Hearing of the House Oversight and Government Reform Committee - Executive Compensation II: CEO Pay and the Mortgage Crisis

Statement

Hearing of the House Oversight and Government Reform Committee - Executive Compensation II: CEO Pay and the Mortgage Crisis

REP. WAXMAN: The meeting of the committee will please come to order.

Today the committee is holding its second hearing on executive compensation. Our subject is the compensation of executives who preside over billion-dollar losses.

There seem to be two different economic realities operating in our country today, and the rules of compensation in one world are completely different from those in the other. Most Americans live in a world where economic security is precarious, and there are real economic consequences of failure. But our nation's top executives seem to live by a different set of rules.

There's no better way to understand these two worlds than to look at real examples. Last year, Circuit City cut costs by arbitrarily firing its most successful retail sales employees. Any employee in computer sales who was earning more than $16 per hour was fired. It didn't make any difference that some of the employees had years of service and a superb performance record. This was their first-hand lesson in market forces. Every fired employee was then given a chance to re-apply for their jobs at lower pay. Those, unfortunately, are often the rules for typical employees. They can work hard, be loyal and do everything right and still lose ground.

The world for executives is quite a bit different. Last year, one of our nation's highest-paid executives was Ray Irani, the chief executive officer of Occidental Petroleum. His total compensation was more than $320 million, which roughly comes out to $154,000 an hour.

By any measure, executive pay is rising rapidly and dramatically. The CEOs of the 500 largest American companies received an average of $15 million each in the year 2006, and that was a 38 percent increase in just one year. In 1980, CEOs were paid 40 times the average worker. Today they are paid 600 times more. And incredibly, 10 percent of corporate profits are now flowing to the top executives.

Now, at first blush, it's hard to reconcile $154,000 an hour with $16 an hour. But CEOs and salesmen have different roles. And the argument, as I understand it, is that a CEO who adds value to the company and its shareholders is worth every penny.

I think there's merit to pay for performance. But it seems like CEOs hit the lottery when their companies collapse. As the financial columnist Allan Sloan put it, even if you flame out on Wall Street, you still get to keep the money.

Today's hearing will examine this issue. The question we will ask is a simple one: When companies fail to perform, should they give millions of dollars to their senior executives?

Our particular focus is the debacle with subprime mortgages. The mortgage crisis and credit crunch is devastating to both homeowners and our nation's economy. Over 7 percent of all mortgages are delinquent or in foreclosure, the highest rate ever recorded. Almost 9 million families now owe more on their mortgages than their homes are worth.

Banks in the United States have written off more than $120 billion in assets. Mortgage companies have gone under or on the brink. Thousands of Americans have lost their jobs and their homes. And the economic spillover is being felt throughout the world.

Three companies that gambled heavily on the subprime bet are Countrywide Financial Corporation, Merrill Lynch and Citigroup. And I want to thank the chairs of their compensation committees and their CEOs for being here today and for their cooperation.

All three companies have suffered enormous losses. Countrywide lost $1.6 billion in 2007, and its stock lost 80 percent of its value. Merrill Lynch lost $10 billion, and its stock lost 45 percent of its value. Citigroup also lost $10 billion, and its stock lost 48 percent of its value.

In light of that terrible performance, the CEOs of Merrill Lynch and Citigroup resigned last year. Mr. Mozilo, the CEO of Countrywide, is also making plans to step down if Countrywide is acquired by Bank of America. But the pay they received from their companies and their stock sales was extraordinary. Any reasonable relation between their compensation and the interests of their shareholders appears to have broken down.

Mr. O'Neal left Merrill Lynch with a $161 million retirement package. Mr. Prince was awarded a $10 million bonus, $28 million on vested stock options and $1.5 million in annual perquisites when he left Citigroup. And Mr. Mozilo received over $120 million in compensation and sales of Countrywide stock.

But the obvious question is, how can a few executives do so well when their companies are doing so poorly? Mr. Mozilo, Mr. O'Neal and Mr. Prince are each classic American success stories. Mr. Prince was the first in his family to go to college. Mr. Mozilo started his company sitting at a kitchen table in a small New York City apartment. And Mr. O'Neal's grandfather was born into slavery and his parents worked several jobs at once to give their children the American dream. Mr. O'Neal himself worked his way through college by working at a General Motors plant.

