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Paid to Fail? An Inside Look At Compensation and Bonuses for Wall Street’s Worst
Since 2000, home mortgage lenders have made more than $2.5 trillion in “toxic” subprime loans and most all these mortgages are failing miserably. In fact, millions of homeowners, tax payers and investors around the entire world are losing billions (possibly trillions) and the home in which they live as a direct result of these CEO’s.
As of this 3th day of November 2008, 299 home mortgage lending institutions have failed and many of these same CEO’s are living high on the hog and rewarded handsomely for their terrible lack of judgment.
Welcome to the economic world we live in now. A place where CEO’s are rewarded handsomely for failing and a world where tax payers fund their bailouts, bonuses, vacations and retirements.
Today, these giants of Wall Street seem distinctly more vulnerable, perhaps a bit more human and some would say criminal.
In mid October, the #1 federal prosecutor in Los Angeles indicated that charges will be filed in the coming months in a sweeping investigation of banks and subprime lenders for their role in the nation’s mortgage crisis.
“I think we are going to see some fairly dramatic results in the near future,” U.S. Attorney Thomas O’Brien told The Associated Press. “There are people who have made many millions of dollars preying on unsuspecting people. That’s wrong. That’s fraud in a tremendous amount.”
A grand jury is investigating at least three mortgage lenders – Countrywide Financial Corp., New Century Financial Corp. and IndyMac Bancorp Inc. Prosecutors are looking at whether mortgage fraud and other white-collar crimes were committed.
These companies “would just sign off on applications no matter how ludicrous the information was,” said Lonergan, who worked at the U.S. attorney’s office for 18 years.
She said it’s unlikely that any alleged misconduct was limited to the lower ranks in the lending institutions.
“Was it just individual loan officers who knew about this?” Lonergan said. “It seems to me unlikely, considering the scope of foreclosures going on right now.”
She added, however, that investigators will have a difficult time trying to prove company executives knew what was going on.
Editorial/Rant by Moe: That argument has been stated on LoanWorkout.org for the past year.
It’s as if a broker and lenders drive up to the bank with the broker who is wearing a gun and mask and then he comes out running with bags of money and die packs blasting off, “GO, GO GO, let’s get out of here!” he says as the lender drives off, wheels screeching.
Later the getaway driver/lender is questioned by the FBI and they ask, “Please explain to us how you didn’t know that your partner/mortgage broker was robbing the bank with a mask on and die packs going off and all. I mean come on, you HAD to know the was robbing the bank?”
The blind lender/driver responds, “How could I have known what he was doing in the bank because I didn’t go in there with them and just because he had a mask, bags of money and die pack exploding doesn’t prove I knew something!”
This appears to be the mortgage lenders and Wall Street’s “weak” defense??????????? Error….
Many look to CEOs themselves to set examples, and they cite decisions by interim AIG chairman Robert Willumstad to forgo contractual bonuses in light of market conditions. At the very same firm, however, former CEO Sullivan is now fighting for his compensation package against regulators who claim he defrauded the company (see Bloomberg.)
Rather than placing any temporary restrictions on executive pay, however, it’s crucial that Wall Street return back to the economic fundamental they claim to profess: pay for play. If Wall Street CEOs do not help their firms produce long-term profits, then it should be seriously questioned whether they genuinely deserve large compensation packages.
Even when firms suffer loses, as Morgan Stanley did last year, executives still earn large base salaries (see WSJ.)
When Congress passed the recent Economic Stabilization Act with up to $700 billion in funds to shore up credit markets, the banks that received equity investments placed limited caps on compensation structures. Still, the banks have been less than forthcoming on bonus structures, leading the New York Attorney General to file suit to release these records (see CNBC).
This comes in light of news that Wall Street owes deferred bonuses to many of their executives which may be funded, in part, with government cash injections (see Reuters), which led House Financial Services committee Chairman Barney Frank, Democrat from Massachusetts, to threaten to cut the Stabilization Act funds (see Boston Herald.) With only $250 billion so far allocated from the Act, banks may be under increased scrutiny regarding executive pay.
