by Nomi Prins
In the end, all of the points Waxman made were valid and reminiscent of those he had made in other hearings. Still, most of the execs made up what they lost in embarrassment points by keeping their money. Shame alone won’t propel them to give back more. They had worked through their shame issues way before they made all of their money, and they had the government’s help.
Consider the Countrywide VIP scandal, also known as the “Friends of Angelo” program, in which favorable loan conditions were given to high-ranking government officials, including Chris Dodd (D CT) and Kent Conrad (D ND), plus a slew of former Fannie Mae CEOs.54 The story of that cozy friendship ring broke on June 12, 2008, just two weeks before Brown filed suit against Countrywide. In September 2008, the Wall Street Journal reported that a Los Angeles grand jury was investigating the loans.55
Remarkably, or perhaps unremarkably as these things go, Dodd is still the chairman of the Senate Committee on Banking, Housing, and Urban Affairs, and Conrad is still the chairman of the Senate Budget Committee. It wasn’t them but the combination of public wrath and lawsuits that made Mozilo “forgo” his official $37.5 million severance pay, although he didn’t give up a supplemental retirement plan (worth $23.8 million in December 2006) and $20.6 million in deferred compensation.56
Even with all of the hearings, investigations, subpoenas, and lawsuits, there weren’t any corporate paybacks. After all, when CEOs and executives siphon a lot of money from our system, they usually keep it, and the system stays intact.
There was some chatter from nonprofit groups and from Waxman about legislating a recovery, or “claw back,” of the estimated $500 million paid to execs at AIG, Bear Stearns, Citigroup, Countrywide, Lehman, Merrill Lynch, and Washington Mutual. But it remained talk, for the most part. “I think you can count on two hands the number of voluntary or involuntary returns of compensation by executives,” said Paul Hodgson, a senior research associate at the research firm Corporate Library, which tracks corporate governance. “More companies are introducing claw back provisions, but instituting the provisions and actually clawing back the pay are two different things.”57
It’s doubtful that claw backs for bonuses paid for overly risky behavior will become law, although two legislators came close to including a claw back provision in the economic stimulus package. Senators Olympia Snowe (R ME) and Ron Wyden (D-OR) sponsored an amendment that passed by voice vote on February 9, 2009, that would have given companies that received TARP money 120 days to pay back—with preferred stock—all bonus money exceeding $100,000 or face a tax of 35 percent on whatever money remained unpaid.58 But the amendment never made it to the bill that was signed into law on February 17, 2009.59
“Somehow it got stripped out behind closed doors,” a Wyden spokeswoman told the Associated Press.60
But, really, claw backs shouldn’t be necessary. If the legislative landscape that encourages risky behavior was sufficiently altered to ensure both less risky practices and compensation tied to long term growth, rather than to short term gain, the overall systemic risk would be reduced—as would the profit from that excessive risk. There would be no need for an after the fact compensation adjustment.
Yet even after these guys pump up their books, churn unscrupulous deals, cash out big, and let it all collapse, most of them walk away with the money. Many remain at their posts or reappear in hedge funds or on their friends’ boards.
The claw back concept made another comeback in March 2009 when AIG caused public uproar and political overreaction after it announced it had to pay $165 million in bonuses.61 The sum was relative chump change, but after more than $182 billion in bailout money had already been given to the insurance company, the public wasn’t happy.62
Although Treasury Secretary Timothy Geithner and the rest of the Obama administration claimed they hadn’t known much about the bonuses until it came time for AIG to pay up—when in doubt, claim ignorance—the bonuses were first revealed in SEC filings in September 2008. So they had been public information for a long time, and numerous news outlets had reported on them.63
On March 18, 2009, the culprit came forward. Chris Dodd admitted that he had added the language to the federal stimulus package that allowed existing bonus contracts to stand—of course, he did so only at the insistence of the administration, he said.
