Highlights from CEO Pay Hearing Today

I previewed a few weeks ago that Angelo Mozilo, head of Countrywide Financial (CFC), the nation’s biggest mortgage lender, E. Stanley O’Neal, former chief executive officer of Merrill Lynch (MER), and Charles Prince, Citigroup’s (C) former chief executive were scheduled to testify before the House to answer questions about their rich pay at a time when investors have lost billions in their firms due to massive writedowns from the housing and credit crunch.

The hearing begins at 10 a.m. today. Overall, some $180bn in total writedowns have been taken to date at dozens of financials. A Congressional report is loaded with stunning, embarrassing emails about decisions the boards made to increase pay for these executives, plus the footstamping Mozilo did behind the scenes to get more pay.

The three were paid $460mn over five years, says the congressional report from the House Oversight and Government Reform Committee. The three companies lost more than $20bn in the last two quarters of 2007 due to their mishandling of the looming subprime mess.

Merrill Lynch gave a $161.5mn pay package to O'Neal after the firm's subprime losses led to his ouster in October. Prince, who resigned in November from New York-based Citigroup, was to receive roughly $30mn in exit pay.

Watch Mozilo, who co-founded Countrywide in 1969, becoming its CEO in February 1998. Mozilo received almost $250mn in total compensation and an additional $406mn from the sale of his Countrywide stock since he became CEO. He also was given the use of the company's jet, payment of his country club fees, and the bank covered income tax payments for some of these perks. Mozilo was also ostensibly bullish on Countrywide's stock, when behind the scenes he was unloading his Countrywide shares from 2003 through 2007.

Mozilo is now under an SEC probe for those sales, which he attributes to a pre-existing executive plan, shares which cost him nothing, and a plan he reportedly widened to unload more stock. Since February 2007, Countrywide's stock has fallen by 87% to $5.70 per share.

Countrywide only just recently canceled a high-priced junket that the damaged lender would have paid for, a junket for bankers at a ski resort near Aspen, Colo., where Countrywide would have footed the bill for rooms going for $725 a night, as well as servings of Kobe beef and caviar.

To date, Countrywide has foreclosed on 90,000 loans, has laid off more than 11,400 employees since last summer, and it has reported a loss of $704mn for 2007, its first annual loss in more than 30 years. Countrywide, along with Bank of America (BAC), has been asking the federal government (meaning taxpayers) to buy up bad mortgages and to broaden its bailout of the housing mess.

Here are highlights from the report, based on thousands of pages of documents from the three companies, board minutes and internal company emails, and hundreds of public Securities and Exchange Commission filings:

A big sticking point in his compensation negotiations was the use by Mozilo and his wife of company aircraft.

“Mr. Mozilo emphasized on several occasions that he expected his new contract to provide explicitly for reimbursement of any taxes owed when his wife traveled with him on the Countrywide jet," the report says. In one e-mail to a compensation consultant, Mr. Mozilo wrote: "In order to avoid extraordinary travel expenses to be incurred by [the President and Chief Operating Officer], and me, the spouses would have to travel commercial or not at all, which is not right nor wise."

And in an extraordinary exchange, Mozilo used his outsize pay as a club when he threatened to retire if he didn’t get his way.

At the end of this e-mail, Mozilo threatened to retire if the board did not address his concerns, triggering sizable payments. "The Board must understand that if I were to retire today I would be receiving the SERP [supplemental executive retirement plan], receive approx. $15mn in deferred comp., get Directors fees and be able to liquidate my 12mn shares without restriction," Mozilo wrote in his email to the consultant. "More importantly I wouldn't have to continuously travel all over the world on behalf of the shareholders.”

The report says the board caved, as “the final compensation agreement obligated Countrywide to pay carry taxes due when Mr. Mozilo's wife accompanied him on business trips on the corporate jet."

The report next talks about how even executive pay consultants, paid millions of dollars by Countrywide, grew uncomfortable with Mozilo's outsized pay. After looking at his total compensation of $185mn covering 2002 to 2006, the report says, that in 2004, "Pearl Meyer raised concerns about the compensation package Mr. Mozilo would receive after his planned retirement as CEO at the end of 2006." The board appeared to have "accepted some of Pearl Meyer's recommendations and rejected others," the report says.

But then Countrywide canned Pearl Meyer, the Congressional report says.

Next, the new executive pay squad the bank hired also grew nervous. “In 2006, a new compensation consultant, Exequity, raised new questions about Mr. Mozilo's compensation package," the report says. “According to Exequity, Mr. Mozilo's compensation was based on a flawed 'peer group' of companies that inflated his pay and inappropriately placed him at the top of this peer group in terms of salary and bonus.”

So “Exequity recommended significant reductions in Mr. Mozilo's compensation," the report says, but Countrywide management wasn't having any of that.

It hired a third compensation consultant, Towers Perrin, "to review the Exequity proposal," the report says, which alleges Towers Perrin was more malleable. "Although the company retained Towers Perrin, internal e-mails show that the consultant appeared to serve as Mr. Mozilo's personal advisor with the goal of achieving 'maximum opportunity' for Mr. Mozilo," the report says. "The final contract was significantly more generous to Mr. Mozilo than Exequity originally recommended.”