The primary restrictions on executive pay for banks now include a limit on so called “Golden Parachutes”, which prevents banks from giving large severance packages, along with “claw back” provisions that force repayment of compensation for executives who presided over banks that filed “materially inaccurate” financial statements during their tenure (see New York Times.) These definitions certainly leave open room for interpretation and do not go into effect retroactively, meaning, in effect, they will be limited in their scope in all likelihood.
Most all Americans have never been asked if it was OK that their tax dollars were helping the country’s top CEO’s and executives to become incredibly wealthy. No one has ever asked lawmakers either. Congress has never taken an explicit, up or-down floor vote on any of the major tax code loopholes that enrich our current captains of industry and finance.
CEO’s of large US companies make more in one day, than the average American worker makes all year. These ridiculous compensation packages that many of these “failed or failing” CEO’s, fund managers and executives have received or are going to receive.
S&P 500 CEO’s last year averaged $10.4 million, 344 times the average Americans pay. Then you have what we call the “economic cartel”, a group of CEO’s, executive and hedge fund managers that profited off the misery and shame in the wake of economic destruction.
Since 2000, home mortgage lenders have made more than $2.5 trillion in “toxic” subprime loans. Most all these mortgage are going bad as millions of American’s lose their homes.
A large proportion of these mortgages were sold to those with credit scores high enough to qualify for conventional loans with far better terms. Instead, individuals often were pushed into subprime loans by unlicensed mortgage brokers motivated by the more favorable commissions and using deceptive tactics.
Bottom line America, the economic cartel has BIG influence over our law makers and they are making their getaways right now before our very eyes.
Main Street wants these players heads on a platter and they want to MAKE SURE that these CEO’s have their day in court. But the question remains is, “How have these executives retained such high compensation rates while their companies crumble and millions of people lose their homes and life savings?”
The list of subprime CEO’s below have been compared to the mob or drug cartel for their explicit involvement in the world economic meltdown. We call them, “The Economic Cartel – Mortgage Unit”
(Please keep in mind that all of these CEO’s made more in 2007 than the world’s most successful investor and CEO, Warren Buffet)
1. Angelo R Mozilo – Former CEO of Countrywide Financial – $144 million- 5-Year Compensation Total $295.73 million
2.Richard S Fuld Jr – Lehman Bros Holdings – $51.65 million – 5 year compensation unknown
3. James E Cayne – Bear Stearns Cos $38.31 million – 5-Year Compensation Total $155.26 mil
4. Lloyd C Blankfein – Goldman Sachs Group $37.05 Million – 5 year unknown
5. E Stanley O’Neal – Merrill Lynch $36 million – 5-Year Compensation Total $87.45 mil and Mr. O’neal was only at Merrill for 4 years. During the height of bad investments and subprime slime. Yet, as captain of Merrill, he averaged $20 million a year in income for running the investment firm into the ground.
6. Kerry K Killinger – Washington Mutual $22.73 million – 5 year compensation unknown
7. Charles Prince – Citigroup $19.67 million – 5 year compensation $68.92 million
8. Brad A Morrice – New Century Financial $15.22 million – Morrice was CEO of New Century Financial for one year and the same year, the company failed. Investors lost 99% of their stocks value. They were the #2 subprime lender
9. G Kennedy Thompson – Wachovia $10.79 million – 5-Year Compensation Total $48.91 mil
10. Robert G Wilmers – M&T Bank $10.45 million – 5 year compensation unknown
11. David A Daberko – National City $9.35 – 5 year compensation unknown
12. Richard F Syron – Freddie Mac $8.05 – 5 year compensation $15.91 million
13. John J Mack Morgan Stanley $7.46 million – 5 year compensation unknown
14. Raymond W McDaniel Jr – Moody’s $7.04 million – 5 year compensation unknown
15. Stuart A Miller - Lennar $6.73 million- 5 year compensation $84.51 million
16. Daniel H Mudd – Fannie Mae 3.94 Million – 5 year compensation unknown
17. Michael W Perry – IndyMac Bancorp $2.13 million – 5 year compensation unknown – IndyMac is now being controlled by federal regulators (FDIC) after it failed in July.
