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Execs Defend Compensation

Mortgage execs testify on compensation versus subprime losses

March 7, 2008


Congress today heard testimony from chief executive officers who defended their hefty compensation packages as their firms faced massive losses on subprime mortgages. The executives seemed to find support among Republican lawmakers as Democrats were on the attack.

The House's Committee on Oversight and Government Reform, chaired by Rep. Henry Waxman (D-Calif.), held the hearing, Executive Compensation II: CEO Pay and the Mortgage Crisis. Among those testifying were Angelo R. Mozilo, founder and chief executive officer of Countrywide Financial Corp.; E. Stanley O'Neal, former chairman and CEO of Merrill Lynch & Co. Inc.; and Charles Prince, former chairman and CEO at Citigroup Inc.

"Collectively, the companies run by Mr. Mozilo, Mr. O'Neal, and Mr. Prince lost more than $20 billion in the last two quarters of 2007 alone as a result of investments in subprime and other risky investments," a House memorandum stated. "During the five-year period from January 2002 through December 2006, as the stock of Countrywide, Merrill Lynch, and Citigroup appreciated, and the three CEOs collectively received more than $460 million in compensation."

Countrywide reported an $0.7 billion loss in 2007. The memorandum noted Mozilo received over $120 million in compensation and sales of Countrywide stock last year. From 2002 through 2006, Mozilo received total compensation of $185 million in cash, stock, and stock options.

In connection with Bank of America Corp.'s planned acquisition of Countrywide, Mozilo said he waived all severance pay and canceled the consulting agreement included in his contract -- which cost him $37.5 million. He noted that the amount he will receive upon the completion of the merger is just amounts he earned through pension and 401k investments, deferred compensation and stock option awards over a 40-year career with the company.

"Since 1982, to early 2007, Countrywide's stock appreciated over 23,000 percent," he stated. "As a result, over recent years I've received substantial income."

The CEO said more than 50,000 subprime borrowers were refinanced into prime loans last year in addition to modifying over 55,000 loans. He noted extreme concern that the recent tightening of underwriting has gone too far and may set back minority home ownership by 15 years.

In response to questioning by Waxman, Mozilo defended his plan to sell shares of the company as the company borrowed capital to engage in a stock buyback plan.

"In addition, Mr. Mozilo's decision to sell almost $150 million in Countrywide stock from November 2006 through the end of 2007 also raises questions, particularly as many of these sales occurred at the same time the company was borrowing $1.5 billion to repurchase its shares," the congressional memorandum stated.

"I was with the company 40 years. I was going to retire. My net worth was in Countrywide," Mozilo explained. "I had to come to a point of diversifying my investments, my assets, and that point came in 2004, and I consistently followed that plan."

He also said that a big portion of his options, which he acquired over a 10-year period, were expiring, and he had to sell them before they became worthless.

Waxman tried compare Mozilo's actions to Enron's executives, who were telling investors to buy shares as they, themselves, were selling shares.

"This is not an Enron situation," Rep. Tom Davis (R-Va.) said in response to Waxman's comments. "Enron was insider trading."

Davis also pointed out even if all of the CEOs received no compensation, losses from the subprime meltdown would not have been impacted. He further noted that the CEOs took hits when the shareholders took hits.

Merrill, which shut down subprime subsidiary First Franklin Financial Corp. this week, reported a $9.8 billion fourth quarter loss as a result of an $11.5 billion writedown related to U.S. collateralized debt obligations and subprime residential mortgages aside from its U.S. bank-related investment securities portfolio. The massive loss led to the ouster of O'Neal in October. O'Neal's severance package was $162 million.

O'Neal, who said he still holds 2.8 million in shares in options of Merrill, pointed out that after he became CEO of Merrill in 2001, net income went from $1.7 billion in 2002 to $7.6 billion in 2006.

"Our stock price rose from $28 in October of 2002 to $97 in January of 2007," O'Neal testified. "Even with the losses sustained in the second half of last year and the broad-based selloff in financial service stocks over the last few months, Merrill Lynch closed yesterday at a price 60 percent higher than it was at its low point shortly after I took over."

He said he initiated a requirement that senior management hold at least 75 percent of the stock options that were awarded. He noted he received no bonus or severance pay for 2007 and said press reports of his exit package actually refer to deferred compensation he had previously earned from as far back as 2000 and earlier. Because he didn't earn cash compensation during his tenure, he received more upon retirement. This plan ensured his interests were aligned with shareholders.

Citigroup posted a $9.83 billion net loss in the fourth quarter mostly due to a $15.0 billion charge in subprime-related collateralized debt obligations -- prompting the company to privately seek $12.5 billion in outside capital and publicly offer $2 billion in stocks. Prince was ousted in November and his exit package was estimated at $39 million.

In his testimony, Prince -- who said he still owns about 1 million share -- noted that during the first half of 2007, Citigroup earned more than it had during any other 6-month period in its 200-year history.

"Citigroup executives are required to take and hold substantial portions of their annual compensation in the form of stock," he said, reading from prepared testimony. "Then, our stock ownership commitment requires those senior executives to retain, on a long-term basis, at least 75 percent of the stock awarded to them while employed by Citigroup."

Prince explained that the company used the wrong risk models to assess certain mortgage-backed securities.

"This happened on my watch," he concluded. "I immediately submitted my resignation."

Citigroup director Richard Parsons, who is the chairman of Time Warner, said Citigroup's senior executives are prohibited from selling stock during their tenure, though Merrill Director John Finnegan noted it would not be unusual for executives to sell shares as the company engaged in a share buyback.

Rep. Patrick McHenry (R.-N.C. ) highlighted John Paulson, a hedge fund investor who earned $3 billion to $4 billion betting against the mortgage industry. Paulson reportedly contributed $15 million to the Center for Responsible Lending in order to encourage them to advocate more restrictive lending policies -- hurting mortgage lenders, home ownership and the economy and helping his bets to pay off.

Mozilo called Paulson's actions "terrible."

"It's amazing. This is a hearing in search of bad guys," Rep. Darrell Issa (R.-Calif.) said. "I'm just trying to see, one more time, are there bad guys in front of me. And I'm not seeing it."

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: [email protected]

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