CEO PAY AND THE MORTGAGE CRISIS

HEARING

BEFORE THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

MARCH 7, 2008

Serial No. 110–81

Printed for the use of the Committee on Oversight and Government Reform

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http://www.house.gov/reform

CEO PAY AND THE MORTGAGE CRISIS

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CEO PAY AND THE MORTGAGE CRISIS

HEARING

BEFORE THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

MARCH 7, 2008

Serial No. 110–81

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

——— ———

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

JIM JORDAN, Ohio

PHIL SCHILIRO, Chief of Staff

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

LAWRENCE HALLORAN, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held on March 7, 2008 .............................................................................. 1

Statement of:

Prince, Charles, former chairman and CEO, Citigroup; Richard D. Parsons, CHAIR, Personnel and Compensation Committee, Citigroup; E.

Stanley O’Neal, former chairman and CEO, Merrill Lynch; John D.

Finnegan, CHAIR, Management Development and Compensation Committee, Merrill Lynch; Angelo R. Mozilo, founder and CEO, Countrywide Financial Corp.; and Harley W. Snyder, CHAIR, Compensation

Committee, Countrywide Financial Corp. .................................................. 164

Finnegan, John D. ..................................................................................... 186

Mozilo, Angelo R. ....................................................................................... 200

O’Neal, Stanley .......................................................................................... 179

Parsons, Richard D. .................................................................................. 171

Prince, Charles .......................................................................................... 164

Snyder, Harley W. ..................................................................................... 224

Wachter, Susan M., Richard B. Worley professor of financial management, the Wharton School, University of Pennsylvania; William F.

Galvin, Secretary of State, Commonwealth of Massachusetts; Brenda

L. Lawrence, mayor, city of Southfield, MI; Anthony Yezer, professor

of economics, the George Washington University; and Nell Minow, editor and cofounder, the Corporate Library ................................................... 67

Galvin, William F. ..................................................................................... 79

Lawrence, Brenda L. ................................................................................. 87

Minow, Nell ................................................................................................ 106

Wachter, Susan M. .................................................................................... 67

Yezer, Anthony .......................................................................................... 93

Letters, statements, etc., submitted for the record by:

Davis, Hon. Tom, a Representative in Congress from the State of Virginia:

Business Roundtable publication ............................................................. 14

Federal Reserve Bank of New York publication ..................................... 30

Minority memo .......................................................................................... 133

Prepared statement of ............................................................................... 35

Finnegan, John D., CHAIR, Management Development and Compensation Committee, Merrill Lynch, prepared statement of ............................. 188

Galvin, William F., Secretary of State, Commonwealth of Massachusetts,

prepared statement of ................................................................................... 82

Issa, Hon. Darrell E., a Representative in Congress from the State of

California:

Carol Loomis article .................................................................................. 129

Information concerning various funds ..................................................... 273

November 2007 Dallas Federal Reserve economic letter ....................... 252

Prepared statement of ............................................................................... 38

Lawrence, Brenda L., mayor, city of Southfield, MI, prepared statement

of ..................................................................................................................... 89

Minow, Nell, editor and cofounder, the Corporate Library, prepared statement of ........................................................................................................... 108

Mozilo, Angelo R., founder and CEO, Countrywide Financial Corp., prepared statement of ........................................................................................ 203

O’Neal, Stanley, former chairman and CEO, Merrill Lynch, prepared

statement of ................................................................................................... 181

Parsons, Richard D., CHAIR, Personnel and Compensation Committee,

Citigroup, prepared statement of ................................................................ 173

Page

IV

Letters, statements, etc., submitted for the record by—Continued

Prince, Charles, former chairman and CEO, Citigroup, prepared statement of ........................................................................................................... 167

Snyder, Harley W., CHAIR, Compensation Committee, Countrywide Financial Corp., prepared statement of .......................................................... 226

Wachter, Susan M., Richard B. Worley professor of financial management, the Wharton School, University of Pennsylvania, prepared statement of ........................................................................................................... 71

Waxman, Chairman Henry A., a Representative in Congress from the

State of California, prepared statement of ................................................. 4

Yezer, Anthony, professor of economics, the George Washington University, prepared statement of .......................................................................... 96

(1)

CEO PAY AND THE MORTGAGE CRISIS

FRIDAY, MARCH 7, 2008

HOUSE OF REPRESENTATIVES,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The committee met, pursuant to notice, at 10:06 a.m., in room

2154, Longworth House Office Building, Hon. Henry A. Waxman

(chairman of the committee) presiding.

Present: Representatives Waxman, Towns, Kanjorski,

Cummings, Yarmuth, Norton, Welch, Davis of Virginia, Cannon,

Issa, McHenry, and Bilbray.

Staff present: Phil Schiliro, chief of staff; Kristin Amerling, general counsel; Karen Lightfoot, communications director and senior

policy advisor; David Rapallo, chief investigative counsel; Roger

Sherman, deputy chief counsel; David Leviss, senior investigative

counsel; Velvet Johnson, counsel; Earley Green, chief clerk; Teresa

Coufal, deputy clerk; Caren Auchman and Ella Hoffman, press assistants; Zhongrui ‘‘JR’’ Deng, chief information officer; Leneal

Scott, information systems manager; Kerry Gutknecht and William

Ragland, staff assistants; Matt Seigler, investigator; Allison

Cassady, professional staff member; Larry Halloran, minority staff

director; Jennifer Safavian, minority chief counsel for oversight and

investigations; Keith Ausbrook, minority general counsel; Kristina

Moore, minority counsel; John Cuaderes and Larry Brady, minority

senior investigator and policy advisor; Patrick Lyden, minority parliamentarian and member services coordinator; Brian McNicoll, minority communications director; Benjamin Chance, minority clerk;

and Ali Ahmad, minority deputy press secretary.

