A preliminary transcript of this hearing is now available - Committee Holds Hearing on CEO Pay and the Mortgage Crisis

**Preliminary Hearing Transcript** STENOGRAPHIC MINUTES Unrevised and Unedited Not for Quotation or Duplication CEO PAY AND THE MORTGAGE CRISIS Friday, March 7,2008 House of Representatives, Committee on Oversight and Government Reform, Washington, D.C. "This is a preliminary transcript of a Committee Hearing. It has not yet been subject to a review process to ensure that the statements within are appropriately attributed to the witness or member of Congress who made them, to determine whether there are any inconsistencies between the statements within and what was actually said at the proceeding, or to make any other corrections to ensure the accuracy of the record." Committee Hearings of the IJ.S. HOUSE OF RBPRESENTATIVES OFFICE OF THE CLERK Office of OfÍïcial Reporters HGO067.000 1- PAGE ]. RPTS MCKENZÏE DCMN HOFSTAD 2 3 CEO PAY AND THE MORTGAGE CRISIS 4 5 6 7 8 Friday, March 7, 2008 House of Representatives, Committee on Oversight and Government Reform, IVashington, D. C. The committee met, pursuant to ca1I, ât 10:06 a.m., in 1-0 l_ 1_ Room 2154, Longworth House Office Building, Hon. Henry A. Waxman [chairman of the committee] presiding. Present: Representatives Waxman, Towns, Kanjorski, L3 Cummings, Yarmuth, Norton, Vüelch, Davis of Virginia, Cannon, Issa, McHenry, and Bilbray. 1"4 Staff Present: Phil Schiliro, Chief of Staff; Kristin 1_5 t6 Amerling, General Counsel; Karen Lightfoot, Communications t7 Director and Senior Policy Advisor; David Rapa1lo, Chief 1_8 Investigative Counsel; Roger Sherman, Deputy Chief Counsel; t9 David Levíss, Senior Investigative Counsel; Velvet .Iohnson, 20 Counsel; Earley Green, Chief Clerk; Teresa Coufal, Deputy 1,2 HGO067.000 2t 22 23 24 25 26 27 28 29 30 31_ 32 33 34 35 Clerk; Caren Auchman, Press Assistant; EIIa Hoffman, Press Assistant; Zhongrui rtJ'Rrr Deng, Chief Information Officer; Leneal Scott, Information Systems Manager; Kerry Gutknecht, Staff Assistant; I¡'Ii11iam Ragland, Staff Assistant; Matt Seigler, Special Assistant; Allison Cassady, Professional Staff Member; I'arry Ha1loran, Minority Staff Director; .Tennifer Safavian, Minority Chief Counsel for Oversight and Investigations; Keith Ausbrook, Minority General Counsel; Kristina Moore, Minority Counsel; 'John Cuaderes, Minority Senior Investigator and Policy Advisor; Larry Brady, Minority Senior Investigator and Policy Advisor; Patrick Lyden, Mínority Parliamentarian and Member Services Coordinator; Brían McNicol1, Minority Communications Dírector; Benjamin Chance, Minority Clerk; and AIi Ahmad, Minority Deputy Press Secretary. HGO067.000 36 37 38 39 Chairman WAXI4AN. The meetinq 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 bitlion-dollar losses. There seem to be two different economic realities 40 +I 42 43 44 45 46 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 47 48 49 50 51 52 53 54 55 56 57 58 59 60 of failure. But our Nation's top executives seem to live by a different set of rules. There is no better way to understand these two worlds than to look at real examples. Last yearr Circuit City cut costs by arbitrarily firing its most successful retail sales employees. Any employer and any employee in computer safes It didn't who was earning more than $te per hour was fired. make any difference that some of the employees had years of service and a superb performance record. This was their firsthand lesson in market forces. Every fired employee was then given a chance to reapply for their jobs at lower pay. Those, unfortunately, are often the rules for tlpical employees: They can work hard, be loya1 and do everything right and stiIl lose ground. Last The world for executives is quite a bit different. consequences HGO067.000 PAGE 6t 62 63 64 65 66 67 68 69 70 7L 72 73 74 75 76 77 78 79 80 8l_ 82 83 84 year, one of our Nation' s highest-paid executives rtlas Ray Irani, chief executive officer of Occidental Petroleum. His total compensation v/as more than $320 million, which roughly comes out to $154,000 an hour. By any measure, executive pay is rising rapidly and dramatícaIly. The CEOs of the 500 largest American companies received an average of $50 million each in the year 2006, and that was a 38 percent increase in just 1 year. In l-980, CEOs were paid 40 times the average worker; today they are paid 600 times more. And incredibly, 10 percent of corporate prof its are no\ltr f lowing to the top executives. Now, at first bIush, it is hard to reconcile $154,000 an hour with $16 an hour, but CEOs and salesmen have different roles. And the argument, âs I understand it, is that a CEO who adds value to the company and its shareholders is worth every penny. I think there is merit to pay for performance. But it seems like CEOs hit the lottery when their companies coIlapse. As the financial columnist A11an Sloan put it, rrEven if you flame out in V'IaII Street, you stiII get to keep the money. " Today's hearing will examine thís issue. The question we will ask is a simple one: V'Ihen companies f ai1 to perform, should they give millions of dollars to their senior executives? Our particular focus is the debacle with subprime 85 HGO067.000 86 87 88 89 90 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 no\^/ owe more on their mortgages than their homes 9t 92 93 94 95 96 are worth. Banks in the United States have written off more than $1-20 billion in assets, mortgage companies have gone under or are on the brink, yet thousands of Americans have lost their jobs and their homes, and the economic spillover is being felt throughout the wor1d. Three companies that gambled heavily on the subprime bet 97 98 are Countrywide Financial Corporation, Merrill Lynch and >J Citigroup. And I want to thank the chairs of their 100 compensation committees and their CEOs for being here today 1_01_ and for their cooperation. All three companies have suffered enormous losses. to2 103 Countrywide lost $1.6 billion in 2007 , and its stock lost 80 ro4 percent of its value. Merrill Lynch lost $10 bi1lion, and 105 its stock lost 45 percent of i-ts value. Citigroup also lost and its stock lost 48 percent of its value. 106 $l-0 billion, In light of that terrible performance, the CEOs of ]-07 1_08 Merrill Lynch and Citigroup resigned last year. Mr. Mozilo, 1_09 the CEO of Countrywide, is also making plans to step down if Countrywide is acquired by Bank of America. 1_1_0 HGO067.000 1-11 PAGE 6 But the pay they received from their companies and their tt2 stock sales was extraordinary. Any reasonable rel-ation 1-l_3 between their compensation and the interests of their tr4 shareholders appears to have been broken down. 1_1_5 Mr. o'Nea1 left Merrill Lynch with a $1-61- million Lt6 retirement package. Mr. Prince was awarded a $1-0 million LL7 bonus , ç28 million in unvested stock options and $l-.5 million 1_1_8 in annual perquisites when he left Citigroup. And Mr. Mozilo 1_1-9 received over $1-20 million in compensation in sales of 1-20 Countrywide stock. WeII, the obvious question is, how can a few executives L22 do so well when their companies are doing so poorly? ]-23 Mr. Mozilo, Mr. O'Neal and Mr. Prince are each classic 1-24 American success stories. Mr. Prince was the first in his r25 family to go to college. Mr. Mozilo started his company 1,26 sitting at a kitchen table in a smaIl New York City 1-27 apartment. And Mr. O'Neal's grandfather was born into L28 slavery, and his parents worked several jobs at once to give L29 their children the American dream. Mr. O'Nea1 himself worked L30 his way through college by working at a General Motors p1ant. 1_3 rEach of these men achieved incredible success through L32 hard work and ability, and each was ríchly compensated when 1_33 their companj-es prospered. And on behalf of this committee, L34 I want to commend them and thank them for their many 1_35 contributions to our country. T2T HGO067.000 1_3 PAGE 7 6 The questions we ask today are not in any way intended to disparage their records. But what \^Ie are trying to 138 understand is fundamental to our Nation's values, and it is 139 also of central importance to the effective functioning of 140 business and our economy. Are the extraordinary compensation packages these CEOs t4L 142 receive reasonable compensation? Or does the hundreds of 143 millions of dollars they were given represent a complete 1,44 disconnect with reality? This isn't a hearíng about illegality or even unethical 145 1-46 breaches. It is a hearing to examine how executives are 1-47 compensated when their companies fai1. And it is a hearing 1-48 to help us understand whether the situation is good for the 1l.49 companies, the shareholders and for America. L50 The testimony today is something those Circuit City l-51 workers I spoke of a few minutes ago would be interested in. 152 It is something the millions of Americans who are going L53 through the pain of foreclosure of their homes would be interested in. And it is something every Member of Congress 1"54 L55 should also be interested in. I want to now recognize Mr. Davis for an opening t56 :j37 ]-57 1_58 statement. 159 r_6 0 you, Mr. Chairman. When asking questions about corporate governance, executive pay and the performance of national financial Mr. DAVIS OF VIRGINIA. Thank HGO067.000 PAGE t6r markets, this committee should proceed very cautiously. 162 Shareholders have the most direct stake in these issues. ]-63 Ours, ât best, is a derivative and potentially damaging role 1,64 in the discussion of complex transactions, proprietary t_65 business decisions and marketplace dynamics. The last thing ]-66 union pension funds and other investors want is Congress ]-67 second-guessing and micromanaging the people looking after 168 their money. t69 410 1,71 That said, there is no dispute the housing market is undergoing a significant contraction, and many Americans are 172 ]-73 174 475 176 suffering the combined hardships of foreclosure and depressed home values. Causes of the unfolding credit crisis involve an intricate web of actions: incentives and assumptions by lenders, mortgage brokers, fund managers, credit rating agencies and many others. In that long chain of causation, the impact of corporate r77 executive compensation is debatable. And that appears to be 178 at least part of the debate we will have today. Fine. But 179 that debate should not degenerate into a sanctimonious search 1_8 0 l_ l_8 1,82 L83 L84 L85 for scapegoats. If every corporate executive of every company involved in subprime lending and securities had worked for the minimum u/age or for nothing, the macroeconomic trends and cyclical forces that drive booms and busts could still vex our economy today. Punishing índividual corporate executives with public HGO067.000 t_86 PAGE floggings like this may be a politically satisfying ritual, like an island tribe sacrificing a virgin to a grumbling 1-87 188 volcano. But, in the end, it won't answer the questions that need to be answered about corporate responsibility and 1_89 economic stability. 1_90 Boards and shareholders have already begun to answer t9t 1-92 these questions for themselves. They have taken steps to assign responsibility and hold corporate managers 93 t94 accountable. CEOs have resigned. Potential payouts have been surrendered or reduced, and so-ca11ed golden parachutes 1_95 trimmed. Investor groups are suing to recoup funds, alleging 1-96 :l.97 violations of regulatory and fiduciary duties. It is in those forums that the sad story of the subprime 1-98 industry should be litigated. V{e should never substitute our 1-99 200 judgment for determination by those with real equities at 20]- stake, nor should we al1ow the committee to be used as a 202 discovery tool for plaintiffs. Our previous hearing on executive compensation 203 204 consultants failed to find much evidence of the claimed 205 conflicts or self-dealing that could distort salary and perk 206 decisions to the detriment of stockholders. Today's attempt 207 to wrap that unproven premise in the much larger subprime 208 crisis only seems to muddle the issue further. Subprime lending expanded mortgage loan availability to 209 2to underserved groups, as Congress mandated. füith the l_ HGO067.000 PAGE 10 2tr encouragement of regulators, innovative financial instruments 212 increased liquidity and spread subprime risk across a broader 21-3 range of supposedly sawvy investors. 2]-4 But almost everyone involved became entranced over time 2]-5 by the unsustainable promise of ever-rising home prices. VrIe 216 have seen this before. V'Ihen the music stopped and real 217 estate markets fel1, foreclosures escalated and holders of 2L8 subprime-backed securities lost bil1ions. In that context, the case studies on corporate 2L9 220 compensation the committee released yesterday have much more 22L to do with changing market conditions, flawed economic 222 assumptions and rosy risk assessments than with inappropriate 223 compensation incentives. Remember, when viewed in the 224 rear-view mirror, objects are closer than they appear. At our request, one of the witnesses on today's first 225 zzo panel will describe the interrelated functions and 227 dysfunctions in subprime markets. vìIe appreciate his being included in this hearing. Mr. Chairman, âs the minority does not have a witness at 229 230 the table who is an expert on questions on executives 23r compensation, we would like to enter into the record a 232 publication by the Business Roundtable explaining best 228 233 234 23s practices on executive compensation. Chairman T/'IA)WAN. Irlithout objection, that will be made part of the record. HGO067.000 236 PAGE 11_ [The information follows: ] 237 ******** INSERT 1-1_ ******** HGO067.000 PAGE t2 238 239 240 24]242 243 244 Mr. DAVIS OF VIRGINIA. Mr. Chairman, I would also like to enter into the record a publication from the Federal Reserve Bank of New York, published in 2000, which praises the securítization of low- to mod.erate-income mortgages as a means of increasing the capital availabl-e to those communities. I believe it sheds some light on the role the Federal Government played in encouraging the securitization of subprime mortgages. Chairman WAXMAN. Without made 245 246 247 objection, that wil-I also be 248 part of the record. [The information follows: INSERT ] 249 ******** I-2 ******** HGO067.000 250 PAGE DAVIS OF VIRGINIA. IVe may ]-3 254 252 not like it, but markets at times produce inequities, and they correct them. Government involvement in that process generally makes Mr. matters r/ì/orse, not better. The professional baseball player with a $1-7 mill-ion 253 254 255 256 257 258 259 260 261" contract who hits only .200 in a season still gets paid. ,Jennifer Lopez and Ben Af f leck didn't have to pay reparations for moviegoers after "Gigli." But, in both cases, their value in the marketplace returns to equilibrium relative to performance without government intervention. That is the hard lesson underlying all the testimony today. And we look forward to a frank and informative discussion. Thank you, 262 263 264 Mr. Chairman. 265 266 267 268 269 270 27L 272 273 274 Mr. Davis. On our first pane1, the committee will hear testimony from five individuals with expertise or experience related to the mortgage crisis: Dr. Susan M. hTachter, the Richard B. Vüor1ey professor of financial management at the University of Pennsylvania's Wharton School; the Honorable V'Iilliam Francis Ga1vin, 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 ì Dr. Anthony Yezer, professor of economics at the George Tr'Iashington University; and Ms. Ne1I Chairman V{AXMAN. Thank You, HGO067.000 PAGE 1.4 275 276 277 278 279 Minow, editor and cofounder of The Corporate Library. We want to thank each of you for being here today. It is the practice of this committee that all witnesses testify under oath. So I would like to ask you if you would please rise and raise your right hand. [Witnesses sworn. ] 280 28r 282 283 284 285 286 287 288 289 290 291- will indicate that each of the witnesses answered in the affirmative. Yes, Mr. Issa? Mr. 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. Chairman WAXMAN. I¡'Iithout obj ection. Mr. ISSA. And, Mr. Chairman, I would also ask that, because it is pertinent information, that the material from the AFI,-CIO Web site tt2OO'| Executive PayVüatchil also be put in Chairman WAXMAN. The record the record in the same location. 292 Chairman VüAXMAN. I¡'Iithout obj ection. 293 294 Mr. ISSA. Thank you, Mr. Chairman. [The information follows: ] ******** CoMMITTEE INSERT 295 ******** HGO067.000 296 297 PAGE 1_5 298 z>v 300 3 01_ 302 303 304 305 306 307 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 5 minutes. We'11 have a clock. It will- be green, and then 1 minute before the 5 minutes are up it will turn yeI1ow, and then red at the end of 5 minutes. We'd like to ask yoü, when you see the red, to try to summarize. But your whole statements will be in the record. Ms. l{achter, why don't we start with you? There's a button on the base of the mike. Be sure to push it in. And pu1l it close enough to you so \^/e can hear everything you have to say. Chairman WAXMAN. We're pleased HGO067.000 308 309 3 1-0 PAGE MS. SUSAN 16 STATEMENTS OF M. VüACHTER, RICHARD B. WORLEY PROFESSOR OF FTNAT{CIAL MANAGEMENT, THE WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA; HON. WIL],IAM OF STATE, COMMONWEALTH F. GALVIN' SECRETARY 311 OF MASSACHUSETTS; HON. BRENDA L. ANTHONY 3L2 3 LAV{RENCE, MAYOR, CITY OF SOUTHFIELD, MICHIGAN; MR. i-3 yEzER, PROFESSOR OF ECONOMTCS, THE GEORGE WASHTNGTON THE 3L4 315 UNIVERSITY; MS. NELL MINOVü, EDITOR AND COFOUNDER' CORPORATE LIBRÄRY 346 STATEMENT OF SUSA}ü WACHTER 31-7 Ms. VüACHTER. Chairman Waxman and distinguished members 318 319 320 321- 322 323 324 325 326 327 328 of the committee, thank you for the invitation to testify at today's hearing and to provide my perspective on the ongoing mortgage debacle and the resulting credít crunch. I am Susan M. Wachter, the Richard B. Worley professor of financial management at The Wharton School at the University of Pennsylvania. FormerIy, I served as the Assistant Secretary of Policy Development and Research at the U.S. Department of Housing and Urban Development. Incentives are an important element of the current debacle in subprime mortgage markets. The focus of subprime market participants on short-term compensation through fees HGO067.000 329 330 331_ PAGE 17 332 333 334 335 336 337 338 339 340 341 342 343 344 345 346 347 rather than long-term loan performance is central to the outcome we see today of unprecedented foreclosure rates in an economy that is, as of now, not in recession. The current crisis is a textbook demonstration of how misaligned incentives can cause financial markets to fai1. In my testimony, I will draw on and briefly describe research that shows why and how misaligned incentives generate financial crisis and why these often lead to housing market crises. Financial crises and collapsing housing markets often occur together. The combined mortgage credit crisis and housing market recession that we currently are in is not a The two phenomena are correlated in remarkable number first. of instances, as in the Great Depression, the Asian financial crisis and the U.S. Savings and Loan crisis. Our current collapse in the subprime mortgage market is yet another example. Such combined crises often result from the misalignment of incentives in financial markets. This misalignment of incentives can be seen today, as weIl, in the current debacle. Dysfunctional compensation schemes operated at every stage of the subprime mortgage securitization process. Short-run volume drove up compensation and, therefore, provided incentives to produce throughout the subprime mortgage supply chain. Long-term loan performance and the 348 349 350 351 352 3s3 Hco067.000 354 PAGE 1_8 likelihood that loans would fail- did not slow down the 355 production process until the failures actually did occur. As the drive to expand markets and garner additional 356 357 volume-driven fees, loans \À¡ere underwritten at ever-riskier 358 terms and with fewer controls and less information on the 359 borrower's ability to repay. Information that pointed to 360 greater risk was ignored, and these loans were originated, 361 underwritten and securitized, generatíng unprecedented growth 362 in fees. 363 Compensation structures that are driven by short-term 364 volume production often lead to financial crises. Such 365 crises Rây, in fact, be inevitable in the absence of market 366 or other institutions that force consideration of long-term 367 performance and profitability. In the short run, weakened lending standards fuel 368 369 demand, which actually drives up housing prices. The result, 370 in this case, \^/as higher housing prices which temporarily 37r supported the market but which caused today far higher than 372 antícipated foreclosures. This occurs when it becomes 373 apparent that the price rises are artificial. Loans made at previous high housing prices with high 374 375 loan-to-value ratios are nottl under water, with loan amounts 376 near to or exceeding mortgage balances. This is where we are 377 today in much of the 2006 book of business of subprime 378 adjustable rate mortgages. And overall we have seen today, HGO067.000 379 380 381 PAGE t9 382 383 384 38s 386 387 388 389 390 3 91_ for the first time since World Vüar II, the lowest percentage of home equity in American homes. This lending crisis has been centered in securitized subprime mortgages. In a well-functioning securities market, as loans become riskier, the príce of securities composed of pools of these mortgages should drop, reflecting their poor quality and heightened risk. In efficient markets, this would have caused demand for and production of such lending to decline and market self-correction before the crisis occurred. We must ask why, despite the increased production of 392 393 394 395 396 397 398 399 400 401- 402 403 poorly underwritten 1oans, this market-correcting decline of prices of the securities backing the loans did not happen. Markets failed to signal the heightened riskiness of securities until the loans actually went into default rather than when the riskier loans were being produced. But the incentives to generate short-term fees without properly pricing or underwriting for long-term performance operate, âs I noted, throughout the supply chain. At origination, mortgage brokers were incentivized to produce. Mortgage brokers were paid for loan closings, not for detecting and rejecting a poorly underwritten loan that was likely to fail. This payment structure meant that the broker had little incentive to restrict issuance only to mortgages of high quality. The losses from bad mortgages that would HGO067.000 PAGE 20 404 405 fail would faII only on the lender or the investor. Yield spread premiums also widened the incentive gap between broker and lenders. 406 407 408 409 4a0 41"t 41,2 413 4L4 4L5 risk for collecting fees up front and passing faulty loans off to lenders and investors. Lenders knew they, too, could pass on the risk of these loans onto the investor and be paid up front for their services. Investment banks and rating agencies were mostly indifferent to the risk of these loans as we1I, because they also knew their revenue would be generated by the securitization process. The increasing demand for these high-yie1d securities ultimately led to an increasing flow of borrowers Mortgage brokers had little 4t6 41,7 448 419 420 42L 422 423 424 425 426 427 428 into subprime loans. TrÏhere were the investors, the ul-timate holders of the risk, in this process? Surely they \¡\rere incentivized to seriously evaluate the risk-return tradeoff of the securiti-es they were purchasing and holding. I¡'fhi1e this would seem self-evident, this did not occur. Rather, investors r^rere purchasing mortgage-backed securities and collatreraIízed debt obligation interest in mortgage-backed securities, which were highly heterogeneous with risk specific to the mortgages in the poo1. Without standardization, there was limited liquidity and these securities did not trade. They $tere not marked to market; rather, they were marked to model. HGO067.000 429 430 43]432 433 PAGE 2t The models were approved by rating agencies that, âs I 434 435 436 437 438 439 440 441- 442 443 444 445 446 447 448 449 450 45]452 453 just noted, limited incentives to evaluate their flaws. There was little incentive for traders to consider the negative outlook for these securities since they did not trade. For many investors who were looking for yield yet needed to be in investor-grade triple-A securities, these MBS and CDOs were too good to turn down as long as they were rated triple-4. But for some investors, the short-term excess return, while invested in seemingly secure instruments, was good enough and no further investigation of risk was necessary. For investors who would have wished to profit from mispricing of this risk, for the trArr and the riskier trBrr and well-named "toxic waste" pieces of these securities, there was 1ittle option to once again take advantage of information, once again since the securities traded very little. In our current situation, it was ultimately the increase in supply of credit that enabled the production of what I have elsewhere called aggressive lending instruments. Industry sources suggest that aggressive lending instruments, such as interest-on1y loans, negative amortizing loans, zero equity loans, and teaser-rate adjustable rate mortgages accounted for nearly two-thirds of all U.S. loan origination since 2003. In 2004, there was a huge growth in the number of HGO067.000 PAGE 22 454 455 456 457 mortgages extended to people with nonprime credit, and, 458 459 460 461, 462 463 464 465 466 particularly, there was a ramp-up in the number of negatively amortizing loans and teaser-rate mortgages. This weakening of lending standards, coupled with increased production, resulted in mortgages that were structured to fail even in the absence of intent or fraud. The result, âs we've seen, has been the massive failure of these loans. For example, recent data that was released by the Mortgage Bankers Association reveals that, in the third quarter of 2007, more than 40 percent of the adjustable rate mortgages extended to subprime borrowers have started the foreclosure process. Chairman WA)04ÃN. Ms. Ti'Iachter, if you want to quickly sum up. 467 468 469 470 471" Ms. WACHTER. It is my pleasure to do so. Thank you, sir. The ultimate question before us is, do we want a system 472 473 474 475 476 477 478 that produces risks such as those that we have seen in the current market? It is clear that V'IaIl Street will underwrite any risk. Risk-taking with the home, through instruments such as I have described, expose borrowers and investors to risk, but they also expose all homeowners and the overall and risk. economy to increased house-price volatility Such lending, financed through MBS, even with diversified loan portfolios, is nonetheless completely HGO067.000 479 480 PAGE 23 exposed to the risk of the business cyc1e. Negatively 48]482 483 484 485 486 487 amortizing and teaser-rate mortgages that ultimately require refinancing for sustainability have similar systemic risk to the kind of mortgages which prevailed during the Great Depression, which also needed to be refinanced, whether the markets u/ere friendly and allowed the refinancing or not. W€, as a society, will have to decide whether $te wish to encourage such financially vulnerable lending as backing to the asset which we also call thank yoü, Mr. Chairman. home. 488 489 [The statement of Ms. V'Iachter follows: ] 490 ******** INSERT 1-3 ******** HGO067.000 491, PAGE 24 Chairman WAXMAN. Thank you very much. 492 Mr. Galvin? STATEMENT OF WILLIAM GALVIN 493 494 495 496 497 498 499 s00 501 502 503 504 505 506 507 508 Mr. GALVIN. Good morning. I am Vlilliam F. Galvin, Secretary of State and chief securities regulator of the Commonwealth of Massachusetts. I commend the committee's decision to ask those who have profited from this mortgage bubble to explain how it happened. I' m here to give specific examples as to its destructive effect on citizens and communities, but I would respectfulty suggest that it's not enough to simply ask how it happened and who profited, but ít also must be asked, did the regulatory process fail? Why was this bubble allowed to build? And are we prepared to prevent another destructive speculative bubble, not just in mortgages or housing, but in any area of our economy that affects the day-to-day lives of our citizens? Commodities such as oi1 and wheat come to mind. s09 510 5l_1 5L2 5 1_3 With respect to mortgages, there has been a growing av/areness of CDOs and collateralization of pools of mortgage loans. vüe have seen the bursting of the credit bubble and f.rozen credit markets. I would like to testify as to my experience, as the head of the Massachusetts securitíes HGO067.000 51"4 PAGE 25 division, about some of the consequences of these events to individual investors, small businesses and loca1 governments. 51-5 fabricated financial instruments, CDOs are artificially 5 1_6 5t7 col-l-ateralized by certain assets such as pools of subprime mortgage 1oans. In certain CDOs, the collateral consisted of 5 1_8 pieces of other CDOs, which can magnify the risk 5l_ 9 520 exponentially. A recent administrative complaint filed by my office 52r 522 523 524 525 526 527 to the City of Springfield, Massachusetts. Springfield had struggled financially over the last decade. In 2004, it had a $20 million operating deficit, but with an intensive restructuríng, it staged a miraculous recovery, resulting in a surplus at the end of the involved the sale of CDOs 2006 fiscal year. The city hired two agents of Merrill Lynch to invest its 528 529 530 531- hard-earned surplus cash. The city's goal was to invest in 532 533 534 535 536 537 safe cash-tike investments. However, according to the allegations in our complaint, which Merrill of course has the opportunity to rebut, Merrill's representatives invested much of the city's money into three highly risky CDOs, including CDOs collateralized by other CDOs. Merrill received underwriting fees and remarketing fees in connection with these CDOs. We have also alleged that, ât the time of the sale, the CDOs s38 Merrill agents did not discuss the risks of owning the HGO067.000 539 540 PAGE 26 541 542 543 544 545 546 547 548 549 550 551_ 552 553 554 555 556 557 558 559 560 561 562 s63 with the city. Shortly after the sale of these CDOs to the city and despite their alleged triple-A rating, the market for them began to dry up, and their market value began to plummet. The estimated market value of one of the CDOs dropped in a couple of months to 5 percent of the purchase price. Merrill initially disclaimed responsibility for these sales. But after my office and other regulators began to investigate, it agreed to buy these instruments back. The Springfield case is not unique. In November, w€ filed an administrative complaint against Bear Stearns wíth respect to two failed hedge funds that invested heavily in mortgage-related CDOs. The allegations involved improperly disclosed conflicts of interest. I¡le're also looking into the sale to the State of Maine by a Massachusetts-based broker of approximately $20 million of structured investment vehicles, commercial paper backed by subprime mortgages, that has precipitously dropped in value. These cases have also spawned a number of investigations by my of f ice. I¡tre are examíning other CDO sales to governmental- entities in Massachusetts. hle are also examining how some of the riskier CDOs managed to receive a triple-A rating. In addition, vre are inquiring as to the effect of the bond insurers' insuring of risky CDO transactions on the value of insured munícipal bonds and the impact of downgrades HGO067.000 564 565 566 567 568 PAGE 27 569 570 57L 512 are particularly concerned about the f.rozert auction markets on the borrowing costs to municipalities. I believe when the final talIy is taken, the magnitude of investor loss will be breathtaking. And I fear that such risk-takers but losses will not be limited to wealthy, ""t.y the small, risk-averse investors and 1oca1 governments who have been unwittingly caught up in this rampant web of risk-taking will incur significant and unnecessary cost. on bond insurers. We 573 The cumulative effect on our overall economy has been 574 575 576 577 578 579 580 581_ 582 583 584 585 sB6 587 sB8 paralysis and decline. In my opinion, what you are examining today is nothing less than the roots of recession. The effects of the reckless mortgage lending that was enabled and fed by the securitization of these mortgages is now being felt by homeowners across the country. Recently a land registration division in my office prepared an analysis of foreclosures in Lowe1l, Massachusetts, which is another Massachusetts city. From 2000 to 2005, there were fewer than 50 foreclosures per year in Lowe11. In 2006, there \¡üere 93. T.n 2007, there \^Iere 283. The report anticipates that foreclosures in Lowell will continue to spike in 2008, as the interest rates of many adjustable mortgages begin to reset. Some common attributes of those mortgages include no-money-down mortgages, interest-on1y mortgages and HGO067.000 sB9 590 591_ PAGE 28 mortgages v/ith very 1ow introductory teaser rates. Often The these loans \^/ere made by national, not 1ocal, lenders. 