“The administration had expressed reservations,” Dodd told CNN. “They asked for modifications.”64
After cable news started hammering day and night on the AIG bonuses, President Obama tried to get Geithner to use the legal system to block them, and an Obama insider said that the bonus money would be taken out of a pending $30 billion bailout gift to AIG, which Geithner confirmed.65
Ultimately, it was the House that responded most publicly to the outcry over the bonuses, by passing a 90 percent tax on bonuses greater than $250,000 for TARP recipients.66 It was a controversial measure that passed overwhelmingly, although some who voted for the bill expressed reservations. It also led certain banks, like Goldman Sachs, Morgan Stanley and JPMorgan Chase, to apply to pay back their TARP money as soon as possible, but they would retain ample federal backing from other avenues besides TARP. The banks knew that, even if Congress didn’t bother to question it. While Congress was debating TARP recipient restrictions, the idea of attaching restrictions to other forms of federal assistance never came up. Still hasn’t.
“It is an extreme use of the tax code to correct an extreme and excessive wrong done to the American taxpayer,” Dave Camp (R MI), who voted for the measure, admitted on the House floor. Camp is right, but not quite for the reasons he mentioned. Using the tax code and restructuring the financial arena to produce less risk and bonus excess would be more beneficial to the stability of the overall economy. At any rate, the Senate knocked down the bill and claw backs have kind of faded away.67
Conflict of Interest
On October 6, 2008—the same day Countrywide agreed to refinance 400,000 home mortgages—Dick Fuld, the former CEO of Lehman Brothers, was in Waxman’s hot seat.
Fuld is a self proclaimed “Lehman lifer.” He was first employed at the company as an intern in 1966 while attending the University of Colorado and started to work full time in 1969 while earning his business degree at New York University.68 He was named vice chairman of Shearson Lehman Brothers in 1984, after American Express bought Lehman and merged with Shearson.69 From 1990 to 1993, Fuld was president and co-CEO of Shearson Lehman Brothers before being named CEO of Lehman Brothers Holdings, Inc., in 1994, after Lehman went public. Along the way, he gained posts in prominent New York City financial and investment institutions, such as the Federal Reserve Bank of New York and the Partnership for New York City, Inc.70 And as Fuld moved up the ranks, Lehman’s stock price puffed up, from $5 per share when it went public in 1994 to $86 per share by 2007.71 Just a year later, on September 15, 2008, Lehman declared bankruptcy.72
Before that, Fuld cashed out. When asked, he declared that he only made “somewhere near” $350 million, not $500 million, which Fuld told Henry Waxman was “inaccurate.”
“Not that anyone on this committee cares about this, but I wake up every single night wondering what I could have done differently,” Fuld said shamelessly.73
But when asked why he thought that Lehman was allowed to fail while the Federal Reserve saved other companies such as Bear Stearns, mortgage giants Fannie Mae and Freddie Mac, and insurance giant AIG, Fuld was more contrite. “Until the day they put me in the ground, I will wonder,” he said.74
Representative Dennis Kucinich (D OH) wondered the same thing. He also pondered why Goldman Sachs was still standing so tall. So he asked Luigi Zingales, a finance expert, a professor at the University of Chicago Graduate School of Business, and the author of the 2003 book Saving Capitalism from Capitalists, who responded with the following:
When you hear about that, you know, a decision was made to let Lehman go down. Goldman Sachs is still standing for sure. Are you concerned, given these facts, that there is an ap
parent conflict of interest by the treasury secretary in permitting a principal of a firm that he was a CEO with to be involved in these discussions about the survival of Lehman?75
Zingales began a long winded, though insightful, answer about Goldman’s involvement with AIG, a major player in the credit default swap market. He noted that another big name, JPMorgan Chase, had $7 trillion in the credit default market and would be out that amount if AIG went under.76 His implication was that Lehman’s entanglements weren’t as important, and in this, he revealed one of the true reasons for the continued AIG bailouts. But he didn’t directly answer the question until pressed.