Chairman WAXMAN. The meeting of the committee will please

come to order.

Today the committee is holding its second hearing on executive

compensation. Our subject is the compensation of executives who

preside over billion-dollar losses.

There seem to be two different economic realities operating in

our country today, and the rules of compensation in one world are

completely different from those in the other. Most Americans live

in a world where economic security is precarious and there are real

economic consequences for 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 year, Circuit City cut costs by arbitrarily firing its most successful retail sales employees. Any employer

and any employee in computer sales who was earning more than

$16 per hour was fired. It didn’t make any difference that some of

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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 typical employees: They can work hard, be loyal and do everything right and

still lose ground.

The world for executives is quite a bit different. Last year, one

of our Nation’s highest-paid executives was Ray Irani, chief executive officer of Occidental Petroleum. His total compensation was

more than $320 million, which roughly comes out to $154,000 an

hour.

By any measure, executive pay is rising rapidly and dramatically. The CEOs of the 500 largest American companies received an

average of $15 million each in the year 2006, and that was a 38

percent increase in just 1 year. In 1980, CEOs were paid 40 times

the average worker; today they are paid 600 times more. And incredibly, 10 percent of corporate profits are now flowing to the top

executives.

Now, at first blush, it is hard to reconcile $154,000 an hour with

$16 an hour, but CEOs and salesmen have different roles. And the

argument, as I understand it, is that a CEO who adds value to the

company and its shareholders is worth every penny. I think there

is merit to pay for performance. But it seems like CEOs hit the lottery when their companies collapse. As the financial columnist

Allan Sloan put it, ‘‘Even if you flame out in Wall Street, you still

get to keep the money.’’

Today’s hearing will examine this issue. The question we will ask

is a simple one: When companies fail to perform, should they give

millions of dollars to their senior executives?

Our particular focus is the debacle with subprime mortgages.

The mortgage crisis and credit crunch is devastating to both homeowners and our Nation’s economy. Over 7 percent of all mortgages

are delinquent or in foreclosure—the highest rate ever recorded. Almost 9 million families now owe more on their mortgages than

their homes are worth.

Banks in the United States have written off more than $120 billion in assets, mortgage companies have gone under or are on the

brink, yet thousands of Americans have lost their jobs and their

homes, and the economic spillover is being felt throughout the

world.

Three companies that gambled heavily on the subprime bet are

Countrywide Financial Corp., Merrill Lynch and Citigroup. And I

want to thank the chairs of their Compensation Committees and

their CEOs for being here today and for their cooperation.

All three companies have suffered enormous losses. Countrywide

lost $1.6 billion in 2007, and its stock lost 80 percent of its value.

Merrill Lynch lost $10 billion, and its stock lost 45 percent of its

value. Citigroup also lost $10 billion, and its stock lost 48 percent

of its value.

In light of that terrible performance, the CEOs of Merrill Lynch

and Citigroup resigned last year. Mr. Mozilo, the CEO of Countrywide, is also making plans to step down if Countrywide is acquired

by Bank of America.

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But the pay they received from their companies and their stock

sales was extraordinary. Any reasonable relation between their

compensation and the interests of their shareholders appears to

have been broken down.

Mr. O’Neal left Merrill Lynch with a $161 million retirement package. Mr. Prince was awarded a $10 million bonus, $28 million

in unvested stock options and $1.5 million in annual perquisites

when he left Citigroup. And Mr. Mozilo received over $120 million

in compensation in sales of Countrywide stock.

Well, the obvious question is, how can a few executives do so well

when their companies are doing so poorly?

Mr. Mozilo, Mr. O’Neal and Mr. Prince are each classic American

success stories. Mr. Prince was the first in his family to go to college. Mr. Mozilo started his company sitting at a kitchen table in

a small New York City apartment. And Mr. O’Neal’s grandfather

was born into slavery, and his parents worked several jobs at once

to give their children the American dream. Mr. O’Neal himself

worked his way through college by working at a General Motors

plant.

Each of these men achieved incredible success through hard work

and ability, and each was richly compensated when their companies prospered. And on behalf of this committee, I want to commend them and thank them for their many contributions to our

country.

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

Are the extraordinary compensation packages these CEOs receive reasonable compensation? Or does the hundreds of millions of

dollars they were given represent a complete disconnect with reality?

This isn’t a hearing about illegality or even unethical breaches.

It is a hearing to examine how executives are compensated when

their companies fail. And it is a hearing to help us understand

whether the situation is good for the companies, the shareholders

and for America.

The testimony today is something those Circuit City workers I

spoke of a few minutes ago would be interested in. It is something

the millions of Americans who are going through the pain of foreclosure of their homes would be interested in. And it is something

every Member of Congress should also be interested in.

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

[The prepared statement of Chairman Henry A. Waxman follows:]

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Mr. DAVIS OF VIRGINIA. Thank you, Mr. Chairman.

When asking questions about corporate governance, executive

pay and the performance of national financial markets, this committee should proceed very cautiously. Shareholders have the most

direct stake in these issues. Ours, at best, is a derivative and potentially damaging role in the discussion of complex transactions,

proprietary business decisions and marketplace dynamics. The last

thing union pension funds and other investors want is Congress

second-guessing and micromanaging the people looking after their

money.

That said, there is no dispute the housing market is undergoing

a significant contraction, and many Americans are 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 executive

compensation is debatable. And that appears to be at least part of

the debate we will have today. Fine. But that debate should not degenerate into a sanctimonious search for scapegoats.