592 593 594 595 596 597 598 traditional relationship between lender and borro\^Ier with respect to a particular piece of property has been severed. National lenders made unsuitable loans to lower-income borrowers, knowing they would not have to live with the mortgage loans for their entire lifespan. Instead, many of those loans were bundled into mortgage-backed securities and CDOs and sold to cities, towns, individual investors and pension plans. The middle men profited in these transactions from a s99 600 60L wide variety of fees, including mortgage origination fees, investment banking fees for underwriting the securities, and the sales and commissíon for selling pieces of them. Fina11y, the recent freezing of the auction market 603 604 appears to be yet another after-effect of the subprime 605 lending excesses and the CDO market meltdown. Vüithin the 606 last couple of weeks, ily office has received calIs from 607 people who thought they hrere investing in safe liquid 608 investments only to find that they, in fact, have purchased 609 auction market securities that are now frozen and cannot be 6L0 liquidated. 6tr We received ca11s from a young saver whose house 61-2 downpayment is now frozen; two siblings whose family trust is 61_3 now frozen; a small-business owner who finds their business 602 HGO067.000 61-4 PAGE 29 interrupted because money they thought was liquid is tied up My office will be 615 in frozen auction market securities. 6t6 investigating these cases in order to determine whether 617 investors were informed their investments might become i11iquid. 61- 8 In addition, \¡/e are looking into the role of the major 61-9 620 investment banks that sold these securities had in these events--such as the CDO auction market crashing; the triple-A 621" o¿¿ rating proving to be all but meaningless; bond insurance 623 becoming very tenuous--that led to the freezing of these 624 markets. 625 626 627 628 629 630 63L 632 633 634 635 are lef t with is mortgage originators, investment banks and their CEOs walking away with profits derived from subprime lending and securitization, and deceived investors and would-be homeowners trying to repair the damage to their lives and communities. I respectfully urge this commíttee and Federal and State regulators to work together to continue to uncover the details of the harm suffered by investors and mortgage borrowers, and to hold the promoters of these exploitative financial arrangements responsible and to demand greater and I¡'Ihat we 636 637 continuing scrutiny by regulators. Thank you for the opportunity to provide this testimony today. HGO067.000 638 PAGE 30 [The statement of Mr. Galvin follows:] 639 ******** INSERT L-4 ******** HGO067.000 640 64]642 PAGE 31 Mr. Galvin. Mayor Lawrence, pleased to have you with us. Be sure that the button is pressed. Chairman WAXMAN. Thank you very much, STATEMENT OF BRENDA LAWRENCE 643 644 Ms. LAWRENCE. Thank you T' m pleased to be here. Good morning, 645 646 647 Chairman Waxman and honorable members of this committee. 648 649 6s0 651_ 652 653 654 655 for inviting me to discuss the problem of foreclosures, âs a mayor, ín the City of Southfield, a problem that, âs you know, is dramatically impacting cities across the country. My city, Southfield, is a racially and ethnically diverse city with a population of 80,000. hle are a middleand upper-cIass community that has been known for having strong and vibrant neighborhoods. We are not the tlpe of city that one would expect to confront serious problems with residential foreclosures. But, unfortunately, the foreclosure crisis that is spreading throughout this country has not passed us by. Vüe currently have 500 vacant Southfield homes in foreclosure, representing approximately 3 percent of our single-family residential housing stock. In our county of Oakland, by median income the fifth-wealthiest county in the country, 6s6 657 658 659 660 661- HGO067.000 662 663 664 PAGE went into foreclosure in 2007. And in metro homes 32 8,000 homes Detroit, the metropolitan area, 47,000 foreclosure. are now in Not surprisingly, home values are falling throughout our 666 region, with Southfield experiencing a 3.2 decrease in the 667 year 2007. We now have residents whose mortgage balances 668 exceed their home values, and they're simply abandoning their 669 homes, rather than go through the foreclosure procedure. Even though we have already reached a critical 1evel, 670 67t the bad neürs is that the situation is like1y to get hlorse. 672 With a wave of adjustable rate mortgage resets expected this 673 year, the number of foreclosures is certain to accelerate. The negative impacts of these mortgage foreclosures and 674 665 675 676 677 678 679 680 681, 682 683 684 685 686 the vacant homes that result is being felt by cities all over this country in many ways: homes and landscaping not being maintained, adversely affecting the neighborhood's appearance and creating blight; vacant homes attract criminal activity, requiring increased police surveillance and reducing the sense of security of residents; these homes have become attractive nuisances for chíIdren; foreclosed and vacant homes frequently require immediate attention from public works because of burst pipes and other dangerous building conditions; vacant homes are potential fire hazards; foreclosed homes drive down property values in neighborhoods; these homes result in a loss of property tax revenues for a HGO067. 000 PAGE 33 687 688 689 690 city, while at the same time causing an increase in city expenditures; foreclosed and vacant homes erode the fabric and the morale of a neighborhood; foreclosed homes result in a disruption to families with the associated financial, social and emotional conseguences. In a word, foreclosed and vacant homes are a cancer in any city' s neighborhoods. In Southfield, v¡e're using our best efforts to deal with these problems. As soon as rÀIe identify a foreclosed or vacant home, it is immediately ínspected and ensured--if need be, we will board that home, if necessary. We check to see if the utilities are operable, and, if not, w€ shut the water off to avoid freezing pipes, which will cause additional damage to the home. We identify the mortgage lender from the foreclosed posting so that we can have an entity to hold accountable if the property is not maintained. This information is put into a database, and then we reinspect on a monthly basis. A list of these properties is provided to our police department so they can increase patrols in the neighborhoods where they're located. 69t 692 693 694 69s 696 697 698 699 700 70L 702 703 704 705 706 707 708 With our city's tax revenues already diminished by declining property values and by the economic conditions 7t0 which has caused a reduction in State aid, the cost of these 7LL efforts is an untimely burden on our city's and every city in 709 HGO067.000 712 71,3 PAGE 34 714 7]-5 716 717 7]-8 719 720 724 722 723 724 725 726 727 728 729 this country's budget. Notvüithstanding our efforts to deal with foreclosure-related issues on a Iocal basis, it is clear that this crisis must be dealt with on a larger scale. I joined the U.S. Conference of Mayors last November for a home foreclosure summit in Detroit. hle met with representatives from the mortgage industry to discuss our concerns. The bottom line, wê told the industry, they had to respond aggressively with loan modifications out of their own enlightened self-interests and on behalf of the 2 million American families that are predicted to face foreclosure in 2008. The mayors convened again in .fanuary and requested Congress to take several actions, including providing Community Development Block Grant funds to help cities monitor and maintain foreclosed and vacant homes; reforming the Federal Housing Administration so that it can help more homeowners in trouble; and increasing the funding for housing counseling agencies. Fina11y, Iet me say that, âs a mayor, one of my greatest 730 73]732 733 734 735 736 fears is the negative impact foreclosures will have on the tax base of 1ocal government. Property tax is the principal source of revenue for cities, counties and school districts throughout the country. Revenue which is used to fund municipal budgets for schools, parks, libraries, police HGO067. 000 PAGE 35 stations, fire stations, hospitals, and maintenance of 738 se\Àrers, roads and bridges. If foreclosures lead to a 739 continued and prolonged decline in property values with a 740 corresponding decrease in tax revenues, the level and quality of the essential public services local governments provide 7 41_ 742 will decline. 743 And thus, while local officials will serve on the front 744 line, âs mayors do every d"y, to continue to address 745 foreclosed issues at home, the Federal Government needs to 746 act swiftly and decisively to confront the growing issues on 747 a national level. 748 In closing, I want to say, while it's on the headlines 749 every d"y, I talk to mayors every d"y, and this issue is one 750 that we have to touch, sme11 and deal with on a daily basis. 75r We are truly in a crisis. And I thank you for the opportunity to speak today here. 752 753 [The statement of Ms. Lawrence follows:] 737 754 ******** INSERT l_-5 ******** HGO067.000 PAGE 36 755 756 Chairman WAXMAN. Thank you very much, Mayor Lawrence. Mr. Yezer? 757 STATEMENT OF ANTHONY YEZER 758 759 760 7 61- toz 763 764 765 766 767 768 769 770 77L 772 773 774 775 776 Mr. YEZER. Thank you, Mr. Chairman and members of the committee, for inviting me today. I'm going to make five basic remarks and then five recommendations, not that there's anything in the fives to It just so happens, as I edited my remarks recommend itself. here, r came up with five and five. First, Ry five basic points. Point number one: The market for mortgage credit consists of the prime or rrArr market, the government-insured market, cal1ed trArr , subprime and "brand X. " And there tends to be no attention to brand X. If we observe property records, there are a 1ot of brand X mortgages. And my suspicion is that people who are in the brand X market are not well-served. Expanding the subprime market tends to get people out of the brand X market. I would like to do more research on the brand X market. My limited inquiries indicated to me it might not be safe. So that's my point number one. There are, in fact, four markets. We should never forget the brand X market. Number two, second point: There's a sound economic HGO067.000 777 PAGE 37 778 779 780 784 782 rational-e for having subprime mortgage market of limited size, particularly concentrating on households that need to refinance out of what I call the home equity trap. You lose your spouse, you lose your health, you lose your job, you have a lot of home equity. Guess what? Prime lenders u¡on't touch you. You can't do a cash-out refinancing. Now you can go for a soft second or something like that, but basically 783 you've got to sell your house. WeI1, I don't think that's 785 appropriate. Subprime market helps you out of that. 784 786 787 788 789 790 79]792 793 794 795 796 797 798 799 800 80r. It's not uncommon for new markets to overshoot. I remember the NASDAQ in the late 1-990s. This corrects. Look at the NASDAQ today. In the case of subprime, the normal market overshooting \^ras supplemented by government, sort of , pushing the lenders on the back and saying, "Go out there and serve all the underserved. rr As one of the people who, when the government was saying that, said, rrl think the people who are underserved may be underserved for a reason and watch out, " I could say I told you so, but I'm not that kind of guy. Nevertheless, I really think that in the area of bank examination we should concentrate on safety and soundness a 1itt1e more. I' m especially worried about depository institutions taking lots of risk. When depository institutions are taking lots of risk, that becomes a general risk for society. That's what Professor Wachter means about HGO067.000 802 803 804 805 806 PAGE 38 the link between housing prices and general financial co11apse. Okay, my third point is that, until recently, the subprime market looked pretty well-behaved. In my testimony, I have some níce prepayment and default equations. They look 807 really good, reaI1y good. I know you're not excited, but 808 that's real1y good. Even things like for the 2/28 ARM, do 809 you get a spike in prepayment or default at 24 months? The 810 answer is a spike in prepayment at 24 months. It looks like 811_ the folks were using it wisely. So then, what happened? Point number four, what 81-2 I 1_3 happened? V'Iell, the anshrer is, according to the research Bt4 that we've been able to do recently, is that basically the 815 bottom dropped out of prices. I actually did the prices 816 for--I couldn't get your district, Chairman Waxman, but this 81,7 is all of LA. Okay, for everybody in the room, your house 818 price increase looks like the Matterhorn--by the wây, not 819 just nohr. It's like the Matterhorn. You've had three 820 collapses, okay, since the late 1970s in house prices in LA. A 1ot of 82]- Guess what happens when you faIl off the cliff? 822 subprime goes bad. 823 824 825 826 fourth point is basically, yeah, it's house prices and, yês, it's going to happen periodically. Subprime is a little bit like providing disaster insurance. You are fine and fine and fine and fine, and then the hurricane hits. So my HGO067.000 827 PAGE 39 828 829 830 831 832 833 834 835 836 837 838 839 840 841, 842 843 844 845 Okay. Fifth point is, I mean, let's not forget that we also have a government sector here that hasn't done so we11. I mean, if you look at, you know, delinquency and default on FHA, it's not a pretty story. And \,rre're actually paying for that pub1ic1y. And, let's see, management of FHA--I guess we'11 blame it on Mr. Bush. Okay, so Mr. Bush--excuse me--President Bush, blame it on him. In addition, when you look at these numbers for FHA, FHA compared to subprime is much worse than the numbers show because subprime mortgages, the best ones, prepay quickly. So, actuaI1y, the performance of FHA compared to sub shoul-d be much better than subprime, and, in fact, it isn't that much better. So we rea11y have an issue with FHA, keeping things in perspective, and with management of FHA. All right. Five recommendations, okay. What I rea1ly wanted to do with these recommendations is to prevent recurrence. 846 847 848 849 850 85r_ thing is the current emphasis on borrower education and financial literacy is misplaced. You can't teach someone financial literacy if they're not And the people are not mathematically literate. mathematically literate, so they can't become financially literate. All right? Maybe some other committee can make them mathematically literate, and then we can worry about that. The fírst HGO067.000 852 853 PAGE 40 854 855 856 857 858 859 860 Two: If you want people to make good decisions, have a standardized mortgage product. I have a recommendation for the Waxman mortgage here. Be a standardized mortgage product. AI1 lenders who provided ít would have to quote prices in a certain fashion and disclose them to people. And people could comparison-shop and keep themselves from being taken to the cleaners. How hard is this? By the wây, FHA could pick up the Waxman mortgage as something they would do. Third point is 1et's examine banks for safety and 861soundness, and not for capital allocation. Fourth point is, actually, all our mortgage products now 862 863 are not what economists would recommend. We actually need 864 some innovative mortgage products. And down the line, I'd B6s hope people would think about that and let some economists 866 talk about what a rea1Iy neat mortgage would be. And the fifth point is we ought to give more attention 867 868 to the efforts of lenders at loan modification or 869 forbearance. I'm reaIIy impressed with the significant 870 numbers of loans where we have modification of forbearance. 87r But I'm also impressed with the survey data that indicates 872 lots of people who are in financial trouble don't contact 873 their lender. And they could get in on these programs. 874 Okay, so I made five points, basically, about the 875 current situation, and then I had five recommendations. 876 That's certainly more than any individual should be entitled HGO067.000 877 PAGE 4A to. Thank you. HGO067.000 878 PAGE 42 [The statement of Mr. Yezer follows:] 879 ******** INSERT I-6 ******** HGO067.000 880 881_ PAGE 43 Chairman WAXMAN. Thank you, Mr. Yezer. Ms. Minow? STATEMENT OF NELL MINOW 882 883 Ms. MINOVü. Thank you very much, Mr. Chairman, members 884 88s 886 887 888 889 890 89L of the committee. It's a great honor to be here, and I appreciate it very much. I'm here on behalf of capitalism. I represent and provide services for the providers of capital, investors. And we providers of capital, w€ want CEOs to be paid hundreds of miltions of doIlars. Nothing makes us happier than when CEOs earn hundreds of millions of doIlars, because they earn it by creating wealth for shareholders. It's when they get paid that kind of money for destroying shareholder value that I think we have a problem. And that is the situation we are going to be talking about today. It's an outrage, it's appalling, that people should get paid like this for the kind of performance that they turned in. And when that happens, it undermines the credibility of the American capitalism. In global markets, that's a risk that we Iiterally cannot afford. There's an outrageous disconnect between pay and performance. 892 893 894 89s 896 897 898 899 900 9 01- HGO067.000 902 903 PAGE 44 904 905 At The Corporate Library, we provide research on issues of corporate governance, and the most reliable predictor of and loss is excessive the potential for Iitigation, liability cEo compensation. 906 907 908 909 910 9]-1- 9L2 9L3 9]-4 91_5 91-6 9L7 9L8 9L9 920 fair to say, with respect to Mr. Davis, that we're not talking--these guys that are going to be on the next panel, these are not scapegoats, and they're certainly not virgins. Yeah, there's a lot of blame to go around. There are a lot of people involved in this mess, and It takes a you heard about all the different parts of it. village to create this kind of disaster. But certainly these people are a part of it. And certainly the pay created perverse incentives that poured gasoline on the fire and, if I can switch metaphors in the middle of a sentence, put a l-ot of economic crack into our system. If we paid Congress--\^te could never pay you for performance, because you perform vastly in excess of anything we could pay you. But if we paid Congress-So I think it's lLaughter. l 92L 922 923 924 925 926 If we paid Congress by the numbers of pieces of legislation you passed, I can guarantee you we would have However, that would not more pieces of legislation. necessarily be better pieces of legislation. And that's what we did with this incentive pay. We paid people based on how much business they generated, not how good it was. HGO067.000 927 PAGE 45 928 929 930 931_ 932 933 thing they did, always--people in politics know this--the first thing they did, they changed their vocabulary. They used to be called high-risk mortgages. Now they're called subprime. It doesn't sound so bad, and then they were able to sell them to everybody. There's a market failure here because the providers of And the first capital have no \¡¡ay to respond to these outrageous pay 934 packages. There's no way to replace the boards of directors. There is a very good piece of legislation that already 935 936 passed the House with a very strong majority on "Say on Pay." We would love to see that pass through the Senate. That 937 938 would help a lot. Another issue is the ability to replace directors, 939 940 either through majority vote or proxy access. T¡'Ihen you hear 94r about the pay plans today, they will te1I you that they're 942 based on the market. They are not. They're based on They're comparing X to X. It 943 comparables, not results. 944 doesn't mean anything. They can show you all the pie charts 945 in the wor1d, there is no market basis for this pay. And 946 there's no excuse for paying people so much for doing so 947 948 949 950 951_ 1ittIe. Put these pay plans under a microscope, âs this committee's report has done very well, and you will see that they don't work. You have to look at pay, you have to ask just one question. ,fust líke any other asset allocated by HGO067.000 952 953 PAGE 46 954 955 956 957 958 the board of directors, what is the return on investment of the pay? The return on investment for these pay packages is less than a piggy bank. And what you want is a pay package that pays off. This current system is not. It may be legal, as we've heard, but it is not right, It is not efficient, it is not the market, and it is not capitalism. [The statement of Ms. Minow follows:] 959 ******** INSERT l-7 ******** HGO067.000 960 96]962 47 Chairman WAXMAN. Thank you very much, Ms. Minow. 963 964 965 966 967 I want to thank all the panelists for your testimony. We are no\^r going to recognize members of the committee for 5 minutes of questioning, and I want to start off with Ms. Norton. Ms. NORTON. Thank you very much, Mr. Chairman. 968 969 970 974 972 I think I'd like to direct this question to Ms. Minow. Ms. Minow, I'm interested in the role of the board in all this. It's very easy to, of course, Iook to the guys who cleaned up. I served on the board of three Fortune 500 companies before I was elected to Congress. I must tell you that none of my experience equips me to understand the role of the board and the compensation or severance packages in these cases. 973 974 975 976 977 978 979 980 98r_ 982 983 984 Let me ask you about Mr. Mozilo's severance, because we got a copy of his severance agreement that Countrywide signed with him. It gives Mr. Mozilo cash severance that would be worth $36 million if the company experiences a change in control, such as the pending Bank of America merger. Now, if you look at the terms of this agreement, I, at 1east, find them quite amazing. If Mr. Mozilo leaves Countrywide, he would, it seems, almost automatically leave with millions of dollars. If--and here I'm quoting--if the board takes any action which, quote, trresults in the diminution of the executive's Hco067. 000 985 PAGE 48 986 981 988 989 990 991, 992 993 994 995 996 997 998 999 1_000 1_001- LO02 l_003 l_004 l_005 1_006 1_007 1_008 r_009 position and responsibilities"--we11, whatever lawyer wrote this, my hat is off to him. Because he appears to have made the board a captive to this executive, rather than his employer. But let me ask you. It appears that, if you read this language, "results in any diminution of his status, title, responsibilities," that they can't take anything away from him, maybe even his private aircraft. It looks like they can terminate him without severance. Indeed, I'm not sure the agreement says this, but it appears that they could terminate him if he committed a felony or acted in bad faith. Norrr, even if his decisions cause his company, Countrywide, to lose billions of dollars and send the economy into a recession, it appears, under this agreement, that they cannot terminate him without paying him millions in severance. This kind of cause agreement, you know, you expect for judges maybe, not CEOs. Nornr, I want to be fair to Mr. Mozilo, because he apparently has announced that he wouldn't seek the $36 million in severance, I suppose given what's happened, if the pending merger is finalized. But, of course, this doesn't change the terms of the agreement and doesn't tell me whether or not there are such agreements floating out there more generally in our country. status, title, HGO067.000 1_01_0 PAGE 49 I woul-d like your evaluation of this agreement. Make me 1011_ understand why a board would have negotiated an agreement. I a0a2 understand what the competition is, of course, for executives 1013 of this kind, the size of the company and all of that. 101_4 Is there any vray in which these severance terms could be 1_01_5 considered justifiable from a corporate governance perspective, looking to the board and its actions? 1_01_6 1_01_7 Ms. MINOW. Thank you for that question. It's not the worst severance agreement I've ever seen. 018 101_9 I think that would go to Tyco, where Dennis Kozlowski's r020 contract provided that even conviction of a felony was not 1024 grounds for termination. So that was probably the 1_ 1,022 rock-bottom. ]-023 'J,024 'J,025 ]-026 to27 to28 r029 103 0 103l_ r032 1_033 L034 But the general idea about severance agreements-Ms. NORTON. How typical is this? Ms. MINOW. It is very typical, with one sma11 exception, which I will get to. But the general idea about severance agreements is that we want to align the interests of the executives with the interests of the shareholders. We don't want them to say, rrT¡tre11, this deal would be good for the shareholders, but I would lose my job, so I'm not going to vote for it. " And there are ü/ays to structure the pay that does that. However, this is the one exception that I would say, is that if the CEO is also the founder and is a massive, massive HGO067.000 1035 103 6 PAGE 50 shareholder, as Mr. Mozilo is, then I don't really see that there is that justification for a severance package of this 1,037 kind, and I would be opposed to it. 103 I Furthermore, I feel very strongly, âs you suggested, 103 9 that CEO contracts should provide that termination for cause 1-040 includes doing a bad job. I think every other job in the 1041 world you can get fired for doing a bad job and not get 1,042 severance. ft's only in the wacky world of CEOs where you 1043 get severance for failing. 1,044 Chairman WAXMAN. Thank you, Ms. Norton. 1045 Mr. Issa? r046 Mr. ISSA. Thank you, Mr. Chairman. r047 I understand the boards aren't working. So would you r_04I put that up, and would you give that to Mr. --is it Yezer? ]-049 Mr. YEZER. As if the f irst rrerr vüere an rra. Mr. ISSA. Okay, Yezer. 1050 1_051_ I don't need more heIp. T' m already doing badly enough 1,052 as it is. 1_053 You know, Mr. Chairman, it was interesting that in your 1054 opening statement you picked on two companies that aren't 1055 here--Circuit City, who I'm well aware of in my prior 1ife, 1056 in the real worId, and their problems and the reasons for L057 their layoffs and so on. 1_058 Sad1y, what you probably don't know is that Circuit City 1_059 has been beat, if you wi11, to a certain extent, in the rr HGO067.000 1_060 PAGE 51_ they had employee compensation, salesmen 1061 compensation, that were commission-based, Best Buy went to a t062 practice of paying a less-than-$16-an-hour flat wage, flo 1_063 commissions, bragged about it that there r^/as no high When marketplace. pressure, and did better. So, ultimately, Circuit City, who had a system of 1065 a066 compensation, commission compensation, lost out in the r067 marketplace. And I'm sad to see that, because I would prefer 1_068 to see that kind of direct benefit to the sales force. But, l_069 clearly, the last effect that you talked about, the layoff of 1,064 l_070 $16-an-hour flat-rated people, once again, in a vacuum, sounded terrible but, in reality, r,'las the result of their 4072 losing in the marketplace. Mr. Yezer, before you got to Occidental Petroleum, Mr. 1_073 Ray Irani being the chairman who got, You know, in 2005, ç64 LO74 1075 mitlion in compensation, can you note that the stock value lo76 there went from, in 2000, about $6, ç7, to about $80, t077 roughly, today? 1,07L HGO067.000 1078 RPTS KESTERSON DCMN SECKIvIAN PAGE 52 r079 1080 1081 1-082 r-083 1-084 [1]-: 05 p.m. l 1085 1_086 i-087 1_088 1_089 r-090 1_091_ L092 l_093 1,094 10 95 Mr. YEZER. I' m sorry. When did you say--when did you say he got the compensation? Mr. ISSA. According to--I did some quick work here. Total compensation of ç64 million-Mr. YEZER. I'm-Mr. ISSA. I' m sorry. That was in 2005. His S-year compensation ended up being about çL27 mi11ion, almost all in stock appreciation. If you v/ere at the helm of a company in 2000 that was at ç7 and you \^/ere able to successfully take it to--approaching $i-00, over $80 in those 8 years, what do you think the benefits should be when you're the fourth largest oil company and a total stockholders return of over 30 percent per year? Vühat do you think the benefit should be? And do you think that Mr. Ray lrani's benefit was at least in some part tied to the success of his company during that period? 1,096 Mr. YEZER. I'm--okay. I'm not an expert on benefits, The first thing I 1-098 but I'11 make two comments about this. 1-099 might do is an event study that is, when this was announced, 1_1_00 see what happened to the share price. If the announcement resulted in the share price going down, then, you know, I If the announcement resulted tro2 wouldn't be too happy about it. r097 1_1_01_ HGO067.000 LL03 PAGE 53 Lto4 t_1- 0 5 l_1_ 06 LtoT l_l_08 l_109 l_l_L0 111-1 1,LL2 1Ll_3 ttL4 l_1_1_5 L1"1,6 LI1.7 1_11_8 L]-]-9 t1,20 Lr2l 1,r22 rL23 tt24 Lt25 tr26 tt27 in the share price staying flat or going up--I mean, the announcement of the compensation. By the way, can I te1I you--put this in perspective. Occidental favorite--this is my favorite Occidental Petroleum story. You know, Armand Hammer was the chairman for a long time. Mr. ISSA. Until he was 90 and dying, yes. Mr. YEZER. Right. Yes. And then he died. Do you know what happened to the share price the day after he died? It You know, a lot of the most overpaid went up significantly. chief executives of firms are people who actually even collect a nickel and their firm doesn't perform at aII. Mr. ISSA. Right. And I appreciate that. Ms. Minow-Mr. YEZER. T' m not an expert on this. Mr. ISSA. Because I think you're probably the yin and yang of this debate here today, when you look at the performance of a company--my understanding is Mr. Irani has been--Dr. Iraní has been at the helm of the company as chief operating officer and chief executive officer since '83, took a long-term approach and even bought out Mr. David Murdoch so that he would not have to move the stock price up in the short run. But just looking at somebody with several decades at a company and the performance from 2000 to 2008, all--virtually all tied to stock appreciation and grants that he accumulated over decades, in this case, isn't that a fairly reasonable--regardless of the dollars that result--but HGO067.000 54 1]-28 ar29 1_130 1t_31_ aa32 1_133 a reasonable relationship in a positive way and something that this committee should know positively? Mr. YEZER. Obviously, this-Mr. ISSA. No, Ms. Minow-Mr. YEZER. If this-Mr. ISSA. I' m sorry. I have very limited time. But, Ms. Minow-- 1,1-34 1_1_35 4136 r1,37 1_ 1_3 I 9 1_1_3 a]-40 t]-4t tt42 1,r43 tt44 tt45 rt46 tt47 L1-48 1,1,49 r-150 LL51 tt52 Mr. YEZER. If this company-Mr. ISSA. I have limited time. I appreciate your answering that. Ms. MINOVü. Mr. Issa, âs I said, nothing makes me happier than seeing a CEO earn hundreds of millions of do11ars. In Mr. Irani's case, I would have preferred to index his pay against his competition. I think that he benefited tremendously from oil prices, which didn't realIy have a lot to do vrith his leadership. But, in general, yês, I agree that is--you want to talk about yin yang, that might be the yin to the yang that we are talking about today. Mr. ISSA. Thank you. I'm sorry. We've run out of time. And I appreciate the chairman's indulgence in my showing that perhaps your two examples were in a vacuum inappropriate, and I yield back. Chairman üIAXMAN. The gentleman's time has expired. The Chair now recognizes Mr. V'Ie1ch. Mr. I/üELCH. Thank you. HGO067.000 1_l_53 PAGE 55 Mr. Chairman. Thank--I want to thank the tts4 witnesses. You all are on the frontlines. I rea11y 1_1_55 appreciate your leadership in trying to get some relief and 1_1_56 also frame the issues. Let me ask a couple of questions. 