by Deb Cupples | Yesterday, I did a post about how Lehman Brothers' executives (with Board members' approval) redistributed billions in shareholder wealth (to themselves) -- some of it while the company wasn't doing well. The news came from a House Oversight Committee hearing on Monday about Lehman's bankruptcy.
Tuesday, the Oversight Committee held a hearing about AIG, which accepted an $85 billion taxpayer-funded bailout last month. Incidentally, AIG has already spent $61 billion of the bailout funds and plans to benefit from the $700+ billion bailout that President Bush signed into law last week.
Like those from Lehman, AIG's executives seemed to enjoy redistributing shareholder wealth to themselves -- and AIG's Board members didn't seem to keen on stopping them. Below is part of Oversight Committee chairman Henry Waxman's summary:
"There are obvious differences between Lehman and AIG. Lehman is an investment bank; AIG is an insurance company. Lehman fell because it placed highly leveraged bets in the subprime and real estate markets; AIG’s problems originate in complex derivatives called credit default swaps.
"But their stories are fundamentally the same. In each case, the companies and their executives grew rich by taking on excessive risk. In each case, the companies collapsed when these risks turned bad. And in each case, their executives are walking away with millions of dollars while taxpayers are stuck with billions of dollars in costs...."
Let's look at executive pay. Lehman CEO Richard Fuld pocketed $300+ million over an eight-year period. AIG Financial Products Group executive Joseph Cassano pocketed $280+ million over an eight-year period. (Oversight Committee)
Apparently, it was time to play Lets Raid the Shareholder Money Pot -- a game that seems perfectly legal but shouldn't be.
Think about that when you consider buying stocks or mutual funds.
Note that a company's Board of Directors sets the pay rates for executives. Often, a company's CEO sits on the Board, and some of them serve as Chairman of the Board. Too often, CEOs find a way to stack their corporate board with people who will vote their way on pay issues.
Back to the similarities: Lehman made sure to give millions in bonuses to top executives -- even during troubled times. AIG had a "Senior Partners Plan" that gave millions in bonuses to 70 executives -- even during troubled times. Bonuses were supposed to be tied to performance.
In 2007's final quarter, AIG had $5 billion in losses. This should have precluded bonuses for senior partners. But ex-CEO Martin Sullivan persuaded the Board to give bonuses anyway: Mr. Sullivan got about $5 million in cash. I don't know what the other 69 (or so) execs got.
Lehman and AIG are not the only companies that have rewarded executives with shareholder dollars despite poor performance. Enron, for example, filed bankruptcy in December 2001: that year, the human beings that made Enron's business decisions paid 152 execs and managers a collective $800 million.
Lehman and AIG were also big on giving parting gifts to execs who were leaving -- again, at the shareholders' expense.
Last month, for example, just four days before Lehman declared bankruptcy, one Lehman official proposed giving a combined $23.2 million in special payments to just three Lehman execs who were leaving their jobs (two were fired). In 2006 and 2007, those three execs' compensation was, collectively, about $99 million (an average of $33 million each).
AIG Board members, after ex-CEO Martin Sullivan resigned in June 2008, voted to give Mr. Sullivan a $15-million parting gift (golden parachute) -- yes, the same Mr. Sullivan who'd presided over AIG's downward spiral.
In February, AIG's Board terminated Mr. Cassano, whose mistakes reportedly necessitated AIG's taxpayer-funded bailout. The Board allowed Mr. Cassano to keep $34 million in "unvested bonuses" and decided to give Mr. Cassano a $1 million per month retainer -- yes, the same Mr. Cassano who'd already pocketed $280+ million over the last eight years.
Did Mr. Cassano have videotapes of Board members inappropriately socializing with farm animals?
Then there's the recent, shareholder-funded celebration.
On September 16, the U.S. Government decided to lend $85 billion to AIG, thinking it would help our economy. Days later, AIG decided to fund a week-long trip for execs to an exclusive resort. AIG's shareholders were billed for the "retreat." Here's Rep. Waxman's description:
"Rooms at this resort can cost over $1,000 per night. Invoices provided to the Committee show that AIG paid the resort over $440,000, including nearly $200,000 for rooms, over $150,000 for meals, and $23,000 in spa charges."
Yes, $440,000 is small change, but it evinces a super-careless attitude toward the shareholders who paid those executives' salaries.
Oversight Committee member Rep. Elijah Cummings' comment: "They were getting their manicures, their pedicures, massages, their facials while the American people were paying their bills." (Washington Post).
AIG is not the only company that has given huge perks to executives at the shareholders' expense. Back in 2000, ex-Tyco CEO Dennis Kozlowski billed shareholders about $1 million for a raunchy, weekend toga party in Italy to celebrate his wife's birthday. That's one of many examples of Mr. Kozlowski's treating the Shareholder Money Pot as his own personal piggy bank.
Also in 2000, Enron earmarked $20 million to start a corporate art collection. It hired an executive's wife to acquire the artworks. She spent nearly a year before Enron's bankruptcy, traveling the world on Enron's private jets, which cost about $5,000 an hour to fly.
Executives' gratifying themselves at shareholders' expense is an old story. Something should have been done about this after the new millennium's wave of corporate scandals (e.g., WorldCom, Enron, Tyco, Adelphia).
Congress and President Bush failed to protect us ordinary investors.
My hope is that Mr. Waxman and his Oversight Committee will continue investigating the public companies that helped drive our nation's economy into a ditch. I know that he's busy, having scheduled five hearings for October.
Still, I hope that he starts a probe on other giants, like Fannie Mae, Freddie Mac, and Merrill Lynch. As bailout-funding taxpayers and ordinary investors, we have a right to know where our money has gone.
And we have a right to expect Congress and the White House to enact legislation that will give us better protections against the human beings that make business decisions for the corporations that employ them.
The Oversight Committee has a page full of links to AIG hearing documents and even a video of testimony. Memeorandum has commentary.
Other Buck Naked Politics Posts:
* Lehman Execs Re-Distributed Billions in Shareholder Wealth
* Execs Took Millions While Driving Companies into Ditch
* Fannie Mae CEO Got $38 Million, Risky Buys Weren't his Fault?
* AIG Spent $61 Billion of Bailout Money and Plans to...
* Wall Street to Say "No thank You" to Bailout Funds?
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