If every corporate executive of every company involved in

subprime lending and securities had worked for the minimum wage

or for nothing, the macroeconomic trends and cyclical forces that

drive booms and busts could still vex our economy today. Punishing

individual corporate executives with public floggings like this may

be a politically satisfying ritual, like an island tribe sacrificing a

virgin to a grumbling volcano. But, in the end, it won’t answer the

questions that need to be answered about corporate responsibility

and economic stability.

Boards and shareholders have already begun to answer these

questions for themselves. They have taken steps to assign responsibility and hold corporate managers accountable. CEOs have resigned. Potential payouts have been surrendered or reduced, and

so-called golden parachutes trimmed. Investor groups are suing to

recoup funds, alleging violations of regulatory and fiduciary duties.

It is in those forums that the sad story of the subprime industry

should be litigated. We should never substitute our judgment for

determination by those with real equities at stake, nor should we

allow the committee to be used as a discovery tool for plaintiffs.

Our previous hearing on executive compensation consultants

failed to find much evidence of the claimed conflicts or self-dealing

that could distort salary and perk decisions to the detriment of

stockholders. Today’s attempt to wrap that unproven premise in

the much larger subprime crisis only seems to muddle the issue

further.

Subprime lending expanded mortgage loan availability to underserved groups, as Congress mandated. With the encouragement of

regulators, innovative financial instruments increased liquidity and

spread subprime risk across a broader range of supposedly savvy

investors.

But almost everyone involved became entranced over time by the

unsustainable promise of ever-rising home prices. We have seen

this before. When the music stopped and real estate markets fell,

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foreclosures escalated and holders of subprime-backed securities

lost billions.

In that context, the case studies on corporate compensation the

committee released yesterday have much more to do with changing

market conditions, flawed economic assumptions and rosy risk assessments than with inappropriate compensation incentives. Remember, when viewed in the rear-view mirror, objects are closer

than they appear.

At our request, one of the witnesses on today’s first panel will

describe the interrelated functions and dysfunctions in subprime

markets. We appreciate his being included in this hearing.

Mr. Chairman, as the minority does not have a witness at the

table who is an expert on questions on executives compensation, we

would like to enter into the record a publication by the Business

Roundtable explaining best practices on executive compensation.

Chairman WAXMAN. Without objection, that will be made part of

the record.

[The information referred to follows:]

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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 securitization of

low- to moderate-income mortgages as a means of increasing the

capital available to those communities. I believe it sheds some light

on the role the Federal Government played in encouraging the

securitization of subprime mortgages.

Chairman WAXMAN. Without objection, that will also be made

part of the record.

[The information referred to follows:]

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Mr. DAVIS OF VIRGINIA. We may not like it, but markets at times

produce inequities, and they correct them. Government involvement in that process generally makes matters worse, not better. The professional baseball player with a $17 million contract who

hits only 0.200 in a season still gets paid. Jennifer Lopez and Ben

Affleck 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, Mr. Chairman.

[The prepared statement of Hon. Tom Davis follows:]

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Chairman WAXMAN. Thank you, Mr. Davis.

On our first panel, the committee will hear testimony from five

individuals with expertise or experience related to the mortgage

crisis: Dr. Susan M. Wachter, the Richard B. Worley professor of

financial management at the University of Pennsylvania’s Wharton

School; the Honorable William Francis Galvin, the Secretary of

State for the Commonwealth of Massachusetts and the State’s chief

securities regulator; the Honorable Brenda Lawrence, the mayor of

the city of Southfield, MI; Dr. Anthony Yezer, professor of economics at the George Washington University; and Ms. Nell 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 hands.

[Witnesses sworn.]

Chairman WAXMAN. The record 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. Without objection.

Mr. ISSA. And, Mr. Chairman, I would also ask that, because it

is pertinent information, that the material from the AFL–CIO Web

site ‘‘2007 Executive PayWatch’’ also be put in the record in the

same location.

Chairman WAXMAN. Without objection.

Mr. ISSA. Thank you, Mr. Chairman.

[The prepared statement of Hon. Darrell E. Issa and the information referred to follow:]

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Chairman WAXMAN. We’re pleased to have you with us today.

We’ve received your prepared testimony. What we’d like to ask you

to do in your oral presentation is to try to stay within 5 minutes.

We’ll have a clock. It will be green, and then 1 minute before the

5 minutes are up it will turn yellow, and then red at the end of

5 minutes. We’d like to ask you, when you see the red, to try to

summarize. But your whole statements will be in the record.

Ms. Wachter, why don’t we start with you? There’s a button on

the base of the mike. Be sure to push it in. And pull it close enough

to you so we can hear everything you have to say.

STATEMENTS OF SUSAN M. WACHTER, RICHARD B. WORLEY

PROFESSOR OF FINANCIAL MANAGEMENT, THE WHARTON

SCHOOL, UNIVERSITY OF PENNSYLVANIA; WILLIAM F.

GALVIN, SECRETARY OF STATE, COMMONWEALTH OF MASSACHUSETTS; BRENDA L. LAWRENCE, MAYOR, CITY OF

SOUTHFIELD, MI; ANTHONY YEZER, PROFESSOR OF ECONOMICS, THE GEORGE WASHINGTON UNIVERSITY; AND

NELL MINOW, EDITOR AND COFOUNDER, THE CORPORATE

LIBRARY

STATEMENT OF SUSAN WACHTER

Ms. WACHTER. Chairman Waxman and distinguished members 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 credit crunch.

I am Susan M. Wachter, the Richard B. Worley professor of financial management at the Wharton School at the University of

Pennsylvania. Formerly, 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 rather than longterm 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 fail. 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 first. The two phenomena are correlated in remarkable number 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 well, in the current

debacle.

