Three executives from major mortgage industry companies were on the hot seat Friday
as the House Committee on Oversight and Government Reform looked into executive
compensation at corporations involved in the subprime mortgage-market shakeout.
The committee, headed by Rep. Henry Waxman, questioned Angelo Mozilo
of Countrywide Financial, Stanley O'Neal, former chief executive
of Merrill Lynch & Co., and Charles Prince, former CEO
of Citigroup, Inc.
It was Mr. Mozilo who received the brunt of the committee's questions. The
founder of Countrywide received total compensation of about $250 million
in the years 1998 to 2007 and another $406 million from the
sale of his company's stock.
Mozilo is the only one of the three who is still employed. The other two lost
their jobs last fall after their respective companies wrote off huge amounts
of money from investments, largely in mortgage backed securities, in the subprime
market. Mozilo will potentially be similarly unemployed once a proposed $4 billion
acquisition by Bank of America is concluded, probably in the third quarter.
In his opening remarks, Rep. Waxman, Democrat of California said, "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. When companies fail to perform, should
they give millions of dollars to their senior executives?"
Countrywide, Citigroup, and Merrill Lynch have reported recent write-downs
of $1.6 billion, $20 billion, and $10 billion respectively.
The day before the hearing a report was released in which Congressional investigators
found that the use of a flawed peer group and easy bonus targets helped inflate
Mozilo's 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
The report says that two compensation consultants employed by Countrywide had
urged the company to reduce Mr. Mozilo's compensation. One of them, Exequity
LLP said that they were replaced by another consulting firm after making their
Republicans on the committee questioned the need for the hearing, saying it
falls outside the panel's primary role of investigating waste, fraud and abuse
in the federal government. One, Rep. Tom Davis of Virginia said that the debate
over executive compensation "should not degenerate into a sanctimonious
search for scapegoats."
The three executives, for their part, defended their compensation, citing the
performance of their companies and the companies' stock in the years they
were in charge.
O'Neal said "My compensation and assets increased only when Merrill
Lynch performed well for its shareholders and employees, and decreased when
it did not."
Mozilo said that, while he prospered along with the company he started and
built, that he is relinquishing $36.4 million in severance payments because
of Countrywide's growing problems and said that rumors of an additional
$115 million in compensation "grossly exaggerated."
O'Neal told lawmakers that compensation for Merrill's senior management was
determined through a "rigorous and independent process" and was consistent
with pay levels in the financial-services industry.
Prince told the committee that his former company "has worked hard to
align management's interests with the interests of shareholders," but said
that when the risk models that the company had used to value mortgage-back securities
proved to be flawed he immediately submitted his resignation.
Independent of the hearing, a recent Internal Revenue Service
ruling will probably encourage companies to eliminate guaranteed bonuses and
equity awards in severance contracts.
In 2009 the IRS said it would eliminate any tax deductions for performance-based
bonuses, restricted stock, or other incentives is their payout would automatically
be triggered by an executive termination.