Scared Monkeys Discussion Forum

Subprime CEOs Explain Why They Made Millions While Americans Lost Homes
Three CEOs Testify About the Subprime Mortgage Collapse and Their Pay Packages

By SCOTT MAYEROWITZ
ABC NEWS Business Unit
March 7, 2008

(while the poor get poorer, the rich get richer..)

http://abcnews.go.com/Business/Economy/Story?id=4407686&page=1

Congressional Democrats got right to the point today: How could the CEOs of three companies behind the subprime mortgage market make millions of dollars while thousands of Americans lost their homes and investors lost billions of dollars?

"There seem to be two different economic realities operating in our country today. And the rules of compensation in one world are completely different from those in the other," said Rep. Henry Waxman, D-Calif., chairman of the House Committee on Oversight and Government Reform. "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."

In 1980, chief executives in the United States were paid 40 times what the average worker made. They now make 600 times the average worker's salary, Waxman said.

"I think there's merit to pay for performance," Waxman said. "But it seems like CEOs hit the lottery even when their companies collapse."

But the Republican ranking member on the committee warned that he would not let the hearing turn into a witch-hunt.

Rep. Tom Davis, R-Va., said it is not the job of Congress to second-guess investor decisions or to help plaintiffs gather evidence for their lawsuits. He said it is fair to question compensation packages but warned that the debate should not turn into a "sanctimonious search for scapegoats."

"Punishing individual corporate executives with public floggings like this may be a politically satisfying ritual -- like an island tribe sacrificing a virgin to a grumbling volcano," Davis said.

The CEOs Testify

The highlight of the hearing came when Countrywide Financial Corp. chairman and chief executive officer Angelo Mozilo, former Merrill Lynch CEO E. Stanley O'Neal and Charles Prince, former chairman and CEO of Citigroup, took an oath and started to testify.

But for the thousands of Americans struggling with their mortgages who might be hoping for somebody to show remorse for the downturn, this was not the place to look.

The CEOs did not take any personal responsibility for the housing market meltdown. Instead, they focused on a series of other economic factors and noted repeatedly how they helped many Americans — who might have not otherwise been able to afford homeownership — get into their first homes.

"I am proud of the homeownership opportunities Countrywide has provided for more than twenty million Americans," Mozilo said.

Mozilo placed blame for what many now see as a recession on "an unprecedented series of economic shocks to the housing and capital markets."

"Much blame has been leveled lately at the variety of products, such as adjustable rate mortgages," Mozilo said. "Before the onset of the current housing crisis, these products were widely offered by industry because they made homes more affordable for more people and helped homeowners consolidate other, more expensive debt.

"In fact," he continued, "adjustable rate mortgages had been popular with both borrowers and lenders for many years. From my perspective, then, the issue is not so much the products, but the housing market."

None of the CEOs spoke directly about their company's roles in selling subprime mortgages.

"I am not in a position to comment in any depth on the sub-prime crisis, particularly because of pending litigation," O'Neal told the Congressional committee.

Prince and O'Neal both spoke about the difficulties they overcame to become some of the top executives in corporate America.

Prince, who was the first in his family to go to college, said he is "extremely grateful for the opportunities Citigroup gave me."

O'Neal said: "Whatever I have achieved in life has been the result of the unique combination of luck, hard work and opportunity that can only exist in this country. My grandfather, James O'Neal, was born into slavery in 1861. He was eventually able to carve out a life for himself and his family through hard work and perseverance."

They Made Millions

In just a five-year period, these three CEOs received more than $460 million in compensation.

And as two have stepped down — with the third planning to do so soon — because of the subprime crisis, the three CEOs have and stand to take in even more money.

This comes as the three companies recorded dramatic losses in the second half of 2007.

Countrywide lost $1.6 billion, Merrill Lynch lost $10.3 billion and Citigroup lost $9.8 billion.

When O'Neal left Merrill Lynch in October 2007, he was given a retirement package worth $161 million.

The largest component of his retirement package was $131 million in unvested stock and options. Staff for Waxman, the committee's Democratic chairman, noted that if the Merrill Lynch board had terminated O'Neal for cause he would have forfeited these stock and options because they had not yet vested.

"It is unclear why this decision was in the interests of Merrill Lynch shareholders," Waxman's staff wrote.