Dysfunctional compensation schemes operated at every stage of

the subprime mortgage securitization process. Short-run volume

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drove up compensation and, therefore, provided incentives to

produce throughout the subprime mortgage supply chain. Longterm loan performance and the likelihood that loans would fail did

not slow down the production process until the failures actually did

occur.

As the drive to expand markets and garner additional volumedriven fees, loans were underwritten at ever-riskier terms and with

fewer controls and less information on the borrower’s ability to

repay. Information that pointed to greater risk was ignored, and

these loans were originated, underwritten and securitized, generating unprecedented growth in fees.

Compensation structures that are driven by short-term volume

production often lead to financial crises. Such crises may, in fact,

be inevitable in the absence of market or other institutions that

force consideration of long-term performance and profitability.

In the short run, weakened lending standards fuel demand,

which actually drives up housing prices. The result, in this case,

was higher housing prices which temporarily supported the market

but which caused today far higher than anticipated foreclosures.

This occurs when it becomes apparent that the price rises are artificial.

Loans made at previous high housing prices with high loan-tovalue ratios are now under water, with loan amounts near to or exceeding mortgage balances. This is where we are today in much of

the 2006 book of business of subprime adjustable rate mortgages.

And overall we have seen today, for the first time since World War

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 price 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 poorly underwritten loans, 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, as 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 fail would

fall only on the lender or the investor. Yield spread premiums also

widened the incentive gap between broker and lenders.

Mortgage brokers had little 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 ratVerDate 11-MAY-2000 11:32 Oct 27, 2008 Jkt 000000 PO 00000 Frm 00076 Fmt 6633 Sfmt 6633 C:\DOCS\44914.TXT KATIE PsN: KATIE
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ing agencies were mostly indifferent to the risk of these loans as

well, because they also knew their revenue would be generated by

the securitization process. The increasing demand for these highyield securities ultimately led to an increasing flow of borrowers

into subprime loans.

Where were the investors, the ultimate holders of the risk, in

this process? Surely they were incentivized to seriously evaluate

the risk-return tradeoff of the securities they were purchasing and

holding. While this would seem self-evident, this did not occur.

Rather, investors were purchasing mortgage-backed securities

and collateralized debt obligation interest in mortgage-backed securities, which were highly heterogeneous with risk specific to the

mortgages in the pool. Without standardization, there was limited

liquidity and these securities did not trade. They were not marked

to market; rather, they were marked to model.

The models were approved by rating agencies that, as I 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-A.

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 ‘‘A’’

and the riskier ‘‘B’’ and well-named ‘‘toxic waste’’ pieces of these securities, there was little 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-only 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 mortgages

extended to people with nonprime credit, and, 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, as 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 WAXMAN. Ms. Wachter, if you want to quickly sum up.

Ms. WACHTER. It is my pleasure to do so. Thank you, sir.

The ultimate question before us is, do we want a system that

produces risks such as those that we have seen in the current market? It is clear that Wall Street will underwrite any risk. Risk-taking with the home, through instruments such as I have described,

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expose borrowers and investors to risk, but they also expose all

homeowners and the overall economy to increased house-price volatility and risk.

Such lending, financed through MBS, even with diversified loan

portfolios, is nonetheless completely exposed to the risk of the business cycle. Negatively 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 were friendly and allowed the refinancing or not.

We, as a society, will have to decide whether we wish to encourage such financially vulnerable lending as backing to the asset

which we also call home.

Thank you, Mr. Chairman.

[The prepared statement of Ms. Wachter follows:]

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Chairman WAXMAN. Thank you very much.

Mr. Galvin.

STATEMENT OF WILLIAM GALVIN

Mr. GALVIN. Good morning. I am William 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 respectfully suggest that it’s not

enough to simply ask how it happened and who profited, but it 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 oil and wheat come to mind.

With respect to mortgages, there has been a growing awareness

of CDOs and collateralization of pools of mortgage loans. We have

seen the bursting of the credit bubble and frozen credit markets.

I would like to testify as to my experience, as the head of the Massachusetts securities division, about some of the consequences of

these events to individual investors, small businesses and local governments.

CDOs are artificially fabricated financial instruments,

collateralized by certain assets such as pools of subprime mortgage

loans. In certain CDOs, the collateral consisted of pieces of other

CDOs, which can magnify the risk exponentially.

A recent administrative complaint filed by my office involved the

sale of CDOs to the city of Springfield, MA. Springfield had struggled financially over the last decade. In 2004, it had a $20 million

operating deficit, but with an intensive restructuring, it staged a

miraculous recovery, resulting in a surplus at the end of the 2006

fiscal year.

The city hired two agents of Merrill Lynch to invest its hardearned surplus cash. The city’s goal was to invest in safe cash-like

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, at the time of the sale, the Merrill

agents did not discuss the risks of owning the CDOs 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, we filed an administrative complaint against Bear Stearns with respect to two

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failed hedge funds that invested heavily in mortgage-related CDOs.

The allegations involved improperly disclosed conflicts of interest.

We’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

office. We are examining other CDO sales to governmental entities

in Massachusetts. We are also examining how some of the riskier

CDOs managed to receive a triple-A rating.

In addition, we are inquiring as to the effect of the bond insurers’

insuring of risky CDO transactions on the value of insured municipal bonds and the impact of downgrades on bond insurers. We are

particularly concerned about the frozen auction markets on the borrowing costs to municipalities.

I believe when the final tally is taken, the magnitude of investor

loss will be breathtaking. And I fear that such losses will not be

limited to wealthy, savvy risk-takers but the small, risk-averse investors and local governments who have been unwittingly caught

up in this rampant web of risk-taking will incur significant and unnecessary cost.