1,L57 One of the things that was occurríng with ylr. Mozilo is that, between November of '06 and December of '07, he sold about 5 1_1_58 million shares of his stock and that \^tas occurring at a time 1_1-59 when Countrywide under his leadership had designed a plan to 0 tL61- buy back over a billion dollars worth of stock and borrowed As an expert on corporate t1_62 money in order to do that. governance, Ms. Wachter-- I'11 ask Ms. Minow. I'11 start 1-6 3 What is your reaction to that apparent tr64 with you first. Thank you, 1_1_6 1- 11_65 contradiction? Ms. MINOW. I find that to be possibly the most deeply concerning of all of the facts that have come out about his pay package. I have to tell you, Mr. Vüe1ch, I'm a very, very Lt66 II67 1t_6I tr69 1,I7 0 r1"7L 1-L72 LL73 11,7 4 tt75 11,7 6 tt17 I don't like to see executives sell stock at all. He had a substantial stock holding, and I think he would have done better in being a steward of the company's assets íf he had to hold on to it. Mr. WELCH. Mr. Galvin, how about You? Mr. GALVIN. V'Ie11, I think it points out the conflicts that are inherent in this whole situation. You raised a point that many of the lenders here, the people who packaged these things, who allowed this process to go on, hlere hard liner on this. HGO067.000 PAGE 56 publicly traded corporations. So that is another whole tt79 dimension. When you look at the coverage they received, once 1_1_80 again, there are many elements of conf 1ict. They \^rere of ten 11_81times receiving coverage from some of these same investment Lt82 banking houses that were engaging in business with them. So I think the bigger question I guess is, hle recognize that 83 And the ttg4 housing is a fundamental need, a necessity of life. impact of this crisis that I think is evidenced by the t_1_85 t_1_86 testimony you've heard this morning has been not only t!87 devastating to those who need housing but also to our l_1_88 economy. And the question is--and that's what I tried to l_189 raise in my original testimony--is, how do we make sure that l_1_90 this doesn't happen again? I understand the mission of this LL91 commission--committee rather is to look at oversight with a LT92 view towards making sure it doesn't happen again. And how do you fix what has happened? And so I think there is a real 1_1_93 tt94 problem when you have this tlpe of activity on the part of r.L95 CEOs. I share Ms. Minow's concern, when you see a sale--we regulate-- I regulate securities in Massachusetts. When you r1-96 t1-97 see this kind of sa1e, it raises red fIags. Mr. VüELCH. Thank you. 1_1_98 Professor V{achter, how about you? You have the chief 1-199 r200 executive implementing a plan for buy back and--and 1,20L letting--for the company and a personal plan for his own ]-202 finances to seI1. LITB t_ 1_ HGO067.000 ]-203 57 Ms. ?'IACHTER. Of course, that was his right. L204 1_205 ]-206 1207 1,208 L209 t2l0 12al ]-2r2 t213 12l4 121-5 12t6 t2t7 ]-21,8 t2t9 L220 t22t 1,222 1,223 1,224 1-225 L226 L227 Unfortunately, in this setting, there hlere decisions that every--by many people at every stage was their right. But the question is, what should it mean for the entire system? And I think we have to step back and look at the systemic problems here. At that point, Mr. Mozilo really could not have--it appears that this may not have been a very good thing to have done. But at that point, the system was already in failure. I think we also have to step back. I'm not commentinq on the ethics of what he did. Mr. wEtc;. wel1, yoü know, my experience around here is that most of the rea11y bad things that happened are 1egal. That is the problem. Mr. Mozilo had a--the--Countrywide hired a firm to give, quote, compensation advice to the board. And as you know, they hired Russ Zimmerman, who came to the conclusion Mr. Mozilo's pay was significantly inflated. Countrywide then hired another compensation consultant, Towers Perrín. And internal e-mails show that ,fohn England, a Towers Perrin advisor, !ì¡as acting as Mr. Mozilo's personal representative. And there is an e-mail that I think is on display over here where Mr. England wrote to Mr. Mozilo that his concern about the board's proposal was that it lowered Mr. Mozilo's maximum opportunity by lowering the target bonus and reducing the maximum bonus. Ms. Minow, what is your view about this arrangement? HGO067.000 1228 PAGE 58 consult and gave an opinion that said the pay was 1229 too high. Countrywide then capitulates and gets a second ]-230 consultant. And then that consultant has personal and direct t23r interaction with the person whose compensation is in They first 4232 1,233 1,234 1-235 question. Ms. MINOW. Yes. That is exactly-- L236 1,237 L238 L239 1240 L24L 1242 ]-243 ]-244 1"245 1-246 1"247 is on. Ms. MINOW. That is exactly the question. And the--the only amendment I would make to the way you framed it is to say it is not Countrywide that did that. It is the compensation committee of the board. And I trust that you're going to present that same question to the chairman of that committee. That is--that is unthinkable to me that the CEO would be allowed to say, I don't want this compensation consultant because he is not offering me enough money; I want that compensation consultant. That is the job of the board, and I believe that is a classic example of a failure of a board. Chairman WAXMAN. Thank you, Mr. I¡'IeIch. Your time has Chairman WAXMAN. Make sure--be sure your mike expired. Mr. Davis. Mr. DAVIS OF VIRGINIA. WeII, thank you very much. I 1249 1250 mean, I look back to the Fed and some of their publications t25L in 2000. They were embracing subprimes. They looked at this 1-252 as a u/ay to make housing more available to people that 1,248 HGO067.000 L253 ]-254 ]-255 PAGE 59 otherwise wouldn't have had it. The real problem here is the market turned down. V'Ie've gone through these--I've been in office 29 years. I've seen boom and bust. I was in loca1 ]-256 government for 1-5 years. And we were reliant on the real 1,257 estate values. And when you go through a bust in the ]-258 marketplace, our budgets were put into turmoil. We went ]-259 through this in Fairfax in L99L and 1-992. So the realL260 problem here when you look at all of the other--a l-ot of L26A issues, was the fact that the market turned down. Ms. Minow, isn't that what happened actuaIly. L262 Ms. MINOW. Mr. Davis, 1et me--let me assume that that ]-263 1-264 is correct for a moment because it could be. That would be ]-265 fine with me. But why are we paying these CEOs as though 1,266 they were successful? I wouldn't--I understand that no one 1267 can predict the future, even the people at the very, very top 1268 of the economy. But we are paying them as though-Mr. DAVIS OF VIRGINIA. That is a separate issue and 1,269 L27 0 I'11 get to that. That is a separate issue. L27t Ms. MINOW. Okay. But I'11 accept your point. Mr. DAVIS OF VIRGINIA. But if you didn't pay them 1272 would have had this crisis? ]-273 anything, you still r27 4 Mr. Yezer, isn't that basically-1,27 5 Mr. YEZER. Yes, this-1,27 6 Mr. DAVIS OF VIRGINIA. I mean, you're looking for a lot 1-277 of culprits when things go wrong. HGO067.000 127 PAGE 60 Mr. YEZER. Well, because look at what happened--you've t279 got the losses in FHA, right? 1280 Mr. DAVIS OF VIRGINIA. Right. I mean, across the 1,28r board. In fact, there are players who are probably equally 1,282 or more culpable when you talk at some of the lenders, the 1,283 appraisers, the rating agencies. I mean, there are a 1ot of 1-284 folks that got caught up in this, including the Federal But 1-285 Government, who was encouraging this type of thíng. 1,286 let's talk a minute about compensation. There is a ]-287 claim--the majority says that the compensation wasn't in line 1288 with performance at these companies. But even their own 1,289 charts showed that Mr. Mozilo--his total compensation was ç42 r290 million in 2006 and roughly half that in 2007. And that is ]-294 even using some sleight of hand to include $20 mill-ion in ]-292 stock sales as compensation. So his compensation was cut in L293 ha1f. Mr. O'Nea1's compensation was $48 million in 2006. L294 OnIy slightly more than a míIlion in 2007. And Mr. Prince's 1295 compensation was $25 million in 2006 and less than half that 1,296 in 2OO7 . Isn't it also true that any stock options that $lere 1,297 not exercised when the stock price was high are then much 1,298 lower later on? So they had--in some of these instances, 1,299 they had to keep 75 percent of their stock under--you know, 13 00 under the ruIes. So as the stock--they suffered, too, now. They started out with a much higher base than the average 1_3 0 1302 person, and you can argue that was good or bad. But the I 1_ HGO057.000 13 03 6t too, relative to everybody. It is a higher percentage hit in some cases. They just l-3 04 1_305 start at a much higher base. V'Ie see that by the way not just in corporate America; we l_306 1,307 see it in sports, athletics, entertainment across the board if you ask what is good compensation. So this value of the l_308 stock that they were not allowed to sell while they hlere 1_309 employed was vastly reduced. And as the performance went 13 L0 They would have had a huge upside 131-1 down, they took huge hits. I'm not saying this isn't a l-ot of ]-31-2 had the economy come in. money, but to take a look at--they did take a hit. l_3 l-3 Now, Ms. Minow, in your testimony, you repeatedly used t3L4 the term "inflated" in talking about the earnings or stock 1_3 L5 prices which were the bases for what you considered to be 1-3 l-6 1-31,7 excessive compensation paid for the executives. Would you r-318 define the term "inflated" for us? Ms. MINOW. Yes. I would define the term to say numbers 1_319 L320 that had to be corrected later on either because of poor argument is that they took a hit, L321, judgment or fraud. L322 ]-323 4324 1-325 1,326 ]-327 Yeah. Well, in some cases--you know, you make decisions every day in business and factors get outside your control. High/ 1ow prices, interest--things outside your control. V'Ihen things go r¡\trong, wê're all looking for somebody blame. But as you take a look at this whole issue, there are a 1ot of people to bIame, including Mr. DAVIS OF VIRGINIA. HGO067.000 1,328 'J,329 1-330 1_3 62 3 1_ ]-332 l_333 'J"334 1_335 1_336 ]-337 1_338 1_339 1-340 L34L L342 1_343 L344 ]-345 1-346 1-347 1_34I ]-349 1_350 13 51_ 1352 the people who signed on the mortgages, in some cases, that they couldn't possibly have taken. Ms. MINOVü. I said that in my remarks. Mr. DAVIS OF VIRGINIA. I know you did. T' m just saying, \,'/e're looking here at just one aspect of this, and I think it ís much more complex than that. And ultimately, of course, the shareholders, this is their duty to look at what the compensatíon is. They have that right, pension funds-Ms. MINOVü. All I'm asking is that they have the ability to respond to it in market terms. Mr. DAVIS OF VIRGINIA. Let me ask this. I'11 ask Mr. Yezer. The popular media has spoken at length about the effect of subprime mortgage--adjustable rate mortgages. Some have suggested that the subprime lending will have resulted in a net decline in home ownership when the current cycle is completed. Do you concur with that, or do you think subprime lending has contributed and expanded home ownership when this is all said and done? ï'11 ask you. You're the economist. Mr. YEZER. Okay. Well, Susan is a1so. Mr. DAVIS OF VIRGINIA. Okay. I'11 just ask you both. Mr. YEZER. Okay. Let me just make one previous point because I think I didn't made it clear. Mr. DAVIS OF VÏRGINIA. SuTe. Mr. YEZER. There is something in financial economics ca11ed an event study in which you basically say that nev/s HGO067.000 l_353 63 ]-354 1_355 1356 1357 1_358 13 59 1_360 13 61 1-362 1_363 gets capitalízed in the share príces. So, essentially, I just look at what happened to the share price when an announcementr was made. And if the share price goes down, I begin to think that the compensation was overly generous. And if it doesn't go down, I think the judgment of the market was that it was appropriate. Every day the market votes on every corporation in the United States and all aspects of its management. And we study this through event studies. That's how the SEC decides to prosecute people in the case of insider training; they look for the information leaking earIy. So this is a well established academic method in which 1364 1_365 you could have someone, even a graduate student employed and t366 L367 study this issue of whether or not you got a--you got a bump in the share price one way or another. And I don't know how it would come out. But that's the way a professional r-368 1"369 economist does it. As to the issue of home ownership, there was a huge r37 0 t37A increase in home ownership, 64 percent to almost 70 percent. It is a tough--you know, it is tough to attribute that to 1372 L373 things--the literature generally thinks that a lot of it was ]-37 4 due to credit restraints being eased by the subprime market. r375 Are we likely to go back to 64 percent? I don't think so. I r37 6 mean, I'd actually probably be willing to bet a lunch that we 1,377 won't go back to 64 percent. HGO067.000 64 home 1378 L3'79 1_380 Ms. WACHTER. Mr. Davis, if I may respond. The subprime took off. ownership rate has already declined to the leve1s before So, although there was this dramatic 13 81_ 1,382 increase from 2O0l until now, ute are back down to the 2OOL Ievels. We've lost all the gains of the period of the subprime growth. So, in fact, home ownership is stilL 1383 1,384 13 85 1_3 86 1_387 13 88 13 89 net--I do believe subprime will decline. Secondly, íf I may, on an earlier point, and with all due respect, the price rises that occurred in the year 2006 vrere because of subprime. So subprime created the price rise that is now putting homeowners under water with loan-to-value declining. So ratios under one. Mr. DAVIS OF VIRGINIA. Good Point. 13 90 L39t Chairman VüA)ilvlAN. Thank you, Mr. Davis of Virginia. Mr. Yarmuth. 1392 Mr. YARMUTH. Thank yoü, Mr. Chairman. And thanks to 13 93 4394 all the witnesses. I come at this from a kind of 13 95 schizophrenic perspective. I was a journalist for many years ]-396 and wrote columns. And I find many of this--much of this ]-397 information would be wonderful fuel for columns. I mean, I 13 98 could look at Mr. Prince getting a $10 million bonus when his L399 company lost $L0 billion and say, that is a wonderful column L400 and it is a wonderful one-Iiner. But on the other hand, my father \^Ias a CEO of a Fortune 1-40]1402 5OO company. My brother is a CEO of a public company. And I HGO067.000 r-4 03 PAGE 65 that, in fact, that $10 billion loss could have been an 1,404 excellent performance because if the company maybe was scheduled to lose $11- bi1Iion, then he might have saved the 1_4 05 company a billion dollars. So that extra $990 million saved 1-406 So I guess my question is that L407 would have been worth it. 1408 when we look at compensation and we can be--we can interpret 1l-409 it many different ways, and Ms. Minow, you referenced that. I did a radio interview this morning, and I was asked about 1_4 0 T4I]- this hearing. They saj-d, what business is it of the L412 government and where is the public stake in this? No\,rI, L4]-3 separating the housing crisis portion and just dealing with 1"4r4 the overall broad question of employee--CEO compensation, a4]-5 what is the public stake in this question? Ms. MINOW. First, I would like to sâY, with regard to t4l6 your hypothetical, I'ût in favor of paying somebody $10 1-41,7 ]-4t8 million for losing a billion dollars less than he was 1,4]-9 scheduled to. As I mentioned earlier, when we l^/ere talking 1,420 about Occidental, I'm in favor of indexing pay to the peer t42r group or to the market as a whole. And I think that is how know 1_ L422 L423 1-424 1-425 you handled that problem. Vüith regard to the overall public interest, âs f said, 1426 1427 this undermines the credibility of our capitalist system. rn g1oba1 markets, the money is going to go to the system that has the most credibility and. the most accountability. And so I think that is a huge public interest. Now, does that mean HGO067.000 PAGE 66 that Congress should legislate how much people get paid? Of t429 course not. That has turned out to be a mistake every time That is why my emphasis has been on 1430 it has been tried. ]-43t giving the market a chance to work by removing the obstacles ]-432 to shareholder oversioht. Mr. YARMUTH. would you repeat what some of those ]-433 ^r; ]-428 ]-434 ]-435 1-436 1,437 obstacles are? Ms. MINOW. Sure. Right no\^/--you know, I always like to say when I'm testifying, nobody understands the word election better than Members of Congress. And yet we call it an 1-438 election when management picks the candidates, no one runs 4439 against them, and management counts the votes. You know, I 4440 don't know what other country would consider that an t44t election. Right now there is no way for shareholders to 1,442 remove directors. And so one of the policies that I'm in 1-443 favor of is what is called majority vote. That is someone 1,444 doesn't get over 50 percent of the vote, they should not be t445 allowed to serve. That would a11ow shareholders to replace ]-446 boards of directors and particularly compensation committees L447 that agree to these abusive p1ans. L448 Mr. YARMUTH. But isn't the reality that most ]-449 shareholders don't care enough and probably shouldn't care 1-450 that much if you have 100 shares of a company and you have a l-45A life or most of the stocks are ov/ned by mutual funds, 1,452 institutional investors, that the actual shareholders rea11y HGO067.000 1_4 PAGE 67 don't have any way of doing that anyway? I mean, isn't there 4454 a structural impediment to what--the kind of democracy you're 1,455 talking about? Ms. MINOTiü. As you just indicated, more than half of the ]-456 investors who ]-457 stock in this country is held by institutional 1458 actually are very big, very smart, and very sophisticated and 1,459 do know how to vote. And as you can see, the votes have 4460 become more and more rational over the past few years as t46t there has been more scrutiny of those votes. Mr. YARMUTH. Dealing no\^I on the foreclosure side and 1462 ]-463 the impact on communities. I've talked to people around my 1,464 community in Louisville, Kentucky, and our foreclosures are ]-465 up significantly over the last 2 yeats. V'Ie're now to 3,700, ]-466 I think, for this past year. And \^te v/ere in the 500 to 600 range 2 years ago. But the people I talked to in the banking 1,467 industry in my community and in the real estate community and 146B 1469 the realtor community and also in the home builders community ]-47 0 say it has very litt1e to do with subprime mortgage, in my t47r market, that this is much more a general economic squeeze issue than it is a subprime crisis. I understand that this 1472 53 ]-473 1,47 4 differs around the country. And, Mayor Lawrence, I understand it differs in your community. r475 1"47 6 L477 But how much--have you been able to determine whether this rea11y--the subprime crisis is the major factor in the HGO067.000 ]-478 PAGE 68 foreclosures or whether it is a broader economic issue? 1-479 Ms. LAWRENCE. You're absolutely right. There is a portion of it that is directly related to subprime. But, 1-480 I48L however, our slump in the housing market--if I lose my job, 1"482 the norm was that I would sell my home, readjust my financial situation, buy a cheaper home, and make other options. Right 1-484 nov\r- -usuaIIy the mortgage now is higher than the price of the home. And in additi-on to that, you can't se1I the home. So 1_485 t4B6 then you have that component of this walk-away which is 1-487 something that is very new to communities, especially to the ]-4BB middle class community. Someone will walk away from usually L489 the highest investment you have in your portfolio as an L490 investor or buyer. The other thing that is happening is that when you look L49I a492 at the job loss and the credit ratings--now, I will give you 1,493 an example. This is one that rea11y kind of floored me. ]-494 Two-famity income, one of the family members lost their job, ]-495 couldn't find a job and eventually found a job in Arizona. L496 They couldn't seIl their house. They walked away from the r497 house. Their credit was stil1 good, bought a house in 1498 Arizona and left the one that was here. One of the things r499 that come from that is zero down. If I have nothing, flo l_500 equity or nothing invested in a home, what am I losing? It t_5 0 is like having an apartment, you just walk away from it. So ]-502 there are a lot of components--I mean, our econoffiY, the 1_483 l_ HGO067.000 1_503 PAGE 69 housing s1ump, the subprime, all of that together is creating 1_504 1_505 l_506 1507 1508 1_509 the crisis. Mr. YARMUTH. Thank you very much. Chairman IVAXMAN. Mr. Yarmuth, your time is up. Mr. Bilbray. Mr. BïLBRAY. Mr. Chairman, I'd like to yield my time to Mr. Issa. Mr. ISSA. I thank the gentleman. Professor ütrachter, I l_51_0 am thrilled that you did such a great job of expressing sort t_5 1_1 a5t2 of the history of how we got here. And somewhat rhetorical but I think important, when did you first wrj-te or publicly 1_51-3 T5I4 say that we were heading for the meltdown that you novt went through the whole how we got there? When did you see it and 1_51_5 t_5 rb say it? Ms. VIACHTER . 2005 , in- -beginning of 2006, the end of 1"51,7 l-518 l-519 2005. Mr. ISSA. Okay, which is interesting, because if you L520 look on the board here, Alan Greenspan almost at that exact L52l same time, âs probably one of the most trusted economists in good. 1-522 America, \^/as saying that these products r,\Iere still 1523 V'Ihen did it become--obviously not then. But when did it in ]-524 your mind become pretty universally understood by economists L525 and the academic community that, in fact, w€ had gone down 1526 the wrong road in allowing the growth of subprime through ]-527 these mechanisms? HGO067.000 PAGE 70 r528 ]-529 1-53 0 Ms. VIACHTER. Not yet today. We actually have well respected economists on this pane1, Tony Yezer, who would disagree. I think he has just said that these are useful instruments. l-531 Mr. ISSA. V'IeII, I think he also said that the 1533 meltdown--I'11 get back to you in a second. I'm going to L534 very much give you both time that I have. I think there is L535 an important point here, though. All the way back in 1977--and what I wanted--can you see that board from where 1_536 r537 you are? I know it is a r^/ays of f . But all the way back in L53 I 1977 when Mr. Waxman was not yet the chairman, the Congress 153 9 passed the Community Reinvestment Act. The median price of a home was about $38,000. Today, it is, even after the 1_54 0 ]-54L shrinking, it ís around ç2r7,000. There has been a steady t542 escalation--this is the national--I have to tell Yoü, as a 4543 Californian, there has not been a steady escalation. It has bit more. But it is on the board 1,544 been up and down a Iittle 1-545 now. That escalation--at some point, the question is all the a546 way back in '77 and in '93 and at each juncture, the L547 government--we on the dais take responsibility--said to banks 154 I and other institutions, you must have a portfolio of these 1-549 high risks, yoü must find !ìIays to get to 1_550 underserved--underserved not because nobody wants to loan 1551 them money, but underserved because they are less credit ]-552 worthy. Do you believe that going forward, because you did a L532 HGO067.000 1_553 PAGE 7L great job of telling us how we got here, that we need to look L554 at other mechanisms to deal with low-income or poor-credit 15s5 individuals and their desire to have home ownershin and how 1556 \¡¡e facilitate that when appropriate? ]-557 Ms. IVACHTER. Thank you very much. ft is an extremely 1_558 important question. May I just as background--that chart 15s9 looks like a steady increase in house prices. The reality is House prices did not increase in 1560 you correct for inflation. t56t the United States for constant quality home until recently, 1562 until 2000. Vle actually have had relatively steady, although 1563 slightly increasing about 1 percent a year. There has been a 1564 dramatic rise nationally since 2000. I'l-1 come back to that 1_565 because that is related but not the essence of your question. 4566 The essence of your question has to do with 1567 homeownership, access to home ownership and the importance of 156 8 increasing home ownership for all in our society, those who ]-569 may not be able to access it, also have opportunity to build L57 0 wealth and have their-t57t Mr. ISSA. And I'm going to hold you at that point. The 1572 opportunity to build wealth, isn't that an inherent problem 1,573 that we have--economists and yourself included--have come to r57 4 assume that somehow you leverage home ownership, you leverage r575 the interest rate against inflation, against the appreciation in order to create wealth? Here today are you willing to say L57 6 L577 that that kind of leveraging is what we should continue to HGO067.000 1_578 PAGE 72 encourage, or should we look at home ownership as an r579 1580 1_5 81 1-582 1_583 1_584 1_585 1_586 1,587 1_588 1_589 1590 1_5 9L 1592 1-5 93 L594 L595 alternative to rent and in fact a place you live and not your primary leveraged investment? Because I'm a Californian. During the same period of time that we went from S38,000 to ç228,000, California went from $50,000 to $450,000 in median price. California has gotten to where this Ponzi scheme that just collapsed in the last few--Iast year or so, year and a half, in fact is nearly twice the national average. And part of it is exactly what you're saying, that we're somehow saying this is about investment rather than affordable homes for people to live in. Isn't that one of the things government should get back to? Ms. WACHTER. Yes. But this is not Community Investment Act. This is not FHA. This is coming from instruments that hrere introduced in 2000. This is not the legislation that Congress passed with government insured. It is the option ARMs. It is the subprime teaser rate ARMs. It is these new instruments- - L596 L597 1_598 ]-599 1600 t_6 01 ]-602 Mr. ISSA. I appreciate all that in your testimony. My question reaIly was, as late as 2005, you've got Alan Greenspan still saying that these devices are a good thing. Ms. VüACHTER. I absolutely agree with you. Mr. ISSA. And you said--Mr. Yezer you said-Ms. WACHTER. So I am saying there is still this disagreement. I personally--you asked for my views. I HGO067.000 1-603 PAGE 73 ]-604 1_605 ]-606 1,607 personally viewed these--I've called them aggressive mortgages, the high-leverage mortgages--I do want to be clear by what I mean. We're not talking about FHA. We are not talking about the CRA loans that r^Iere invested by community l-ender banks. We're talking about híghIy leveraged, negatively amortized ARMs, these subprime mortgages, these 1,609 teaser rate ARMs, all of these instruments are simply inappropriate. That doesn't mean that they have to regulate l_610 L61-L it to zero. But they became--their use \,'/as completely inappropriate in terms of the importance ín today's--in the 1-612 1613 economy of these past years. 1,6r4 Today the market is completely shut down for much of 't,6]-5 this subprime. V'Ie now have to be very careful that we don't a6t6 completely shut off the liquidity for the appropríate use of 1617 adjustable rate mortgages and jumbo loans. So we're now in a 161_8 different part of the curve. But absolutely I've said in t6a9 writing and I myself have a quarterly product that comes out 1-620 which points to the inappropriateness of these very r-608 1_621, mortgages. Chairman WAXMAN. The gentleman's time has expired. 1622 1"623 The Chair recognizes himself for 5 minutes. 1624 1-625 1626 1627 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 of Ms. Minow, you've been critical HGO067. 000 PAGE 74 million bonus in cash. He wasn't ]-629 entitled to this because he had no employment contract with 1_63 0 Citigroup. 1_631_ Now, at the time Mr. Prince left Citigroup, the company L632 was losing $l-0 billion as a result of decisions made while he \,\ras CEO. Did this make sense? Was it appropriate to give 1_633 r634 Mr. Prince a $10 million bonus when Citigroup had just lost 1_635 $1-0 billion? :J.636 Ms. MINOW. Mr. Chairman, I feel a little bad picking on 1637 him. I don't think it was appropriate. But his sins are so 1_638 much smaller than the other people we are talking about that L639 it almost seems like $1-0 million isn't that much. Overall, L640 his pay package was not as far out of whack with performance L641" as the other people that we've been discussing. And I will ]-642 say that it is not unusual- for CEOs without a contract to be ]-643 given that kind of money because the board feels bad about ]-644 their exit, and it is not their bank account, so they're L645 happy to write a check on it. L646 Chairman VüAXMAN. Well, from a shareholder perspective, L647 what rationale would there be to give a former CEO who had L648 just presided over a loss a $10 bi11ion, perks of $1.5 L649 million, a cash bonus of $1-0 million? From a t_650 shareholder--because the board is supposed to represent the 1_651 shareholders, aren't they? L652 Ms. MINOVü. That is my belief . It doesn't always work t62B $1-0 2007, he was given a HGO067.000 1_653 PAGE 75 L654 1_655 ]-656 1657 1658 4659 1660 1,66! 1662 L663 L664 L665 a666 1,667 that way. From a shareholder perspective, I do not think it is possible to justify that payment. Chairman VüA)ffiAN. 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. One of the big problems in the whole financial services area historically, r believe, is that there has 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 \n/e've all been speaking to this morning as far as the housing market. ]-668 1"669 ]-670 1671, L672 L673 L674 1-675 But it also is, what are we learning from this? V'Ihat are vre doing about--to make sure this type of problem doesn't occur again? One of the issues that came up in the context of Congressmanlssa's questions is the whole issue of securitizaLion. The reason this big pool of money was available was because of securitization. Severing the link between a specific value for a home and, in fact, the pool of money t67 6 1,67 7 that was available that fostered the abuse of loans that were just chronicled by the professor. So the question HGO067.000 ]-67 PAGE 76 I 1,67 9 1-680 1681_ L682 r_683 ]-684 L685 1,686 1-687 r_688 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 screr,rl up again. It may be in a different context, a different company, but it is going to happen. And the question is, what are h¡e doing about it? And I'm particularly concerned when it affects things that are essential to 1ife, shelter, fuel, things that we all need and things that destroy our economy overall. And I think that is what we're seeing no\ÂI . Chairman WAXMAN. V'1e11, it has enormous impact on the economy and on communities, as we've heard from Mayor ]-689 L690 t69t ]-692 4693 1,694 1,695 ]-696 4697 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 compensation--and it may not be as much as others. I mean, 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 are protected. There is--our workers in this country are looking to their ]-698 1"699 1_700 17 01" t7 02 retirement Lo 401-(k) p1ans. 