish maybe - I better not say that. But I don't think we withheld resources. I mentioned very briefly this morning in my talk that technology is very much on our minds. Some would say [it is] dominating our thinking. We're not holding back at all. The fastest growth in our expenses is in technology. We've got 2,500 full-time people. We have over 500 in systems. That's really getting to be an information business if I ever saw one.

MB: What were the most crucial and successful strategic shifts or adaptations that were made in the operating strategies during your tenure? It sounds like it was the matching of the portfolio.

BIRK: I think that's the most significant. To me it was a re-examination of where we were technically. I don't think we had the time earlier or the resources to lead in the area of operations systems. We clearly have a high focus on that at this point in time and I think that was a very necessary one. It's one thing to get the revenue in the front door. It's another thing to effectively process it and then serve your customer and help them be more efficient. It's working through that process and setting a system strategy going forward, which is really starting to pay off for us and will, I think, show significant strides as we go down the line. The more we talk to mortgage bankers, the more we talk to our customers, the realization is that that's the place where the costs have to come out of the process: the mortgage process. Now, there's a lot of similarity there to the securities business where a certificate damn-near strangled the industry. That mortgage, that note, and everything surrounding it and all the cottage industries that are protecting themselves, have to be reviewed carefully.

MB: What were some of the adjustments that you had to make in terms of decision making?

BIRK: My style of management is one that tries to pin down accountability. That may sound a little bit "motherhoodish" to you [but] I worked at that at Fannie Mae. Not that it wasn't there. But, I mean, you have to understand, that from 1983-85 or earlier, the driving force of the company was survival and financial recovery. And that's easy to understand. That's easy for employees to latch onto and they did. But then the question is: What's the next driving force and how do you make decisions? I'm a strong believer in accountability, in describing that accountability and turning people loose who are talented and then measuring results. I think we did a bit of that. We organized. So we established an operating committee with the six or seven people who are accountable for running the whole business. One of the great features of Fannie Mae is that here you've got a company, which I believe ranks sixth in size by somebody's measure, which is quite strong. We may be one of the largest financial services companies in the world. We've got 2,500 people. You can walk around and see, touch and speak with everybody. And that is a wonderful advantage. Then if you assign accountability, people can have fun, frankly, at what they're doing. That doesn't mean you don't do a little bit of group think. That doesn't mean you don't have task forces and so on. But I am a very strong believer, it sounds rather simple but it's not, in making sure that people understand what they're accountable for. As an aside, for example, Michael Smilow, our credit person, has what I call terminal authority on credit. We have a committee of interested people who are smart and they provide a lot of advice and he listens to that and decisions are made. But if they're wrong or if there are problems, it's [his responsibility]. No committee, no meetings. That's the way you have to do it, I believe. I don't think that's dictatorial in that particular situation. So I think we've worked on that and I think it's worked. Frankly, we were very happy with the retention of the senior people in the company who are outstanding. Therefore, my belief is that they though this was a good process also.

MB: Speaking of retention of senior people in the company, before you came to the job of president there were a few short-tenured predecessors. I'm wondering what is unique about you and what you brought in, what you were able to work with, that didn't work for the others.

BIRK: That's a tough question. Let me say that... I think there were special circumstances virtually in every one of those situations. I don't know what was unique. I think that, quite frankly, when you're in a position of president or chairman you're expected to know the business. I've got to tell you that I think I'm smart enough to admit I didn't know the business up front. I don't hold that up as a great thing, but because I had some insight as a director, it occurred to me very quickly that these were very smart people. And it's kind of a dumb phrase, but when you work at Fannie Mae you can't fake it. You get found out pretty quickly and you get pushed aside one way or another. I think I learned that. I think that helped me. I don't think that's anything to apologize for and you learn with the people. But I frankly think, in part, it was understanding the talent we had, getting their confidence and then letting them do their work. It's almost as simple as that and I really believe that. You can't tell them what to do when they know more than you do. If you don't let them do it, it's no fun for them. It doesn't mean you don't have controversy and conflict. But that's been my style all the way along and I have never had a problem, and I'm not sure why, including in my previous career, of people leaving.

MB: What were some of the things that hit you immediately in terms of how decisions are arrived at, the different kinds of decisions that you could or could not make in a GSE environment versus a Wall Street firm?

BIRK: Well, I think we, very necessarily, and thankfully we conducted ourselves in this way, were very sensitive to what our purpose in life is. I think the culture flows from that. By the way, another unique feature of Fannie Mae is that it definitely has a clear corporate culture. Many companies, I would say most, don't. They're not sure. I mean, they're in it to make money or return stockholder interest or to serve customers. Fannie Mae's [corporate mission] is pretty clear and I think it is understood. The corporate culture of Fannie Mae and why we have a franchise - I don't hesitate to use that word - is to serve a purpose in this country and I think there's a realization in everything we do that that's where it starts. It sounds a little "high horse" I suppose, but it's true. When we decide on things, whether they're pricing or customer relations or a variety of other things, it really is dominated by the thought of our charter responsibility. In housing, [it is] providing liquidity to the mortgage market at a profit, which is what the charter says. But we talk about it all the time in decisions. Now, I think other companies talk a lot about their customers and how to serve them, but I don't think there's quite the common thread that we are cognizant of at all times about why we exist.

MB: How has managing a high profile, politically visible organization affected some of the decisions or style of management that you've seen in the time that you've been at Fannie Mae?

BIRK: Amplify that a little bit more so I know what you mean?

MB: With new capital requirements expected to be included in the government-sponsored enterprise legislation, Fannie Mae decided voluntarily to build its capital by a certain date - by 1992 - and the way that Fannie Mae decided to build its capital was via retained earnings. How has that affected you and what you do on the operating side?