Each of these men achieved incredible success through hard work and ability, and each was richly compensated when their companies prospered. And on behalf of this committee, I want to commend them and thank them for their many contributions to our country.

The questions we ask today are not in any way intended to disparage their records. But what we're trying to understand is fundamental to our nation's values and is also of central importance to the effective functioning of business and our economy.

Are the extraordinary compensation packages these CEOs received reasonable compensation, or does the hundreds of millions of dollars they were given represent a complete disconnect with reality?

This isn't a hearing about illegality or even unethical breaches. It's a hearing to examine how executives are compensated when their companies fail. And it's a hearing to help us understand whether this situation is good for the companies, the shareholders and for America.

The testimony today is something those Circuit City workers I spoke of a few minutes ago will be interested in. It's something the millions of Americans who are going through the pain of foreclosure of their homes would be interested in. And it's something every member of Congress should also be interested in.

I want to now recognize Mr. Davis for an opening statement.

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REP. TOM DAVIS (R-VA): Thank you, Mr. Chairman...
Mr. Chairman, as the minority does not have a witness at the table who is an expert on questions of executive compensation, we would like to enter into the record a publication by the Business Roundtable explaining best practices on executive compensation.

REP. WAXMAN: Without objection, that will be made -- (cross talk) -- in the record.

REP. DAVIS: Mr. Chairman, I'd also like to enter into the record a publication from the Federal Reserve Bank of New York published in 2000 which praises the securitization of low- to moderate-income mortgages as a means of increasing the capital available to those communities. I believe it sheds some light on the role of federal government played in encouraging securitization of subprime mortgages.

REP. WAXMAN: With objection, that will also be made part of the record.

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REP. WAXMAN: Thank you, Mr. Davis.

On our first panel, the Committee will hear testimony from five individuals with expertise or experience related to the mortgage crisis. Dr. Susan M. Wachter, the Richard B. Worley professor of financial management at the University of Pennsylvania's Wharton School; the Honorable William Francis Galvin, the secretary of state for the Commonwealth of Massachusetts and the state's chief securities regulator; the Honorable Brenda Lawrence, the mayor of the City of Southfield, Michigan; Dr. Anthony Yezer, professor of economics at the George Washington University; and Ms. Nell Minow, editor and co- founder of the Corporate Library.

We want to thank each of you for being here today. It's the practice of this Committee that all witnesses testify under oath, so I'd like to ask you if you would please rise and raise your right hand.

(The witnesses are sworn in.)

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REP. WAXMAN: The record will indicate that each of the witnesses answered in the affirmative.

Yes?

REP. ISSA: Mr. Chairman, I would ask unanimous consent that all members be allowed to put their opening statements into the record in the appropriate position.

REP. WAXMAN: Without objection.

REP. ISSA: And Mr. Chairman, I'd also ask that the -- because it's pertinent information, that the material from the AFofL-CIO Web site 2007 executive pay watch also be put in the record, in the same location.

REP. WAXMAN: Without objection.

REP. ISSA: Thank you, Mr. Chairman.

REP. WAXMAN: We're pleased to have you with us today. We've received your prepared testimony. What we'd like to ask you to do in your oral presentation is to try to stay within five minutes. We'll have clock. It'll be green, and then one minute before the five minutes are up it'll turn yellow and then red at the end of five minutes. We'd like to ask you, when you see the red, to try to summarize. But your whole statements will be in the record.

Ms. -- let's see, Ms. Wachter, why don't we start with you? There's a button on the base of the mike. Be sure you press it in and pull it close enough to you so that we can hear everything you have to say.

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REP. WAXMAN: The gentleman's time is expired.

The chair will recognize himself for five minutes.

Ms. Minow, you've been critical of the corporate governance practices of Citigroup. During our committee's investigation, we learned that when the former CEO of Citigroup, Charles Prince, left the company in November 2007, he was given a $10 million bonus in cash. He wasn't entitled to this, because he had no employment contract with Citigroup.

Now, at the time Mr. Prince left Citigroup, the company was losing $10 billion as a result of decisions made while he was CEO. Did this make sense? Was it appropriate to give Mr. Prince a $10 million bonus when Citigroup had just lost $10 billion?

MS. MINOW: Mr. Chairman, I feel a little bad picking on him. I don't think it was appropriate, but his sins are so much smaller than the other people we're talking about that it almost seems like $10 million isn't that much.

Overall his pay package was not that -- as far out of whack with performance as the other people that we've been discussing. And I will say that it is not unusual for CEOs without a contract to be given that kind of money, because the board feels bad about their exit and it's not their bank account, so they're happy to write a check on it.

REP. WAXMAN: Well, from a shareholder perspective, what rational would there be to give a former CEO who had just presided over a loss of $10 billion, perks of $1.5 million, a cash bonus of $10 million? From a shareholder -- because the board's supposed to be representing the shareholders, aren't they?

MS. MINOW: That's my belief. It doesn't always work that way. From a shareholder perspective, I do not think it is possible to justify that payment.

REP. WAXMAN: Mr. Galvin, you represent an institutional investor. Do you have a comment on this?

MR. GALVIN: Yes. I'm concerned about this, because it continues -- the continuation of this practice, or the acceptance of these practices, may well lead to additional abuses in the future.

I mean, one of the big problems in the whole financial services area historically, I believe, is that there's been a history here of allowing people, at great public expense, to make big mistakes and simply either be dismissed with pay or the company to pay a fine and move on their merry way until they do it again.

And one of my greatest concerns about this is obviously, the crisis we've all been speaking to this morning, as far as the housing market, but it also is: What are we learning from this? What are we doing about -- to make sure this type of problem doesn't occur again?

You know, one of the issues that came up in the context of Congressman Issa's questions, is the whole issue of securitization. The reason this big pool of money was available was of securitization. Severing the link between a specific value for a home and, in fact, the pool of money that was available, it fostered the abusive loans that were just chronicled by the professor.

So the question is, if you continue to reward people for making mistakes, if you continue to reward people for screwing up, you know what? They're going to screw up again. It may be in a different context, a different company, but it's going to happen. And the question is, what are we doing about it?

And I'm particularly concerned when it affects things that are essential life -- shelter, fuel -- things that we all need and things that destroy our economy overall and I think that's what we're seeing now.

REP. WAXMAN: Well, it has enormous impact on the economy and on communities -- as we've heard from Mayor Lawrence. It has a rippling effect in confidence in the whole economic system.

But I'm not picking on anybody, Ms. Minow, when I ask about these compensations -- and it may not be as much as others. After all, they can point to some of the others in financial areas where they make even more money. I don't have any problem with people making money. I just want some alignment, some rationality where the shareholders and everybody else is protected.

There is -- our workers in this country are looking to their retirement to 401(k) plans -- that means investment in public corporations; and therefore, they want American corporations to succeed. Is this giving the right incentives for corporations to succeed when we're compensating the executives in a way that doesn't seem to have a rationally to it.

Ms. Wachter, do you want to comment on that?

MS. WACHTER: Well, I do think it's extremely important that, as Mr. Galvin just said, that the incentives be in place. And we do need to seriously look at the lessons learned from this crisis.

This crisis is the first one that has involved homes in America, as well as individual -- not large investors only, but small investors: pension funds, cities. And it's coming home to cities in two ways: in communities in both housing and funding. So it is really a great concern for cities. We must learn the lessons.

And if the decision makers don't have failure incentives to watch this, in terms of their own personal reiteration, then indeed, the mistakes will be made again and --

REP. WAXMAN: And we're not discussing --

MS. WACHTER: -- perfectly.

REP. WAXMAN: -- this whole question in the abstract, because we're talking about a specific crisis that's resulted from these collateralized loans, and you've studied that.

Can you tell us in layman's term how the practices of Merrill Lynch and Citigroup and other investment banks contributed to this mortgage crisis?

MS. WACHTER: On the one hand, they were innovators, and that's their job. On the other hand, they were creating high-risk instruments -- and that's their job. So actually, on some levels they were doing the job.

But the question that we have to ask is two: One, as a society, do we want to allow and encourage the home to be backed by very volatile, risky investments that will actually potentially cause not only the people who were securitized by these instruments to borrow these, but indeed all homeowners to be exposed to this kind of risk? We are the only country in the world that is so exposed.

REP. WAXMAN: I thank you very much for your responses to the questions of all our members of the committee and for your presentation.

I would like to ask you if you'd be willing to respond to questions in writing that might be submitted to you for the record.

Thank you very much for being here today.

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REP. WAXMAN: We'll take a five-minute break while our next panel comes in to take their places.

(Recess.)

REP. WAXMAN: (Strikes gavel.) The meeting of the Committee will please come back order.

On our second panel, we will hear testimony from Mr. Charles Prince, the former chairman and chief executive officer of Citigroup, Inc.; Mr. Richard D. Parsons, chairman of Time Warner and the chairman of Citigroup's personnel and compensation committee; Mr. E. Stanley O'Neal, the former chairman and chief executive office of Merrill Lynch; Mr. John D. Finnegan, chairman of the management development and compensation committee for Merrill Lynch and the chairman and chief executive officer of the Chubb Corporation; Mr. Angelo Mozilo, chairman and chief executive officer and co-founder of Countrywide Financial Corporation; and Mr. Harley Snyder, the chairman of the Countrywide compensation committee. As well as that company's lead director, among other real estate ventures, Mr. Snyder is the president of HCS, Inc.

We're pleased to welcome all of you to our hearing. I appreciate your being here. It's the practice of this Committee that all witnesses who testify before us do so under oath. So now that you're seated, I would like to request that you stand up and please raise your right hands.

(The witnesses are sworn in.)

The record will indicate that each of the witnesses answered in the affirmative.

Your prepared statements will be in the record in full. We will have a clock that right now has a red light on, but it will be five minutes. Green for four, yellow for one, and then it will turn red at the end of five minutes. When you see that, we would like you -- ask you to summarize, if you would. But we're not going to be so strict that we're going to cut anybody off.

Mr. Prince?

REP. DAVIS: Mr. Chairman, can I just ask --

REP. WAXMAN: Yes, certainly.

REP. DAVIS: -- unanimous consent that we enter the minority memorandum in the record containing discussions of the timeline of the subprime crisis?

REP. WAXMAN: All of the memos prepared by staffs of the Committee will be entered into the record, without objection.

REP. DAVIS: Okay. Thank you.

REP. WAXMAN: So ordered.

Mr. Prince, we want to start with you. There's a button on the base of the mike. Be sure it's on and have it close enough so it can pick everything up.

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REP. WAXMAN: Thank you very much, Mr. Snyder, and all of you.

We're going to now start with questions, and we're going to do 12 minutes controlled by the chairman and then 12 minutes controlled by Mr. Davis. I'll start off first.

And Mr. Mozilo and Mr. Snyder, I want to ask you about Countrywide.

It's the largest mortgage lender in the nation and it's the company most identified with the mortgage crisis. Both of you in your roles as CEO and board member have an obligation to act in the interest of your shareholders, but I'm having a difficult time reconciling that issue with Mr. Mozilo's compensation.

In October 2006, for instance, before the mortgage crisis erupted, Mr. Mozilo filed a stock trading plan, and this plan allowed him to sell 350,000 shares per month. Over the next few months, Mr. Mozilo revised this plan twice. In December, he amended his plan so that he could sell 465,000 shares per month. And then on February 2nd, 2007, Mr. Mozilo increased his stock sales to 580,000 shares per month. That was the same day that Countrywide stock hit a record high of $45 a share. In total, I believe Mr. Mozilo sold 5.8 million shares for $150 million between November 2006 and the end of 2007.

Does that sound right to you, Mr. Mozilo?

MR. MOZILO: I don't have -- Congressman, I don't know the number. As I stated in my verbal remarks, that the goal was to reduce my holdings because of my retirement. I ended up with 6-and-a-half million shares. We were trying to sell half of the holdings, so it may be around that number.

REP. WAXMAN: Well, Mr. Mozilo, you had good timing because Countrywide's stock has fallen nearly 90 percent since you amended your stock trading plan. But what's most unusual about these sales may be that they occurred at the same time that Countrywide decided to spend $2.5 billion to buy its stock back. Countrywide didn't have enough money to buy back the stock, so it actually borrowed $1.5 billion to finance the stock repurchases. The stock buyback plan appeared to have a significant effect on Countrywide's stock. The plan was announced on October 24, 2006, when Countrywide's stock was selling at $37.33. By February, Countrywide's stock had increased in value to $45 a share.

Mr. Mozilo, help me understand why these stock sales were in the best interest of shareholders? You were using shareholder and borrowed money to buy back Countrywide stocks and keep the price up at the same time you were selling your own personal shares. How did this help the shareholders?

MR. MOZILO: Well, first of all, I -- you know, I'd like to frame it the way it was. As I stated in my verbal remarks, I started in 2004 with the 10b5-1 plans, and the reason why I went that route rather than selling all the stock at once -- I could have -- was to continue to stay aligned with the shareholders because those plans required that shares be sold over a period of time at some of the numbers that you noted.

If one was to take advantage of a particular situation, they would sell the stock all at once rather than over a period of time. And I wanted to stay aligned with the shareholders. So that began back in 2004. That was shares that I had held for over 10 years -- options I held over 10 years -- that were expiring. So the first group of options had to be sold; otherwise they would go worthless.

There is -- and I'd be happy to provide this to the committee -- there is absolutely no relationship between the buyback of stock and my sale of options -- exercise of option to sell the stock -- no relationship whatsoever. Again, if one was to do that, they would just take advantage of that event and sell all the stock at one time. And I of course, as a result of that, have ended up not selling a significant amount of shares of the stock -- severely depressed.

Secondly, the buyback of stock was a process that went on for well over a year. That was a proposal made by our treasurer and our CFO, and the question was what to do with our capital. We were a company for 30-some-odd years that was a user of capital and never accumulated it. We invested it in our own business -- our servicing business. We came to the point where the company was exceedingly profitable, generating capital, and the question in any company is, what is the best use of that capital? How do you provide the greatest return to the shareholders? The buyback of that stock was designed to increase the return on equity for our shareholders. And there's a variety of ways of doing it, and you can replace that type of capital with borrowings. Now, I'm not -- that happened some time ago. I'm not familiar with all of the mechanics that we went through, but the purpose of it was to benefit the shareholders and increase the return on equity.

REP. WAXMAN: Well, I want to ask you to look at what happened. It was an absolute disaster for Countrywide and its shareholders because Countrywide stock fell through the floor after February, 2007. It's now worth only $5.20 per share, and, in fact, the stock price just dropped 87 percent since its peak. We don't have the exact figures, but it looks like Countrywide shareholders lost almost all of the $2.5 billion the company spent on repurchasing shares when you were selling stock.

Mr. Snyder, our investigation has shown that it wasn't just Mr. Mozilo who was selling shares during this time period, it was also the board members. One board member exercised 228,000 options between November 2006 and June 2007, making almost $7 million. In fact, you sold, yourself, 170,000 shares in 2006 for more than $6 million, and you sold 20,000 shares in December, 2006, during the stock buyback, earning more than $800,000.

How were those sales in the best interest of the shareholders?

MR. SNYDER: Mr. Chairman, the shareholders had the same opportunity to sell their stock, as we had. Our stocks were sold -- my stocks, like Mr. Mozilo's, were sold under a 10b5-1 Plan, under a prearranged selling order, that you state that when the stock reaches a certain price -- which is prearranged, preset -- that's when the stock is sold.

In fact, I think, as you pointed out, Chairman, that I sold stock at a price in November or December of 2006. Had I waited until February, I could have sold it at substantially a higher price.

REP. WAXMAN: Mr. Parsons and Mr. Finnegan, I understand that Merrill Lynch and Citigroup have different policies on this issue. You've taken steps to prevent executives from selling shares without approval. You require your CEOs to obtain the approval of the general counsel before altering their stock trading plans.

Mr. Parsons, if the CEO of Citigroup proposed to sell $150 million worth of stock at the same time Citigroup was engaged in a massive stock buyback, would this raise any red flags for you?

MR. PARSONS: Well, Mr. Chairman, as you've pointed out, we have procedures in place that would, first, flag it; second, cause counsel to opine on it; and, perhaps more importantly to your question -- I didn't address it in my opening remarks, it's in my statement, but Mr. Prince addressed it in his opening remarks -- we have a stock ownership requirement that would probably preclude the CEO, such as Mr. Prince, from doing just what your question implied. Namely, all senior officers and all board members have to retain, during their term of service, at least 75 percent of all of the equity compensation that they've received over the course of the years they worked for the company.

So, unless someone had literally billions, they wouldn't be in a position to move on that level of stock that you just indicated. But beyond -- beyond that answer, what we would do, I'm sure, would -- is we would, we would consult with counsel; we would consult to understand the reasons; and we'd make a judgment based on the facts that we found on them.

REP. WAXMAN: And you would do that to protect the shareholders? Isn't that the whole idea of that --

MR. PARSONS: And --

REP. WAXMAN: -- looking at that sale?

MR. PARSONS: -- and the process -- and the process, if you will. Because, you know, frequently appearance is equally important with substance and reality.

REP. WAXMAN: Thank you.

Mr. Finnegan, you're a board member at Merrill Lynch, I want to ask you the same questions. Would this kind of a transaction raise a red flag for you?

MR. FINNEGAN: Well, let me echo Mr. Parsons' remarks first. The fact is that we have stock retention requirements, so it would be purely hypothetical. Mr. O'Neal never had the kind of stock holdings that Mr. Mozilo had, such that he could have been selling $150 million worth of stock and complying with our stock retention requirements.

Like at Citi, if Mr. O'Neal wanted to sell stock, he would have come to the compensation committee and we would have talked to the general counsel. It would have required approval. Again, the magnitude here -- because of the difference in stock holdings, really, you know, isn't -- wouldn't have been irrelevant at the -- at the time.

I also think that -- I have no reason to believe, nor would I have any reason to believe that our board members would see anything inconsistent with selling stock when you were doing a stock buyback. Stock buyback are put in place -- they're generally considered very investor-friendly. Your investors like to see it -- the improved earnings per share, the improved return on equity.

We wouldn't necessarily make any decision on a proposed stock sale because we're in stock buyback situation. Again, the issue would always be: magnitude, is it within the rules, and what would the perception be? And we would confirm -- consult with general counsel on the matter and to make a decision.

REP. WAXMAN: Well, here's the problem I have with the stock sales. Mr. Mozilo and Mr. Snyder seem to be saying two completely inconsistent things. You tell the shareholders that Countrywide stock was undervalued, and a great investment for the company and its shareholders to make -- the reason for them to buy the shares. But when you acted in your personal capacities, you were selling millions of shares. And that doesn't speak well of your faith in the company's stock.

I'd like you to respond to that.

MR. MOZILO: Mr. Chairman, I was with the company 40 years. I was going to retire. Almost all of my net worth was in Countrywide. I had to come to a point of diversifying my investments and my assets. And that point came in 2004. And I consistently followed that plan.

It was my belief that every time I set the plan in place -- one, it is not my belief, it is a fact that the shareholders knew exactly what I knew -- I set them in place after earnings were announced, and any plans were announced. They were aware of the buyback. They were aware of earnings the previous quarter. And our projections for the ensuing years demonstrated that we were going to increase capital and -- because the company was doing extremely well throughout that whole period of time.

REP. WAXMAN: Well, I think the reason Mr. Parsons indicated it might not look good is the whole example of what happened with Enron, because with Enron they were selling the stock -- the executives were selling the stock, and they often have knowledge that no one else would have, and I think all of this is still being investigated.

But the appearance is not a good appearance. If you're telling your shareholders it's a good investment to buy the stock for the corporation, and at the same time you're selling the stock to benefit yourself at that higher price --

MR. MOZILO: Well, I think, again, the investors, who are mostly institutions, made the decision whether to buy or sell the stock based upon the information we provided. I never asked anybody to buy the stock. Nor did I ask anybody to sell the stock. We presented our performance, we had a 30-year performance of no losses.

REP. WAXMAN: Well, my time here is expired, but I must say, your timing was awfully good for yourself, but not particularly for some of the other shareholders.

Mr. Davis.

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REP. WAXMAN: The gentlelady's time has expired.

But just for the record, Mr. Finnegan, is this the same Mr. England that Merrill Lynch hired to advise Merrill Lynch in setting Mr. O'Neal's compensation as CEO?

MR. FINNEGAN: Merrill Lynch hired Mr. England, I think, in 2003 before I was on the Compensation Committee. It's the same Mr. England.

REP. WAXMAN: Thank you.

Mr. Issa.

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REP. WAXMAN: The gentleman's time has expired.

And the chair is going to recognize himself for the last round of questions.

Mr. Finnegan, in October of 2007, Merrill Lynch's board faced a difficult decision about Mr. O'Neal's ongoing role at the company. Under his leadership as CEO, the company invested heavily in the mortgage market and was suffering record losses as a result of these choices. The board concluded it was time to end Mr. O'Neal's relationship with Merrill Lynch, then had to make a decision about whether to treat his departure as a termination or allow him to retire. Despite the company's financial difficulties, the board did not terminate Mr. O'Neal. Instead, they allowed him to resign and then retire from the company. And that decision allowed him to collect a retirement package worth $161 million, including stock and options that had not vested.