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 overcompensating the executives in a way that doesn't seem to have a rationality HGO067.000 L7 03 PAGE 77 to it? Ms. Vüachter, do you want to comment on that? Ms. V'IACHTER. T¡'IeI1, t7 04 17 05 I do think it is extremely important l7 06 that, as Mr. Galvin said, that the incentives be in place and t7 07 we do need to seriously look at the lessons learned from this 1_708 crisis. This crisis is the first one that has involved homes t7 09 in America as well as individual--not large investors on1y, And it is coming t71,0 but small j-nvestors, pension funds, cities. tTtt home to cities in two hrays in communities, both housing and ]-71,2 funding. So it is reaIly grave concern for cities. We must t7t3 learn the lessons. And if the decision makers don't have t7t4 failure incentives to watch success in terms of their own t7t5 personal remuneration, then, indeed, the mistakes will be t7t6 made again. not discussing this whole t718 question in the abstract because \¡/e're talking about a T719 specific crisis that has resulted from these--from these 1720 collateralized 1oans. And you've studied that. Can you te11 172t us in layman's terms how the practices of Merrill Lynch and 1722 Citigroup and other investment banks contributed to this 1-723 mortgage crisis? 1-724 Ms. VüACHTER. On the one hand, they \^/ere innovators and 1-725 that is their job. And on the other hand, they \^Iere creating L726 high-risk instruments, and that is their job. So, actua11y, 1727 on some levels, they vrere doing the job. But the question we t7t7 Chairman WAXMAN. And \,rre're HGO067.000 ]-728 1729 PAGE 78 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 173 0 investments that will actually potentially cause not only the t73l people who were securitized by these instruments, that ]-732 borrowed these, but indeed all homeowners to be exposed to ]-733 this kind of risk? We are the onlv countrv in the world that 1,'734 is so exposed. 4735 r736 t737 ]-738 r739 ]-740 t7 4l L7 42 t7 43 L7 44 l,Iel1, I thank you very much for your response to the questions of all of our members of the committee and for your presentation. I would like to ask you if you would be wilting to respond to questions in writing that might be submitted to you for the record. Thank you very much for being here today. Mr. ISSA. Mr. Chairman, I'd like to ask unanimous consent that Carol Loomisarticle from Fortune Magazine be included in the record because it is pertinent to this portion--the pay and compensation portion. Chairman WAxtvlAN. t7 45 [The information follows: ] 4746 ******** CoMMITTEE INSERT ******** HGO067.000 L7 PAGE 79 objection, it vüi1l be made L748 part of the record. We'Il take a S-minute break while our t749 next panel comes in to take their places. 47 Chairman WAXMAN. Without 1,7 50 [recess.l Chairman VüAXMAN. The meeting of the committee will 4752 please come back to order. On our second paneI, wê will hear ]-753 testimony from Mr. Charles Prince, the former chairman and 1754 chief executive officer of Citigroup, Inc.; Mr. Richard D. ]-755 Parsons, chairman of Time Warner and the chairman of ]-756 Citigroup's Personnel and Compensation Committee; Mr. E. Stanley O'Nea1, the former chairman and chief executive 1,7 57 4758 officer of Merrill Lynch; Mr. ,John D. Finnegan, chairman of r759 the Management Development and Compensation Committee for Merrill Lynch and the chaírman and chief executive officer of L7 60 the Chubb Corporation; Mr. Angelo Mozilo, chairman and chief L7 6L executive officer and co-founder of Countrywide financial 1-7 62 corporation; and Mr. Harley Snyder, the chairman of the 1,7 63 t7 64 Countrywide Compensation Committee, as well as that company's lead director. Among other real estate ventures, Mr.. Snyder 1,7 65 r7 66 is the president of HCS, Inc. a75t HGO067.000 PAGE 80 t7 67 17 68 STATEMENTS OF CHARLES PRINCE, FORMER CTIAIR}4AN AND CEO, CITIGROUP; RICHARD D. PARSONS, CHAIR, PERSONNEL AITD r7 69 177 0 COMPENSATION COMMITTEE, CTTIGROUP; CHAIRIvIAN AND E. STANLEY O'NEAL, FORMER CEO, MERRILL LYNCH; 'JOHN D. FINNEGAN, CHAÏR, t77L 1,772 1,773 177 4 MANAGEMENT DEVELOPMENT S4 COMPENSATTON COMMITTEE, MERRILL LYNCH; ANGELO R. MOZILO, FOUNDER AND CEO, COUNTRYWIDE FINAT\TCIAI, CORPORATION; AND HARLEY W. SNYDER, CHAIR, COMPENSATION COMMITTEE, COUNTRYVüIDE FINAT{CIAL CORPORATION to welcome all of you to 177 6 our hearing. I appreciate your being here. It is the 1777 practice of this committee that all witnesses that testify t778 before us do so under oath. So now that you're seated, I 1779 would like to request that you stand up and please raise your right hands. LTBO 4775 Chairman VüAXMAN. We're pleased ITBI ]-782 [V'Iitnesses sworn. ] will indicate that each of Your prepared t7 83 the witnesses answered in the affirmative. Vüe will have a L7 84 statements will be in the record in full. ]-785 clock that right now has a red light or, but it will be 5 minutes: green f.or 4; ye11ow for l; and then, ít will turn 1,7 86 r7 87 red at the end of 5 minutes. When you see that, w€'d like to 17 88 ask you to summarize, if you wouId, but we're not going to be r789 so strict that $¡e're going to cut anybody off. Chairman VüAXMAN. The record HGO067.000 ]-790 PAGE 81- Mr. Prince-Mr. DAVIS OF VIRGINIA. Mr. Chairman, can I just ask t7 9t L792 unanimous consent that we enter the minority memorandum in ]-793 the record that is containing díscussion of the timeline of 1,7 94 the subprime crisis? 1,7 95 [The information follows: ] t7 96 ******** CoMMITTEE INSERT ******** HGO067.000 PAGE 82 1797 Chairman WAXMAN. All of the memos prepared by staffs t798 ]-799 and the committee will be entered into the record. Without objection, so ordered. Mr. Prince, wê're going to start with you. There is a 1800 1_80l_ button on the base of the mic. Be sure it is on and have ir t802 close enough so that it can pick everything up. Hco067.000 1_803 PAGE 83 STATEMENT OF CHARLES PRÏNCE Mr. PRINCE. Chairman Waxman, Congressman Davis, and 1_805 members of the committee, good afternoon. In November of last year, I voluntarily stepped down as 1806 I started 1807 Citigroup's chairman and chief executive officer. 1_808 working for the company as an attorney at one of Citigroup's 1809 predecessors in L979. Over nearly 30 years I worked my u/ay 181_0 up first to general counsel, then to chief administrative l_81_l_ officer, chief operating officer, chief executive officer of 1-81,2 one of Citigroup's major businesses and, fina11y, to CEO and 1_813 then chairman of the board. As the first member of my family to go to co1lege, I'm t81-4 1_8L5 extremely grateful for the opportunities that Citigroup gave LBr_6 to me. I also am truly proud of Citigroup and its employees. It is a company that I helped to build. û{hen I started the r81"7 l_8 i_8 company, it had about 60,000 employees, made about $20 In 2006, my last full year as CEO, 18L9 million a year in profit. 1_82 0 we had about 325,000 employees and we made about $20 billion t82t in profit. The first 6 months of 2OO7 were the best 6 months T' m proud of what I ]-822 in the company's 200-year history. r823 accomplished. To be a part of Citigroup for nearly 30 years 1-824 and finally to serve as its CEO was a true honor and 1825 privilege. 1_804 HGO067.000 ]-826 ]-827 PAGE 84 During my tenure as CEO, Citigroup achieved several noteworthy accomplishments. I'11 give one or two examples. As one example, wê repaired our extremely important ]-828 ]-829 relationships with regulators around the worl-d. Citigroup is l_83 0 a company that is regulated in almost every way and in almost l_831_ every country that we operate in. And these relationships, 1,832 unfortunately, had deteriorated. In addition, early in 2005, 183 3 we embarked on a comprehensive corporate governance and 1_834 ethics initiative, something \,üe ca11ed the five-point plan, 1835 which focused on expanding employee training, enhancing the 1836 emphasis on talent and development, strengthening performance ]-837 appraisals and connecting ethical conduct directly to 183 I compensation, improving communication and tightening internal I took the lead in designing the implementing the 183 9 controls. five-point p1an. And each year I met with more than 50,000 184 0 ]-84L of our employees to emphasize the high priority Citigroup 4842 placed then and places nor^t on ethics and best business practices. 1_843 4844 Citigroup's efforts on this front have been recognized. 1845 Over the past several years, the Institutional Shareholder r846 Services, the leading independent analyst on corporate r847 governance, including executive compensation decision making, has rated Citigroup's corporate governance practices in the L84 I 1-849 top 10 percent of all S&P 500 companies. Tn 2OO7 , ISS rated 1_850 Citigroup in the Lop 2 percent of diversified financial HGO067.000 1851_ PAGE 85 1-852 1_853 1_854 1-855 l_856 l_857 1-8s8 services companies. The founder of ISS, Robert Monks, has described Citigroup's corporate governance practices as unique, cutting-edge and exceeding the best practices currently required by 1aw and in the industry. I' m proud and Citigroup is justifiably proud of its corporate governance practices. The Citigroup board of directors has also instituted processes designed to ensure fair executive compensation, as l-859 1B60 1861_ 1,862 1-863 a864 1865 1866 ]-867 1868 1,869 1_870 1874 a872 1-873 1,87 4 1-875 you'I1 hear in more detail from Mr. Parsons in just a moment. The board conducts an independent assessment of executive performance and rel-ies on a fu1ly independent compensation consultant. And I note that a recent hearing of this committee highlighted the importance of independent compensation consultants. Citigroup has worked very hard to align the interests of management with the interests of shareholders. citigroup executives are required to take and hold substantial portions of their annual compensation in the form of stock. Then our stock ownership commitment requires those senior executives to retain on a long-term basis at least 75 percent of the stock awarded to them while employed by citigroup. The primary purpose we had in mind when we imposed this requirement was to tie our executives' long-term personal financial interests with those of the company and its shareholders. We couldn't sel1 down. Over time, w€ would experience exactly what the shareholders experienced. HGO067.000 r87 6 PAGE 86 And that is exactly what happened to me. 1,87 7 1-878 r87 9 1-880 1_881 1,882 1_883 ].884 1885 ].886 L887 1_888 1-889 1_890 well recognized as a corporate compensation best practice, Citigroup has had this requirement in place for more than a decade. Citigroup also has been a leader ín community lending and investment. And Citigroup's leadership in this area predates the current crisis by decades. As one example, in September 2003, after I was named CEO, Cítigroup made a $200 billion commitment to affordable mortgage lending to low- and moderate-income families. Last year we met that commitment ahead of schedule, and we continue to support affordable mortgage programs. We've also formed many partnerships with community groups. As examples, w€ have worked with ACORN, the National urban League, the National Council of La Raza and Neighbor Works America to support affordable lending, financial education and community Now 1891 development. Mr. Chairman, ín light of the red 1ight, I'11 skip that 1_8 93 if I may and finish up? Yeah? Personally I've spoken out on mortgage issues. .Tust LB94 last year, in an address to the Greenlining Institute in Los 1-8 95 LB96 Ange1es, I criticized the current patchwork of regulatory t897 rules that permit certain mortgage brokers and lenders to pursue regulatory arbitrage, seeking out areas of weaker 1_898 r_899 banking regulation often to the detriment of consumers, and r_900 called for closing the regulatory loopholes that permit these a892 HGO067.000 1_901_ PAGE 87 issues to develop. I recognize how incredibly fortunate I am to have had 1903 the opportunity to lead Citigroup. It is never easy to t904 retire from a company to which one has devoted one's entire t_905 career. And my retirement from Citigroup was no exception. 1906 Last fall it became apparent that the risk models which ]-907 Citigroup, the various rating agencies and frankly the rest 1908 of the financial community had used to assess certain 190 9 mortgage-backed securities were wrong. As CEO, I was 910 ultimately responsible for the actions of the company, ]-9tL including the risk models that we used. While I wasn't the 191,2 trader and I \,r¡asn't the risk of f icer, I was the chief And this happened on my watch. In the 913 executive officer. ]-9'1,4 interest of the company I had worked so hard to buiId, I 1915 immediately submitted my resignation and the board of I recognize some a9a6 directors accepted it a few days later. questions have been raised about my compensation, much of the 1-91,7 191_8 information that has been reported is incomplete or L9t9 inaccurate, and I welcome the opportunity to provide the ]-920 committee with the complete information. Thank you. 192L [The prepared statement of Mr. Prince follows:] ]-902 1_ 1_ L922 ******** INSERT 2-1_ ******** HGO067.000 ]-923 PAGE 88 Chairman WAXlvlAN. Thank you very much, Mr. Prince. L924 L925 L926 L927 Mr. Parsons. Mr. PARSONS. Mr. Chairman-Chairman WAXMAN. There is a button on the base of the mike. L928 STATEMENT OF RICHARD D. PARSONS Mr. PARSONS. Mr. Chairman, Mr. Ranking Minority Member, 1_930 and distinguished members of the committee. I'm Richard ]-93l Parsons, and I'm the chairman of Time Ï¡larner. I appear 1-932 before you today, however, in my capacity as a member of the 1933 Citigroup board of directors and chairman of the board's L934 Personnel and Compensation Committee to address your L929 1_935 questions about executive compensation. Executive compensation levels, particularly in the ]-936 ]-937 financial services arena, are driven by highly competitive The competition for 1_93I markets to attract and retain talent. r939 talent is especially for a company with the scope and scale ]-940 of Citigroup, the leading g1obal financial services company 1,94r competing, serving customers and conducting business in more L942 than 100 countries around the world. A compensation approach ]-943 that allows Citi to attract and retain the top financial ]-944 services industrv talent around the world is a core HGO067.000 1,945 PAGE 89 ]-946 1947 1948 1949 1_950 1951_ 1952 1_953 1,954 1_955 1956 1,957 1_958 ]-959 1-960 responsibility of the Compensation Committee. I believe good corporate governance requires that public companies be as transparent as we can be about the processes r^re use to determine executive compensation. lVe strive to make the descriptions of our compensation philosophy and process that are contained in our public filings c1ear, detailed and thorough. Let me highlight briefly a few important aspects here. The starting point for compensation decisions regarding Citi executives is an objective assessment of both the competitive landscape and the individual's performance and achievement in enhancing the company's ability to gro\^I, compete in the global financial markets, serve its customers and generate shareholder value. By tying compensation to performance, Citi aims to attract and retain the best talent and to align the interests of senior executives with the interest of stockholders. Performance has several important aspects, quantitative, t96t L962 L963 Individual rewards reflect the L964 overall performance of the company, as well as the L965 performance of an executive's particular business. Further, L966 we are concerned with more than just Cití's short-term t967 financial results. A large portion of executive compensation L968 is tied directly to the creation of long-term shareholder ]-969 as well as qualitative. va1ue. HGO067.000 ]-97 0 PAGE 90 I97L 1972 consider nonfinancial measures as weIl, including the ability to execute strategic alternatives, to maintain regulatory relationships, to position the company for future We L973 L97 4 growth and to invest in and deliver first-rate customer service, to navigate complex 1egaI issues and to develop t975 talent. V'Ihile these measures may not produce immediate ]-976 financial results, they are stil1 very important factors that 4977 help drive Cíti's long-term success and build long-term value ]-978 for shareholders. Moreover, Citi focuses not just on the business results 1-979 t_980 achieved by senior executives but on how they do business. As part of its business culture, Citi believes each employee l_981]-982 has certain responsibitities to customers, to one another and And it evaluates its senior l_983 to the enterprise itself. ]-984 executives and other employees on how well they meet those r_985 responsibilities. Compensation decisions for senior L986 executives at Citi are the result of independent review and L987 analysis undertaken by the Personnel and Compensation l_988 Committee, which consists so1eIy of independent directors. L989 The committee regularly reviews the company's compensation 1990 programs, evaluates performance and determines compensation a99L 1,992 of the ]-993 ]-994 in the operating committee and approves the compensation structure for other senior executives of the company. In carrying out these responsibilities, the committee relies on a variety of benchmarking and performance CEO HGO067.000 ]-995 1,996 1,997 PAGE 9L data provided by the company and compensation consultants. In addition, the compensation committee uses an independent ]-998 L999 2000 outside consultant who does no other work for Citi and reports directly to the compensation committee to review, anal-yze and advise the committee about its compensation decision--about its compensation decisions, including whether those decisions are reasonable. The committee is well av¡are that executive compensation 200]2002 2003 must be competitive with pay at peer companies if citi 2004 2005 2006 2007 2008 2009 20ao 20aL is going to attract and retain the kind of talent needed to successfully manage and grow the company. Benchmarking for citi is difficult, because the combination of lines of business at Citi is not precisely replicated at any other company. For compensation benchmarking purposes, wê look at a group of leading companies with significant financial services operations, including many with global presence, companies such as Bank of America, Deutsche Bank, General 2042 201,3 201-4 201-5 20L6 201-7 Merrill Lynch. The complete list can be found in Citi's publicly filed proxy. The committee uses its business judgment and discretion to assess the performance measures, the input from the independent consultant and the benchmarking data that Electric, Goldman Sachs, .-TPMorgan Chase and collectively help determine compensation decisions. HGO067.000 20]-8 201-9 PAGE 92 RPTS BINGHAM DCMN BURRELL [1-2 : 2020 2021- 05 p .m. ] 2022 2023 2024 2025 2026 202'7 2028 2029 2030 203]- 2032 2033 not use a formulaic approach to weigh performance criteria because the committee and the company believe that the adoption of any given formula could inadvertently encourage undesirable behavior; for example, favoring one financial measure to the exclusion of other important values. Rather, we use a balanced approach that considers in the context of a competitive marketplace factors contributing to the financial performance of the Citigroup over time and the individual leadership of senior executives. I will simply conclude by My statement is on file. saying that we appreciate the opportunity to be here today to address the questions of this committee and as they relate to Mr. PARSONS. The committee does how we 2034 2 at Citi go about determining compensation measures. 035 Thank you. 2036 [Prepared statement of Mr. Parsons follows:] 2037 ******** INSERT 3-1 ******** HGO067.000 PAGE 93 2038 2039 Chairman WAXMAN. Thank you very much for your testimony. 2040 Mr. O'NeaI. STATEMENT OF 204]- E. STANLEY O'NEAL 2042 2043 2044 2045 2046 2047 Mr. O'NEAL. Chairman Waxman, Mr. Davis, members of the committee, good afternoon. Whatever I have achieved in life has been the result of a unique combination of 1uck, hard work and opportunity that I think can only exist in this country. 2048 2049 2050 O'Neal, was born into slavery in 1-861-. He was eventually able to carve out a l-if e for himself and his family through hard work and perseverance. over My grandfather, .James 205L 2052 2053 2054 2055 2056 2057 20s8 2059 2060 time, he acquired some farmland and was able to donate a smaIl parcel for the construction of a one-room schoolhouse in a small town in rural Alabama called hledowee. It served students in the first through the sixth grades, all taught by one teacher. And like our home in Wedowee, it had no indoor plumbing or running water. That was the town where I grew up, and that was the school that I attended. My parents never had an opportunity for higher education. They both worked hard, each of them at times holding more than one job. Vühen I was 13 my father moved us to Atlanta so he could take a job in a factory at General HGO067.000 206]2062 PAGE 94 Motors nearby. For a tíme, w€ lived in a Federal housing project, which was all my parents could afford. Eventually 2063 they were able to save enough money to make a down payment on 2064 their first house. They lived in that house for 30 years, 2065 eventually paying off the mortgage. Watching my parents work and save to afford their own 2066 2067 home gave me an appreciation of the unique pride and 2068 satisfaction that comes with home ownership. I worked my way 2069 through college by working at the same GM factory where my 207 0 father had worked. fn 1-98'7, L joined Merrill Lynch and spent close to the 207]2072 next 21 years of my life there, eventually being named 2073 President in the summer of 2001-. Within weeks of becoming President, Merril-l Lynch and the American economy faced a 207 4 When terrorists attacked the World Trade Center on 2075 crisis. 207 6 September L1th, we had to evacuate all 9,000 of our employees 2077 from our offices directly across from the Twin Towers. Over 207 I the following days and weeks I 1ed the firm's efforts to 2079 assist its employees and to manage its business in the 2080 aftermath of the attacks. Our employees !ìIere scattered in 208r locations throughout New York and New ,Tersey, and at the time 2082 many people thought that the future of Merrill Lynch was in 2 083 doubt. But we survived, and in fact we flourished. After I became CEO I Ied Merrill through a period of 2084 2085 rapid growth. Our revenues grer¡ü dramatically from $18.3 HGO067.000 PAGE 95 2086 2087 2 088 2089 2090 209]2092 2093 2094 2095 2096 2097 2098 2099 2LOO billion in 2002 to ç32.7 bill-ion in 2006. Net income more than quadrupled from $1.7 billion to ç7.6 billion. Shareholder return on equity virtually tripled from 7.5 percent in 2002 Lo 2L.3 percent in 2006. And our stock price rose from $28 in October of 2OO2 to ç97 in ,fanuary of 2007. And even with the losses sustained in the second half of last year and the broad-based sell-off in financial servíce stocks over the last few months, Merrill Ï-,ynch closed yesterday at a price 60 percent higher than it was at its l-ow point shortly after I took over. As a result of the extraordinary growth at Merrill Lynch during my tenure as CEO, the Board saw fit to increase my compensation each year. The financial services industry has a long history of paying many individuals high, not just senior executives. Most of my compensation consisted of 2LOL restricted stock and options, and I \^¡as required to hold the 2t02 majority of the stock I was awarded. My assets and my 21-O3 compensation increased only when shareholders and employees 2to4 benefited and decreased when it did not. fn fact, I 21,05 initiated a requirement that senior management hold at least 2to6 75 percent of the stock and options that ü/ere awarded. 21,07 It is important to note that the compensation of senior 21,08 management at Merrill Lynch was determined by the Board of 2L09 Directors upon recommendation of the Compensation Committee, 2LL0 which is composed exclusively of independent directors, and HGO067.000 PAGE 96 2ttt an independent and rigorous process hlas used, 2rt2 and pay 1evels were determined consistent with levels in the industry 2tt3 2rt4 21"15 2rt6 2r17 2tL8 2rt9 2L20 2L2t 2t22 2L23 2L24 2L25 21-26 21,27 2]-28 21,29 2]-30 2I3L 2L32 2L33 2]-34 21,35 generally. Performance \^/as measured against targets such as revenues, return on equity, and some strategic objectives, all established at the beginning of each year. fn 2007, Merrill, along with and many other financial services firms, encountered difficulty as a result of the unprecedented meltdown in credit markets, including mortgage-backed securities. I am not in a position to comment in depth on the subprime crisis, especially because of pending litigation matters. I can say, however, that Merrill Lynch held mortgage-backed securities that, like many other financial institutions and the rating agencies, âs wellas others, we believed carried low risk. Unfortunately, due to a number of unforeseen factors, that turned out not to be the case. There has been some press about my so-caIIed severance packages. These stories are inaccurate. The reality is that I received no bonus for 2007 and no severance pay. The amount disclosed in the press consisted mainly of deferred compensation, stock and options that I had earned during the years prior Lo 2007, in part reaching back several years to 2000 and earlier. Had I received all my compensation in cash during my tenure, I would have received no so-cal1ed payout upon HGO067.000 PAGE 97 retirement. But having given me a significant part of my 2137 compensation in stock and options, the Board ensured that my 2]-38 personal financial interests were closely aligned with those 2]-39 of the shareholders of the company. To the extent that 2]-40 Merrill's stock has decreased in val-ue since my departure, so 2t4t too has the value of the consideration I received. I am not aware of any fact that should raise a concern 2142 2]-43 about whether there was an appropriate process in place for The 2]-44 determining senior executive compensation at Merrill. 2445 company recruited sophisticated, independent individuals to 2r46 its board through a careful nominating procedure. To my 2147 knowledge, the independent directors of the Compensation 2148 Committee compensated senior management in accordance with 2]-49 their independent judgment about the company's performance. I just want to end by saying that because of my own 2L50 2L5L personal history, I understand, as well as anyone, the 2L52 importance of home ownership, not only financially, but also 2L53 socially, emotionally, and I would never do anything 2]-54 knowingly that would deny anyone else that privilege. 2]-55 [Prepared statement of Mr. O'Nea]- follows:l 2L36 21,56 ******** INSERT 3-2 ******** HGO067.000 21,57 21,58 PAGE 98 Chairman V'IAXMAN. Thank you very much, Mr. O'Neal. Mr. Finnegan. STATEMENT OF ,JOHN FINNEGA}I 21"59 Mr. FfNNEGAN. Chairman Tatraxman, Ranking Minority Member 2L6L Davis, and members of this distinguished committee, I thank 2L62 you for the opportunity to testify before you today. I am 2L63 the Chairman of the Board and Chief Executive Officer of the 2L64 Chubb Corporation. I became a member of Merrill Lynch's 2L65 Board of Directors and a member of the Board's Management 2166 Development and Compensation Committee in 2004. f became 2167 chairman of the Compensation Committee in April 2007. 2]-68 Mr. Chairman, your letter requests that I address how 2]-69 the compensation of Merrill Lynch's former Chairman and Chief 217 0 Executive Officer Stanley O'Neal was determined and the basis 2t7L for Mr. O'Neal's separation agreement. As requested, I will 2L72 summarize here and explain in greater detail in my written 2:l.73 statement the process employed by the Compensation Committee. I will start by addressing two important factual 217 4 2175 matters: First, Mr. O'Neal's 2007 compensation, and second, 2r7 6 other compensation amounts earned in prior years to which Mr. 2177 O'Neal was entitled when he left the company. 2L78 With respect Lo 2007, the Board determined unanimously 2]-60 HGO067.000 217 9 PAGE 99 that Mr. O'NeaI would receive no bonus of any kind for 2007 2480 and no severance payment.. For executives at Mr. O'Neal's 2a8L Ieve1, the bonus constitutes the overwhelming proportion of 2182 annual compensation. Mr. O'Neal's total compensation for 2183 2007 was only his base salary, which had been paid biweekly 2484 during the year until his termination on October 3Oth. Aside 2r85 from his base salary, a compensation of benefits retained by 2]-86 Mr. O'Neal at his departure had been earned and awarded to 2187 him in prior years. The $l-61- million f igure disclosed in our and highlighted by the media at the time of 21-88 public filings, 2189 his departure reflects compensation and benefits, over 80 2]-90 percent Merrill stock, all earned over the course of his 2t9a career at Merrill Lynch prior to his separatíon from the 2192 2]-93 company. O'NeaI accomplished a great deal for Merrill Lynch in 2L94 2]-95 21-96 2]-97 21-98 2]-99 2200 2204 2202 2203 the years before 2007. He was elected President and COO in ,JuIy of 2001-. Immediately prior to Mr. O'Nea1's appointment as President, the company's results for the first 6 months of that year had declined by 30 percent. But Mr. O'Neal acted quickly and decisively to restructure the company. Management was reshaped. Operations were streamlined and a long-term recovery strategy was put in place. Mr. O'NeaI's leadership positioned the company for what r^ras to be a period of significant growth and profitability. Over this period, Mr. O'Nea1's leadership qualities and HGO067.000 2204 1_00 achievements \¡¡ere widely recognized by the markets, clients, 2205 2206 2207 analysts, competitors and the media. The Compensation Committee has established a formal process aimed at measuring and rewarding tangible results against performance objectives. This process starts at the 2209 beginning of each year and continues throughout the year. 22tO The committee develops its annual compensation determination 22tt for senior management with three primary objectives in mind. 2212 Fírst, rv€ pay for performance. Second, we try to ensure that 2213 compensation for the company's executives is competitive with 2214 that of key competitors in our industry. And third, we 2215 emphasize stock-based compensation, support alignment of our 2216 executives' financial interests with those of shareholders, 2217 and to encourage retention. 221-8 Returning to the specifics regarding Mr. O'NeaI in the 2219 falI of 2007, âs chairman of the Compensation Committee, I 2220 presided over the process that the Board used to determine 2221 his separation agreement. The Board determined that while 2208 2222 2223 2224 2225 ¿zzo 2227 2228 Mr. O'Neal up until the mortgage crisis had achieved outstanding results as CEO of Merrill Lynch, he was not the right person to take the company forward. New leadership was required. Mr. O'Neal received no bonus and no severance and he also lost his job. However, the Board recognized that Mr. O'Neal was entitled to retain the compensation and benefits that he had earned in prior years and that he was eligible to HGO067.000 2229 2230 PAGE ]-01 223]2232 2233 2234 2235 2236 2237 receive under the company's retirement provisions. This is what the Board believed it could do and what it should do. In conclusion, Mr. O'Neal's 2OO2 to 2006 compensation was on a scale of that of other CEOs of major investment banks. In those years, he provided strong and decisive leadership during a phase of significant restructuring, repositioning and growth for the company. Although his Iegacy is marred by deep losses in very specific parts of our business, the overall health and vitalíty of the rest of the company's g1oba1 franchise is due in large part to the strength of leadership and direction that he provided. And Mr. O'Nea1's compensation from 2002 to 2006 reflect these results. fn 2007, when tangible results were not delivered, Mr. O'Neal lost his iob and receíved no bonus and no severance. 2238 2239 2240 2241- 2242 2243 2244 2245 2246 2247 for providing the company with an opportunity to explain our process and decisions, and I will do my best to answer any questions you might have. lPrepared statement of Mr. Finnegan follows:] Thank you 2248 ******** INSERT 3_3 ******** HGO067.000 2249 PAGE LO2 Chairman WAICMAN. Thank you very much, Mr. Finnegan. 2250 Mr. Mozilo. STATEMENT OF ANGELO 2251- R. MOZILO 2252 2253 2254 2255 2256 2257 2258 2259 2260 2261, 2262 2263 2264 2265 2266 2267 2268 2269 227 0 Mr. MOZILO. Chairman Waxman, Ranking Member Davis, and members of the committee, you have invited me here today to participate in a hearing on issues related to CEO compensation and severance arrangements against the backdrop of our pending sale to Bank of America and the ongoing housing crisis. The current crisis is very serious, and homeowners, both subprime, more recently prime borrowers, are suffering from rapidly declining home prices. The primary cause for increasing delinquencies and foreclosures is that for the first time since the Great Depression, there's a nationwide deterioration in síngle family real estate values combined with now increasing unemployment. First, I would like to address your specific questions related to both my compensation and the exaggerated reports concerning my severance. I am receiving no severance or change of control payments whatsoever. I waived any and all severance, in addition canceled the consulting agreement included in my contract. In total, I gave up $37.5 million HGO067.000 2271 2272 2273 2274 2215 2276 2277 2278 2279 PAGE L03 which under my contract I was to receive upon the closing of 2280 228L 2282 2283 2284 2285 2286 2287 2288 2289 2290 229L 2292 2293 2294 2295 the Bank of America transaction. During my 40.year career with Countrywide, I invested in the pension plan and participated in a 401- (k) . In some years f had deferred parts of my compensation and at various times I have been awarded stock options. None of these are severance. All were earned over a 4)-year period of service. I waived my severance benefits because I didn't want the issue of my change of control pa)rments to impede the important task of completing the BofA's acquisition of Countrywide, a transaction that I believe is critical for our 40,000-p1us employees, our shareholders, our customers, and for our country. Turning to my own compensation, Countrywide's board has aligned the interests of our top executives, including ffiê, with shareholders by making our compensation primarily performance based, mainly tied to earnings per share and share price appreciation. Since 1-982, through early 2007, Countrywide stock appreciated over 23,000 percent, reaching a peak market value of over $25 billion from a starting value of zero. As a result, over recent years, I received substantial income from bonuses under a formula that was approved by our shareholders on at least two occasions. Another significant portion of my compensation over the past 30 years has been in the form of stock options, options that HGO067.000 2296 2297 PAGE TO4 2298 2299 required the price of the stock to rise above the option price before any income could be realized, thereby aligning me squarely with our shareholders. Therefore, âs a stock price appreciated, the value of my personal holdings also grew in va1ue. 2300 230]2302 2303 2304 2305 2306 2307 2308 Since I planned to retire at the end of my contract, which expired in 2006, and based upon the advice and guidance 2309 2340 231,L 231,2 23]-3 2314 23]-5 23]-6 23A7 23:l.8 23L9 2320 of my financial adviser, starting in 2OO4 I commenced a process of exercising options earned in earlier years Not\^rithstanding these sales, today I remain one of the largest individual shareholders with approximately 6.5 million shares in vested options. In short, âs our company did we1I, I did well, âs did our shareholders. But when our company did not do we1l, like ín 2007, my direct compensation and the value of my holdings declined materially, which is as it should be. My experience is not unlike many other American CEOs. I cofounded Countrywide 40 years ago. We started with less than five employees. I Iiterally put up all the money that I had both saved and borrowed to start Countrywide. In these last 4 decades, I have devoted my life to building a mortgage banking company that focused on extending home ownership opportunities to all Americans, including minority families who had been largely left behind by traditional mortgage lenders. HGO067.000 PAGE l_05 232]2322 2323 2324 2325 2326 2327 2328 2329 2330 233L 2332 2333 2334 2335 2336 2337 2338 2339 2340 234]2342 2343 2344 2345 very proud of the home ownership opportunities that Countrywide has provided for over 20 million families, and I am equally proud of the 39 years of success that we have had as a company. But there's no question that the past 6 months have been horrific for many of the homeowners that we served, for our shareholders and certainly for our employees. In my 55 years in the industry, this by far is the worst housing crisis I have ever seen, combined with an unprecedented collapse of the credit and liquidity markets. I want to underscore, however, what is perhaps the most important goal going forward is to keep families in thei:r homes. Although subprime loans never exceeded more than 1-0 percent of our business, ât Countrywide we have substantially enhanced our efforts to assist financially distressed homeowners to keep their homes, particularly those who are facing loss of income, a personal tragedy, and no longer have the safety valve of stabl-e or increasing home prices. Ln 2007 we helped more than 8l-,000 families avoid foreclosure, completed more than 50,OOO loan modifications, and refinanced more than 50,000 subprime borrowers into prime or agency eligible loans. rn ad.dition, w€ committed $L6 billion to a home retention initiative focused on providing assistance to subprime borrowers facing rate resets. We have played a leading role in the HOPE NOrü alliance and have partnered with over 40 home ownership counseling agencies I am HGO067.000 2346 2347 1_06 around the country, including NACA and ACORN. 2348 2349 2350 2351, 2352 2353 2354 2355 2356 2357 2358 2359 2360 236]2362 I am concerned that the recent tightening of underwriting criteria has potentially gone too fat. For the housing market to recover, underwriting guidelines need to strike a better balance between providing borrowers with access to loans and lenders and investors with the assurance that these loans will be repaid. Families should be given the opportunity to own a home, and they, not speculators, should be the beneficiaries of the current lower housing prices. Fina11y, my greatest concern as I come to the end of my 55 years in providing home financing to families living out their dream of home ownership is that the reaction to current events will take us back to the early 1-990s when minorities and lower income families did not have the opportunity to own a home and that the disparity between white and minority home ownership will again widen. 2363 2364 2365 2366 2367 2368 2369 237 0 I believe that Countrywide is a great only-in-America story. My immigrant grandfather was right when he told me that he came to America because anything is possible in this great country. I hope and trust as üÍe come through this difficult time that at the end of the day the unbridled ability of one to achieve and succeed irrespective of their heritage will remain a cherished American hallmark. Thank you very much. Hco067.000 2371- PAGE IO7 [Prepared statement of Mr. Mozilo follows:] 2372 ******** INSERT 3-4 ******** HGO067.000 PAGE VüA)(I4AN. ]-OB 2373 2374 Chairman Snyder. Thank you very much Mr. Mozilo. Mr. 2375 STATEMENT OF HARLEY W. SNYDER 237 6 2377 2378 2379 2380 2381, 2382 2383 2384 2385 2386 2387 2388 2389 2390 239L 2392 2393 2394 Mr. SNYDER. Chairman Waxman, Ranking Member Davis, members of the committee, my name is Harley Snyder from Valparaiso, Indiana. T spent my entire adult life in the real- estate business and rel-ated real estate ind.ustries. I am a Director of the National Association of Realtors and served as President of that association in l-983. I'm a member of the Board of Countrywide Financial Corporation, and I currently serve as the lead director and Chair of the Compensat ion Committee . The commíttee has asked me today to discuss the compensation and severance of Countrywide CEO Angelo Mozilo. Let me first reinforce from a board perspective the comments made by Mr. Mozilo. The Board understands that a significant number of borrowers across the country are finding it increasingly difficult to keep their homes in the current economic environment. Countrywide is committed to being the leader in the effort to help as many of those borrowers as possible keep their homes. The Board is fu11y supportive of the steps taken by the company management to significantly HGO067. 000 1_09 2395 2396 2397 increase our ohrn efforts to help and to work with the community groups, government and others in our industry to assist homeowners. 2398 I will in the short term, with the short-term l-O-month The 2399 contract, I would like to begin discussion of that. 2400 Board negotiated with Mr. Mozilo in 2004. Mr. Mozilo had an 2401 employment agreement that was set to expire in FebruãtY, 2402 2006. The contract expired at the end of February because 2403 the company's fiscal year end was previously the last day of 2404 February. After the company changed its fiscal year, the 2405 Compensation Committee, which at the time I was a member of 2406 though not the Chair, thought that it made sense to have the 2407 expiration date of the contract changed as wel1. As such, 2408 the Board asked Mr. Mozilo to postpone his anticipated 2409 retirement from ful1-time CEO duties for approximately 10 2440 months. Given our objectives and the short-term duration of 241,1 the extension, we reached a conclusion that the most 241,2 practical and appropriate business approach was to simply 241-3 extend the contract on the same underlying economic terms and 2444 conditions. These terms included. an incentive bonus program 2445 that was tied to the earnings per share performance of the 2416 company which was consistent with a program structure that 2417 had previously been approved by the shareholders on at least 24r8 two separate occasions. The Board also awarded Mr. Mozilo 24r9 additional payment in consideration of his agreeing to HGO067.000 2420 2421 2422 2423 2424 2425 2426 2427 PAGE 110 contract extension and postponing his retirement. The Compensation Committee \Àras advised by the Pearl Meyer consulting firm during these negotiations. On the specific question of extending his contract at the existing economic terms, wê further sought and received an opinion from the executive compensation consulting firm of Hewitt Associates. I¡'Ihen the contract extension \i¡as signed, we expected Mr. 2428 Mozilo would retire as CEO in December of 2006. It turned 2429 out that during that year the Board determined that the 2430 company would be best served by having Mr. Mozilo continue as 243r CEO rather than retiring as he had planned. By then the 2432 individual that we thought would succeed Mr. Mozilo as CEO 2433 had left the company. Accordingly, \^/e once again asked Mr. 2434 Mozilo to postpone his retirement. 2435 As v\¡ith many companies the Board's compensation 2436 philosophy had continued to evolve to reflect changes in 2437 compensation practices and norms. During the 2006 2438 negotiatíons, w€ made significant changes to Mr. Mozilo's 2439 contract. We substantially reduced the guaranteed portion of 2440 Mr. Mozilo's cash compensation by decreasing his base salary 244L from nearly ç2.9 million to $1.9 million annually. The new 2442 contract also included provisions that would require that 2443 certain return on equity and net income targets be met before 2444 he would be eligible to receive an annual bonus. A maximum HGO067.000 PAGE 11-1_ 2445 2446 2447 cap \¡ras also added to the bonus payout, and a portion of the annual equity-based award was made in restricted stock 2448 2449 2450 245]2452 instead of stock options These restricted stock units contain new performance-based requirements that provided that the stock units would not vest unless the company achieved an annual return on equity of L2 percent or greater. The balance of 2453 2454 2455 2456 2457 2458 2459 2460 246]2462 2463 2464 2465 2466 2467 2468 2469 his equity award was paid ín stock appreciation rights, which by design have a built-in performance component as they have no value unless the company' s stock price increases. As \,üith the earlier contract, wê believe that this aligned Mr. Mozilo's interest with that of the shareholders. I would point out that our bonus formulations, which had produced bonuses for Mr. Mozilo for the years the company was highly profitable, resulted in no bonus for 2007. That was the only time in the last 30 years in which the company suffered an annual loss. Finally, the contract negotiations between Mr. Mozilo and the Compensation Committee took place against the backdrop of significant and sustained achievement by the company and a broad recognition throughout the business communíty that Angelo Mozilo's tenure as CEO had been a remarkable success. This is reported in the general business press, where Barron's hailed Mr. Mozilo as one of the world's best CEOs, ot Fortune, which had headlined an article on the HGO067.000 247 0 PAGE ]-1,2 company, rrMeet the 23,000 Percent Stock. " This was also 2474 2472 2473 247 4 recognized in the banking and mortgage communities, which honored Angelo with American Bankers Lifetime Achievement Award. 2475 247 6 2477 2478 2479 Recently, Mr. Mozilo made the decision independently to voluntarily forego severance pa)¡ments that he would have been entitled to receive under hís contract in the event the Bank of America transaction closes. That was his deeision. And the Board simply entered into an agreement with Mr. Mozilo to implement his decision. 2480 2481- Mr. Chairman, that concludes my remarks, and I stand prepared to the best of my abitity to respond to your questions. flPrepared statement of Mr. Snyder follows:] 2482 2483 2484 ******** INSERT 3-5 ******** HGO067.000 PAGE l_13 2485 2486 2487 Chairman I/'IA)il4ÄN. Thank you very much, Mr. Snyder, and 2488 2489 2490 249L 2492 2493 2494 2495 2496 2497 2498 2499 2500 250L 2502 2503 2504 2505 2506 2507 2s08 2s09 all of you. vüe are going to now start with questions and we're going to do 12 minutes controlled by the chairman and 12 minutes controlled by Mr. Davis. I will start off first. Mr. Mozilo, and Mr. Snyder, I want to ask you about Countrywide. It is the largest mortgage lender in the Nation, and it is the company most identified with the Both you in your roles as CEO and board mortgage crisis. member have an obligation to act in the best interests of your shareholders. But I am having a difficult time reconciling that issue with Mr. Mozilo's compensation. In October of 2006, for instance, before the mortgage crisis erupted, Mr. Mozilo filed a stock trading pIan, and this plan allowed him to seII 350,000 shares per month. Over the next few months, Mr. Mozilo revised his plan twice. In December he amended his plan so that he could seIl 465,000 shares per month. And then on February 2, 2007, Mr. Mozilo increased his stock sales to 580,000 shares per month. That was the same day that Countrywide's stock hit a record high of $45 a share. In total, I believe Mr. Mozilo sold 5.8 míllion shares for $1-50 million between November 2006 and the end of 2007. Does that sound right to you, Mr. Mozilo? Mr. MOZILO. Congressman, I don't know the number. As I HGO067.000 25LO PAGE L1,4 stated in my verbal remarks, the goal was to reduce my 25tt holdings because of my retirement. I ended up with 6-I/2 25]-2 million shares. I¡tre rÂrere trying to se1l half the holdings, so 25]-3 it may be around that number. 2514 Chairman VüAXMAN. Mr. Mozilo, you had good timing 25a5 because Countrywide's stock has fallen nearly 90 percent 251,6 since you amended your stock trading p1an. But what is most 25]-7 unusual about these sales may be that they occurred at the 25L8 same time that Countrywide decided to spend $2.5 billion to 25L9 buy its stock back. Countrywide didn't have enough money to 2520 buy back the stock, so it actually borrowed $1.5 billion to 252r finance the stock repurchases. The stock buyback. plan 2522 appeared to have a significant effect on Countrywide's stock. 2523 The plan was announced on OcLober 24, 2006, when 2524 Countrywide's stock was selling at $37.33. By February, 2525 Countrywide's stock had increased in val-ue to $45 a share. 2526 Mr. Mozilo, help me understand why these stock sales 2527 were in the best interest of shareholders. You \^rere using 2528 shareholder and borrowed money to buy back Countrywide's 2s29 stocks and keep the price up, ât the same time you were 2s30 selling your own personal shares. How did this help the 253! 2532 2533 2534 shareholders? Mr. MOZILO. WeI1, first of all, I would like to frame it the way it was. As I stated in my verbal remarks, I started ín 2004 with the pending 51- plans and reason why I Hco067.000 2535 2536 2537 PAGE 1_t_5 \^rent 2538 2539 2540 2541, 2542 2543 2544 2545 2546 2547 2548 2549 2550 255L 2552 2553 2554 2555 2556 2557 2558 2559 that route rather than selling all the stock at once, âs' I could have, was to continue to stay in line with the shareholders because those plans required the shares be sold over a period of time and some of the numbers that you noted. If one was to take advantage of the situation, they would sell the stock all at once, rather than over a period of time. I wanted to stay in line with the shareholders. So that began back in 2004. That was shares that I had held for over 10 years, options that I held over 10 years, that were expiring. So the first group of options had to be so1d, otherwise they would go worthless. I would. be happy to provide this to the committee. There is absolutely no relationship between the buyback of stock and my sale of options, exercise buys and sale of stock, flo 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 of course the result of that had ended up not selling a significant amount of shares with the stock severely depressed. Secondly, the buyback of stock was a process that went on for well over a year. It was a proposal made by our Treasurer and our CFO, and the question was what to do with our capital. T¡le are a company for 30 some odd years that was a user of capital and never accumulated. it. lVe invested it in our own business, a servicing business. We came to the HGO067.000 2560 PAGE It6 the company was exceedingly profitable, 2561_ generating capital, and the question in any company is what 2562 is the best use of that capital? How do you provide the 2563 greatest return to the shareholders? The buyback of that 2564 stock was designed to increase return on equity for our And 2565 shareholders. There is a variety of \^tays of doing it. 2566 you can replace that type of capital with borrowings. That 2567 happened some time ago. I. am not familiar with all of the 2568 mechanics that we went through. But the purpose of it was to 2569 benefit the shareholders and increase the return on equity. 257 0 Chairman IiüA)ruAN. I want to ask you to look at what 257L happened. It was an absolute disaster for Countrywide and 2572 its shareholders because Countrywide's stock feII through the 2573 floor after February 2007. It is now worth only ç5.20 per 2574 share and in fact the stock price has dropped 87 percent 2575 since its peak. V'Ie don't have exact figures, but it looks 2576 like Countrywide's shareholders lost almost all of the ç2.5 2577 billion the company spent on repurchasing shares when you 257 I were selling stock. 2579 Mr. Snyder, our investigation has shown that i-t wasn't 2580 just Mr. Mozilo who was selling shares during this time 258L period. Tt was also the board members. One board member 2582 exercised 228,000 options between November 2006 and .fune In fact, yoü sold yourself 2s83 2007, making almost $7 million. 2584 L70,000 shares in 2006 for more than $6 mi11ion. And you point rnrhere HGO067.000 PAGE II7 2585 2586 2587 2 sold 20,000 shares in December 2006 during the stock buyback, earning more than $800,000. How were those sales in the best interests of the shareholders? 588 2589 2590 2591, 2592 2593 2594 2595 2596 2597 2598 2599 2600 260L 2602 2603 2604 2605 2606 2607 2608 2609 Mr. SNYDER. Mr. Chairman, the shareholders had the same opportunity to sell their stock as we had. Our stocks were so1d, my stocks, like Mr. Mozilo's, \ÀIere sold under a 1-0b51plan under a prearranged selling order that you state that when stock reaches a certain price which is prearranged, pre-set, that is when the stock is sold. In fact, I think as you pointed out, Chairman, that I sold stock at a price in November, December of 2006. Had I hlaited until February, I could have sold it at a substantially higher price. Chairman WAXMAN. Mr. Parsons and Mr. Finnegan, I understand that Merrill Lynch and Citigroup have different policies on this issue. You have 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 seII $L50 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. V,IelI, Mr. Chairman, as you've pointed out, we have procedures in place that would first flag it, second, HGO067.000 PAGE 118 26tO 26]-1, cause counsel to opine on it, and perhaps more importantly to 26]-2 261-3 2644 26a5 2616 2617 26]-8 26:l,9 your question--I didn't address it in my opening remarks, it is 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 received over the course of the years they have worked for the company. So unless someone has 2620 Iiteral1y billions, they wouldn't be in a position to move on 262r that leve1 of stock that you just indicated. But beyond that answer, what we would do, I am sure, is 2622 2623 we would consult with counsel, wê would consult to understand 2624 the reasons, and we would make a judgment based on the facts 2625 2626 2627 as r,'re f ound them then. Chairman WAXMAN. And you would do that to protect the shareholders, isn't that the whole idea? 2628 2629 2630 263L 2632 2633 2634 the process. And the process, if you wi1l. Because frequently appearance is equally important with substance and reality. Chairman V'IAXMAN. Mr. Finnegan, you are a board member at Merrill Lynch. I am going to ask you the same questions. Vüould this kind of Lransaction raise a red flag for you? Mr. FINNEGAII. Let me echo Mr. Parsons' remarks first. Mr. PARSONS. And HGO067.000 L]-9 2635 2636 2637 The fact is that we have stock retention requirements, so it 2638 2639 2640 264L 2642 2643 2644 2645 2646 2647 2648 2649 2650 265L 2652 26s3 2654 Mr. O'NeaI never had that kind of stock holdings that Mr. Mozilo had such that he could have been selling $1-50 million worth of stock and complying with our stock retention requirements. Like at Citi, if Mr. O'NeaI wanted to seIl stock, he would have come to the Compensation Committee, and we would have talked to the General Counsel, and it would have required approval. Again the magnitude here, because of the difference in stock holdings, rea11y, you know, isn't--wouldn't have been relevant at the time. I also think that I have no reason to believe nor do I have any reason to believe our board members would see anything inconsistent with setling stock when you are doing a stock buyback. Stock buybacks are put in p1ace, they are generally considered very investor friendly. Investors like to see them. They improve earnings per share, they improve return on equity. We wouldn't necessarily make any decision on a proposed stock sale because we are in a stock buyback would be purely hypothetical. 2655 2656 2657 situation. Again, the issue there would be magnitude; is it within the rules, and what would the perception be. And we would consult with General Counsel on the matter and make a decision. Chairman Ti'IAXMAN. Here 2658 2659 is the problem I have with stock HGO067.000 2660 PAGE 1,20 2664 2662 2663 2664 2665 2666 2667 sa1es. Mr. Mozilo and Mr. Snyder seem to be saying two completely inconsistent things. You tel1 the shareholders that Countrywide's 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 would like to hear you respond to that. Mr. MOZILO. Mr. Chairman, I was with the company 40 2669 Almost all of my net worth 267 0 years. I was going to retire. 267r was in Countrywide. I had come to a point on diversifying my 2672 investments, my assets, and at that point came Lo 2004, and I 2673 consistently followed that p1an. It \¡ras my belief that every 2674 time I set the plan in p1ace, one, it is not my belief, it is 2675 fact, that the shareholders knew exactly what I knew. I set 2676 them in place after earnings \^Iere announced and any plans 2677 were announced. They were aware of the buyback. They vüere 2678 aware of earnings in the previous quarter. And our 2679 projections for the ensuing years demonstrated that \¡/e \À¡ere 2680 going to increase capital because the company hlas doing 268]- extremely well throughout that whole period of time. 2682 Chairman V,IA)ffAN. I th.ink the reason Mr. Parsons 2683 indicated it might not look good is the whole example of what 2684 happened with Enron. Because with Enron, they ü/ere selling 2668 HGO067.000 PAGE I2I the stock, the executives were selling the stock, and they 26A6 often had knowledge that no one else would have, and I think being investigated. But the appearance 2687 all of this is still is not a good appearance if you are telling the shareholders 26BB 2689 it is a good investment to buy the stock for the corporation 2690 at the same time you are selling the stock to benefit 2691, yourself at that higher price. 2692 Mr. MOZILO. T think again the investors, who are mostly 2693 institutions, made the decision to buy or sel1 the stock 2694 based. upon the information we provided. I never asked 2695 anybody to buy the stock. Nor did I ask anybody to sell the 2696 stock. I'Ie presented our performance, we had a 30-year 2697 performance of no losses. Chairman WAXMAN. I¡'Ie11, my time here has expired. But I 2698 2699 must say your timing is awfully good for yourself but not particularly for some of the other shareholders. 27 00 27 0t Mr. Davis. 27 02 Mr. DAVIS OF VIRGINIA. Let me just say this is not an Enron situation. This is a l-0b51-. This is in fact to 27 03 protect people. Enron was insider trading. I \^/as a general 27 04 27 05 counsel for a public company before I came to Congress and I just have a different bent and understanding of this. 27 06 Longstanding 1aw is under a case that goes back almost a 27 07 27 08 century, the Dodge Brothers v. Ford Motor Company. 27 09 Corporations exist to make money for their shareholders. 2685 HGO067.000 27]-0 271"r PAGE I22 27L2 271-3 271"4 271-5 2716 27L7 That is law. That is your fiduciary duty. It is not other. All of these executive compensation packages, to my understanding, were negotiated in accordance with guidelines outlined by the Business Roundtable. Mr. Parsons, is that true in the case of Mr. Prince? Mr. PARSONS. WelI, sir, it happens to be true that our practices and procedures are congruent with the Business I think we actually Roundtable. I think we got there first. 2718 271-9 2720 272L 2722 2723 2724 2725 2726 2727 2728 2729 2730 2731, 2732 2733 2734 got there before they did. Mr. DAVIS OF VIRGINIA. That's fine. I admit some people may not like the Business Roundtable, but I think that is kind of definitive in terms of the gold standard. Mr. Finnegan, \^rere yours in accordance with--did you look at the compensation package with tvtr. O'Nea1? Mr. FINNEGAN. Yes, sir. Chairman Ti'IA)WAN. Is it also congruent? Mr. FINNEGAN. Yes, sir. Again, wê developed our own practices, but I would say they are largely congruent with the Business Roundtable. Mr. DAVIS OF VTRGINIA. I am trying to understand that this was not some'kind of special deal that you had worked out. This is normal business practice, that is--Mr. Snyder, is that the same in this case? Mr. SNYDER. Absolutely true. Mr. DAVIS OF VIRGINIA. So as I understand these Hco067.000 2735 2736 2737 PAGE ]-23 packages, when the company does poorly the CEO also takes a 2738 2739 2740 2741 2742 2743 2744 27 45 2746 2747 2748 27 49 hit. It costs the CEO money because their compensation goes üp, the stock price goes up, it goes down, stock price goes down, a lot of their compensation is in shares. Shareholders' price rise, they do weI1. Shareholders, including unions' pension funds, State employee pension funds, retirees, g1oba1 investors, stock prices going up, CEO is compensated, nobody is complaining at this point. And if they do, the shareholders have an avenue for doing that, don't they, through the annual- shareholders meeting and election of directors? Mr. SNYDER. Yes. Mr. DAVIS OF VIRGINIA. Isn't that the way it works, in my understanding? Mr. SNYDER. YCS. 2750 Mr. DAVIS OF VIRGINIA. Not unlike, by the wâY, movie 275r stars or professional athletes who will negotiate a deal and 2752 íf they have a bad year--like down here in Washington we have 2753 seen a 1ot of bad professional athletes' deals where they are 2754 over--Albert Be11 comes to mind--$14 million for sitting on And in this 2755 the bench all year and you are stuck $tith it. 2756 case I don't think anybody was given a bonus for this, but 2757 their compensation, as I understand it, was basically 2758 preordained under their dea1s. And some of the money that 2759 they got was basically what they had accumulated through the HGO067.000 27 60 PAGE ]-24 years in deferred compensatÍon. 27 6t Mr. Parson, is that correct basically? 27 62 Mr. PARSONS. In the main, sir. In the case of Mr. 27 63 Prince, there was in fact a bonus component to his 27 64 separation. I won't call it severance. At the time of his 27 65 separation we had to make a calculation as to what, if dfly, 2766 bonus Mr. Prince would be entitled to for the year 2007. üle 2'7 67 made a judgment, but that judgment was consistent with your 27 68 earlier stated principle that when the shareholders don't do 2769 welI, the executives don't do well and his bonus was 2770 basically leveraged off of the loss of value of shareholders. 2771 Mr. DAVIS OF VIRGINIA. Vühat troubles me about it is the 2772 2773 277 4 focus here where if you take a look at the whole subprime mortgage market, there was so many different components and you are a very small piece of this. You can look at the 2775 2776 2777 mortgage lenders. You can look at the appraisers. You can 27't8 2779 2780 27 81" 2782 2783 look at the Fed itself in some statements they made praising this as an innovative avenue to be able to get people with lower incomes home ownership. You can look at the rating agencies. It is hardly confined to your corporations in particular. And, in point of fact, Lf your CEOs had made nothing during this time, I don't think it would have saved That is one home or any decisions would have been different. what--that is my understanding of what I take ar^Iay from this hearing. 