BIRK: Well, it certainly made our planning easier, although I'm not sure we would have done it a lot differently. I think that very early on, it drove us to focus on that issue as a primary issue, which resulted, by the way, in the idea of engaging Paul Volcker [former chairman of the Federal Reserve.] I was part of that decision. In other words, when we first started to talk about this in a very open way on what is reasonable - not what can we get by with or what is the lowest form. And after talking about this a lot, we decided to do that. And that proved to be as valuable experience as we ever would have hoped it to be.

Mr. Volcker - I was in all those meetings early on - conducted himself like a taskmaster. He's not some person who has anything to prove and he studied the issues intensely. At meeting after meeting after meeting, [he] brought our attention to what he thought were things to be considered that would be significant. So it became very apparent to us that what we thought might be [required from us in new] capital standards, in fact, would occur, and might be even more stringent. We conducted ourselves accordingly. In looking at the business and projecting the business [we] saw where we could get to a point where, while we never had a lot of concern, everybody else could agree that we had a capital position that was as solid as one might expect in our business. So it certainly became a significant part of our thinking. As we got into various features of our business, the thinking of what capital would be required to support that [business venture], took on an increased role. Businesses sometimes like to avoid that issue.

MB: So when you approached a new business area you said, |okay, now wait.'

BIRK: Absolutely. Somebody says, |Here's a new business. Here's repos. Here's something else. The customer wants this. And by the way here's the profitability.' We say, |How much capital are you assigning to it? Well, wait a minute. That changes the facts.' So it becomes a more significant factor than before, not that you're driven again by the financial side, because, again, we do things in response to our charter with varied rates of profitability, some more than others. And this is where the pendulum has swung, and we recognize that in all of the finance business.

MB: Has it surprised you that perhaps the pundits in Washington and the people on Capitol Hill may have discounted the Volcker plan because it was commissioned by you or paid for by you, or that was not received as the credible instrument of a measurement of your capital needs?

BIRK: I would say, somewhat contrary, I think it probably has. I see press reports. I saw Wall Street reports last week referring to the Volcker standard and I was quite surprised about that. I think that with respect to the whole question of regulation, amazingly enough that capital, which was the whole ballgame a year and a half to two years ago, now seems to be almost secondary. I mean, it's unbelievable to me. Where it dominated their thinking as well as ours, now the question is other things. So I think an enormous amount has been learned. Our executives have been asked to explain, and have responded to a while variety of people [asking] what the tests are. I think those lessons and those meetings have been extremely significant. I mean, there's almost not a day or a week that goes by that somebody from Fannie Mae isn't called upon to go somewhere to say let me run through it again. I think the rapidity of those sessions, the honesty of those sessions and the professionalism of the work behind it have carried the day. I think it's shown in what seems to be proposed here. So I think that's been a very successful effort and frankly there's not a great deal of difference between Freddie Mac and Fannie Mae on this issue. There certainly might have been a wide difference.

MB: Let's look at the future a little bit. As you leave behind the president's job and the next person comes into place, what do you see as some of the key challenges that they will have to wrestle with?

BIRK: Again, it will be a different chapter. We have two people coming. One of them is already there as you probably know. We're having a president, [Lawrence] Small, coming from Citicorp and [Franklin D.] Raines who's coming in still again from Wall Street. Mr. Small will be carrying on many of the activities of a typical chief operating officer. Mr. Raines, [Fannie Mae's new vice chairman] who, by the way, has a Harvard law degree, is a Rhodes scholar. The primary thrust I would say to you in addition to certain line responsibilities will be new areas of business for Fannie Mae - significant areas. We really expect to carefully analyze and test every facet of the housing finance industry to see where we might play a meaningful role. I'm not going to be more specific than that. We've got some thoughts on it already. But we're going to be in a position, at least in my judgment, with our earnings continuing, with our capital structure sound, to play a more significant role. If we have over $6 billion at the end of 1991, and we will, then we're going to have more than $7 billion next year [1992]. This is going to lead us into a position of playing an even more significant role if in fact there are needs to be filled, and there are. So you're going to see, I think, a very aggressive and thoughtful analysis of opportunities.

MB: What will you miss most about Fannie Mae? What will you miss least?

BIRK: Keep in mind I'm going to stay on the board. They've asked me to. And I would do whatever they said. I could move on. I'm on four other boards, corporate boards and two other non-corporate. So I could say I'm going to miss the fast interaction of very bright people. We're participating in the legislative process now, for example, and we believe that it has to be changed; and we have seen a lot of people work all weekend. They don't dislike that. I mean, they're not workaholics. I'll miss working with those people and all those really bright minds that you get exposed to again because of the size of our company. I guess what I'll miss least is the fact that I was reasonably committed in a variety of things when I got here, which I retained. Being president of Fannie Mae is not a part-time position. So your schedule becomes rather dominant on that. I was easing into a timeframe when I had a little more control over my life, and I have had less time. So I've enjoyed and have been thrilled by all of it. But I think time moves on rather quickly and I need to have slightly more control over my time, or they'll be throwing me out of the golf courses and everything else. And my wife, who has been wonderful through all of this, is entitled to having us see each other a little more and [to see our] families.

Janet Reilley Hewitt is editor in chief of Mortgage Banking and Real Estate Finance Today.
COPYRIGHT 1992 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:Federal National Mortgage Association's president and chief executive officer Roger Birk
Author:Hewitt, Janet Reilley
Publication:Mortgage Banking
Article Type:Interview
Date:Jan 1, 1992
Previous Article:The MBA Cost Study: measuring performance.
Next Article:Custom-fit servicing software.

Related Articles
Walter Buczynski and Darrell Swanson.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters