Case Studies: Fat-Cat CEOs' Short-Sightedness Fueled Mortgage Crisis

Millions of American families are losing their homes through foreclosures -- and the financial turmoil set off by the collapse of the mortgage market could total nearly $1 trillion, according to the International Monetary Fund. Meanwhile, CEOs of companies at the center of the crisis are walking away with big pay.

According to the AFL-CIO 2008 Executive PayWatch, the CEO of a Standard & Poor's 500 company made, on average, $14.2 million in total compensation in 2007, according to early estimates. In comparison, the median pay for workers rose only 3.5 percent, to $36,140 in 2007, from $34,892 the previous year, according to the U.S. Bureau of Labor Statistics.

This year, PayWatch features case studies of CEOs whose push for short-term financial gains helped spawn the mortgage crisis. The case studies highlight the need for reform to protect companies and their investors -- and the PayWatch site makes it easy for users to contact members of Congress to urge new rules on mortgage protection and executive pay.

What makes the excessive pay for the CEOs of mortgage-related companies so egregious is that for many Americans, their home is their most valuable asset and an important source of financial security for their retirement. And for a growing number of working families, the American Dream of homeownership has become a nightmare. American workers are being hit by a double-whammy as they lose not only their homes, but also their retirement savings, as pension funds bear the brunt of overwhelming losses faced by financial institutions.

Excessive CEO pay takes money out of the pockets of shareholders -- including the retirement savings of America's working families. Moreover, a poorly designed executive compensation package can reward decisions that are not in the long-term interests of a company, its shareholders and employees.

Among the PayWatch case studies is that of Angelo Mozilo, chairman and CEO of Countrywide Financial Corp., the nation's largest mortgage company. After a consultant said his pay package was too large, Mozilo brought in another consultant to renegotiate his package in 2006.

In an e-mail message, Mozilo complained to John England of Towers Perrin, who helped redo his pay package: "Boards have been placed under enormous pressure by the left-wing anti-business press and the envious leaders of unions and other so-called 'C.E.O. Comp Watchers.'"

Mozilo's renegotiated contract with Countrywide included an annual salary of $1.9 million, an incentive bonus of between $4 million and $10 million and fringe benefits, as well as $37.5 million in severance benefits. After the mortgage market collapsed, public pressure forced Mozilo to give up the severance package.

In seven case studies, including Mozilo, PayWatch shows the strong need for new laws to reign in CEO pay and to tie pay to real performance:

  • The Bear Stearns case study shows how former CEO James Cayne, who held nearly 6 percent of the investment bank's total outstanding shares, was one of the biggest beneficiaries of the bailout of his Wall Street firm. He pocketed more than $40 million. A day after Bear Stearns' directors agreed to the increased offer from JPMorgan Chase, Cayne unloaded his entire holdings at $10.84 a share, creating a $61.3 million profit.

  • Although Citigroup's third quarter profits dropped 57 percent, Charles Prince, who resigned as chairman and CEO last November, walked away with a king's ransom of at least $25 million.

  • At Merrill Lynch, CEO Stanley O'Neal lost his job last October after the firm posted a $2.24 billion third-quarter loss due to a staggering $8.4 billion write-down on investments in junk mortgages and risky debt securities. Yet O'Neal, who left with stock options and other compensation worth more than $160 million, told a congressional hearing he received no severance package, no bonus for 2007, no severance package and no "golden parachute."

  • John Mack, chairman and CEO of Morgan Stanley, received $41.7 million in compensation in 2007, a year in which the Wall Street firm reported the first loss in its 72-year history because of a $9.4 billion charge on subprime related investments. Mack, who kept his job, did not receive a bonus in 2007, but he did receive stock awards valued at $40.1 million and $399,153 of other compensation on top of his $800,000 salary, according to the company's 2008 proxy.

  • Wachovia's CEO G. Kennedy Thompson hasn't suffered as much financially as the company's shareholders. Thompson didn't receive a $5 million cash bonus in 2007 that he got in 2006, but Wachovia granted him stock options and restricted stock with a combined value of $14.3 million. Meanwhile, the fourth largest bank's net income in the fourth quarter of 2007 plunged to $51 million or three cents a share, from $2.3 billion or $1.20 a share a year earlier, and its revenue fell 17 percent to $7.2 billion.

  • Washington Mutual, the nation's largest savings and loan institution, was so badly burnt by the mortgage meltdown that it needed a $7 billion infusion of capital from a private equity firm and other investors to stay independent. But CEO Kerry Killinger was paid more than $14 million in compensation in 2006. Although he refused a bonus in 2007 because of the company's poor performance, the 2008 proxy reveals that Washington Mutual more than made up for that by giving Killinger a hefty grant of stock and options awards valued at close to $13 million. This was on top of a base salary of $1 million.


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