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The New York Times
Business
Congress Questions
Executives on Pay
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Doug Mills/The New York Times
Charles Prince, former chief of Citigroup; Richard D.
Parsons, former chair of Citigroup's compensation committee; E.
Stanley O'Neal, former chief of Merrill Lynch; John Finnegan, chair
of Merrill's compensation committee; and Angelo R. Mozilo, chief of
Countrywide Financial; and Harley W. Snyder, a consultant and
private investor in real estate, appeared before a House committee
looking into C.E.O. pay and retirement packages at companies deeply
involved in the current mortgage crisis. |
By JENNY ANDERSON,
nytimes.com on the Web, March 7, 2008
WASHINGTON — Three prominent
financial executives faced questioning from a House committee on Friday about
the huge paydays that they earned from the subprime mortgage boom, even as their
companies have lost billions of dollars and thousands of borrowers have lost
their homes.
The questioning mainly fell along party lines, with Republicans apologizing for
hauling such distinguished corporate officials before the panel, and Democrats
questioning everything from the income gap in America to the particular bonuses,
stock sales and compensation the executives were awarded.
Two of the three lost their jobs last fall after the collapse of the subprime
market — E. Stanley O’Neal, Merrill Lynch’s chairman and chief executive, and
Charles O. Prince III, his counterpart at Citigroup — but left with sizable pay
packages. The other, Angelo R. Mozilo, the founder and chief executive of
Countrywide Financial, presided over the demise of a once high-flying company
that is now being acquired by Bank of America.
They appeared at a hearing of the House Committee on Oversight and
Investigations, which, with its inquiry into supersize ballplayers winding down,
once again turned its attention to supersize pay.
Along with the three executives, the chairmen of the compensation committees at
all three companies also testified, along with a panel of academics, governance
advocates and state and municipal officials.
Many Republicans on the committee fought the very premise of the hearing.
“This is a hearing in search of bad guys,” said Darrell E. Issa, Republican of
California. “Are there bad guys in front of me? I’m not seeing it.”
Tom Davis, the ranking minority member from Virginia, said that even if the
executives had been paid nothing, there would still be a housing crisis.
And Mr. Issa emphasized that all of the executives were primarily rewarded with
stock, meaning they have suffered alongside shareholders as the value of
financial stocks has plummeted.
But the Democrats honed in on why executives who oversaw such vast losses were
so well compensated.
“There seem to be two economic realities operating in our country today,”
Representative Henry A. Waxman, Democrat of California, the committee chairman,
said as the hearing opened Friday morning. “Most Americans live in a world
where economic security is precarious and there are real economic consequences
for failure. But our nation’s top executives seem to live by a different
set of rules.”
The question before the committee, he said, was this: “When companies fail
to perform, should they give millions of dollars to their senior executives?”
John Finnegan, chairman of Merrill’s compensation committee, was asked why Mr.
O’Neal was permitted to retire rather than being forced out for cause. If
Mr. O’Neal had been fired, he would have forfeited the $131 million in stock and
options he had earned in prior years.
Mr. Finnegan said cause involved unethical behavior, not bad judgment. “To
say you don’t have the tools, it means that even if someone performs badly there
are no consequences,” Mr. Waxman retorted.
One representative asked Mr. Prince if the fact that Goldman Sachs had so far
averted any major write-downs or losses was evidence that the problems in the
mortgage market were forseeable. Mr. Prince responded, “You’d have to ask
the people at Goldman, and they are not here today.”
Executive compensation has emerged as a hot topic in Washington in recent years.
Surveys show that Americans, regardless of their income or political leanings,
overwhelmingly believe that their business leaders are overpaid.
The hearing shed some light on how Wall Street’s compensation philosophy may
have contributed to the mortgage boom. Corporate boards and compensation
committees agreed to lucrative bonus plans that gave their leaders strong
incentives to take big risks. Executives aggressively pushed their
companies into lucrative businesses, like underwriting subprime mortgages and
packaging the loans into complex securities. Then, as the housing and
credit markets plummeted, those profits turned into enormous losses for
shareholders. Wall Street’s top executives still kept their pay.