2784 HGO067.000 27 85 PAGE L25 But I Issa. am going to yield the balance of our time to Mr. 2786 27 87 27 88 27 89 2790 279]2792 2793 27 94 2795 2796 2797 2798 2799 2800 2 801_ Mr. ISSA. I thank the gentleman. You know it is amazing. This is a hearing in search of, You know, bad guys. And I have listened so far to the chairman and to the ranking member, and I am just trying to see one more time, are there bad guys in front of me? And I am not seeing it. Mr. Prince, you had a substantial piece of skin in Citibank. Are you completely out today? Mr. PRINCE. No, Congressman. Mr. ISSA. How much skin do you stil1 have in Citibank? How many shares do you sti11 o\^tn approximately that are subj ect to the perf ormance of the company you \ÀIere so critical in for so many years? Mr. PRINCE. I own about a million shares. And except for a few shares I sold in 1-999 I haven't ever sold any shares 2802 2 803 2804 280s 2806 2807 2 Mr. ISSA. So the fact is you hlere aligned with the performance of an organizaLíon, did the best you could to make it succeed. Mr. Parsons, I am going to ask you because you undoubtedly interacted with former Treasury Secretary Robert Rubin, who is I believe still a board member who certainly enjoyed Mr. Prince's performance because he made about $1-7.3 808 2809 mi11ion, according to our figures, as a result of his board HGO067.000 PAGE 1"26 2810 281"1, menìlcership and 28L2 28L3 281-4 281,5 281-6 stock appreciation. But more importantly, I understand that at the time Mr. Prince offered his resignation, Bob Rubin \^ras saying, I'don't let him go, we need him at the he1m"; isn't that roughly true? 28r7 2818 2819 2820 2821 2822 2823 2824 2825 2826 2827 2828 2829 2830 283L 2832 2833 2834 Mr. PARSONS. My recollection Mr. ISSA. Okay, so here we have somebody who did a great deal of good, got caught up in what is an implosion, and one of the most respected people, ãL least to us here on the dais, and somebody who understands the bigger financial picture was fighting to keep him and keep him for a reason, which was the future of Citibank. So I don't see a villain here. I would like to. I would like to find somebody I could blame for the meltdown of home mortgage values and actually home mortgages. I don't see it there. Mr. O'Neal, you hrere 2 decades with your company. Do you have stock left in Merrill Lynch? Mr. O'NEAL. Yes, including stock that I own plus options, approximately 2.8 million shares. Mr. ISSA. And every time the stock goes down a buck, you lose $2 million on paper. Mr. O'NEAL. Yes, Congressman Mr. ISSA. So you have always had skin in the game in your 2l years plus affiliated with Merrill Lynch? Mr. O'NEAI-,. That is correct. Mr. ISSA. Now isn't it true that roughly--and these HGO067.000 PAGE L27 2835 2836 2837 2838 2839 2840 2841 2842 2843 2844 2845 2846 2847 figures may not be accurate--roughly 20 percent of the stock owned by Merrill Lynch is owned by the most sophisticated possible group, and that is the brokers and employees of Merrill Lynch? Mr. O'NEAL. I think that is approximately correct. Mr. ISSA. Okay. Mr. Finnegan, I will go to you. I am going to assume that the employees, stockbrokers, people particularly in the retail end at Merrill l-,ynch, they are going to be very active in the upcoming board decisions and so on, but this was a sophisticated group that understood 1-Ob5s, understood open periods and closed periods and understood the underlying value of institutional paper, is that right? Mr. FINNEGAN. I think that would be fair to say. Mr. ISSA. So unless we want to blame all our individual brokers and everybody whose skin was in this, 40 percent of it, in addition to Mr. O'Neal's, r,.Iê are not going to find a villain today at Merrill Lynch. Okay. Mr. Mozilo, you are an interesting case because the company of Countrywide and you are one and the same. You are the most recognized person here relative to a tremendous success story. I want to put in perspective, though, because they are talking about, you know, these figures over $l-00 million that they quote you got out. Let me ask a couple of questions. If I put, 1et's sây, $10,000 in in L982 into your 2848 2849 2850 285L 2852 2853 2854 2855 2856 2857 2 858 2859 HGO067.000 PAGE 1,28 2860 286L 2862 2863 2864 2865 2866 2867 2868 2869 287 0 287]2872 2873 287 4 2875 287 6 2877 2878 2879 2 880 2881, 2882 2883 2884 figures show that I would have made $230 million when I sold that stock the same day that your 10b5 allowed you to sel1. Is that right roughly? Mr. MOZILO. USA Today did an article on that. Mr. ISSA. Okay, so what we are talking about is a man at the helm 40 years building a company, and the $1-0,000 put in when you went, when you served your company and Microsoft started, and I would have gotten $230 million for my $10,000 after 40 years, I think that is more than inflation. So I have a hard time seeing the dollars you got for your stock. But let's go into something, and my colleague will probably pick it up more because he is a Financial Services Committee member, but 1-0b5, âs I understand it--l¡lr. Snyder, I bit--10b5 is an am going to sort of go to you a little instrument designed to protect the stockholders and to cause sales made, particularly during not open periods, to be arm's length. Isn't that ríght? Mr. SNYDER. Absolutely, Congressman. Mr. ISSA. And the open periods, íf either one of You, that occurred at Countrywide, were they typically the'1 to l-0 days or a littIe longer often in which there utas no reason to close the trading window? Mr. SNYDER. T' m sorry, Congressman? Mr. ISSA. In other words, is your quarterly rropen to seII periods" that occur in public companies, do you happen company, my HGO067.000 L29 2885 2886 2887 2888 2889 2890 289L 2892 2893 2894 2895 2896 2897 2898 2899 2900 to know, Mr. Mozilo, do you know, did you typically have an open period every quarter? Mr. MOZILO. V'Ie had an open period. I don't know the extent of the open period, but I know that our counsel advised me within 3 days after our earnings announcement where everything was known to do it then. Mr. ISSA. Right. That is the best, the sweetest part of an earnings announcement because there is nothing that hasn't been said Mr. MOZILO. That's correct. Mr. ISSA. And if you had sold 3 days after your announcements, each of these, all the sales that \ÀIere being made, if you wi11, under the scheduled 1-0b5, if you had sold them on those days, would there have been, to the best of your knowledge, any substantial difference in how much you would have received if you had simply sold them during your open periods? 2904 2902 2903 2904 290s 2906 2907 2908 2909 Mr. MOZILO. If I had just sold it then wíthout engaging in a 1-0b51, yês, it would have been substantially higher because the last l-0b51 came to zero, âs the stock dropped, because I would not seIl under $28 a share. That was built into my 1-0b5L. Mr. ISSA. I don't know if I am the only one here but I know I am the only Member of Congress that is on a public board and have availed myself of 10b5s on behalf of my HGO067.000 29rO 1_3 0 foundation in the past. These are part of a public process. There is transparency on those very filings and on each of 29ta 2912 29]-3 29]-4 291-5 291,6 2947 291-8 291,9 2920 2921, 2922 2923 2924 2925 2926 2927 2928 2929 2930 293L 2932 2933 2934 the subsequent sales that occurs., isn't that right? Mr. SNYDER. Yes, sir. Mr. MOZILO. That's right. Mr. ISSA. Mr. Mozilo, either you or people on your behalf in the company, every time one of these sales occurred didn't you typically find institutions calling to inquire to do their due diligence of how many, why were these sales made, not just as to you, but as to any executive with potential inside information? Mr. MOZILO. They were, and as a result of that we continuously made my plans public so at least they understood the plans were in existence, that I had no control over the saIes, because again my choice r'.las to se1I all of it at once. I could have done it at $45 a share. I chose not to. I chose to keep it, to stay with the shareholders and d.o it over a period of time. Mr. ISSA. I am looking at three corporations here in which you all had skin in the game, you all sti11 have skín in the game, you all suffered the losses, all of you complied with the transparency rules and the best practices rules, all of you--and I am not trying to defend you. I would made you the victims if I could possibly blame the meltdown on you. I reaIly would love to do it. It would make it easy on us HGO067.000 PAGE 131- 2935 2936 2937 because we wouldn't be culpable--you had exercised exactly 2938 2939 2940 2944 2942 2943 2944 the tlpes of things we asked for in transparency and yet we are putting you here today and asking you why you were so foolish as to agree with Greenspan and Bernanke and continue selling these products that ultimately we are now saying Ied to a meltdown of subpríme Mr. Chairman, I look forward to finding out if there is actually something wrong here. So far, Mr. Chairman, you certainly have not found it. Chairman IVAXMAN. Gentleman's time has expired. Mr. Yarmuth. 2945 2946 2947 2948 2949 2950 2951 2952 2953 2954 2955 2956 2957 2958 2959 Mr. YARMUTH. Thank you, Mr. Chairman, and I want to thank all the witnesses for being here. This is a rare opportunity to have what I think what anyone would call giants in American business. And I thínk there is some questions here that rea1ly are larger than what any of your individual situations might present. I understand Mr. Davis' comment about athletes performing poorly and still being paid and other analogous situations, but I thínk \^/e are dealing with a totally. different picture here, and so r would like to broaden it slightly because we have had evidence of those of you who had losing years in your companies still being compensated very generously and severance packages that are outside the comprehension of most Amerícans. But there is a bigger picture that I think concerns my HGO067.000 PAGE 1-32 constituents, many of them and many people throughout the 2961, country, because they look at the enormous salaries, and I am 2962 not referring to any one of you specifically, and I will 2963 reiterate that no one is accusing any of you of doing even 2964 anything unethical not to speak of i1legal, but when we see a 2965 situatíon in which corporate executives make tens of millions 2966 of dollars for enhancing stock price and at the same time we 2967 see layoffs of 3,000 employees, we see companies moved 2968 overseas, wê see plants closed and companies merged and jobs 2969 ended in this country, \¡te see an income picture nationally' in 297 0 which over the last 5 or 6 years all of the income growth in 297L this country has gone to the top 5 percent of the population 2972 and none to the remaining 95 percent, and you all know the 2973 numbers in terms of disparity of executive salaries versus 2974 employees salaries and how that has gone over the last few 2975 decades from a factor .of 30 times to now pick a number , 4OO, 2976 500 times are various estimates. So my question is all of 2977 you have had experience with compensation committees and some 2978 of you are on them. 2979 When you meet in these compensation committees, is there 2980 any discussion of the impact that your decisions have on 298t essentially consumer attitudes about the relative value of 2982 what you are paying your executives and what the average 2983 worker in your company makes, what that does to employee 2984 morale, what your impact on communities might have if you tie 2960 HGO067.000 PAGE 1_3 3 298s 2986 compensation to stock performance, which often means that you close plants and sever jobs. I want to know from those of 2987 you, Mr. Prince, Mr. Parsons, Mr. O'Neal, if these type of 2988 conversations take p1ace, ot ís this all about how you 2989 enhance the executive salaries and executive .compensation? 2990 Mr. Prince, you want to deal with it first? Mr. PRINCE. I will, Congressman. You are raising very 299r 2992 important and significant societal issues, and I would say 2993 that there was a trend perhaps 10, 15 years ago to broaden 2994 2995 2996 2997 2998 2999 3000 3001 3002 3003 3004 3005 3006 3 3 3 007 008 009 the base of consideration to what were called stakeholders, communities and so forth. And there was a great deal of controversy at the time about that subject and whether or not decisions should be made in the interest of entíties other than stockholders. You are raising that question again. I believe it is fair to say that today the standard of corporate governance pretty much focuses people on what is best for stockholders; that is to say, the holders of capital are the ones who are favored in these decisions. And it ís, I think, a very fair and appropriate question to raise as to whether or not that focus ought to be broadened to communities and so forth. Mr. YARMUTH. Thank you. And if I could get somebody else to respond. I just want to add one thing, and now when we are dealing with companies, $30 billion, so forth, it is not a small matter because the impact can be society wide, âs HGO067.000 3 3 PAGE 134 010 011 301-2 301_3 30i,4 3 0r_5 301_6 301-7 30L8 3 0L9 3020 3024 3022 3023 3024 3025 3026 3027 3028 in the mortgage situation, more than just on one smal1 company or one community. Mr. Parsons, would you like to respond? Mr. PARSONS. We1l, the specific response to the question asked \^ras yes. We in the Citigroup Compensation Committee actually discussed the very question that you are raising. Trlhere is the balance point? How do we remain competitive without contributing to something that could be tearing at the fabric of society? So, y€s, we do discuss it, and essentially our guideposts are--as Mr. Prince indicated, our job is to make sure we have the talent that can manage and move forward this giant global1y leading enterprise, and in so doing, wê have to be competitive with what it takes to get that talent, and we have to orient it towards pay for it may have been performance. 3029 3030 3 031 But the thing that, the back end of your question, the thing that is going through my mind, when you say how do you balance this against the reaction of the masses, \^Ie are a market economy. And essentially what we do is we look to the market to make those judgments as to where the balance has to be. You have to be competitive. You have to be in the marketplace. And my own impression is that with all its 3032 3033 3034 fIaws, the market economy stil1 works best out of all the models we have out there to look at and to choose from. I didn't know all these stories when I showed up this HGO067.000 3035 3036 3 PAGE 135 037 3038 3039 3040 afternoon, but Mr. Prince is the first college graduate in his family. Mr. O'NeaI is the grandson of a sIave. Mr. Mozilo is the son of an immigrant who founded the company 40 years ago. These are American stories and it is because the market works. It has imperfections. vüe try and moderate and mitigate them, but we look to the market for our primary source of input in terms of what is competitive. Chairman VüAXMAN. Thank you, 3044 3042 3043 Mr. Yarmuth. Your time has expired. 3044 3 045 3046 3047 3048 3049 3 0s0 3 051_ Mr. McHenry. Mr. MCHENRY. Thank you, Mr. Chairman. I serve on the Financial Services Committee, so I fol1ow these issues pretty substantially. I have read numerous stories about many of you that are here before us today. And there is a question that this today is about CEOs' profits and their performance in the marketplace. So I would like to ask about another market driven connection between profit and performance. Several articles have been written about a hedge fund manager named 'John Paulson who bet against borrowers in housing market. He actually made a bet that the housing 3052 3 3 3 3 3 3 3 053 054 055 056 057 market would go down. In return for that financial bet he has netted out $3 to $4 billion in 1- year, which is regarded, and many sources would refer to that, âs the largest 0s8 0s9 individual gain in Vüal1 Street history in any 1- year. Now here is a hedge fund manager who bets against the HGO067.000 PAGE L36 3060 3 061_ 3062 3 063 3064 3 interests of the American economy, who bets against growth, in fact bets against all you gentlemen here before us today and the companies you represent, much less individual homeowners. What is also interesting is a connection between Mr. Paulson and a group caIled Center for Responsible Lending. 06s Mr. Paulson gave them a $l-5 million gift in order to 3067 encourage them to advocate for more restrictive lending practices when it comes to the mortgage industry; in 3 068 3069 particular, forcing public policy that would force, a11ow bankruptcy judges to cram down the value of mortgages. So 3 070 307r therefore companies like your former companies would lose 3072 more money under this proposition, therefore he would receive more benefits, Mr. Paulson would receive more financial gain 3 073 3066 307 4 3 075 3076 3077 3 078 3079 3080 3081_ 3082 3083 3084 in this matter. Now I am curious to know your thoughts on this matter, especially you, Mr. Mozilo, with your long history in the mortgage industry, your leadership on these ínnovations, and especially this idea that you have someone who funds advocacy in order to undermine the American economy and home ownership. Would you comment on that? Mr. MOZILO. We1l, Congressman, in my verbal comments, I talked about my deep concern as to what is happening with respect to the underwriting of loans today. I have spent my life trying to lower the barriers of entry for Americans to HGO067.000 3 PAGE 137 I think that is what drives families and 3 086 drives neighborhoods and drives communities and drives this 3 087 country, and to the extent that these restrictions now relative to underwriting has materially impacted the ability 3 088 3089 of low and moderate income and minorities to own a home, this kind of action you are talking about--I didn't know anything 3 090 about Paulson. I know another Paulson, but it is not the 3 09r_ 3092 same person--that it is discouraging to me. You know, the capitalistic system when not abused is a wonderful system, 3 093 ArId I was unaware of this 3094 but when abused it is terrible. 309s hedge fund and what it did and the contribution to the nonprofit, the alleged nonprofit to impact underwriting. 3 096 The problem we face is, and again in my remarks I stated 3097 3098 ít is the deterioration of value of homes. As values were going up, we had no problem. V'Ie had no delinquencies and no 3 099 foreclosures because people had options, because people run 31_00 into three things in their lives generally, loss of job, loss 31_01_ 3t02 of marriager loss of health. V'Ihen that happens, and they own 3 L03 a home, and it impacts their income, they generally have a way out, se11 the house, refinance, do something. That 3LO4 31_05 equity that they have in the homes is virtually wiped out, 3 106 and that is what is exacerbating this whole foreclosure 085 own homes because 31_07 problem. 3l_08 310 9 I think it is despicable for people to play on the troubles of others. In fact in Countrywide's case one of the HGO067.000 3 l_1_0 3 L11- PAGE 138 who most disturbing things is that we have not individuals 31,12 3 l_1-3 3t1_4 311_5 3 are calling to try to take advantage of these low priced homes now, but speculators accumulating dol-lars. It is horrible. Mr. MCHENRY. My time is wrapping up here. Can you just ansv/er yes or no. Do you profit by people losing their homes? 116 Mr. MOZILO. By the billions of doll-ars that we have written of.f., the answer is clearly no. 311_8 Mr. MCHENRY. Mr. O'Neal, did your firm profit by people 31r_9 3L20 losing their homes? Mr. O'NEAL. C1ear1y, no. 3t2t Mr. MCHENRY. Mr. Prince, did your fírm? 3]-22 Mr. PRINCE. Absolutely not. 3L23 Mr. MCHENRY. Let me ask the Compensation Committee 3]-24 Chairs here a question, simple yes or no ans\^Ier. Mr. 31-25 3126 Parsons, MÍ. Finnegan, Mr. Snyder, do you seek to pay your CEOs--let me ask this r^ray. Do you try to get the best 3'J,27 3]-28 performance with the least amount of cost to your 3]-29 shareholders when you hire executives? Meaning, do you seek 313 0 to pay them a lot more for bad performance or do you seek to 313l_ get the best performance with the least amount of costs? Mr. PARSONS. The latter, sir. 3l-32 Mr. MCHENRY. Mr. Finnegan. 3L33 Mr. FINNEGAN. Yes, sir. We clearly seek to pay for 3r34 3Il7 HGO067.000 3l-35 31-36 PAGE 1-39 performance and to pay no more than the market would demand. Mr. MCHENRY. Mr. Snyder. Mr. SNYDER. Clearly the latter. 3L37 Mr. MCHENRY. So clearly the idea is you get the largest 3r-38 313 9 value per shareholder as possible, therefore the initial premise of this 314 0 understanding of this hearing, the initial 3A4t hearing is faIse, that you actually are trying to do the best 3r42 interests for your shareholders. Thank you for testifying. 3]-43 3'J,44 Chairman vüAxMAN. Gentleman's tíme has expired. 3]-45 3]-46 3]-4'7 3l_48 Mr. We1ch. Mr. WELCH. Thank you, Mr. Chairman. I want to thank the members of the witness panel and congratulate each of you for the successes you have had in your career. I have a few questions. 3L49 3l_50 3l_51_ 3152 31_53 31_54 3 t_55 3 t_56 3]-5'7 3l_58 3 L59 Mr. Prince, when you were chief executive, htas one of your principal responsibilíties having a risk management model to protect the assets of your company? Mr. PRINCE. Yes. Mr. WELCH. And did you have a risk management model that forecast what would be the upside and downside for the bank plunging into the subprime market? Mr. PRINCE. T¡'Iith all due respect, Congressman, we didn't plunge into the subprime market. But clearly our risk model did not forecast what happened. HGO067.000 316 0 PAGE 1-40 Mr. VüELCH. Now my understanding is Goldman Sachs in 31,6I 31-62 31-63 3L64 31_65 3]-66 3L67 3L68 3:J.69 31,7 0 31_7r 31,72 fact dodged the bullet and perhaps as a peer to folks at Goldman Sachs you could perhaps, with, the benefit of refl-ection, te1l us what decisions they made that in retrospect might have been good for the CEO at Citi to have made to protect asset value? Mr. PRINCE. V'Iel], Congressman, that is a good question. Alone among the major participants on Wal1 Street, Goldman Sachs, âs you say, seems to have dodged the bullet. So it is not simply the one-on-one comparison. Mr. WELCH. Does that suggest that at least for some what happened was foreseeable and it was possible to take action to avoid it, the consequences HGO067.000 PAGE 't 4t 3]-73 3]-74 3]-75 3]-76 3177 3 RPTS MCKENZIE DCMN HOFSTAD 178 3479 3 180 3 t_81 31-82 3 183 Mr. PRINCE. I really don't know, Congressman. You'd have to ask the people at Goldman. They're not here today. Mr. WELCH. Mr. Parsons, you had different executives at high levels making different decisions based on a risk assessment. And my question is, first of all, is it, as chair of the compensation committee, your view that one of the principal responsibilities of the chief executive of a company--and, of course, yoü were a chief executive of one of our major American companies--to manage risk of shareholders' assets ? 31_84 3 the maintenance of a 3 186 risk-management function, and particularly in a financial 31_87 services institution, yês, that's an important responsibility. 31_88 Mr. V'IELCH. And with respect to some of these--risk 31_89 3l_90 management would include that, if you are going to extend 3t9L credit, that you would have an assessment of the 3]-92 credit-worthiness of the borrohler, which is not a moral term, 3 193 it's an ability-to-repay term, correct? Mr. PARSONS. Yes. Now, this is a much more, as you 3]-94 know, Mr. Congressman, nuanced problem than the question 3 195 implies, because there are people who make the initial 31,96 3]-97 lending judgment and then those instruments get ro11ed into 185 Mr. PARSONS. To oversee HGO067.000 PAGE L42 319I 3L99 32 00 3204 3202 3203 3204 5ZV) 3206 3207 other instruments. But, as a general proposition, a financial services institution ought to maintain, and Citi did maintain, a very robust risk-management process. Mr. WELCH. I' m havinq a líttl-e trouble with how nuanced it is. First of all, there's plenty of blame to go around with the subprime crisis--a lot of failures in government, in the regulatory agencies, all around. So this is not just about the gentlemen who are at the tab1e. But there's an immense amount of suffering. But capitalism oftentimes gets in the worst trouble when it can't regulate itself, and restraint gets thrown out the window most often when a lot of money is to be made. But what's happened here with the compensation is that And some did get it right. Goldman Sachs did get it right. they're in the same business that each of you are in, and that is making money for the long term. Yet the folks who made decisions, in retrospect, wish they made different ones and received pretty generous compensation packages. And I think that's the disconnect that a 1ot of us are feeling. So I just want to go back to you, Mr. Parsons. You are a very respected person in the world of finance and in corporations, and you've served with great distinction on many boards. And f know you take all this seriously. 3208 3209 32r0 32at 321,2 321-3 321,4 32L5 32]-6 3217 32r8 32r9 3220 322L 3222 HGO067.000 PAGE L43 when 3223 3224 What happened to focusing on an assessment of risk Ioans that r/ìrere being extended were no money down, no 3225 3226 3227 3228 3229 3230 3231, 3232 3233 3234 323s 3236 3237 3238 3239 3240 324]3242 3243 3244 to Pay, no closing costs? It was essentially, to a consumer, this pot of gold where they might be able to buy a home that they never v/ere able to have. But, clearly, whether you originated the loan, as was the principal job at Countrywide, or you packaged and then sold those loans on the secondary market, what happened to the obligation to make a hard-headed risk assessment? Mr. PARSONS. WeII, the obligation, Mr. Congressman, that's a large and important question, and probably worthy of a hearing like this before another panel. What happened? Because, clearly, it was a systemwide faílure, right? If the only financial services player that anyone can identify who dodged this bull-et-Mr. WELCH. I'm going to interrupt. It is a systemwide--and I want to stipulate that we all, every institution, the government, the Fed can be held accountable for its share of the bIame. But each of us in our owt:ì. areas of responsibility, if you're the CEO of a company, if you're on the compensation committee, you've got to focus on your share. And it's not helpful to say that it's just requirement that you show ability 3245 3246 3247 systemwide. We're asking what you could do as a CEO, what one coul-d do as the chair of a compensation committee. Mr. PARSONS. As was pointed out, I think by the HGO067.000 PAGE ]-44 3248 3249 3250 325L 3252 3253 3254 3255 3256 3257 or, if not, by the ranking member, yoü're asking an accountability question. And as you know, each of the CEOs who were running companies that hit this iceberg, in his own wây, has taken accountability, had accountability imposed on Chairman him. And what we're doing now at Citi is we're going back and we're reworking the entire risk-management, risk-assessment process. Because while we had one and we thought it was robust, wê, âs an institution, missed this pitch. Mr. WELCH. All right. Thank you. Chairman WAXMAN. The gentleman's time has expired. 3258 3259 3260 326L 3262 3263 3264 3265 3266 3267 3268 3269 327 0 327]3272 Mr. Cannon? Mr. CAIÍNON. First of all, I would like to apologíze to the panel. I've been in the other room listening, to some degree, but this is a hearing that normally we don't have on a Friday. We appreciate your being down here. And rather than going home, I decided to stay, because I think these issues are very important. But I had other things I needed to attend to. So I would ask your forgiveness for not being here through the whole hearing. And 1et me also add that I am very proud to be sitting here with such a distinguished panel of people who run the country, who run the business of the country, at least some of the important businesses of the country. And I've followed your careers in business publications, and I want to HGO067.000 3273 327 4 PAGE 1,45 thank you for coming down here and taking your time. We had a hearing yesterday where Mr. Chertoff was asked 3275 3276 3217 327 8 327 9 3280 328L 3282 3283 3284 3285 3286 3287 3288 3289 3290 329L 3292 3293 3294 3295 3296 3297 to have his staff stand up, and a couple of our members of the committee pointed out that he only had white men workíng for him. And it was a big issue that actually didn't rea1ly relate to much. But I make that point to say that you guys on this panel are an amazing paneI, because what you represent is the selection of the best. We're not here--color, background or circumstances in which you were born is not what got you where you are. It's competency over a long period of time. And that is because, in the market, for capability, capable leadership, you all have emerged. And it seems to me that one of the problems vüith this hearing is that it has a tendency to attack people who succeeded rather than--and blame people when there's a market. What I hope young people in America, who may see or may not see this, take home is that the opportunity to be a leader is great and the compensation is rea11y great. And so there's an incentive to be assiduous and work and in developing the ski11s that you all have. Now, I would like to just--if any of you have--I have some questions I want to ask, but if any of you have something you'd like to say that you haven't had the opportunity to say yet, I'd like to give you that opportunity. HGO067.000 PAGE 446 3298 3299 3300 3301 Thank you. Let me ask Mr. Finnegan a couple of 3302 33 03 questions, then. Mr. Finnegan, you've said that most of what Mr. O'Neal left with was represented by stock awards earned in prior years which vested over a period of time. What was the committee's objective in making such a substantial portion of 3304 33 05 33 06 33 07 33 08 3309 331_0 33 L1- 33]-2 331_3 331,4 331_5 33 L6 331"7 33LB 33l_9 the awards in stock? And did it, in fact, work? Mr. FINNEGAN. I think the committee's objective in making a substantial portion of our annual incentive award was two-fold. One was, because the stock vested over a number of years, it was a retention device. And secondly, it was to establish a congruence of interest with the shareholders, so that while the award related to the current period, the actual ultimate dollar amount payable to the executive \^/as a function of future stock perf ormance. I think it worked very we11. I mean, in Mr. O'Neal's case, for a number of years, he benefited from the fact the stock went up after receiving the award. But in 2007, when Merrill Lynch stock declined precipitously, he suffered an economic penalty which probably today is about $l-25 million. Mr. CAI{NON. So that the $l-61- million he took out, none of that was a severance bonus? Mr. FINNEGAN. Out of the $l-61- million Mr. O'NeaI took away as part of his departure, all but $30 million of it--we had $1-30 million of it essentially related to prior stock 3320 3321 3322 HGO067.000 PAGE t47 3323 3324 3325 3326 3327 period awards based on previous awards, $5 million was deferred comp and retirement plan benefits to which he was 3328 3329 333 0 3331 3332 3333 entitled, and $25 miltion was a supplemental executive retirement plan payment. Mr. CANNON. So the vast bulk of that was the result of the increased value in stock that Mr. O'Neaf was a principal factor in creating. Mr. FINNEGAN. All of the $161- million related to prior period performance and all hrere amounts to which Mr. O'Neal was entitled as a retirement-eligibIe employee. Mr. CAI{NON. Let me get one more question in, while I still have some time. On page 17 3334 3335 3336 3337 3338 3339 3340 of the majority's supplemental memo, the majority states that, 'rThe biggest decision the board made upon Mr. O'Neal departure was his decision to a11ow him to retire rather than to terminate him for cause." That's quoting the majority's supplemental memo. Is that true? In fact, Iet me just drop a couple of questions- - 3341 3342 3343 3344 3345 3346 3347 Mr. FINNEGAN. That was the determinant decision, âs it relates to Mr. O'Neal's package as he 1eft. For Mr. O'Neal to have forfeited the bulk of his awards, which were the stock awards, w€ would have had to terminate him for cause. The provisions related to cause in Mr. O'Neal's agreement--and it is the same provisions as it relates to all HGO067.000 3348 PAGE I48 executives at Merrill Lynch, wíth respect to the stock 3349 awards--are very specifíc and basically cover misconduct, not 3350 3351 3352 33 53 3354 33 55 3356 3357 3 unsatisfactory future financial performartce. Mr. CANNON. Thank you. Chairman WA)ffAN. The gentleman's time has expired. Mr. CANNON. I yield back, Mr. Chairman. Chairman WA)CMAN. VìIe have several other members who want to ask questions in S-minute rounds. But let me ask if any of you need a break, a little recess? Don't be embarrassed. Okay. If not, then we're going to continue. Ms. Norton? Ms. NORTON. Thank yoü, Mr. Chairman. 