So how did these “loser” CEO’s win big and how do they continue to cash in?
The answer lies mainly one source: legacy pay, which ensured that executives would be well compensated largely independent of their actual performance (as dictated in contracts).
What has remained constant, even as the gigantic monetary returns of the Street have given way to massive security losses is that executives of the firms are compensated at near record highs. By constructing a compensation structure that ensured strong returns through a combination of stock options, bonuses and severance packages, the Titans of Wall Street seemingly floated above the clouds of economic uncertainty.
Today, however, this is raising attention on the compensation practices of these banks since they are now increasingly regulated by public ownership. The bull that once dominated over Wall Street, assuring us that the economic engine is driven by the financial engineering is being called into question.
In theory, these executive and trader compensation packages are tied to performance, but the data doesn’t entirely justify the compensation structures. Today, the financial structure of Wall Street is crumbling under credit pressures – the mortgage backed securities that the firms invested in are worth a fraction of what they paid for them and there has been a definite lack of stable investments in recent markets.
So, if the banks aren’t making a profit, why are they paying out bonuses at all? The answer goes back to the risk/reward structure that Wall Street banks use to ensure their “talented” traders bond jump ship to a competing bank. But, a more important question should be asked: why are people competing for trading skills that result in loses, no matter how competitive the firms are with one another?
Managing directors at investment banks earned average bonuses over $1 million last year, and are expected to earn over $500,000 this year (see Time Magazine). Then, if the bonuses cannot come directly from this year’s profits and past profits are being used to shore up the bank’s financial books, then where exactly do the funds for these bonuses come from?
Especially since most investment banks are planning layoffs, including an estimated 3,000 jobs lost at even thriving Goldman Sachs and Barclays, not to mention the wide spread job cuts at Lehman Brothers and Merill Lynch, as they integrate into new ownership.
So, how far have we really come from 2007, or, for that matter, from the Gilded Ages of the 1880s when the concentration of wealth grew enormously, or even from the 1980s when Wall Street went on a bond trading excursion that ended in the failure of countless Savings and Loan Institutions?
The answer, unfortunately, is that we still have a principle-agent problem: investment manager compensation is still not entirely linked with fund performance, even if it is more closely linked than it was a few years ago.
An even larger problem, at the core of the issue, is that the activities on Wall Street still incentivize financial engineering and over building successful companies – it is more profitable to engage in mergers than it is to get your hands dirty building a true company.
Look at Ceberus, which discovered how difficult it is to run an industrial company in a competitive market when it bought Chrysler (see Herald Tribune) As a result, the investment company is seeking to exit the manufacturing industry and instead return back to its roots in financing by shifting GMAC (the General Motors financial arm, of which it owns 51%) into a full bank – as part of this process, of course, GMAC may qualify for a federal investment, which could help facilitate a merger of GM with Chrysler, thus giving Cerberus a proverbial exit strategy while keeping salaries high. Arguments are being leveled that this financial engineering is designed to save US industry, and along with it, manufacturing jobs and improvements in “green vehicle” production.
The truth, however, relates back to the same old story: the notion that what is good for Wall Street is good for Main Street is running thin.
Again, the question must be asked: who is paying for all of this?
Unfortunately, the answer seems to be tax payers, whether in this generation or next, as the federal deficit reaches all time highs, funding special interests and increasingly turning its back on the public interest as a whole. Who, in this climate is showing leadership, then?
Removing tax payers from this equation and forcing banks to face their own music, therefore, would be a movement in the right direction. Even in this difficult economic climate, the dual levers of risk and reward need to operate fully to ensure that good decisions are rewarded while poor decisions lead to consequences.
Restoring this equilibrium of accountability is crucial to bringing Wall Street back to its roots.
