WASHINGTON — Three prominent financial executives were summoned before Congress on Friday to face questions about the huge paydays that they earned from the subprime mortgage boom, even as their companies have lost billions of dollars and thousands of borrowers have lost their homes.
Two of the three lost their jobs last fall after the collapse of the subprime market —E. Stanely O’Neal, Merrill Lynch’s chairman and chief executive, and Charles O. Prince III, his counterpart at Citigroup— but left with sizable pay packages. The other, Angelo R. Mozilo the founder and chief executive of Countrywide Financial presided over the demise of a once high-flying company that is now being acquired by Bank of America.
They are appearing at a hearing of the House Committee on Oversight and Investigations, which, with its inquiry into supersized ballplayers winding down, once again turned its attention to supersized pay.
Along with the three executives, the chairmen of the compensation committees at all three companies were also scheduled to testify, along with a panel of academics, governance advocates and state and municipal officials.
Executive compensation has emerged as a hot topic in Washington in recent years. Surveys show that Americans, regardless of their income or political leanings, overwhelmingly believe that their business leaders are overpaid.
“There seem to be two economic realities operating in our country today,” Representative Henry Waxman, Democrat of California, the committee chairman, said as the hearing opened Friday morning. “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.”
The question before the committee, he said, was this: “When companies fail to perform, should they give millions of dollars to their senior executives?”
The discussion is expected to shed some light on how Wall Street’s compensation philosophy may have contributed to the mortgage boom. Corporate boards and compensation committees agreed to lucrative bonus plans that gave their leaders strong incentives to take big risks. Executives aggressively pushed their companies into lucrative businesses, like underwriting subprime mortgages and packaging the loans into complex securities. Then, as the housing and credit markets plummeted, those profits turned into enormous losses for shareholders. Wall Street’s top executives still kept their pay.
“With executive compensation you get what you pay for and you pay for what you get,” Nell Minow, editor of the Corporate Library, an independent research firm specializing in corporate governance, said in testimony prepared for the hearing. “If you make compensation all upside and no downside, that will affect the executives assessment of risk. It will make it clear to him that he can easily offload the risk onto shareholders. It’s heads they win, tails we lose.”
Mr. Mozilo’s pay drew the most scrutiny from members of Congress. He has taken home more than $410 million since becoming chief executive in 1999, including several stock sales made under an automatic plan while the company was buying back shares.
Federal securities regulators have been scrutinizing those trades. And in a report released Thursday, Congressional investigators found that the use of a flawed peer group and easy bonus targets helped inflate his 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 testify.
Mr. O’Neal and Mr. Prince each landed a windfall when they resigned.
Mr. O’Neal retained more than $161 million after he was ousted in October on top of the $70 million he took home during his four-year tenure. The bulk of the exit pay was linked to previously earned benefits and stock since his departure was deemed a retirement; he did not receive any severance pay. Merrill Lynch, meanwhile, has announced write-offs totaling more than $10.3 billion and watched its stock price fall sharply.
Mr. Prince collected $110 million while presiding over the evaporation of roughly $64 billion in market value. He left Citigroup in November with an exit package worth $68 million, including $29.5 million in accumulated stock, a $1.7 million pension, an office and assistant, and a car and driver. Citigroup’s board also awarded him a cash bonus for 2007, largely based on his performance in 2006 when the bank’s results were better, worth about $10 million. Citigroup has announced write-offs worth roughly $20 billion and seen its share plummet over 60 percent from last year’s high.
“From a shareholder perspective, it is not possible to justify that payment,” Ms. Minow said of the $10 million bonus to Mr. Prince, though she added, “His sins were so much smaller than the other people we’re talking about.”
In his prepared testimony, Mr. Prince focused on his humble beginnings, as the first member of his family to go to college, and the plaudits that Citigroup received for improving corporate governance on his watch.
“Last fall, it became apparent that the risk models which Citigroup, the various rating agencies and the rest of the financial community used to assess certain mortgage backed securities were wrong,” he said. “As C.E.O., I was ultimately responsible for the actions of the company, including risk models that eventually proved inadequate.”
Since his resignation, he said, “some have raised questions about my compensation, and much of the information reported in the media is incomplete or inaccurate.”
Mr. O’Neal, too, said reports about his compensation package were inaccurate. “The reality is that I received no severance package,” he said in prepared testimony.
Emphasizing that the compensation process at Merrill was “appropriate” and “independent,” he said: “It is true that top executives at public companies in the United States, especially in the financial services industry, are highly compensated. But a great percentage of that compensation, certainly for me, was and is at risk. When the business does well, all shareholders do well. But if the businesses does not do well, the value of that compensation can plummet.”
And Mr. Mozilo, noting that “our stock price appreciated over 23,000 percent” from 1982 to 2007, said he received performance-based bonuses approved by shareholders and exercised options as he prepared for retirement. “In short, as our company did well, I did well,” he said.
Other executives at financial companies could collect similarly lavish parachutes. James E. Cayne will retire with stock and options worth $560 million when he steps down from Bear Stearns, according to a severance analysis in late February by James F. Reda & Associates, an independent compensation-consulting firm in New York. It found that Kerry K. Killinger, Washington Mutual’s chief executive, might get worth $58 million and $74 million if the company is sold. John J. Mack, Morgan Stanley’s chairman and chief executive, might walk away with as much as $148 million, largely from previously earned stock.
Regulators are focusing on the link between solid pay practices and sound risk management. At a conference in New York last month, Randall S. Kroszner, a Federal Reserve Board governor, urged financial institutions to consider altering their compensation policies to include some types of deferred pay. He also suggested that any new risk management guidelines for the industry touch on incentive compensation.
“It is up to financial institutions themselves not bank supervisors to decide how compensation should be structured,” he said. “But managers and boards of directors should understand the consequence of providing too many short-term and one-sided incentives.”
Meanwhile, a recent Interal Revenue Service rule reversal will lead many companies eliminate guaranteed bonuses and equity awards in severance contracts.
Starting next year, the agency said it would no longer allow companies to receive a tax deduction for any performance-based bonus, restricted stock, or other incentive payout if it would automatically be paid out if a top executive was terminated. Senator Charles Grassley of Iowa, the ranking Republican on the Senate Finance Committee, has floated the idea of eliminating that tax deduction altogether.