Congress Rips Lavish Pay of Subprime CEOs
The stunning pay packages of executives at financial groups hammered by the U.S. mortgage crisis came in for stinging criticism from Democratic lawmakers and investor advocates at a congressional hearing Friday.
The executives themselves -- including the former chiefs of Wall Street giants Merrill Lynch and Citigroup -- defended their records, while one Republican lawmaker blasted the hearing as "a sanctimonious search for scapegoats."
The session before the House Oversight and Government Reform Committee marked Congress' latest foray into one of corporate America's most enduring controversies -- the sky-rocketing compensation of chief executive officers.
On a global scale, U.S. CEOs earn vastly more money on average than their peers abroad, and about 600 times more than the average U.S. worker, up from just 40 times in 1980, according to academic studies of executive pay.
"Incredibly, 10 percent of corporate profits are now flowing to the top executives," said Rep. Henry Waxman, a California Democrat and chairman of the committee.
The handsome compensation of some financial executives in recent months has contrasted starkly with the billions of dollars in losses being recorded by their companies due to the deflating home price bubble and the subprime mortgage debacle.
"There's merit to pay for performance. But it seems like CEOs hit the lottery even when their companies collapse," said Waxman, who called "extraordinary" the pay given to former Merrill CEO Stanley O'Neal, former CitigroupCEO Charles Prince and Countrywide Financial CEO Angelo Mozilo.
With U.S. corporations headed into the annual process of disclosing executive pay packages ahead of annual meetings, all three of the executives appeared before Waxman's panel and said that they earned their pay, while admitting that mistakes were made in the handling of subprime mortgage investments.
"The past six months have been horrific ... This is the worst housing market I have ever seen," Mozilo said.
He said he is "extremely concerned" that recent tightening of mortgage underwriting criteria has gone too far.
"For the housing market to recover, underwriting guidelines need to strike a better balance between providing borrowers with access to loans and lenders and investors with the assurance that these loans will be repaid," he said.
Mozilo urged Congress to reform the Federal Housing Administration, expand tax-exempt mortgage revenue bonds for both home purchases and refinancing and to take other steps to address the widening mortgage crisis.
While witnesses at the hearing debated the housing downturn and what to do about it, the main focus was whether Mozilo, Prince and O'Neal deserved the generous pay packages awarded to them based on their performance on the job.
Calling the hearing a search for scapegoats, Virginia Rep. Tom Davis said CEO pay scales were not to blame for the housing crisis that now threatens to tip the economy into recession.
"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," said Davis, senior Republican on the committee.
"But in the end, it won't answer the questions that need to be answered about corporate responsibility and economic stability," Davis said.
In 2007, Mozilo was paid $1.9 million in salary, received $20 million in stock awards based upon performance and sold tens of millions of dollars worth of stock. In that year, Countrywide , the largest U.S. mortgage lender, announced big losses and weathered an 80 percent drop in its stock price.
Prince quit at Citigroup in November as the largest U.S. bank warned it would write off billions of dollars in subprime related losses. Overall, he was compensated that year with a $40 million pay and severance package.
The board also awarded Prince with perquisites worth $1.5 million a year upon his retirement that include an office, an administrative assistant and a car and driver for five years.
O'Neal's retirement packet from Merrill was $161 million. He got it despite being ousted days after the world's biggest brokerage reported the largest quarterly loss in its history.
"Over the last few years, CEOs at companies involved in the subprime mess received excessive compensation largely based on performance measurements linked to inflated earnings targets," said Nell Minow, editor of The Corporate Library and a long-time investor rights advocate, at the hearing.