“Let me ask you this,” Kucinich interrupted him. “You throw Lehman Brothers overboard. Does that help what competitive position may remain with respect to Goldman Sachs?”
“I think it is clear that Goldman Sachs benefits from Lehman Brothers going under, yes,” Zingales said.
Therein lies the checkmate against Fuld. After his forty year career with Lehman, the ultimate punishment may have been the cold reality that his ties to the powerful deciders in D.C. were simply not strong enough.
Still, Fuld managed to save a small fortune, $100 million according to the New York Times, and $350 million according to his statements to Waxman. Sure, he took a hit. At one time his company stock was valued at $800 million, but I’m thinking whatever he kept in the end is still a pretty livable nest egg.
Lehman’s ordinary employees, like Enron’s and Countrywide’s, didn’t get out quite so well. Days before Lehman declared bankruptcy, Lehman Holdings, the bankrupt entity, laid off about a thousand workers via letters saying that their promised severance payments and health benefits would cease immediately.77
Please Don’t Call It a Bonus
From 2000 to 2008, Wall Street paid more than $185 billion in bonuses to its employees, including $130 billion in the latter four years, according to a report issued on January 28, 2009, by New York State comptroller Thomas P. DiNapoli.78
While most Americans were focused on keeping their jobs in early 2009, public wrath over Wall Street bonuses was strong. The outrage led President Obama to acknowledge the “shameful” excess, striking a populist pose on February 4, 2009, by announcing a $500,000 cap on the cash part of executive compensation for those firms that going forward wanted to float on a bed of TARP dollars.79
Six days later, on February 10, 2009, Treasury Secretary Geithner’s first public speech was full of harsh admonishment. “Investors and banks took risks they did not understand,” He said. “Individuals, businesses, and governments borrowed beyond their means. The rewards that went to financial executives departed from any realistic appreciation of risk.”80
There were more tame compensation restrictions to come. Dodd inserted a bonus limit for executives from firms receiving federal financial aid to one third of their yearly salary until the money gets repaid into the stimulus package Obama signed in February 2009.81 But the thing is, despite the astonishing $18.4 billion that Wall Street paid itself for an abysmal 2008, the remaining firms will still find a way to pay their execs sick sums of money in the future.82 The big financial companies are raising base salaries to make up for the bonus cap. In late May 2009, Morgan Stanley chief financial officer Colm Kelleher saw his base yearly salary more than double to $750,000 from $323,000.83 It’s even easier to structure noncash compensation methods than it is subprime collateralized debt obligations (CDOs) or to rename bonuses “retention awards,” as one senior Morgan Stanley executive told his employees to call them.
“There will be a retention award. Please do not call it a bonus. It is not a bonus. It is an award. And it recognizes the importance of keeping our team in place as we go through this integration,” James Gorman, co president of Morgan Stanley, told his advisers during a recorded conference call obtained by the Huffington Post on February 11, 2009. Gorman said the awards would be linked to 2008 performance and added, “I think I can hear you clapping from here in New York. You should be clapping because frankly that is a very generous and thoughtful decision that we have made.”84
The argument over entitlement and talent versus stability and restraint reigns supreme on Wall Street, with many media outlets and pundits chiming in to lament the loss of “talent” in the industry as a result of bonus or other compensation restrictions, bailout or no bailout.
“In placing limits on executive pay, the administration faces a few potential pratfalls. First, if the plan is too restrictive, it could drive away talent from the companies that perhaps need a bailout the most. After all, why take a job at a place that’s in need of a turnaround if there’s little reward at the end of the day?” Brian Wingfield and Josh Zumbrun wrote on Forbes.com on February 4, 2009.85
But that’s a bunch of bull. It doesn’t take talent to win when your firm makes the rules, holds the cards, and is the house. And it’s extreme negligence when you lose. At any rate, if the industry and the transactions in which it engages were less risky, and therefore less dangerous to the greater population, and more regulated, and therefore not spilling extra profits to the house by extorting them from the public, even the most “talented” of the “talent” wouldn’t need to get paid $25 million for three months just to show up. (Yes, that means you, Peter Kraus, for your nonstint at Merrill Lynch before it merged with Bank of America).