When Prince left Citigroup in November 2007, he received a cash bonus worth $10.4 million. The board also allowed him to retain more than $28 million in unvested restricted stock and stock options.

Mozilo also stands to make millions if Bank of America's proposed $4 billion acquisition of his company goes through.

Facing mounting public opposition, Mozilo has already said that he would give up $37.5 million of severance pay, fees and benefits linked to his expected departure after the Bank of America deal closes. He also gave up some other benefits, such as use of the company's aircraft.

"I voluntarily gave up these benefits because I did not want this issue to detract from, or in any way to impede, the important task of completing the Bank of America transaction," Mozilo said.

But he still won't leave empty-handed. Separate from his severance package, Mozilo will still keep various retirement benefits and deferred compensation already earned. Those add up to about $44 million.

He has also sold millions of dollars in stock options as his company started to face financial troubles.

The Boards Approved the Pay

All three CEOs spoke about how it was their company boards that approved their pay packages. They also all noted that their companies are now working to assist homeowners facing foreclosure.

"Executive compensation levels, particularly in the financial services industry, are driven by a highly competitive market to attract and retain talent," said Richard D. Parsons, who heads Citigroup's compensation committee and is also chairman of the board of Time Warner. "The competition for talent is especially important for a company with the scale and scope of Citi."

Harley Snyder, chairman of Countrywide's compensation committee, noted that his board was advised by compensation consultants every time it changed Mozilo's salary.

Snyder also said that under Mozilo's tenure, Countrywide's stock saw large increases and that many of the recent changes to Mozilo's contract tied pay to stock price. Those benefits would be worthless until the stock price rose.

"As with the earlier contract, we believed that this aligned Mr. Mozilo's interests with that of the shareholders," Snyder said.

But other witnesses said that the pay incentives still didn't force the CEOs to make prudent long-term decisions but just to make decisions that benefited their company and, more importantly, their stock price.

Susan M. Wachter, a financial management professor at the University of Pennsylvania's Wharton School, said that incentives are an important element in the subprime debacle.

The current crisis is a textbook case of how misaligned incentives can cause markets to fail," Wachter said.

Nell Minow, editor and co-founder of The Corporate Library, which tracks executive compensation, went further saying: "There is no excuse for paying people so much for doing so little."

It's certainly safe to say that the vast majority of leading corporate executives aren't worth the money they're paid.  The market, however, in many instances permits them to profit mightily from being in the right place at the right time.  The situation is analagous to the vast wealth showered on leading sports and entertainment figures.  Are THEY "worth" their princely salaries?  I think it's pretty obvious that they're not, but, the market being what it is, there really isn't much anyone can do about it.  Whom would you give the money to, after all, and what laws could possibly be written to enforce your judgment? 

I think it's also important to point out that the so-called "sub-prime" mortgage crisis isn't really about sub-prime loans at all, nor did the "crisis" have its origins in the sub-prime lending market.  The current problem stems from a generalized downward trend in residential real estate prices, and this trend affects both prime and sub-prime borrowers alike.  When a mortgage borrower owes considerably more on his loan than the market value of the property securing the debt, he is well motivated to default, which has been happening with alarming frequency in many parts of the country.  This is especially the case in a declining real estate market, such as the current one, where the mortgage borrower is extremely unlikely to reverse his losses in a reasonable time frame.  Moreover, the escalating level of defaults drives real estate prices lower still by further glutting the market with foreclosure property, thus inspiring further defaults, and so on.  It's a vicious cylce, and one which isn't likely to be broken unless and until either:

1)  Speculators have been driven out of the real estate market, allowing prices to float down to their natural, sustainable level, or

2)  The currency is sufficiently inflated so as to smooth over the nominal dollar decline in real estate prices. 

Option 2 above essentially boils down to subtlely allowing all mortgage borrowers to "default" on some portion of their loans in order to provide relief for those with acutely adverse loan-to-value ratios, thus giving them sufficient incentive to NOT default and thereby breaking the cycle.  In this way, losses in the real estate sector are spread over and absorbed by a large portion of the U.S. economy.  Judging from the Federal Reserve's aggressive moves to reduce interest rates, it would appear as though this is the option they've settled upon.  These are the inescapable facts of the situation that MUST be dealt with.  All the class warfare rhetoric from Waxman and company is just worthless window dressing.