The cumulative effect on our overall economy has been 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 Lowell, MA, which is another Massachusetts city. From 2000 to 2005, there were fewer than 50 foreclosures per year in Lowell. In 2006, there were 93. In 2007, there

were 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-moneydown mortgages, interest-only mortgages and mortgages with very

low introductory teaser rates. Often these loans were made by national, not local, lenders. The traditional relationship between lender and borrower 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 wide variety of fees, including mortgage origination fees, investment banking fees for underwriting the securities, and the sales and commission for selling pieces of them.

Finally, the recent freezing of the auction market appears to be

yet another after-effect of the subprime lending excesses and the

CDO market meltdown. Within the last couple of weeks, my office

has received calls from people who thought they were investing in

safe liquid investments only to find that they, in fact, have purVerDate 11-MAY-2000 11:32 Oct 27, 2008 Jkt 000000 PO 00000 Frm 00088 Fmt 6633 Sfmt 6633 C:\DOCS\44914.TXT KATIE PsN: KATIE
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chased auction market securities that are now frozen and cannot

be liquidated.

We received calls from a young saver whose house downpayment

is now frozen; two siblings whose family trust is now frozen; a

small-business owner who finds their business interrupted because

money they thought was liquid is tied up in frozen auction market

securities. My office will be investigating these cases in order to determine whether investors were informed their investments might

become illiquid.

In addition, we are looking into the role of the major investment

banks that sold these securities had in these events—such as the

CDO auction market crashing; the triple-A rating proving to be all

but meaningless; bond insurance becoming very tenuous—that led

to the freezing of these markets.

What we are left 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 committee 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 continuing scrutiny by regulators.

Thank you for the opportunity to provide this testimony today.

[The prepared statement of Mr. Galvin follows:]

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Chairman WAXMAN. Thank you very much, Mr. Galvin.

Mayor Lawrence, pleased to have you with us. Be sure that the

button is pressed.

STATEMENT OF BRENDA LAWRENCE

Ms. LAWRENCE. I’m pleased to be here. Good morning, Chairman

Waxman and honorable members of this committee. Thank you for

inviting me to discuss the problem of foreclosures, as a mayor, in

the city of Southfield, a problem that, as 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. We are a middle- and upper-class community that has been known for having strong and vibrant neighborhoods. We are not the type 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. We 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, 8,000 homes went into foreclosure in 2007. And

in metro Detroit, the metropolitan area, 47,000 homes are now in

foreclosure.

Not surprisingly, home values are falling throughout our region,

with Southfield experiencing a 3.2 decrease in the year 2007. We

now have residents whose mortgage balances exceed their home

values, and they’re simply abandoning their homes, rather than go

through the foreclosure procedure.

Even though we have already reached a critical level, the bad

news is that the situation is likely to get worse. With a wave of

adjustable rate mortgage resets expected this year, the number of

foreclosures is certain to accelerate.

The negative impacts of these mortgage foreclosures and 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 children; 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 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 consequences.

In a word, foreclosed and vacant homes are a cancer in any city’s

neighborhoods.

In Southfield, we’re using our best efforts to deal with these

problems. As soon as we identify a foreclosed or vacant home, it is

immediately inspected and ensured—if need be, we will board that

home, if necessary. We check to see if the utilities are operable,

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and, if not, we 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 data base, 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.

With our city’s tax revenues already diminished by declining

property values and by the economic conditions which has caused

a reduction in State aid, the cost of these efforts is an untimely

burden on our city’s and every city in this country’s budget.

Notwithstanding our efforts to deal with foreclosure-related

issues on a local 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. We met with representatives from

the mortgage industry to discuss our concerns. The bottom line, we

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 January 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.

Finally, let me say that, as a mayor, one of my greatest fears is

the negative impact foreclosures will have on the tax base of local

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 stations, fire stations, hospitals, and maintenance of sewers, roads and bridges. If foreclosures lead to a continued and prolonged decline in property values with a corresponding decrease in

tax revenues, the level and quality of the essential public services

local governments provide will decline.

And thus, while local officials will serve on the front line, as

mayors do every day, to continue to address foreclosed issues at

home, the Federal Government needs to act swiftly and decisively

to confront the growing issues on a national level.

In closing, I want to say, while it’s on the headlines every day,

I talk to mayors every day, and this issue is one that we have to

touch, smell and deal with on a daily basis. We are truly in a crisis.

And I thank you for the opportunity to speak today here.

[The prepared statement of Ms. Lawrence follows:]

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Chairman WAXMAN. Thank you very much, Mayor Lawrence.

Mr. Yezer.

STATEMENT OF ANTHONY YEZER

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 recommend itself. It

just so happens, as I edited my remarks here, I came up with five

and five.

First, my five basic points. Point No. 1: The market for mortgage

credit consists of the prime or ‘‘A’’ market, the government-insured

market, called ‘‘A’’, subprime and ‘‘brand X.’’ And there tends to be

no attention to brand X. If we observe property records, there are

a lot 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 No. 1. There are, in fact, four markets. We should never forget the brand X market.

No. 2, second point: There’s a sound economic rationale 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 won’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 you’ve got to sell your house. Well, I don’t think that’s appropriate. Subprime market helps you out of that.

It’s not uncommon for new markets to overshoot. I remember the

NASDAQ in the late 1990’s. This corrects. Look at the NASDAQ

today.

In the case of subprime, the normal market overshooting was

supplemented by government, sort of, pushing the lenders on the

back and saying, ‘‘Go out there and serve all the underserved.’’ As

one of the people who, when the government was saying that, said,

‘‘I 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 little 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 the link between housing prices and general financial collapse.

OK, my third point is that, until recently, the subprime market

looked pretty well-behaved. In my testimony, I have some nice prepayment and default equations. They look really good, really good.

