CEOs responsible for mortgage crisis defend their huge salaries
WASHINGTON ” Three corporate executives called in for a shaming by Democratic lawmakers on Friday defended raking in hundreds of millions of dollars despite contributing to the subprime mortgage crisis that has their companies reeling from losses and the nation on the edge of recession.
“There’s a complete disconnect with reality,” said Rep. Henry Waxman, D-Calif., chairman of the House Oversight and Government Reform Committee.
But the CEOs testifying before the committee, Angelo Mozilo of Countrywide Financial Corp.; Stanley O’Neal, formerly of Merrill Lynch & Co; and Charles Prince, formerly of Citigroup Inc.; defended their pay as appropriate.
“As our company did well, I did well,” said Mozilo, founder of Countrywide, the nation’s largest mortgage lender and a key player in the subprime problem. “But when our company did not do well, as in 2007, my direct compensation and the value of my holdings declined materially, which is as it should be.”
Republicans on the committee generally agreed. “This is a hearing in search of bad guys,” said Rep. Darrell Issa, R-Calif. “All of you complied with the transparency rules and the best practices rules.”
The hearing was the second held by Waxman on the issue of executive pay, which Forbes magazine said averaged $15.2 million for the CEOs in the largest 500 U.S. companies in 2006, an increase of 38 percent in one year.
He questioned how all three CEOs could profit handsomely at a time when their companies were losing billions of dollars and stock values were plunging.
“You’re in the middle of an enormous debacle,” Waxman said. “It seems like everyone is hurting except for you.”
“It’s only in the wacky world of CEOs where you get severance for failing,” said Nell Minow, editor of The Corporate Library and one of the economic experts testifying.
Committee figures showed that Countrywide suffered a $1.2 billion loss in the third quarter of 2007 and then lost another $422 million in the fourth quarter. By the end of the year, the company’s stock had fallen 80 percent from its five-year peak in February. During the same period, Mozilo received a $1.9 million salary, $20 million in stock awards contingent upon performance and sold $121 million in stock.
Some of those stock sales occurred at the same time the company was borrowing $1.5 billion to repurchase its shares.
Rep. Elijah Cummings, D-Md., questioned Mozilo’s insistence ” documented in a November 2006 e-mail ” that he be reimbursed for taxes owed when his wife traveled on Countrywide’s corporate jet.
Mozilo related how he had started Countrywide in 1969, sitting in the kitchen of his small New York apartment. He said his direct compensation and the value of his stock holdings declined substantially last year and he had not received, and will not receive, a bonus for 2007 and 2008.
Mozilo also said he would give up some $37 million in severance pay if Bank of America proceeds with plans to acquire Countrywide.
O’Neal received a retirement package of $161 million when he was pushed out as Merrill Lynch CEO last October. But the committee said that if the company had terminated O’Neal for cause rather than letting him retire, he would not have been entitled to $131 million of that in unvested stock and options. During 2007, the firm reported $18 billion in writedowns related to subprime and other risky mortgages.
O’Neal countered that he had received no bonus in 2007 and no severance pay.
He was defended by John Finnegan, chairman of Merrill Lynch’s compensation committee. “All of the $161 million related to prior-period performance and all were amounts to which Mr. O’Neal was entitled as a retirement-eligible employee.”
The lawmakers also asked why Citigroup, which saw its stock fall 48 percent at the end of 2007 compared with a year earlier, would award Prince a cash bonus worth $10.4 million after he stepped down as CEO last November. He also received $28 million in unvested stock and options and $1.5 million in annual perquisites upon his departure.
“I’m proud of my accomplishments,” Prince said, speaking of his contributions over almost three decades to Citigroup’s growth and the company’s efforts to assist homeowners facing foreclosure.
Rep. Tom Davis of Virginia, top Republican on the committee, noted that Mozilo’s total compensation package in 2007 was about $22 million, half that of 2006, while Prince also saw his compensation halved in 2007 to about $12 million. Linking executive pay to the subprime crisis “only seems to muddle the issue further,” he said.
Several of the executives did acknowledge public resentment over the fact that large company CEOs now receive about 600 times what the average worker earns, compared to about 40 times in 1980.
The question, said Richard Parsons, chairman of Citigroup’s personnel and compensation committee, is “how do we remain competitive without contributing to something that could be tearing at the fabric of society.”
On the Net:
House Oversight and Government Reform Committee: http://oversight.house.gov/