March 9, 2008 6:43AM

Final Thoughts on the Fat Cat CEO Pay Hearing

By Elizabeth MacDonald

Some final thoughts on the hearing last Friday on the rich compensation given to Angelo Mozilo, founder and chief executive of Countrywide Financial (CFC), E. Stanley O’Neal, former CEO of Merrill Lynch (ML), and Charles Prince, former CEO of Citigroup (C).

There were dozens of questions I wanted asked, which I’ve noted below.

We have reported this story on Money for Breakfast, and I also covered the hearing with Fox Business’s crack team of Cheryl Casone, Tom Sullivan, Dagen McDowell and Ray Hennessey.

These bank executives are under fire for getting rich pay at a time when the government is now struggling with a housing and credit crisis these three helped engineer. Banks have written off $180bn in assets in the housing slump, while thousands of jobs have been lost and home foreclosures soar to record highs. Moody’s estimates 3.5mn people will lose their homes to foreclosure during this crisis.

During the five-year period from January 2002 through December 2006, the stock of Countrywide, Merrill Lynch, and Citigroup appreciated, and the three CEOs collectively received more than $460mn in compensation. Mozilo in particular got $250mn in compensation plus made $414mn in stock sales.

However, the executives received rich payouts largely based on profits that didn’t exist. Their companies booked $20bn in writedowns for the final two quarters of 2007. The three banks to date have reported more than $45bn in writedowns from the crisis. Stocks in their companies have plunged to record lows, and investors have lost tens of billions of dollars.

And as I’ve already reported to you, the Federal Bureau of Investigation and the Department of Justice are probing 14 companies, including mortgage brokers, investment banks and mortgage lenders, as part of a wide-ranging investigation of potentially fraudulent business practices. It’s an unusually wide-ranging probe, as the bureau is reviewing possible accounting fraud, insider trading or other violations in connection with loans made to borrowers with weak, or subprime, credit.

At the same time, the Securities and Exchange Commission has been conducting about three dozen civil investigations into the origination and valuation of securitizations of subprime loans.

Justice and the FBI is looking at whether officials at Countrywide, the nation’s largest mortgage lender, misrepresented its financial condition and the soundness of its loans in security filings, The Wall Street Journal reports. However, a Countrywide spokeswoman has said the bank is not aware of any investigation.

Here’s what I would have asked Mozilo, O’Neal and Prince:

Do you think it is right that you got paid for “performance” when your companies were booking massive losses?

Due to the record writedowns and losses your companies are reporting, the compensation you received was essentially based on phantom profits. Given how your companies are struggling, do you think you should give some of that pay back?

Your rags to riches tales–O’Neal says he was descended from slaves, Mozilo from immigrants, and Prince, the first in his family to go to college–sound like a compelling, made in America story.

But wouldn’t you agree that plenty of Americans have risen above difficult backgrounds, and none were paid millions of dollars to leave the smoking wreck of their companies behind after they have driven them into a ditch?

Was this instead an emotional tug at the heartstrings, a head fake to mask your rich payouts given at a time when you left behind companies that are suffering like never before?

Do you, Mr. Mozilo, think it’s right to be asking for so much in pay at a time when your company sold borrowers loans they could not afford, 90,000 of which are delinquent, at a time when your bank along with Bank of America is asking US taxpayers to bail out these loans, at a time when your bank has already laid off 11,400 workers?

Mr. Mozilo, you said in your testimony that you plan to waive $37.5mn in severance pay if Bank of America buys Countrywide in a $4.1bn deal, a deal BofA needs to do to protect its $1bn investment in Countrywide last summer. However, you reportedly stood to collect a windfall of $115mn dollars after Countrywide agreed in January to the sale to Bank of America. Why just $37.5mn?

Mr. Mozilo, why did you suddenly announce on Jan. 28 that you would forfeit the $37.5mn? Was it due to the public outcry over your pay package and Congress’s announcement of the hearing on executive pay?

In talking about how you built the company, Mr. Mozilo, you said that the stock in your company “started at zero,” and yes stock in your company made an astronomical ascent. Isn’t saying it started at zero was a tad bit of an overstatement, made during your discussion of your humble beginnings, as the initial public offering in Countrywide stock debuted over-the-counter in 1969 at about $1, then started trading on the New York Stock Exchange in 1985 at around $2?

According to internal documents reviewed by Congressional committee staff, Mr. Mozilo, you used one of Countrywide’s compensation consultants as your own personal adviser, with the goal of achieving “maximum opportunity” for yourself. Two other compensation consultants hired by Countrywide from 2004 to 2006 were soon terminated after they questioned the amount of compensation you received as being inflated, with one consultant noting that you wanted them to regard your pay package as commensurate to the compensation paid to the CEOs of the largest US banks, worth many times more in market cap than Countrywide.

How do you explain using Countrywide shareholder capital to pay for three consultants, two of which you didn’t agree with because they thought your pay was inflated, and one of which advocated even more shareholder capital be spent on you?

