by D. Cupples | Yesterday, Congressman Henry Waxman and his Oversight Committee held a hearing, at which it became public knowledge that CEOs from three companies hit hard by the subprime mortgage crisis took home fat compensation packages despite huge losses for their companies. Reuters reports:
"In the last two quarters of 2007 alone, the three executives' firms lost more than $20 billion on investments in subprime and other risky mortgages...
"Yet the three took home fortunes in 2007 -- $120 million for Countrywide Financial Corp CEO Angelo Mozilo; a $161 million retirement package for ex-Merrill Lynch CEO Stanley O'Neal; and $39.5 million in stock, options, bonus and perks for former Citigroup CEO Charles Prince."
This is something that should concern ordinary investors and the congressmen who are elected and paid to represent them. Obviously, that a hearing was held, suggests that some congressmen are concerned.
Rep. Waxman said, "I have no problem with paying for success. But it looks like when you're a CEO you get paid for failure." Precisely, and the payment comes at shareholders' expense.
Not all committee members seemed concerned about the possible bilking of ordinary shareholders. As I've seen repeatedly when watching House Oversight Committee hearings on C-SPAN, there's usually at least one Republican congressman who makes irrelevant comments when knee-jerk defending witnesses. In yesterday's hearing, it was Rep. Tom Davis (R-VA), who said:
"Punishing individual corporate executives with public floggings like this may be a politically satisfying ritual -- like an island tribe sacrificing a virgin to a grumbling volcano.... But in the end, it won't answer the questions ... about corporate responsibility and economic stability."
Due respect, Rep. Davis is wrong. For the most part, the buck stops with a corporation's CEO. If the three CEOs at yesterday's hearing had done their job diligently, they would have been cautious about investing in risky mortgages whose value was directly tied to artificially inflated home values. The artificial price inflation didn't take anyone by surprise: the media has been discussing for several years now.
If those CEOs weren't as diligent as they could (or should) have been, did they really earn the $320 million they took from shareholders in the last half of 2007?
Other BN-Politics Posts:
* Housing Crisis: Housing Prices are Dropping and Should Drop
This isn't capitalism. It's corruption.
I want to be clear about this. I have absolutely ZERO problem with people like Bill Gates raking in billions of dollars. But if you want to do that, you need to OWN THE COMPANY. The wealth someone like Gates earns is a reflection of the enormous wealth that the company he steers has generated. That is capitalism, and there is nothing wrong with it at all.
On the other hand, the wealth people like Mozilo and O'Neal are earning is not a reflection of the success of their companies; rather, it is robbing that much more from a company that is already hemorrhaging money. They pack the board with their friends and allies, and take turns voting each other sweetheart deals. It's really that simple. It's a lot easier to justify when the company is doing well, but honestly, it's just as corrupt in that situation.
Until recently, Japan (certainly a free market capitalist state with powerful corporations) has a "10-1 ratio" law - that is, no salary at the company can be more than ten times greater than the lowest salary at the company. I'm not sure I would support that sort of law, but I'd certainly get on board with a law that said any extreme exception in executive compensation requires an explicit stockholder vote. After all, there are some genius managers out there who are worth multimillion-dollar salaries. Somehow, I doubt Mozilo and O'Neal are among their ranks.
This isn't capitalism. It's corruption.
Posted by: Adam | March 08, 2008 at 12:04 PM
I agree. Corporate corruption (starting with Enron and WorldCom) was one of the topics I used to research (then I moved on to contractor fraud).
Posted by: D. Cupples | March 08, 2008 at 04:36 PM