I know you’re not excited, but that’s really good. Even things like

for the 2/28 ARM, do you get a spike in prepayment or default at

24 months? The answer is a spike in prepayment at 24 months. It

looks like the folks were using it wisely.

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So then, what happened? Point No. 4, what happened? Well, the

answer is, according to the research that we’ve been able to do recently, is that basically the bottom dropped out of prices. I actually

did the prices for—I couldn’t get your district, Chairman Waxman,

but this is all of LA. OK, for everybody in the room, your house

price increase looks like the Matterhorn—by the way, not just now.

It’s like the Matterhorn. You’ve had three collapses, OK, since the

late 1970’s in house prices in LA. Guess what happens when you

fall off the cliff? A lot of subprime goes bad.

So my fourth point is basically, yeah, it’s house prices and, yes,

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.

OK. Fifth point is, I mean, let’s not forget that we also have a

government sector here that hasn’t done so well. I mean, if you

look at, you know, delinquency and default on FHA, it’s not a pretty story. And we’re actually paying for that publicly. And, let’s see,

management of FHA—I guess we’ll blame it on Mr. Bush. OK, 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, actually,

the performance of FHA compared to sub should be much better

than subprime, and, in fact, it isn’t that much better. So we really

have an issue with FHA, keeping things in perspective, and with

management of FHA.

All right. Five recommendations, OK. What I really wanted to do

with these recommendations is to prevent recurrence.

The first thing is the current emphasis on borrower education

and financial literacy is misplaced. You can’t teach someone financial literacy if they’re not mathematically literate. And the people

are not 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.

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. All lenders

who provided it 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 way, FHA could pick up the Waxman mortgage as

something they would do.

Third point is let’s examine banks for safety and soundness, and

not for capital allocation.

Fourth point is, actually, all our mortgage products now are not

what economists would recommend. We actually need some innovative mortgage products. And down the line, I’d hope people would

think about that and let some economists talk about what a really

neat mortgage would be.

And the fifth point is we ought to give more attention to the efforts of lenders at loan modification or forbearance. I’m really impressed with the significant numbers of loans where we have modification of forbearance. But I’m also impressed with the survey

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data that indicates lots of people who are in financial trouble don’t

contact their lender. And they could get in on these programs.

OK, so I made five points, basically, about the current situation,

and then I had five recommendations. That’s certainly more than

any individual should be entitled to. Thank you.

[The prepared statement of Mr. Yezer follows:]

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Chairman WAXMAN. Thank you, Mr. Yezer.

Ms. Minow.

STATEMENT OF NELL MINOW

Ms. MINOW. Thank you very much, Mr. Chairman, members 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,

we want CEOs to be paid hundreds of millions of dollars. Nothing

makes us happier than when CEOs earn hundreds of millions of

dollars, 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 literally cannot afford. There’s an outrageous disconnect between pay

and performance.

At the Corporate Library, we provide research on issues of corporate governance, and the most reliable predictor of the potential

for litigation, liability and loss is excessive CEO compensation.

So I think it’s 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 you heard about all the different parts of

it. It takes a 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 lot of economic crack into

our system.

If we paid Congress—we could never pay you for performance,

because you perform vastly in excess of anything we could pay you.

But if we paid Congress—[laughter]—if we paid Congress by the

numbers of pieces of legislation you passed, I can guarantee you we

would have more pieces of legislation. However, that would not

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.

And the first 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 capital

have no way to respond to these outrageous pay packages. There’s

no way to replace the boards of directors. There is a very good piece

of legislation that already passed the House with a very strong majority on ‘‘Say on Pay.’’ We would love to see that pass through the

Senate. That would help a lot.

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Another issue is the ability to replace directors, either through

majority vote or proxy access. When you hear about the pay plans

today, they will tell you that they’re based on the market. They are

not. They’re based on comparables, not results. They’re comparing

X to X. It doesn’t mean anything. They can show you all the pie

charts in the world, there is no market basis for this pay. And

there’s no excuse for paying people so much for doing so little.

Put these pay plans under a microscope, as 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. Just like

any other asset allocated by 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 prepared statement of Ms. Minow follows:]

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Chairman WAXMAN. Thank you very much, Ms. Minow.

I want to thank all the panelists for your testimony.

We are now 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.

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, look 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.

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 least, 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,

‘‘results in the diminution of the executive’s status, title, position

and responsibilities’’—well, 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.

Now, 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.

Now, 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.

I would like your evaluation of this agreement. Make me understand why a board would have negotiated an agreement. I understand what the competition is, of course, for executives of this kind,

the size of the company and all of that.

Is there any way in which these severance terms could be considered justifiable from a corporate governance perspective, looking to

the board and its actions?

Ms. MINOW. Thank you for that question.

It’s not the worst severance agreement I’ve ever seen. I think

that would go to Tyco, where Dennis Kozlowski’s contract provided

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that even conviction of a felony was not grounds for termination.

So that was probably the rock-bottom.

But the general idea about severance agreements——

Ms. NORTON. How typical is this?

Ms. MINOW. It is very typical, with one small 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, ‘‘Well, 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 ways 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 shareholder, as

Mr. Mozilo is, then I don’t really see that there is that justification

for a severance package of this kind, and I would be opposed to it.

Furthermore, I feel very strongly, as you suggested, that CEO

contracts should provide that termination for cause includes doing

a bad job. I think every other job in the world you can get fired

for doing a bad job and not get severance. It’s only in the wacky

world of CEOs where you get severance for failing.

Chairman WAXMAN. Thank you, Ms. Norton.

Mr. Issa.

Mr. ISSA. Thank you, Mr. Chairman.