“With executive compensation you get what you pay for and you pay for what you
get,” Nell Minow, editor of the Corporate Library, an independent research firm
specializing in corporate governance, said in testimony prepared for the
hearing. “If you make compensation all upside and no downside, that will
affect the executives assessment of risk. It will make it clear to him
that he can easily offload the risk onto shareholders. It’s heads they
win, tails we lose.”
Mr. Mozilo’s pay drew the most scrutiny from members of Congress. He has
taken home more than $410 million since becoming chief executive in 1999,
including several stock sales made under an automatic plan while the company was
buying back shares.
Federal securities regulators have been scrutinizing those trades. And in
a report released Thursday, Congressional investigators found that the use of a
flawed peer group and easy bonus targets helped inflate his pay. He also
had been entitled to a $37.5 million severance package, though he forfeited that
in January, shortly after Congress requested that he testify.
Mr. O’Neal and Mr. Prince each landed a windfall when they resigned.
Mr. O’Neal retained more than $161 million after he was ousted in October on top
of the $70 million he took home during his four-year tenure. The bulk of
the exit pay was linked to previously earned benefits and stock since his
departure was deemed a retirement; he did not receive any severance pay.
Merrill Lynch, meanwhile, has announced write-offs totaling more than $10.3
billion and watched its stock price fall sharply.
Mr. Prince collected $110 million while presiding over the evaporation of
roughly $64 billion in market value. He left Citigroup in November with an exit
package worth $68 million, including $29.5 million in accumulated stock, a $1.7
million pension, an office and assistant, and a car and driver.
Citigroup’s board also awarded him a cash bonus for 2007, largely based on his
performance in 2006 when the bank’s results were better, worth about $10
million. Citigroup has announced write-offs worth roughly $20 billion and
seen its share plummet over 60 percent from last year’s high.
“From a shareholder perspective, it is not possible to justify that payment,”
Ms. Minow said of the $10 million bonus to Mr. Prince, though she added, “His
sins were so much smaller than the other people we’re talking about.”
Elijah E. Cummings, Democrat from Maryland, noted that “We’ve got golden
parachutes drifting off to the golf course and have people I see every day who
are losing their homes and wondering where their kids will do their homework.”
He then asked Mr. Mozilo about an e-mail message he sent demanding that the
taxes due on his wife’s travel on the corporate jet be covered by the company.
“It sounds out of whack today because it is out of whack, but in 2006 the
company was going great,” Mr. Mozilo explained. “In today’s world I would
never write that memo.” Mr. Mozilo also apologized for another e-mail
message in which he complained about his compensation. “It was an
emotional time,” he said. “I apologize for that memo.”
Mr. Mozilo said he had left a card in each Congressional office with a help line
for constituents having problems with their loans. He added that if the
number didn’t work, “call me — I take this very seriously.”
In his prepared testimony, Mr. Prince focused on his humble beginnings, as the
first member of his family to go to college, and the plaudits that Citigroup
received for improving corporate governance on his watch.
“Last fall, it became apparent that the risk models which Citigroup, the various
rating agencies and the rest of the financial community used to assess certain
mortgage backed securities were wrong,” he said. “As C.E.O., I was
ultimately responsible for the actions of the company, including risk models
that eventually proved inadequate.”
Since his resignation, he said, “some have raised questions about my
compensation, and much of the information reported in the media is incomplete or
inaccurate.”
Mr. O’Neal, too, said reports about his compensation package were inaccurate.
“The reality is that I received no severance package,” he said in prepared
testimony.
Emphasizing that the compensation process at Merrill was “appropriate” and
“independent,” he said: “It is true that top executives at public
companies in the United States, especially in the financial services industry,
are highly compensated. But a great percentage of that compensation,
certainly for me, was and is at risk. When the business does well, all
shareholders do well. But if the businesses does not do well, the value of
that compensation can plummet.”
And Mr. Mozilo, noting that “our stock price appreciated over 23,000 percent”
from 1982 to 2007, said he received performance-based bonuses approved by
shareholders and exercised options as he prepared for retirement. “In
short, as our company did well, I did well,” he said.
Mr. Waxman ended the hearing by complimenting the witnesses on their
extraordinary individual tales and for their service to their firms. But
he added, “It seems like everyone is hurting except for you.”
Eric Dash contributed reporting from New York.
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