Outside of normal perspective land, cash composes a disproportionately low percentage of an executive’s compensation package. That’s why the seemingly magnanimous Wall Street execs can forgo a year or two of cash bonuses to get the government off their backs and out of their capital pool.86
Just ask former treasury secretary Henry Paulson. For 2005, he received only $600,000 in cash but $38.2 million in other forms of compensation, including $30.1 million in restricted shares (which had a five year vesting period had he not become treasury secretary) and 220,000 stock options.87
At the start of the TARP capital injections in October 2008, Paulson had to work to convince Goldman Sachs CEO Lloyd Blankfein and JPMorgan Chase CEO Jamie Dimon to take TARP money. Blankfein and Dimon didn’t want to seem weak by being clustered among all of the other loser banks. At least that’s what they conveyed. But they pocketed the money anyway—who wouldn’t? Especially without any stringent restrictions on how they could use it?
After much congressional debate, language was added to the stimulus that merely took into account golden parachutes and did away with favorable tax treatment for compensation payments greater than $500,000.
Bonuses Always Bounce Back
But in the end, none of this political posturing over compensation legislation language really matters. Wall Street anticipated a weak bonus year for 2009 for two reasons. First, because anyone who could evaluate a decaying asset at all—I’m excluding Washington from this skill—knew that the banking system would only deteriorate further in the near future, even if Washington backed private investors to buy toxic assets. Second, banks still owed money they had borrowed using their inferior assets as collateral. The payback clock didn’t stop simply because banks wouldn’t disclose exactly what they owned or owed, which really should have been part of Obama’s conditions.
But bonuses always bounce back. During the last twenty five years, there have been four periods of decreased bonuses. Each was followed by increases that made up for those dents within a year or two. Yes, this time the meltdown is more pronounced, but I’m taking that into account. Someone will get paid to put the pieces of broken banks back together again and repackage and resell the toxic assets.
Recall that during the Savings and Loan Crisis, 747 savings and loan banks were shut, the Federal Savings and Loan Insurance Corporation went bust, and the Resolution Trust Corporation swooped in to collect bad (mostly real estate) assets. Ultimately, this exercise cost the American public half a trillion dollars.88
Wall Street bonuses were down in 1988 and 1989 by 21.3 percent and 5.5 percent, respectively.89 Guess what? By 1991, they had doubled.
> In 1994, during the Mexican Peso Crisis, Wall Street bonuses were cut 15.7 percent, only to rebound 26.7 percent the following year. Similarly, recall that in 1998, the Fed, spurred by a bunch of personally invested CEOs, bailed out Long Term Capital for a paltry $3.65 billion during the Russian debt crisis. Wall Street pared back, and cut bonuses by 18.8 percent. They jumped by 48.5 percent the next year.
Then there was the triple whammy of the Enron and WorldCom scandals in late 2001 and 2002, compounded by the recession that was caused by a spate of scandalous corporate bankruptcies and a nervous post 9/11 stock market. Bonuses were down 33.5 percent and 25 percent during those two years. By 2004, they zoomed back to pre recession levels.
Bonuses nearly doubled over the next two (subprime, CDO, and credit derivatives growth) years, reaching all time highs in 2006, a record year for two since deceased investment banks, Bear Stearns and Lehman Brothers. Bonuses remained in the clouds through 2007.
For 2008, bonuses were down just 44 percent, to 2004 levels despite a complete Wall Street hemorrhaging; the near fatal condition of the country’s largest bank, Citigroup; the closing of two major investment banks; and the immensely stubborn and reckless merger of another, Merrill Lynch, into Bank of America, for which Merrill CEO John Thain bagged a $15 million sign-on bonus and $68 million in stock options.90