I understand the boards aren’t working. So would you put that

up, and would you give that to Mr.—is it Yezer?

Mr. YEZER. As if the first ‘‘e’’ were an ‘‘a.’’

Mr. ISSA. OK, Yezer.

I don’t need more help. I’m already doing badly enough as it is.

You know, Mr. Chairman, it was interesting that in your opening

statement you picked on two companies that aren’t here—Circuit

City, who I’m well aware of in my prior life, in the real world, and

their problems and the reasons for their layoffs and so on.

Sadly, what you probably don’t know is that Circuit City has

been beat, if you will, to a certain extent, in the marketplace. When

they had employee compensation, salesmen compensation, that

were commission-based, Best Buy went to a practice of paying a

less-than-$16-an-hour flat wage, no commissions, bragged about it

that there was no high pressure, and did better.

So, ultimately, Circuit City, who had a system of compensation,

commission compensation, lost out in the marketplace. And I’m sad

to see that, because I would prefer to see that kind of direct benefit

to the sales force. But, clearly, the last effect that you talked about,

the layoff of $16-an-hour flat-rated people, once again, in a vacuum, sounded terrible but, in reality, was the result of their losing

in the marketplace.

Mr. Yezer, before you got to Occidental Petroleum, Mr. Ray Irani

being the chairman who got, you know, in 2005, $64 million in

compensation, can you note that the stock value there went from,

in 2000, about $6, $7, to about $80, roughly, today?

Mr. YEZER. I’m sorry. When did you say he got the compensation?

Mr. ISSA. According to—I did some quick work here. Total compensation of $64 million——

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Mr. YEZER. I’m——

Mr. ISSA. I’m sorry. That was in 2005. His 5-year compensation ended up being about $127 million, almost all in stock appreciation. If you were at the helm of a company in 2000 that was at $7

and you were able to successfully take it to—approaching $100,

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? What do you think the

benefit should be? And do you think that Mr. Ray Irani’s benefit

was at least in some part tied to the success of his company during

that period?

Mr. YEZER. I’m—OK. I’m not an expert on benefits, but I’ll make

two comments about this. The first thing I might do is an event

study that is, when this was announced, see what happened to the

share price. If the announcement resulted in the share price going

down, then, you know, I wouldn’t be too happy about it. If the announcement resulted in the share price staying flat or going up—

I mean, the announcement of the compensation. By the way, can

I tell 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 went up significantly. You know, a lot of the most overpaid chief executives of

firms are people who actually even collect a nickel and their firm

doesn’t perform at all.

Mr. ISSA. Right. And I appreciate that. Ms. Minow——

Mr. YEZER. I’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. Irani has been

at the helm of the company as chief operating officer and chief executive officer since 1983, 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 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——

Mr. YEZER. If this company——

Mr. ISSA. I have limited time. I appreciate your answering that.

Ms. MINOW. Mr. Issa, as I said, nothing makes me happier than

seeing a CEO earn hundreds of millions of dollars. 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 really have a lot to do with his leadership. But, in general,

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yes, 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 WAXMAN. The gentleman’s time has expired.

The Chair now recognizes Mr. Welch.

Mr. WELCH. Thank you.

Thank you, Mr. Chairman. I want to thank the witnesses. You

all are on the frontlines. I really appreciate your leadership in trying to get some relief and also frame the issues. Let me ask a couple of questions. One of the things that was occurring with Mr.

Mozilo is that, between November 2006 and December 2007, he

sold about 5 million shares of his stock and that was occurring at

a time when Countrywide under his leadership had designed a

plan to buy back over $1 billion worth of stock and borrowed money

in order to do that. As an expert on corporate governance, Ms.

Wachter—I’ll ask Ms. Minow. I’ll start with you first. What is your

reaction to that apparent 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. Welch, I’m a very, very hard liner on this. 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 if he had to hold on to it.

Mr. WELCH. Mr. Galvin, how about you?

Mr. GALVIN. Well, 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, were publicly traded corporations. So that is

another whole dimension. When you look at the coverage they received, once again, there are many elements of conflict. They were

often times receiving coverage from some of these same investment

banking houses that were engaging in business with them. So I

think the bigger question I guess is, we recognize that housing is

a fundamental need, a necessity of life. And the impact of this crisis that I think is evidenced by the testimony you’ve heard this

morning has been not only devastating to those who need housing

but also to our economy. And the question is—and that’s what I

tried to raise in my original testimony—is, how do we make sure

that this doesn’t happen again? I understand the mission of this

commission—committee rather is to look at oversight with a view

toward making sure it doesn’t happen again. And how do you fix

what has happened? And so I think there is a real problem when

you have this type of activity on the part of CEOs. I share Ms.

Minow’s concern, when you see a sale—we regulate—I regulate securities in Massachusetts. When you see this kind of sale, it raises

red flags.

Mr. WELCH. Thank you.

Professor Wachter, how about you? You have the chief executive

implementing a plan for buy back and—and letting—for the company and a personal plan for his own finances to sell.

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Ms. WACHTER. Of course, that was his right. Unfortunately, in

this setting, there were 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 commenting on

the ethics of what he did.

Mr. WELCH. Well, you know, my experience around here is that

most of the really bad things that happened are legal. 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 Ross Zimmerman, who came to the conclusion Mr. Mozilo’s

pay was significantly inflated. Countrywide then hired another

compensation consultant, Towers Perrin. And internal e-mails

show that John England, a Towers Perrin advisor, was 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? They

first consult and gave an opinion that said the pay was too high.

Countrywide then capitulates and gets a second consultant. And

then that consultant has personal and direct interaction with the

person whose compensation is in question.