Now I can understand the instinct of wanting to allow Mr. O'Neal to retire, but it had real financial repercussions. If the board had fired him for cause, he would have received over $6 million -- nothing to sneeze at -- in differed compensation and standard retirement benefits. But he would not have received $131 million in stock and options or an executive annuity worth $24 million because these had not vested. What was the rationale for letting Mr. O'Neal retire with $131 million in unvested stock instead of terminating him and recouping this money for the shareholders?

MR. FINNEGAN: Sir, the stock awards that Mr. O'Neal had received and which were unvested were governed by certain provisions related to retirement eligibility and cause. Essentially, Mr. O'Neal had sufficient points in terms of age and years of service to leave the company and take those stock awards with him unless we could terminate him for cause. The provisions related to cause covered misconduct. They did not cover unsatisfactory financial results.

REP. WAXMAN: Now why didn't the contract allow the board to fire him for cause? You're the one who wrote the terms of the contract. So isn't this a bootstrap argument? "You can't fire from cause, it's not in the contract." But you wrote the contract and didn't provide for that.

MR. FINNEGAN: Well, sir, Mr. O'Neal didn't have a contract individually. The contract I'm referring to is the agreement between Merrill Lynch and all of its executives -- 10,000 executives were covered by the stock award program. Mr. O'Neal's provisions are not unique. The cause provisions in the stock awards apply to Mr. O'Neal and 10,000 other people and they're also generally consistent with the type of cause provisions you see in the industry and American corporations in general.

REP. WAXMAN: Well, I don't see that in most people's jobs. If there's cause, they get fired. Now you're saying it wasn't just Mr. O'Neal, but many other executives. Your company lost $2.4 billion in the third quarter, $10.3 billion in the fourth quarter -- the largest quarterly loss in the company's history. You recorded writedowns of $7.9 billion in third quarter, $11.5 billion in the forth quarter. By the end of last year, your stock had plummeted 45 percent from its high in the previous January.

If that doesn't qualify as poor performance that justifies terminating your CEO and maybe others as well for cause, I -- it's hard to understand what does. But to say that you don't have the tools, it means that even if somebody performs badly, there are no consequences to them. Isn't that right?

MR. FINNEGAN: No, sir. I think the consequences were pretty dramatic. Mr. O'Neal lost his job, he got no severance, he got no bonus and because he was forced to retain stock in the company, he suffered about a $120 million economic penalty.

REP. WAXMAN: And that was enough of a risk to give him the incentive to not do the things that the company did.

MR. FINNEGAN: Sir, I don't know. I think Mr. O'Neal performed very, very well over a long period of time. 2007, there was an unprecedented decline in real estate values, a dramatic and precipitous decline and drying up of liquidity in the mortgage markets, both no one predicted --

REP. WAXMAN: Well, the mortgage crisis is having enormous repercussions. The families are losing their homes. Our economy is suffering. Thousands are losing their jobs. And it seems like everyone is hurting except for the CEOs, who have the most responsibility. I have no problem with paying for success, but it looks like when you're a CEO, you get paid for failure even if you're the CEO of the largest home loan company -- the company perhaps most responsible for the mortgage crisis in the country -- you can make $120 million in stock sales when your shareholders are losing 80 percent of their value.

I thank all of you for being here. And I want to say to Mr. O'Neal and Mr. Prince and Mr. Mozilo what I said my opening statement. You're all classic American success stories. You have tremendous accomplishments. You have all made enormous contributions to our country. But that's -- what's also true is that you're in the middle of an enormous debacle that ended up costing your companies and shareholders billions of dollars. It cost people their homes. It cost other people their jobs. It seems like everyone is hurting except for you.

In our first hearing in December on this issue of compensation for executives, we looked at the conflicts of interest among compensation consultants. We shined a light on that problem. As a result, corporate practices are beginning to change. I hope this hearing will also have the same effect. This is the first Congressional hearing ever to look at how CEOs are compensated when their companies are losing billions. And what I think we've learned is that if we don't have a system where there are real consequences for failures, that's a real problem. Executives who preside over billions of lost dollars of losses shouldn't be getting millions in bonuses, unvested stock and stock sales. Yet this appears to be what's happening. The bottom line is there need to be better mechanisms for accountability. Without this, our economy will remain vulnerable to the kind of economic disruptions we're now experiencing.

I thank you all for being here and I hope we'll all learn from the exchange of information. You've been very generous with your time.

That concludes our business and we stand adjourned. (Gavel sound.)

END.

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