358 3359 336 0 33 61 3362 3363 3364 3365 3366 3367 3368 3369 337 0 3371" First of all, I want to thank aIl of you for agreeing to testify today. At this hearing I have been perhaps as interested, maybe even more interested, in the role of the board and the compensation committees, because, after all, they're the agents of the shareholders of the pension plans of the institutional- investors, and they have a very specific fiduciary duty. Mr. Snyder, you are a member, You were a member of the compensation committee when Mr. Mozilo began his discussions, his contract discussions in 2006, were you not? Mr. SNYDER. I was a member of the compensation committee, ma'am. 3372 HGO067. 000 L49 3373 337 4 Ms. NORTON. It's you. in that rol-e that I want to question 3375 337 6 Countrywide hired a compensation consultant--that does 3377 33 78 3379 3380 33 B1 to me to be regular order--RoSS Zimmerman from Exequity to help advise them on the compensation package. Now, the committee has documents that show that Mr. Zimmerman recommended to reduce Mr. Mozilo's compensation to bring it in line with his peers--in other words, that Mr. Mozilo was seem overpaid. 3382 3383 3384 3385 3386 3387 3388 3389 3390 33 9r- 3392 3393 3394 33 95 3396 3397 At that point, a competing consultant was brought in. ,John England f rom Towers Perrin was hired by Countrywide. First, it's important to try to establish who ,John England worked for, believed he was working fot, and, for that matter, who Mr. Mozilo believed he was working for. Of course, in today's paper, Thomas Perrin is quoted as saying he was working for the company. But the documents do not seem to indicate that or that Mr. Mozilo thought that. Mr. Mozilo, 1et me quote from an e-maiI you \alrote, October 15, 2006, to Countrywide's general counsel. And I'm quoting here. "approximately 2 weeks à9o, the head of the compensation committee and I agreed that it would be best if I obtained a compensation consultant. Since that time, I brought in .Tohn England, consultant of Towers Perrin.'l Your e-mail, Mr. Mozilo, says that Mr. England was brought in to Serve as your consultant. fsn't that correct? HGO067.000 33 98 33 99 34 00 34 0l- PAGE 1-50 3402 3403 3404 34 05 3406 3407 34 08 I mean, isn't that what those words seem to mean? Mr. MOZILO. You know, I'd like to just give a litt1e background on that. The compensation committee asked me to bring in someone to assist. The memo clearly is confusing, you know, in retrospect. I had been familiar with Ivlr. England from another 1ife. I asked the company if he could be hired to assist me. I asked our general counsel. Ms. NORTON. Why was he assisting--Mr. Snyder, whY \¡¡asn't he assisting you? How can Mr. Mozilo be self -dealing about his or,'rn compensation? Mr. SNYDER. In fact, Congressv¡oman, the at-that-time 3409 chair of the compensation committee suggested to Mr. Mozilo 34L0 that he hire an attorney and a consultant, or secure the services of an attorney and a consultant, to advise him in 341"1 34r2 the contract discussions. Ms. NORTON. We11, who paid for him? 34]-3 Mr. SNYDER. L' m sorry? 341-4 Ms. NORTON. Did the company pay this additional 3415 34]-6 34L7 341_8 consultant? 34A9 3420 342L 3422 Mr. SNYDER. The company engaged Mr. England for the purposes of advising Mr. Mozilo, yês, ma'am. Ms. NORTON. So he was advising Mr. Mozilo; he wasn't advising the company. But the company was paying, after they already paid for a compensation consultant? Mr. SNYDER. Yes, ma'am. HGO067.000 PAGE l_51 3423 3424 Ms. NORTON. Now, I note that Mr. Mozilo's consultant proposed many, many changes--this is a consultant he brought 3425 3426 3427 3428 3429 3430 343L 3432 3433 3434 3435 3436 3437 in about his salary--many changes in the compensation package that had been recommended by the company's consuftant. For example, he wanted the salary compared to the salaries paid to CEOs in medium-sized companies like BB&T and SunTrust, according to the documents we have. He wanted the salary to be based on compensation paid to the head of Goldman Sachs and Bank of America. Mr. Mozilo to get a $1-5 million sign-on equity award. Now, that's really interesting. He's a founder of the compàfly, and he's getting a sign-on award of And he wanted $1-5 mi11ion. 3438 3439 3440 344L 3442 3443 3444 3445 3446 3447 In one e-mail, this second consultant said he was unhappy with the board proposal because--oh, I'm sorry--I bel-ieve this is Mr. Mozilo, said he was unhappy with the board proposal because it did not achieve a maximum opportunity for Mr. Mozilo. No\nr, 1ook, none of this makes sense to me. I want to know how it makes sense to you, since obviously you are responsible, have a fiduciary obligation to the shareholders, which means you are trying to keep costs down. Why does it make sense, after hiring Mr. England to advise, that you then hire--I'm sorry--are hiring one consultant to advise, that you then hire a consultant for the CEO whose compensation HGO067.000 PAGE r52 3448 3449 3450 3451, package is at issue, pay for it to advise, and then adopt the compensation package of Mr. Mozilo's agent? 3452 3453 3454 3455 3456 3457 3458 3459 3460 346L 3462 3463 3464 3465 3466 3467 Mr. SNYDER. Congresshroman, Mr. Zimmerman was--his services \¡¡ere acquired by the compensation committee. He served the compensation committee. Mr. England was hired by the company to advise Mr. Mozilo. Ms. NORTON. Yeah. And why was it more appropriate to adopt the package at considerably more expense to the company that was advised by Mr. Mozilo's agent? Mr. SNYDER. I respectfully disagree, Congress\^Ioman. We did not. In fact, Mr. Mozilo's annual compensation was reduced from ç2.9 million annually to $1.9 million. Ms. NoRToN. rt was increased above what vour o\^In consultant advised. Mr. SNYDER. Again, I would respectfully disagree, Madam Congresswoman, because we did have support of our consultant in our proxy for the compensation package that \^¡as-Ms. NORTON. Which consultant? Mr. SNYDER. Mr. time Exequity. Zimmerman of Hewitt Associates, at that 3468 3469 347 0 347L 3472 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'Nea1's compensation as CEO? Mr. FINNEGAN. Merrill Lynch hired Mr. England I think Chairman vüAXIvlAN. The HGO067.000 PAGE 1-53 3473 347 4 3475 3476 3477 in 2003 before I was on the compensation committee. Chairman WAXMAN. Mr. Issa? Mr. ISSA. Mr. Snyder, I just want to fol-low up on the gentlelady's question. Were you desirous of keeping your 4O-year tenured CEO for a period of time longer? Mr. SNYDER. Congressman, the short ansv¡er is yes, but I'd like to take a moment to explain. Mr. ISSA. T¡Iell, flo, Do. T.' m just trying to correct her, as I rea11y have another line. Mr. SNYDER. Yes. Mr. ISSA. So you were desirous of keeping him. He wanted more money. You hired someone that said less. You tried to work out the difference. You came to something amicable. And the president insisted, Mr. Mozilo insisted that it go to a shareholders' vote, if I understand these parts of the history. Is that right? Mr. SNYDER. Ty¡rica11y, the chairman's compensation has always been approved by the shareholders, y€s. Mr. ISSA. Okay. Again, you know, I'm looking for the villain here; I don't see it. And I want to see it if it exists. But you did have an arm's length relationship. You each $/ere represented by their experts. You came to a common number, and the stockholders agreed on it. Mr. SNYDER. Yes. Mr. ISSA. Okay. I apologize, but I want to move on to 3478 3479 348 0 348L 3482 34 83 3484 34 85 3486 3487 34 88 3489 3490 349J- 3492 3493 3494 3495 3496 3497 HGO067.000 PAGE 454 3498 3499 3500 3501_ 3502 3503 3504 3505 3506 3507 3508 3509 351_0 35 l_1_ 3512 3513 35L4 351_5 35L6 351"7 3518 351_9 3520 352L 3522 a couple other areas. Mr. Parsons and Mr. Prince, I'Ít going to come back to you for a second, and actually Mr. O'NeaI. No\,rI, I guess, Secretary Paulson but, in 2005, then Goldman Sachs CEO was Paulson, and he earned $1-6.4 million, according to Forbes, for being smart enough to stay out of subprime. And I apologize, I can't read the writing here, but Lloyd Blankfein is now the CEO, and he earned $600,000 and got a bonus of #2.7 million, because, in spite of this, it hasn't been a great year for Goldman compared to 2005. Would you say--and I rea11y go to Mr. Parsons and Mr. Finnegan--I mean, it sounds like Goldman has good years and people make a 1ot of money and, in later years, maybe they don't make as much. They link it to compensation, and even though they dodged the buIlet, you don't necessarily see the guy that dodged the bullet somehow getting a big windfall, nor the guy who comes after him getting the benefit. I mean, that happens in business. It's based on how the years are working and then how the subsequent years are working. So Goldman Sachs looks like it's following somewhat the same pattern as the other two companies. ltÏould you say that's roughly correct? Mr. PARSONS. As a general proposition, I would say the proposition you articulated is roughly correct. I don't-Chairman WAXMAN. Be sure the button is pushed in. HGO067.000 3523 PAGE 155 3524 3525 3526 3527 Mr. PARSONS. I don't know the accuracy of any of the numbers that you just stated, so I can't speak to that. Mr. ISSA. Okay, and I grabbed it from Forbes, so we'1l just assume for a moment that those numbers are as good as we can get. 3528 3529 3530 353 1 And, Mr. Chairman, I'd like to insert into the record any corrections if we find better numbers. 3532 3533 3534 3535 3536 3537 3538 353 9 3540 3541 3542 3543 3544 3545 3546 3547 I want to kind of do a recap, because this ís going to be my last round here, and we'11 be wrapping up soon. From what I can see here today, none of you foresaw this debacle the way apparently Goldman Sachs did. Therefore, you did not make adjustments by getting out of this market. Two, all of the individuals here, compensation was linked to performance, I think pretty well-established. If anyone disagrees, I'd like to know it. Three, because of the very nature of pay for performance and delay the payout to make sure, if you wi11, that it's not a quick blip and you run with your money, all of you received money in years that were not as good for years that were better because it was delayed. Is that correct? So, in every case, what we're seeing is large amounts of dollars linked to a bad date, but, in fact, if we símply aligned the dollars back to the dates of the performance in which it was earned, what we see is a curve that matches properly. Isn't that correct? HGO067.000 3548 PAGE 156 3549 3550 3551- 3552 3553 3554 3555 3556 Mr. O'NEAL. That's correct. Mr. FINNEGAN. That's correct. Mr. ISSA. Mr. Chairman, I would like to ask unanimous consent that the economic letter from November 2OO7 from the Dal1as Federal Reserve be included in the record, because it's very pertinent to this cycle of the Subchapter S. Chairman WAXMAN. Vüithout objection, that will be the order. [The information follows: ] 355 7 ******** CoMMITTEE INSERT ******** HGO067. 000 PAGE 1-57 Mr. ISSA. And, fina11y, I would like to close--none of 3559 you \,\rere in Cleveland with me less than a year ago when Mr. 3560 Kucinich, the Chairman of my subcommittee, worked on this very issue of the availability of home loans to underserved 3 561_ 3562 communities and the growing default rate in Cl-eveland. Vüe 3563 drove through and we saw the boarded-up homes, and we saw the 3564 fact that this thing was becoming a meltdown in Cleveland. But I want to note for the record, Mr. Chairman, that, 3565 3566 at that hearing, one of the most important things that came 3567 up again and again and again was that the people of Cleveland of money to 356 I were asking at that time for greater availability 3569 finance homes. So just as $70,000 homes hlere being walked 3570 avìJay from because they couldn't make the payments, wê \,\Iere 3571_ being asked to find ways to finance home affordability. Mr. Chairman, I would urge us both to work on a 3572 3573 bipartisan basis to find sol-utions going forward for home since, c1ear1y, the model of 3574 availability and affordability, 3575 simply throwing money at it even if they are risky and, in fact, ultimately not stable if the home values go down hasn't 357 6 3577 worked, that we work together as Government to try to find a 3558 3578 3579 3580 3581_ 3582 solution that's sustainable. And, with that, T thank the gentleman and yield back. Chairman I¡IÐOvIAN. The gentleman's time has expired. Mr. Cummings? Mr. CUMMINGS. Thank you very much, Mr. Chairman. HGO067.000 3 PAGE 1_58 583 3584 3585 35 86 3587 3588 3 3 589 590 3591_ 3592 3593 3594 3595 3596 3597 3598 35 99 3600 36 01 3602 3603 3604 3605 3606 3607 First of all, I want to thank all of you for being here. This is a mess. This is a mess. I have listened here very carefully. I've heard things about curves, business practices, yoü make profit at one point and then you don't make profit. The bottom line is that there are people that are being Read the put out of their houses--people in my district. front page of the Baltimore Sun today; there's a front-page story about them. And I hope that the SEC looks at all of this very carefully, because, I got to tell You, something doesn't smell right. Mr. Mozilo, I wanted to ask you about some of Countrywide's customers who have come to us with their stories. Let's put a human face on all this. lVhen Shirley Mutterman and her husband were buying their first home in Fauquier County, Virginia, Countrywide gave them a good-faith estimate for a fixed interest rate of 6.25 percent over 30 years. They $/ere told they would have to put no money down, would have no closing costs and could move in the beginning of the following month. But the closing date was pushed back 2 weeks until just a day or two before they planned to move. And when they arrived at closing, Countrywide presented them with two loans, a 7.25 percent adjustable rate mortgage and an LL.25 percent 1-5-year fixed rate second mortgage. At closing, their only options were to HGO067.000 PAGE 159 walk ahray from the house they found and pay a penalty or sign 3609 the loans that Countrywide presented. They chose to sign, and they are nor^I on the verge of losing their home. 36 10 3608 3611_ And I know that what happens at the chief executive 3612 3613 3614 3 615 361,6 361-'7 361_8 leve1, w€ have a tendency to say--some chief executives sâY, well, that happened down below. Other ones sâY, it happened under my watch, and so therefore I take responsibility. But I want to hold that and I want to go to something e1se, because Mr. Issa makes this sound like it's just some lightweight isolated thíng, some business practices just didn't go right, and so therefore some people should not hold responsibility here. Some members of this committee have said that you're being used as a scapegoat, and that's the last thing I want, Mr. Mozilo. And I don't rea11y understand why they're saying that. You run the largest originator of home mortgages in the country. If you don't bear personal responsibility, I some 36]-9 3620 3621, 3622 3623 3624 3625 3626 3627 3628 3629 363 0 3631_ 3632 In 2003, less than 5 percent of Countrywide's loans \ÀIere paid to subpríme borrowers, those at greater risk of default. But by 2006, this number doubled. Countrywide made more than $1-20 billion worth of these loans from 2003 to 2006. Over the same period, you also moved aggressively from fixed rate loans to adjustable or variable rate loans. The don't know who does. And listen to this. HGO067.000 3633 PAGE ]-60 percentage of adjustable loans in Countrywide portfolio 3634 363s 3636 3637 3638 363 9 by 2005. That's a massive increase. Moreover, your company began offering a new product called pay option ARM. These loans a1low homeowners to choose how much they would repay. V{hen they couldn't cover the interest rates, the principal the homeowner owed increased, in effect digging them deeper into a hole, like jumped over 50 percent 3640 364l. 3642 quicksand. 3643 3644 3645 3646 3647 3648 3649 36s0 3 651_ 3652 3653 3654 3 3 655 656 also heard from many families about the problems posed by Countrywide's aggressive use of no-doc or liar loans with low teaser rates. And what is happening is that people are desperate. They are reaching for their dreams, and their dreams are turning into nightmares. And so we see these compensation rates--I'm sitting here and I'm trying to--I'm just trying to--I'm sitting here and I'm saying to myself, wait a minute. On the one hand, we've got the golden parachutes drifting off onto the golf fieId, and on the other hand, I've got people that I have to see every day who are losing their homes, trying to figure out how they are going to--where their children are going to come to do their homework the next night. But Yet, sti11, \rrle've got this thing going around, ring around the rosy, as if We 3657 there should not be a connection between compensation what happens when we have this kind of conduct. and HGO067.000 3658 1-6 1_ I don't know all the answers, and I've got a 3659 feeling that we're not going to get aII the answers in a But I'm hoping that, when all the dust 3660 hearing like this. 366L settles, that we are able to protect the American people, 3662 that that person who is reaching out there just trying to 3663 have a litt1e piece of the American dream--and while I worry 3664 about the executives and I know that, You know, the $250 3665 million that you might make and whatever is important, I guy gets 3666 rÀrorry about this whole culture where the little 3667 squeezed and, the next thing, he has nothing but a debt--not 3668 a house, a debt--and then the parachute just drifts on up the 3669 golf course. So I'm hoping that the SEC will- look into this, I hope 367 0 367L that all the agencies will look into it very carefully, so 3672 that we can make sure that there is true balance, so that 3673 that person in my district is able to fu1fill his or her dream and for future generations. 367 4 Chairman 9'IA)WAN. Thank you, Mr. Cummings. 3675 Mr. Towns? 367 6 Mr. TOWNS. Thank you very much, Mr. Chairman. 3677 Let me begin by thanking all of you for being here. 367 I You know, I want to start out with some very basic kinds 3679 3680 of stuff, because I must admit that I'm having some problems 3681_ here, because I get the feeling that it's "you scratch my 3682 back, I'11 scratch your back.'r I mean, I'm getting that No\al, HGO067.000 3683 PAGE 162 feeling here, and that, to me, is not good. Let me begin by just asking yoü, Mr. Parsons, you are 3684 3685 the CEO of Time hlarner. And, of course, in Citigroup, you 3686 actually chaired the compensation board. And those are two it's the financial 3687 very different companies. With citi, 3688 service business, and with Time l¡larner, you are in the media 3689 business. Some people might look at that and say, rrHe doesn't know anything about finance. He's just in there 36 90 3691- because all the CEOs are taking care of each other. They're 3692 scratching each other's backs. " V{hat do you say to somebody like that? Because, after 3693 3694 all, r mean, your company is all together different from the 3695 company that you hrere serving on the compensation board for. Mr. PARSONS. Wel-1, I can think of many dif ferent 3696 3697 ansurers, but I'11 try to confine myself to the one that's 3698 perhaps most relevant. First of all, although I currentty--weI1, actual1y, 3699 3700 currently T' m the chairman of Time Warner. I was the CEO 37 0r until the end of last year. Mr. TOWNS. If you could pulI that closer to you. I 37 02 37 03 can't quite hear you. Mr. PARSONS. I say, while currently the chairman of 37 04 3705 Time hlarner, I was the CEO for many years, until the end of last year. Prior to joining Time Warner, I \Àras the chairman 37 06 and CEO of Dime Bank Corp, which was the fourth-largest 37 07 HGO067.000 3708 37 09 L63 371-0 371,t 37L2 37]-3 3714 37l.5 371,6 371"7 371,8 37]-9 3720 3721 3722 3723 3724 3725 3726 3727 3728 3729 3730 financial services thrift in the United States. And so I had extensive financial services background. So I know something about the business. But secondly and perhaps more importantly, the issues that compensation committees deal with are issues of talent attraction and talent retention. There's a huge war going on in American business--and, in fact, now it's globa1 business--to seek, find, attract and retain the best talent you can for whatever corporation it is that you happen to be serving, whether on the board or as an executive. And those issues, the issues of sort of enlightened human resource management, of which compensation is one t are more similar across the business spectrum than one might think. So, in point of fact, I do have a fairly substantial financial services background, but I also have been managing large corporate enterprises that are out competing in the world for talent for many years. And so I hope that those, together with some modicum of common sense, qualify me to serve as an independent director of Citigroup. Mr. TOVüNS. Thank you. Mr. Finnegan, I want to raise the same question with you. Thank you very much, Mr. Parsons. 373L 3732 Mr. FINNEGAN. Sir, I ran Chubb Corporation, which is an insurance company and financial services business, and prior HGO067.000 3'733 PAGE L64 3734 3735 3136 3737 3738 to that I was CFO and CEO of GMAC, which is a major diversified financial services company. Mr. TOWNS. Mr. Snyder? Mr. SNYDER. Yes, Congressman. I want to clarify a point that I made to Congresswoman Norton, just for the record, that I don't want to give any misimpression. The 3739 bonus formula was approved by the shareholders, not the 3740 contract. So I want to clarify that point. But in specific answer to your question, Congressman, I 37 4t prior to my service with Countrywide, I served on two 37 42 different bank boards, I \ÀIas chair of a mutual fund board. I 37 43 3744 have been involved with the financial services community for 3745 all of my career, which spans more than 50 years. Mr. TOWNS. Let me just very quickly--my time is running 3746 3747 here. 3748 3749 3750 37 51" 3752 3753 3754 3755 3756 3757 Mr. Mozilo, your compensation agreement in 2006 entitled you to a $10 million award. Now, I understand--now, the rationale behind that, of course, you received a $1-0 million stock award, and that was because you indicated that you did not want to retire and you would have gotten $3 million a year if you retired. Is there anybody else in the company getting that, or have that kind of arrangement? Mr. MOZILO. V'IeIl, yeah, there's a substantial number of executives that have pension p1ans. So I'm not the only one HGO067.000 3758 PAGE 165 that gets it. There's a substantial number of employees that 3759 get it. But I wanted to retire. That was my desire, to retire. 37 60 And, unfortunately, I made the decision to stay on, and that 37 6L \^ras the basis by which that agreement was made. 37 62 Mr. TOWNS. How can you explain that to the 37 63 37 64 shareholders, why you took a $10 million stock award and now you are getting $3 million retirement? I mean, how do you 37 65 37 66 explain that? Mr. MOZILO. Well the stock award was over a 3-year 37 67 period from 2006, I believe, to 2009. And it was 37 68 performance-based, so I had to perform for the shareholders 37 69 in order to receive the value of that. It was not a gift of 377 0 It had performance-based aspects to it. I had 3774 $1-0 miIlion. 3772 to stay; T had to provide a return on equity to the 3773 shareholders. I had a large number of requirements in order 377 4 for it to be realized. Actua1ly, very litt1e of it will be 3775 realízed, as a result of what has happened. Chairman WAXMAN. The gentleman's time has expired. 377 6 3777 Thank yoü, Mr. Towns. Mr. TOWNS. Thank you, Mr. Chairman. 377 I Chairman VüAXMAN. Mr. Kanjorski? 3779 Mr. KAN'JORSKI. Thank you very much, Mr. Chairman. 3780 Let me make a comment. I actually don't know why you're 37 8L 37 82 all here today, other than the fact that you had the lack of HGO067.000 37 83 L66 good fortune to serve in organizations and in positions that 3784 3785 3786 3787 3788 3789 3790 37 91, 3792 3793 3794 3795 3796 37 97 haven't done very successfully in the last l-8 months. That's hardly why we should hold you up and beat you too badIy. So I don't want my remarks to appear to beat you. However, in listening, I think there are some public policy things this committee and this Congress can learn from you and consider in the future. Let me ask you an overall question. Do any of you feel that you were undercompensated over this 2-, 3-year period? So there's nobody here who says we were underpaid? Okay. I was wondering whether or not you are familiar enough with your tax consequences to te1l us whether or not most of the compensation you've received, âs I've discerned ít from the testimony, is at the minimum capital gains, 15 percent, and not consistent with--or have all of you paid absolute-Mr. FINNEGAN. Ordinary income. Mr. MOZILO. Ordinary income, top tax bracket. Mr. KANJORSKI. On everything? Mr. MOZILO. Yes. Stock options are ordinary income. Mr. I(AN,JORSKI. Okay. How about anybody else? Did anyone else get the advantage of just capital gains? Mr. O'NEAL. No. Mr. I(AN'JORSKI. Now, trtle are holding you up to an awful lot of criticism. Quite frankly, when I look at what you have made, some people may compare you to other people, like 3798 3799 3800 3801_ 3802 3803 3804 3805 3806 3807 HGO067.000 3808 3809 3 PAGE 1-67 810 3 8l_1_ 3812 3 813 3814 381_5 381_6 3 3 3 817 818 819 3820 382L 3822 3823 3824 3825 3826 3827 Mr. Paulson with that hedge fund making $3 billion or ç4 billion and Mr. Sorenson making $1.4 billion. The question I have really is, one, do you think as a matter of public policy we ought to see that these people who make these unusual incomes should pay at least the amount of taxes that the average employees pays? So that we ought to do away with 1-5 percent capital gains, shove them up to what is reasonable income earned rates. And two, what is enough? I mean, I'm waiting for some executive to come along with the first trillion-dollar income. V'Iould that shock any of you? It must shock one of you. You think our system should al1ow absolute unlimited--and if the Congress and the American people are stupid enough to not tax these people or these things, someone should walk avray with a trillion-doIIar income? 3828 3829 3830 3 831_ Mr. MOZILO. I think, âs a matter of tax policy, that's really the role of Congress and the Government to determine that. And I really have no comment on that. It is a very difficult issue because \^Ie are a capitalistic system, we want people to take risk, we want jobs to be created, we want capital to be created, we want people to have opportunities-- 3832 Mr. I(ANJORSKI. WelI, w€ just heard you criticizing one of our fellow members, someone selling short in the market HGO067.000 3833 168 3834 3835 3 836 3837 3838 3839 3840 3 841 3842 3843 3844 3845 3846 3847 3848 3849 3850 3851_ 3852 38s3 3 3 3 3 854 855 856 857 or $4 bi11ion, as if that were a sinful act in a capitalist system. I never learned that in school. Mr. MOZILO. No, I dídn't criticize the amount of money he made. I criticized what he was doing. Mr. I(AN,JORSKI. You mean selling short is immoral? Mr. MOZILO. No. In terms of the contribution to an entity that was going to restrict lending in order to increase the amount of foreclosures. Mr. KAN'JORSKI. I know, Mr. Mozilo. Then we have to do a subjective judgment. Let me give you an example. I have just finished with Monoline Insurance Company, and we found that the securitization pools of some of the monoline companies found in trouble is that there was a failure of the first payment on 18 percent of the mortgages in 2006. No\ar, with the brilliance that we have at this table and the other hundreds of executives around this country, I can't belíeve that somebody didn't sdY, woI¡I, \¡üe may have a problem if 1-8 percent of the people we're giving mortgages to don't make the first installment palrment. Didn't that ever come to your attention? Mr. Prince, your bank was in trouble. Didn't you get any reports that there \,\Iere such horrific failures in the and making $3 billion system? Mr. PRINCE. I think, Congressman, that, in all honesty, HGO067. 000 PAGE ]-69 3 3 858 859 by the time some of those reports surfaced, in the spring of 2007, most of the damage had already been done. That is the- - 3860 3 861_ 3862 3863 3864 3 865 3866 3867 3868 3869 3870 3871" 3872 3873 387 4 3 875 387 6 3877 3 878 3879 3880 388l_ Mr. KAN,JORSKI . I¡'Ihen do you think the damage occurred? Mr. PRINCE. !VeI1, I think, honestly, that the lending patterns began to deteriorate pretty significantly in 2006. And so, by the time-Mr. KAN'JORSKI. I just wanted to frame that, because on the floor the other day--I want to make it quite clear for my friends on the other side, this isn't being blamed on the Clinton administration, is it? Does anybody think we could push this back to pre-2000 so r,rle could have another crucifixion? So it did happen during this administration. Why didn't our Federal Reserve, why didn't our SEC, as Mr. Cummings asked the question, why didn't our Treasury Department see the same statistics that I got on 18 percent failures of mortgages and securitized pools? V'Ihy didn't they see this? Do you have an ans\^Ier, Mr. Mozilo? You ran the company with the largest number of these. Did you participate in putting pools together? Mr. MOZILO. Yes, w€ did, certainly $te did. As Mr. Prince points out, these things happen over time, so you are not finding out instantaneously-Mr. I(AN,IORSKI. No, flo, this is for the year 2006. 3882 HGO067. 000 PAGE t70 3883 3884 3885 3886 3887 3888 3889 3890 3 891 3892 3 893 3894 3895 Mr. MOZILO. Yes, right. And we immediately--first of all, we investigated each of these l-oans, âs to what the cause of it was. And it was a variety of causes. One was-Mr. KANJORSKI. Most1y people didn't have the income, they didn't have the net worth, and they should have never been in those loans. Isn't that the cause? Mr. MOZILO. That's not generally the cause. Because people who were sincere about living in a house and want to preserve their house will make the payment or will contact us to see if we can help them work it out. Generally these are speculators, didn't work out for them, values went down, they abandoned. And a 1ot of it was fraud. 3896 3897 3898 3899 3900 3 long did it take you to come up with the understanding that there was this type of an l-8 percent failure rate before you sent the word down the line, rrCheck all of these loans or future loans for these characteristics Mr. I(AN,JORSKI. How so we don't have this horrendous failure"? 901 3902 3903 Mr. MozILO. Yes, immediately--withín the first--if don't get payment the first month, we're contacting the borrower. And that's part of what we do. And we are we 3904 3 3 905 906 3907 adjusting our-Mr. KAN'JORSKI . I understand you do to the mortgage holder. But don't you put all those together ín statistics and say, "These packages we are selling now are failing at HGO067.000 3908 3909 3 PAGE I7I 910 3 911_ 39]-2 3 913 39]-4 3 915 3916 39]-7 3 91_8 rate that they'11 never last and there will be total decimation of our business and of these mortgages"? Chairman WAXMAN. The gentleman's time has expired, but please ansv/er the question. Mr. MOZILO. As has been pointed out, these mortgages are put in very complex securities and have a 1ot of charges to them. So it's very different to see a loan or series of loans, are they in that particular security or another security? The only one who would know that would be the such a horrific security holder. Chairman WAXMAN. All members have had a chance to ask a 39t9 first round of questions, and some members have indicated 3920 they want to ask a second round of questions. Should we 3924 continue on, or should we have a break? Continue on. Okay. 3922 Ms. Norton, I want to recogni-ze you for 5 minutes. 3923 Ms. NORTON. Thank yoü, Mr. Chairman. 