Mr. Mozilo, separately, two executive pay consultants your bank, Countrywide, hired told the bank they considered your pay “inflated,” according to the Congressional report, partly due to easy bonus targets and the use of this flawed peer group. How do you explain their conclusions?

Mr. Mozilo, when Congressman Elijah E. Cummings asked why you had demanded that Countrywide pay income taxes on your wife’s travel on the company jet, you replied, “It sounds out of whack today because it is out of whack, but in 2006, the company was doing great,” adding you would not have made such a request today and apologized for complaining about your compensation in an internal email. Can you please explain your thinking here?

And by the way, you did more than complain if Countrywide refused to pay these income taxes on your wife’s use of the company jet. You threatened that if you quit, the company would have to pay out a lot of money toward your retirement, and that you would get to liquidate 12mn shares in the bank, according to an internal email you sent. The bank’s board eventually capitulated. All correct?

Mr. Mozilo, while still at the company, you asked to collect $3mn a year in benefits that you were eligible to receive only when you retired, internal documents show. You noted in testimony that this request was “unusual,” and a hired consultant wrote in an email that “We can troll through proxy statements but I have never heard of a CEO receiving a pension payment in addition to earning salary, bonus and long-term incentives,” while still working at the company. How do you explain your request?

Mr. Mozilo, why did you on three occasions increase the amount of stock you could sell, selling a total of $150mn from 2006 to 2007, at a time when your company was borrowing $1.5bn to do a $2.5bn buyback of shares, stock sales which occurred right when Countrywide was on the brink of plunging into the mortgage meltdown? (Readers, the SEC is probing the sales.)

Mr. Mozilo, you have maintained that the sales were prompted by deadlines you faced to exercise stock options as well as the desire to diversify your assets in preparation for your retirement. Why did you wait so long to diversify?

Did you diversify at a time when shares in your company were increasing due to record profits your bank was enjoying from the housing bubble? Did you purposely “diversify” at a time when your company was borrowing money to do a share buyback, a buyback that increases stock prices?

Mr. Mozilo, you said in testimony: “The goal was to reduce my holdings because of my retirement . . . almost all my net worth was in Countrywide.” However you got paid $250mn in cash compensation, or $25mn for every year you worked as CEO, and you sold $414mn worth of shares, shares you did not have to pay for. So what do you mean “almost all” of your net worth was in Countrywide?

Mr. O’Neal, you said in testimony that you earned the stock options in Merrill that you were given. SEC filings though indicate that you got $131mn of the $161mn you were given when you were shown the door last fall in an “early retirement” payout. You wouldn’t have been given the payout if you were fired. How did you get your company to agree to an early retirement deal when you had no intention of retiring up until last fall?

Mr. O’Neal, you received $131mn in stock and options that were not vested yet, meaning, you didn’t work the remaining years of your vesting period to earn them. Workers typically must work five years, the usual period of time for a vesting period, before they get to own their stock and options. Can you explain what you meant by saying that you earned them?

Mr. O’Neal, can you please explain to us why you were given that payout, given that it was based on phantom profits since to date your company has recorded $24bn in writedowns from the subprime mess?

Mr. Prince, why did you say last summer that Citi was still “dancing” in the subprime business when the computer terminals at your bank were flashing fire engine red signals that a meltdown was already underway, proving, as I’ve said before, that artificial intelligence is no match for natural foolishness?

Mr. Prince, do you think you should hand back to Citi your $10.4mn “performance” bonus you received on being shown the door given that your bank has recorded $21bn in writedowns, and given that that bonus was based on profits that didn’t exist? Do you think you should also give back the $28mn in unvested stock and options and $1.5mn in annual perquisites you received?

Rep. Tom Davis (R-VA), what did you mean when you said linking executive pay to the subprime crisis ”only seems to muddle the issue further,” given that these executives were paid compensation based on the record amount of business they brought in from selling and securitizing subprime loans?

To all three executives: Why did you remain silent and not utter a word when Republican Congressman Cannon, who lauded you and thought you were terrific, asked you all whether you thought you were paragons of Corporate America that our nation’s children can look up to as examples of who they can be when they grow up?

To all three executives: What do you say to Congressman Henry Waxman’s comments: “’You’re in the middle of an enormous debacle. It seems like everyone is hurting except for you” and “I have no problem with paying for success. But it looks like when you’re a CEO you get paid for failure.”

To all three executives, what do you say to comments from Nell Minow, editor of The Corporate Library and one of the corporate governance experts who testified: ”It’s only in the wacky world of CEOs where you get severance for failing.” Also, Minow criticized “all-upside, no downside pay plans.” What do you say to that?

And finally Minow said a significant “corporate governance weakness, even in the post-Enron era, remains investors’ inability to do much about excessive CEO pay approved by subservient boards.” Minow urged the Senate to adopt legislation already passed in the House to give shareholders a non-binding “say on pay.”

To all three executives: Do you think this legislation would work?