Now check this out--Mozilo won a new Countrywide contract that said if the bank reduced his status at the company or took away his plane rides, he would quit with pay. Under the contract, "Mozilo could terminate his employment and receive severance if the board took an action that ‘results in the diminution of Executive's status, title, position and responsibilities’ or that ‘results in the Executive not being able to travel by private aircraft at Company expense,’" the report says. “In contrast, the board could terminate Mr. Mozilo without paying him cash severance only if Mr. Mozilo is convicted of a felony or acts in 'bad faith.'"

Now watch the very easy earnings targets Mozilo needed to hit to win his pay.

“Under the terms of the 2006 contract, Mr. Mozilo is entitled to a cash bonus (not to exceed $10mn) calculated as a percentage of Countrywide's net income if the company's return on equity (ROE) exceeds l0%," the report says, 10%, at a time when "Countrywide was regularly achieving a ROE of over 20%, so the 2006 contract provided Mr. Mozilo with a large bonus even if the company's ROE dropped significantly."

And check this out. The Congressional report says that one Countrywide official wrote in an internal e-mail: "I can't believe how low the ROE measures are. ...[S]hareholders or newspapers might comment all over this evident fact."

Next check out how Mozilo made three changes to his stock trading plan, each time increasing the amount he was allowed to sell, eventually selling 5.8mn shares for $150mn between November 2006 and December 2007.

At the same time, the bank borrowed a big $1.5bn to help buy back $2.5bn worth of shares, which help improve earnings per share figures--and subsequently the bank's stock price.

“The Countrywide board knew of the changes to Mr. Mozilo's stock trading plan but did not act to prevent Mr. Mozilo's sales," the report says. "Several board members also made large stock sales during this period."

Notably in 2007, the discrepancy between Mozilo's compensation and Countrywide's performance is striking. "In 2007, Countrywide announced a $1.2bn loss in the third quarter and an additional loss of $422mn in the fourth quarter," the report says.

By December 31, 2007, the company's stock had plummeted 80% from its five-year peak in February, the report notes. "During the same period, Mr. Mozilo was paid $1.9mn in salary, received $20mn in stock awards contingent upon performance," and sold another $121mn in stock, the report adds.

When the board opted to cut Mozilo's bonus to $10mn from $15mn, Mozilo e-mailed the consultant who crafted that idea.

"I appreciate your input but at this stage in my life at Countrywide this process is no longer about money but more about respect and acknowledgment of my accomplishments," he wrote. "Boards have been placed under enormous pressure by the left wing anti-business press and the envious leaders of unions and other so called 'CEO Comp Watchers' and therefore Boards are being forced to protect themselves irrespective of the potential negative long-term impact on public companies."

Mozilo added: "I strongly believe that a decade from now there will be a recognition that entrepreneurship has been driven out of the public sector resulting in underperforming companies and a willingness on the part of Boards to pay for performance."'

Countrywide's losses have continued in 2008. In SEC filings last week, Countrywide reported a large increase in delinquencies on its pay option adjustable-rate mortgages, its stock is now trading at $5.70 per share, a drop of more than 87%o from its high of $45.03 per share during the stock buyback in early 2007, the report says.

Now on to Merrill's O'Neal. The report says the company gave him a $161mn retirement package when he left in October, despite the fact that “during 2007, Merrill Lynch reported $18bn in write-downs related to subprime and other risky mortgages. By the end of 2007, the company's stock had fallen 45% from its five-year peak in January."

It adds that a big chunk of O'Neal's retirement package was $131mn in unvested stock and options. But O'Neal of course walked. "If the Merrill Lynch board had terminated Mr. O'Neal for cause, he would have forfeited these stock and options because they had not yet vested," the report says. “Allowing Mr. O'Neal to retire instead of terminating his employment for poor performance significantly inflated the value of Mr. O'Neal's retirement package. It is unclear why this decision was in the interests of Merrill Lynch shareholders.”

And finally Prince's reward at Citigroup, the lawyer who said last summer the bank was still "dancing" in subprime even while the house was burning down:

Prince left Citigroup in November 2007, getting a cash bonus worth $10.4mn. The board also let him keep more than $28mn in unvested restricted stock and stock options. "It is unclear how these decisions were related to Mr. Prince's performance or benefited Citigroup shareholders," the report says.

No kidding. During 2007, Citigroup took more than $18bn in write-downs related to the subprime and credit crisis and its stock dropped by 48% from its five-year peak in December 2006. Prince got a performance bonus in 2007, unlike Mozilo and O'Neal, the report says.

The board also awarded Prince perks when he was sent out the door, the report says, "worth $1.5mn annually, upon his retirement in November 2007. These perquisites included an office, an administrative assistant, and a car and driver for five years," plus Citi promised to pay his tax bills on these benefits, this, despite the fact his employment contract didn't entitle him to these benefits.

Citigroup's stock fell to a nine-year low this week, and has now dropped 61% since its high in December 2006.