3924 Mr. Parsons, I'ITr continuing the line of questions that 3925 3926 most interest me, and that is the role of the board and the 3927 compensation committee, because this is all the shareholders 3928 3929 3930 3 have to represent them. 931 3932 I regard Mr. Prince as an honorable person, because he recognized his own role in contributing to the crisis of his company, and he did the honorable thing in offering his resignation. But of all the CEOs sitting here today, Mr. HGO067.000 3933 PAGE L72 3934 3935 Prince is the only one who received a bonus in a year when all of these companies were experiencing multibillion-dollar losses. No\,rr, 3936 3937 3938 understand my question. This was not a golden 3939 3940 394L 3942 3943 3944 3945 3946 3947 3948 3949 3 parachute. This was not prearranged compensation. This was not contractual. The board had to meet and affirmatively act after the resignation to give Mr. Prince a bonus, which, by the way, a cash bonus at a time when the company \47as experiencing these losses of $10.4 million loans. Now, could I just ask you, Mr. Parsons, in your own opinion, do you believe that a $10 million bonus that was not required of the company, not contractual, came after a resignation, one would say for cause, do you believe that that bonus served the fiduciary interests of the shareholders of Citicorp? Mr. PARSONS. Yes, I do, Madam Congresswoman. Ms. NORTON. Please explain. 9s0 Mr. PARSONS. As simply as I can put it, you're correct, 3 951_ 3952 3 953 that was a discretionary action taken by the compensation committee, recommended to the board and approved by the board. Why? At the time that Mr. Prince, who is an honorable man-Ms. NORTON. At the time, I'Íì sorry? 3954 3 955 3956 3957 Mr. Prince, who is--I was agreeing with your assessment that-Mr. PARSONS. HGO067.000 3958 PAGE L73 3959 3960 3961 3962 3 Mr. Parsons, your voice is too soft. Pull the microphone right up to your 1ips. Mr. PARSONS. At the time that Mr. Prince tendered his resignation, he had, in effect, put in a period of time over 2007, I'11 call it 10 months, that we had to make a judgment Chairman VüAxtvlAN. 963 3964 3965 3966 3967 3 968 as to how to compensate him for. As you know, compensation and entities-Ms. NORTON. But he was going to receive his compensation for work done. This is a bonus, isn't it? Mr. PARSONS. That's part of compensation. compensation in entities tike Citi and the other entities up here consists 3969 397 0 3971- 3972 3973 3974 3975 397 6 3977 essentially of two parts: one' a base salary and, number two, a bonus calculation. And as you've heard others testify, the great bulk of compensation for any year is usually conveyed or given in the form of a bonus. So we will-Ms. NORTON. What's the compensation then? If the bulk of it was in the form of a bonus, what was the compensation? Mr. PARSONS. Bonus is a component of compensation. Ms. NoRToN. I¡'Iell, flo, you're saying--can you just aggregate that for me? Because you're making a statement as if that \Áras necessary in order to compensate him for the year 3978 3979 3980 3981_ 3982 2007. I want you to explain how this was compensation. Mr. PARSONS. All right. Compensation, broadly defined, is that amount which the bank conveys to its employees for HGO067.000 3983 PAGE t74 3984 3 3 985 986 3987 3988 3989 3 their work during a period of time. In Citigroup, for senior executives, that compensation essentially comes in two different tranches or components: one is base salary-Ms. NORTON. And what was his salarY? Mr. PARSONS. A million dollars a year. Ms. NORTON. So he got 1-0 times his salary in a bonus, cash bonus, that the board had to step up and give him after he--I realize his salary-Mr. PARSONS. That's correct. Ms. NORTON. --his salary, it seems to me, was--somebody had been thoughtful about his salary. But now the bonus, after a failure of the company was such that he himself though he should resign, earned him 1-0 times that amount in bonus. 990 3991, 3992 3993 3994 3995 3996 3997 3 998 3999 4 000 4 001_ 4002 4003 4004 4005 4006 4007 Mr. PARSONS. So how did that happen? Here are the matters that the committee considered ín making a judgment. In No\ar, you characterize the company as having failed. point of fact, Citigroup made almost $4 billion in 2007. They did have major write-offs, but the company \'\tas profitable. Indeed, many parts of the company had experienced record levels of performance. only one part of the company rea11y imploded, and that was the part that was focused on these subprime loans. Other matters that we took into consideration--you heard Mr. Prince testify when he opened this hearing that the two HGO067.000 PAGE ]-75 4008 4009 4 01-0 quarters preceding the quarter that 1ed to his resignation r^rere two of the most profitable in 2OO-year history of Citi. V'Ie had improved relations with all of our regulators around 40tL 401,2 4 013 40L4 4 015 the world. So, in other words, a lot of good things had happened over the course of the year. But some bad things happened also, and those things caused Mr. Prince to resign. Ms. NORTON. I understand you, Mr. Parsons. You have more? I don't-Mr. PARSONS. No. I just wanted to complete the story. 40r7 Ms. NORTON. I can understand. The size of the bonus is 4 018 40]-9 interesting to me. But let me ask you about the board that Because if the board decides we're going 4020 had to decide this. 402]- to give him 1-0 times what his salary was this year, even 40]-6 4022 4023 4024 4025 4026 4027 though he resigned essentially for cause, how long did the board meet? What kind of discussion occurred, in order to get to a tenfold increase in that last year? Chairman WAXMAN. The gentlelady's time has expired, but please answer the question. 4028 4029 4030 4031 4032 Mr. PARSONS. I will do my best to be brief. Essentially, the determination was made by the compensation committee based on the factors I told you. And while it may have been l-0 times his salary, it was less than half of the bonus he'd gotten the previous year, because we related his bonus to what happened to shareholders. HGO067.000 4 PAGE 1,7 6 033 4034 4035 4036 4037 4038 4039 4040 I can't give you minutes and hours, in terms of how long the comp committee met. But the comp committee met, considered it thoroughly, and then made a recommendation to the board and the board-Ms. NORTON. Mr. Chairman, thank you very much. I do want to indicate that we have information that the board met for 20 minutes to decide on this particular affirmative act of offerinq a bonus to Mr. Prince when he resigned. Thank you. Chairman TVAXIIAN. Thank You, Ms. Norton. 404L 4042 4043 4044 4045 4046 4047 4048 4049 4050 4 051_ 4052 4 053 4054 4 055 4056 4057 Mr. Cummings? Mr. CUMMINGS. Thank you very much, Mr. Chairman. Mr. Mozilo, I actually have to ask you about a bait-and-switch situation involving Shirley Mutterman and her husband from Fauquier County, Virginia. And sadly, they suffer today perhaps because they did not look into the detail or maybe they u¡ere not given the proper information. But if they had looked into their situation with the detail that you looked into your compensation package, perhaps they would have had certain questions answered. And I refer, Mr. Mozilo, in 2006, Yoü renegotiated your compensation package with the board at Countrywide. The documents obtained by the committee indicated that you were unhappy with the pay package. HGO067.000 4 PAGE me L77 058 4059 4060 406L 4062 4063 4064 4065 4066 4067 put up an e-mail you wrote to your compensation consultant--and you can put that up--on October 20, 2006. And let me tetl you what you said. And I quote, "At this stage ín my life at Countrywide, this process is no longer about money but more about respect, âfl acknowledgement of my Let accomplishments. Boards have been placed under enormous pressure by the left-wing, anti-business press and the envious leaders of unions and other so-caIled CEO comp 4068 4069 407 0 407L 4072 4073 4074 4075 407 6 watchers. I strongly believe that, a decade from no\^/, there will be a recognition that entrepreneurship has been driven out of the public sector, resulting in underperforming companies and a willingness on the part of boards to pay for performance, " end of quote. What did you mean by that? Mr. MOZILO. TrIelI, it was an emotional time, Congressman, for me. I had planned to leave the company. They asked me to stay. The chairman at that time had sent me a proposal that was sharply different from what I had expected, and I reacted emotionally. 4077 4078 4079 4080 4 081 4082 I apologize for that memo, but it was as the result of a dialogue that resulted in the chairman of the committee asking me to get my own consultant. That' s how the ,John England issue came about. But I regret the words I used. I tend to be an emotional individual and was upset at the time. Mr. CUMMINGS. I understand. Alrd I understand that. HGO067.000 4 PAGE 1,7 I 083 4084 4 085 4086 4087 4088 4089 4 090 4091, But I want you to understand that I've got some constituents that are emotionally upset too, because they're losing their houses. And you were worried about something very important, your wife, and I understand that. And according to the documents, you hlere seeking a wide range of perks. So on several occasions, you emphasized that you wanted your contract to provide explicitly for the reimbursement of any taxes owed when your wife traveled with you on Countrywide's jet. 4092 4093 4094 4095 4096 4097 4098 4099 41_00 4101- 4]-02 41_03 4]-04 41_05 4L06 41"07 e-mail you wrote to your compensation consultant, this one on November 23, 2006. And I quote, "In order to avoid extraordinary travel expenses to be incurred by the chief operating officer and me, the spouses would have to travel commercial or not at all, which is not right nor wise, " end of quote. In fact, you were so concerned about getting taxes paid on your wife's travel that you raised the possibility of retiring if you didn't get this. In the same e-mail to your compensation consultant, you said this, and I quote: "The board must understand that, if I were to retire today, I would receive approximately $l-5 million in deferred comp, 9et directors fees and be able to liquidate my 1-2 million shares without restriction, rr end of quote. Mr. Mozilo, yoü made an enormous amount of money. And that's great, that's wonderful, God bless you. According to Let me show you another HGO067. 000 4l_08 1-7 9 the documents reviewed by the committee, you've made almost 4A09 $250 million in compensation and collected $406 million from 41a0 the sale of Countrywide stock. Why was it so important to you that Countrywide pay the 4III 4tr2 taxes on your wife's travel on a Countrywide jet? And I just want you to understand that, again, the 4]-]-3 41L4 reason why this gets to me so badly is because, just a few weeks dgo, I held a f orum where \ÀIe were trying to help people 41_15 in my district renegotiate their Countrywide loans, and they 411,6 were on the doorstep of foreclosure, some of them with tears 41-]-7 4tL8 in their eyes. And, you know, they're worried about their 4tr9 wives too. They hlere worried about where their wives \^Iere going to cook and where they \^Iere going to s1eep. 41,20 But I'm just curious-41,2r Mr. MOZILO. First of all, I understand exactly what you 4122 41,23 are saying. Again, I've spent a good part of my life dealing 4124 with the issue of homeownership, particularly among 4425 lower-income and minority people. I understand more than 4r26 anyone else the importance of homeownership. My dad didn't 4127 buy his first home until he was over 50 years o1d and died a of making 4L28 few years 1ater. I understand the difficulty 41,29 payments, because I interviewed many of these buyers to make 4r30 these loans at the beginning of Countrywide. I serviced many 41"3r of these loans. I collected the payments. I understand, as 4L32 you do, the importance of homeownership and the trials and HGO067.000 PAGE 1_80 4L33 41,34 4135 tribulations people go through. And that's why v/e've worked so hard. Nobody's doing more than Countrywide, in terms of trying to keep people in their homes and work these things out. And the thing--before I get into the wife issue--is that 4r36 4L37 41_38 4]-39 41-40 4r4A 4L42 4L43 4L44 4145 4]-46 4147 41,48 I want to say to you that I want to work with your office, and I want to assign people to your staff to work on each of these loans. This burden shouldn't be your burden. It should be our burden and our responsibility to make it right and to find out what rea11y are the facts behind these cases, how did they happen. And particularly the first case you mentioned, about the 11 percent loan, You know, I don't even know how that starts. And I do take full responsibility for anything that happens at Countrywide. As for the wife issue, you know, in comparison, it sounds out of whack today because it is out of whack today, 41,49 4 t_50 4I5I 4]-52 4L53 4L54 41"55 41-56 4L57 in today's world. Tn 2006, things were fantastic. The company had 30 straight years of increased earnings--one of the most successfuf companies in the history of America, in terms of earnings, stock value, all of that. The issue was a trivial issue, in retrospect. And what had happened was that, in some cases--and it happened in very few cases, by the way--that the wife is an important part of going to business arrangements, business meetings, to affairs. They're important. And the issue was, how do I get HGO067.000 4 PAGE 181 her there? And the way it worked out on the travel was, if 4L59 she had to come, which was rarely because we had five kids 4a60 and nine grandkids and she stays home, but if she did, I had 416l to pay an enormous amount of--a substantial amount of money 4]-62 to have her on that plane with me. And that's how the issue came up. It came up with my 4a63 4]-64 colleague who was the second in command of the company' and I 4]-65 wrote the memo. In today's world, I would never write that 158 4a66 memo. HGO067.000 PAGE 1-82 4r67 41,68 RPTS KESTERSON DCMN BURRELL 4]-69 417 0 [2: ]-0 p.m.l Mr. Chairman. CUMMINGS. I appreciate it. Thank You, Mr. 4t7t 4172 41,73 Chairman WAXMAN. The gentleman's time has expired. Mr. Cannon, do you want to-- 4r7 4 Mr. CANNON. Thank 4r75 4r76 Chairman WAXI4ÄN. you, Mr. Chairman. Yes. The gentleman is recognized. Mr. CAIINON. Mr. Mozilo, can I follow up on this a 4177 Iittle bit now? My understanding is that Countrywide is 4]-78 shrinking ín most of its areas. But do you have any areas of 41,7 9 the company that are actually growing larger? Mr. MOZILO. Yes. We have a very large insurance 41_80 41-8r operation, casualty and life insurance company, that is doing 41,82 extremely we1l. Balboa Life and Casualty. We bought it back 4183 in November of 2000--1,999. It is doing extremely we11. Mr. CANNON. Do you have any divisions that are growing? 4184 Mr. MOZILO. I' m sorry? 4r85 Mr. CANNON. Within Countrywide, the lending area, do 4]-86 41,87 you have divisions of Countrywide that are gror^Iing? Like 4 188 your- - 4]-89 Mr. MOZILO. You know, in most areas it is either stable 4i.90 4L9a to shrinking. Mr. CAIINON. Are your--you've just been talking-- HGO067.000 41,92 1_83 Mr. MOZILO. Do you mean like homeowners? Those areas? 4r93 It is all growing. I mean, we have almost 4,000 people today 4r94 versus ín 2004, maybe 2- or 3OO who are solely working on the issue that the Congressman raised. These are serious issues, 41,95 4]-96 a Serious impact on 1ives. So rÀ¡e--our servicing area--vte're worth of mortgages. 9 million 4]-97 servicing $1-I/2 trillion cusromers, and today many of whom are in problems - So that 41,98 4]-99 4200 420]- area is expanding dramaticallY. Mr. CANNON. You're adapting--Countrywide is adapting to the problems of America and helping out? Mr. MOZILO. It is our responsibility to do that. 4202 Mr. CAI{NON. You talked a littIe bit about your history 4203 4204 and when your dad bought his first home. There is a lot of 4205 data out there that indicates that families that own homes do 4206 better. Their children do better in school, their children I suspect that is part of what motivates 4207 do better in life. 4208 you here, is it not? Mr. MOZILO. You know, I think my background certainly 4209 42tO motivates me as it does I'm sure each of the CEOs here at the 42tt table. But I have--since I spent a good part of my life in 4212 the field interviewing borrowers for loan applications, I get I understand what it means to Hispanic families who 42L3 it. 421-4 can't give you the actual data that you need to approve them, but they have the money. They have the money in the house 421,5 42t6 and they have various jobs, but they can't give you the HGO067.000 4217 421-8 PAGE LB4 42L9 4220 422L 4222 4223 4224 4225 4226 4227 4228 4229 4230 423]4232 4233 4234 4235 4236 4237 4238 formal type of verificatíons that you need in the normal environment. But they are willing to do whatever it takes to stay in that home. I get it when--in fact, there is a loan that--one of the first loans I made was in south central Los Angeles to a family that came to me--that was 30 years ago. They came to me just a few years ago with a book of their life and the life was about their house and what that house did to put their children through school and help him build his business, a ca-r retail business. This is a very important thing to me. This is the mission. And I take it very seriously. Mr. CAXTNON. And we are at the highest rate of home ownership in the history of America today, are we not? Mr. MOZILO. I^Ie are no$/. But that's when--my verbal remarks, I'ûì concerned we're going to go the other way. Mr. CANNON. V,Iell, I really hope that you're reaI1y successful in renegotiating the loans of many of these people. I spend a lot of time in 'Judiciary Committees trying to stop an attempt to change the bankruptcy laws that would totally foul up our system. Are you familiar with the rrNew York Times" piece by Gretchen Morgenson that was entitled "Inside the Countrywide Lending Spree"? Mr. MOZILO. I' m familiar with it. She has written 4239 4240 several articles. Mr. CANNON. In that article, she said providing the 424r HGO067.000 PAGE 1_85 4242 4243 4244 4245 4246 4247 4248 4249 4250 425L 4252 4253 4254 4255 4256 4257 4258 4259 4260 best loan possible to your customers was not always the main goa1. Have you had a chance to respond to that artícIe? V'Iould you like to now? Mr. MOZILO. We'd be happy to provide the committee with--\¡¡e gave a--if that is the article that I think it is, they sent it to us before they printed it, asked us to respond. We found serious flaws in that article--throughout the article, sent our comments to them and their choice was not to make any changes in the article. But obviously it doesn't make any sense for us to make a loan that is going to fail because we lose. They 1ose, the borrower loses, the community loses and we lose. 426L 4262 4263 4264 4265 4266 Mr. CANNON. That seems so obvious to me that I'm inclined to ask you to repeat it three times and then go over the red light to explain to people, the fact is you're not in the business of making loans, nobody here is in the business of making loans that will cause people to fail. And, in fact, w€ had this amazing, remarkable time in Amerícan history caused by a confluence of events, including availability of capital, but also the securitizaLion, the very complex securitization of loans that have allowed you to have the capital to allow people to get into home loans. And we also had the creativity to come up with systems that allow people to get in. Do you have any anything else you would like to comment HGO067.000 4267 4268 4269 427 0 PAGE 186 on that, Mr. Mozilo? 4274 4272 4273 4274 4275 427 6 Mr. MOZILO. I think what came to mind when you \À¡ere going through that, Congressman, is that I don't think anybody ever predicted, certainly not to me, that we would have a complete collapse of the credit markets and the capital markets within a week or two period. And that was the very foundation of which Countrywide operated under, with And all of that disappeared and there access to liquidity. \^ras no model built by anyone in the world that took into consideration that kind of catastrophe. Mr. CANNON. Mr. Chairman, I noticed my time has expired. I really hope the people on this panel and others are able to solve the problem of renegotiating loans so that constituents like Mr. Cummings referred to and my 4277 4278 4279 4280 428]4282 4283 4284 4285 4286 4287 constituents can solve their problems and America doesn't crater. Thank you and I yield back. Chairman VüAXMAN. The gentleman's time has expired. Issa. Mr. Mr. ISSA. I thank the chairman. And as we wind down, I want to just clear up a couple of things. And I know Mr. Cummings 4288 4289 4290 429L did not want to mislead anyone. Ms. NORTON. V'Iou1d the gentleman yield me 5 seconds? Mr. ISSA. Of course, Ms. Gentlelady. Ms. NORTON. Because Mr. Mozilo was kind enough to offer to assign people to Mr. Cummings in order to help with people HGO067.000 4292 4293 4294 4295 4296 4297 4298 4299 4300 PAGE T87 who have had serious problems with their subprime mortgages. I have my own constituents here in the District of Columbia. Could f ask for a similar assignment? Mr. MOZILO. Absolutely. And in fact, Congresswoman, we have placed in each of your offices, both the committee offices and the entire House of Representatives, a card which gives you all the reference numbers to ca1l. And if there are any issues whatsoever, call me directly. That's what I do. 430L 4302 43 03 Ms. NORTON. Is your number on there, Mr. Mozilo? Mr. MOZILO. I' 11 give it to you. it to you. Ms. NORTON. Thank you. T' 1I be happy to give 4304 43 05 Mr. ISSA. Thank you. And in reclaiming my time, I Mr. Chairman, I would 4306 trust we'11 do that one off the air. 4301 ask unanimous consent to include in the record a number of 4308 charts and information related to performance of various 4309 funds that include these t)æes of mortgage backed securities, 431_0 including Merrill Lynch, BlackRock and others. 43tL Chairman VüAXMAN. V{ithout objection, it will be made part of the record. 431,2 43A3 [The information follows: ] 431J.4 ******** CoMMITTEE INSERT ******** HGO067.000 431-5 PAGE t_88 43]-6 431-7 43 18 43]-9 4320 4321- 4322 4323 4324 4325 4326 4327 4328 4329 4330 433L 4332 4333 4334 4335 4336 4337 4338 4339 Mr. ISSA. Thank you, Mr. Chairman. I want to clear up one thing that was said in perhaps a vacuum, sounds terrible to people out in, if you will, the rest of the world that may be watching. Mr. Mozilo, it is kind of interesting that you deal with a tax problem if you take your wife to go meet with institutional lenders or any number of other people with whom you need to develop a relationshíp or even to a board meeting in which other board members may bring their spouses. I want to note for the record, the chairman, myself, probably everyone that was on the dais here today at some tíme has put their spouse on a Boeing 737 business jet or a 757 beautifully painted with the United States of America and gone around the world meeting with foreign heads of state, meeting with secretaries, meeting with the people in which our spouses are very helpful in presenting a better view of America. And we do that deliberately. The Speaker of the House included. I've traveled with her and her husband, Paul. So--and we have no tax consequence whatsoever. The only thing we do is we pay for their meals. But on a military jet, it is considered to be at no cost to the government. So I hope we will all put into perspective that those on the daís recognize that often travel with a spouse on officíal business can in fact be very much good business, good for America and good for the profits of the compârly, depending upon which side of this dais you're on. HGO067.000 4340 PAGE 1_89 I think it is important again to sort of wrap things up 434]- here. And my hope is that we would try to have an 4342 understanding. Everything that I've asked to have submitted including this memorandum or this 4343 to the record virtually, 4344 chart showing the--virtually--and these are median prices. 4345 These are not snapshots or current sa1es. But the median 4346 price of a home exceeding inflation at a national level in 4347 California, exceeding it by nearly twice what it does on a 4348 national basis has gone on almost unrelentlessly on a bit of a dip in the early'90s. 4349 national basis. A little 4350 And I know all of you got to see a part of that. Everything 435r that I've asked to have submitted to the record, I think 4352 former Fed Chairman Greenspan, Chairman Bernanke, all made 4353 the assumption that in fact creditworthiness had to do with 4354 wives--you know, marriages, jobs and health. I don't believe 43 55 that until recently we on the dais and certainly not you 4356 there thought that, in fact, underlying value of homes would 4357 ultimately be what began a cycle downward. And I would like 4358 to put out one question because this is a learned group here 4359 today and I'd like to have your input. Shou1d this committee and the Congress, the government 4360 436L look at--as we do with the Fed Chairman who looks at 4362 inflation and he looks at the money supply and that money 4363 supply related to inflation and jobs, he tries to participate 4364 in a regulation so that we not overheat the economy and that HGO067.000 PAGE t-90 4365 4366 4367 4368 4369 437 0 u/e 4374 4372 4373 437 4 in fact try to not have deep recessions. Should an agency of the government ot, if you wil1, âfl agency set up by the government tike the Fed, look at home pricing, the fact that we put into the market home ownership incentives, sometimes at government expense, and that it fuels the growth in the price of homes or that if we take it out, it can slow it down? would that type of oversight by the government or an entity that we set up be productive as a result of what lve've learned about overheating the growth in home loans and thus the rise in the value and obviously what \ive're dealing with today? 4375 437 6 4377 437 I 4379 4380 43 8t_ Mr. MOZILO. I think that anything--I think we should explore any potential possibility to avoid what we have just--what vle're going through. And by the wâY, I don't think that bullet has fu1ly passed Yet, whether it be Goldman 4382 43 83 4384 43 85 4386 4387 43 88 or anybody e1se. I don't think that bullet has completely arrived. But I do believe we should study \^Iays that we can mitigate this kind of disaster. Because the people who really suffer are the people who are in those homes, losing those homes. And as I said, I've never seen anything like this and hopefully we won't see anything like this again. Mr. ISSA. Is there anyone else before we conclude? Mr. Chairman, I thank you for helping put this in perspective and perhaps lead towards a bipartisan effort to keep these boom-and-bust occurrences from occurring. 4389 HGO067.000 19i- 4390 4391, 4392 4393 4394 4395 4396 4397 Mr. Chairman. I yield back. Chairman WAXMAN. The gentleman's time has expiredChair is going to recogníze himself for the last round of Thank you, The questions. 4398 4399 4400 440L 4402 4403 4404 4405 4406 4407 4408 4409 441-0 44'J"r Mr. Finnegan, in October of 2007, Merrill Lynch's board faced a difficult decision about Mr. O'Nea1's ongoing role at the company. Under his leadership as CEO, the company and 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 al1ow him to retíre. the board did Despite the company's financial difficulties, 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 $1-61- milIion, including stock and options that had not vested. I can understand the instinct of wanting to al1ow 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 deferred compensation and standard retirement benefits. But he would not have received $l-31 million in stock and optíons or an executive annuity worth $2a miltion because these had not vested. I¡'Ihat was the rational-e for letting Mr. O'Nea1 retire with $1-31- million in 4412 441-3 44L4 HGO067. 000 PAGE L92 44]-5 unvested stock instead of terminating him and recouping this money for the shareholders? Mr. FINNEGAN. Sir, the stock awards that Mr. O'Neal had 4447 44r8 received and which were unvested were governed by certain and cause. 44r9 provisions related to retirement eligibility 4420 Essentially Mr. O'Neal had sufficient points in terms of age 4421 and years of service to leave the company and take those 4422 stock awards with him unless \^/e could terminate him for 4423 cause. The provisions related to cause covered misconduct. 4424 They did not cover unsatisfactory financial results. Chairman WAXMAN. Now, why didn't the contract allow the 4425 4426 board to fire him for cause? You were the one who wrote the 4427 terms of the contract. So isn't this a boot strap argument 4428 you can't fire for cause, it isn't in the contract but you 4429 wrote the contract and didn't provide for that? Mr. FINNEGAN. We1l, sir, Mr. O'Neal didn't have a 4430 The contract I'm referring to is the 443L contract individually. 4432 agreement between Merrill Lynch and all of its executives, 4433 l-O,OO0 executives who are covered by this stock award 4434 program. Mr. O'Neal's provisions are not unique. The cause 4435 provisions in the stock awards are part of Mr. O'Neal and 4436 1-O,OOO other people and are also generally consistent with 4437 the tlpe of cause provisions you see in the industry and 4438 American corporations in general. 44i.6 4439 Chairman WAXlvlAN. Tlfel1, I don't see that in most Hco067.000 4440 PAGE l_ 93 people's jobs. If there is cause, they get fired. Now 444r you're saying it wasn't just Mr. O'Neal, but many other 4442 executives. Your company lost ç2.4 billion in the third 4443 quarter, $10.3 billion in the fourth quarter, the largest You recorded 4444 quarterly tost in the company's history. 4445 writedowns of ç7.9 billion in the third quarter, tt.5 billion 4446 in the fourth quarter. By the end of last year, your stock 4447 4448 4449 4450 had plummeted 45 percent from its hígh in the previous 445L 4452 4453 4454 4455 4456 4457 .Ianuary. If that doesn't qualify as poor performance, it justifies terminating your CEO and maybe others as well for cause, it is 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. FINNEGAII. No, sir. I think the consequences were pretty dramatic. Mr. O'NeaI 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 $l-20 million economic penalty. 4458 4459 4460 446L 4462 4463 4464 that was enough of a risk to give him incentive to not do the things that the company did? Mr. FINNEGAN. Sir, I don't know. I think Mr. O'NeaI performed very, very well over a long period of time. In 2007, there was an unprecedented decline in real estate values, a dramatic and precipitous decline in--drying up of Chairman VüAXMAN. And HGO067.000 4465 4466 4467 4468 4469 447 0 4471" PAGE 1-94 4472 4473 447 4 4475 447 6 in the mortgage markets. Almost no one-Chairman WAXMAN. Wait. 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 I have no problem with paying had the most responsibility. 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 can make $120 million in stock sales when your shareholders are losing B0 percent of their liquidity value. Now, I thank all of you for being here. And I want to 4477 4478 4479 4480 4481, say to Mr. O'Neal and Mr. Prince and Mr. Mozilo what I said in my opening statement. You're all classic American success stories. You have tremendous accomplishments. You've all made enormous 4482 4483 4484 4485 4486 4487 4488 4489 contributions to our country. But that is--what is also true is that you're in the middle of an enormous debacle that ended up costing your companies and shareholders billions of doIlars. 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 the light on that problem. As a HGO067.000 1_95 4490 449L 4492 4493 4494 4495 4496 4497 4498 4499 4500 450L 4502 4503 4504 4505 4506 4507 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 Arrd compensated when their companies are losing billions. what I think we've learned is that we--if we don't have a system where there are real consequences for failures, that is 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 is happening. The bottom line is there needs 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 you'11 all learn from the exchange of information. You've been very generous with your time. That concludes our business, and we stand adjourned. [The information follows: ] 45 08 ******** INSERT 5-1, ******** HGO067.000 PAGE ]-96 4509 [The information follows: ] 451-0 ******** TNSERT 5-2 ******** HGO067.000 PAGE T97 451L lV'Ihereupon, at 2 :26 p . ß. , the committee \ÂIas adjourned.l