Ms. MINOW. Yes. That is exactly——

Chairman WAXMAN. Make sure—be sure your mike 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. Welch. Your time has expired.

Mr. Davis.

Mr. DAVIS OF VIRGINIA. Well, thank you very much. I mean, I

look back to the Fed and some of their publications in 2000. They

were embracing subprimes. They looked at this as a way to make

housing more available to people that otherwise wouldn’t have had

it. The real problem here is the market turned down. We’ve gone

through these—I’ve been in office 29 years. I’ve seen boom and

bust. I was in local government for 15 years. And we were reliant

on the real estate values. And when you go through a bust in the

marketplace, our budgets were put into turmoil. We went through

this in Fairfax in 1991 and 1992. So the real problem here when

you look at all of the other—a lot of issues, was the fact that the

market turned down.

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Ms. Minow, isn’t that what happened actually.

Ms. MINOW. Mr. Davis, let me—let me assume that is correct for

a moment because it could be. That would be fine with me. But

why are we paying these CEOs as though they were successful? I

wouldn’t—I understand that no one can predict the future, even

the people at the very, very top of the economy. But we are paying

them as though——

Mr. DAVIS OF VIRGINIA. That is a separate issue and I’ll get to

that. That is a separate issue.

Ms. MINOW. OK. But I’ll accept your point.

Mr. DAVIS OF VIRGINIA. But if you didn’t pay them anything, you

still would have had this crisis?

Mr. Yezer, isn’t that basically——

Mr. YEZER. Yes, this——

Mr. DAVIS OF VIRGINIA. I mean, you’re looking for a lot of culprits

when things go wrong.

Mr. YEZER. Well, because look at what happened—you’ve got the

losses in FHA, right?

Mr. DAVIS OF VIRGINIA. Right. I mean, across the board. In fact,

there are players who are probably equally or more culpable when

you talk at some of the lenders, the appraisers, the rating agencies.

I mean, there are a lot of folks that got caught up in this, including

the Federal Government, who was encouraging this type of thing.

But let’s talk a minute about compensation. There is a claim—the

majority says that the compensation wasn’t in line with performance at these companies. But even their own charts showed that

Mr. Mozilo—his total compensation was $42 million in 2006 and

roughly half that in 2007. And that is even using some sleight of

hand to include $20 million in stock sales as compensation. So his

compensation was cut in half. Mr. O’Neal’s compensation was $48

million in 2006. Only slightly more than a million in 2007. And Mr.

Prince’s compensation was $25 million in 2006 and less than half

that in 2007. Isn’t it also true that any stock options that were not

exercised when the stock price was high are then much lower later

on? So they had—in some of these instances, they had to keep 75

percent of their stock under—you know, under the rules. So as the

stock—they suffered, too, now. They started out with a much higher base than the average person, and you can argue that was good

or bad. But the argument is that they took a hit, too, relative to

everybody. It is a higher percentage hit in some cases. They just

start at a much higher base.

We see that by the way not just in corporate America; we see it

in sports, athletics, entertainment across the board if you ask what

is good compensation. So this value of the stock that they were not

allowed to sell while they were employed was vastly reduced. And

as the performance went down, they took huge hits. They would

have had a huge upside had the economy come in. I’m not saying

this isn’t a lot of money, but to take a look at—they did take a hit.

Now, Ms. Minow, in your testimony, you repeatedly used the

term ‘‘inflated’’ in talking about the earnings or stock prices which

were the bases for what you considered to be excessive compensation paid for the executives. Would you define the term ‘‘inflated’’

for us?

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Ms. MINOW. Yes. I would define the term to say numbers that

had to be corrected later on either because of poor judgment or

fraud.

Mr. DAVIS OF VIRGINIA. Yeah. Well, in some cases—you know,

you make decisions every day in business and factors get outside

your control. High/low prices, interest—things outside your control.

When things go wrong, we’re all looking for somebody blame. But

as you take a look at this whole issue, there are a lot of people to

blame, including the people who signed on the mortgages, in some

cases, that they couldn’t possibly have taken.

Ms. MINOW. I said that in my remarks.

Mr. DAVIS OF VIRGINIA. I know you did. I’m just saying, we’re

looking here at just one aspect of this, and I think it is much more

complex than that. And ultimately, of course, the shareholders, this

is their duty to look at what the compensation is. They have that

right, pension funds——

Ms. MINOW. 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’ll 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? I’ll ask

you. You’re the economist.

Mr. YEZER. OK. Well, Susan is also.

Mr. DAVIS OF VIRGINIA. OK. I’ll just ask you both.

Mr. YEZER. OK. Let me just make one previous point because I

think I didn’t made it clear.

Mr. DAVIS OF VIRGINIA. Sure.

Mr. YEZER. There is something in financial economics called an

event study in which you basically say that news gets capitalized

in the share prices. So, essentially, I just look at what happened

to the share price when an announcement 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 early.

So this is a well established academic method in which you could

have someone, even a graduate student employed and 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 economist does it.

As to the issue of home ownership, there was a huge increase in

home ownership, 64 percent to almost 70 percent. It is a tough—

you know, it is tough to attribute that to things—the literature

generally thinks that a lot of it was due to credit restraints being

eased by the subprime market. Are we likely to go back to 64 percent? I don’t think so. I mean, I’d actually probably be willing to

bet a lunch that we won’t go back to 64 percent.

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Ms. WACHTER. Mr. Davis, if I may respond. The home ownership

rate has already declined to the levels before subprime took off. So,

although there was this dramatic increase from 2001 until now, we

are back down to the 2001 levels. We’ve lost all the gains of the

period of the subprime growth. So, in fact, home ownership is still

declining. So net—I do believe subprime will decline.

Second, if I may, on an earlier point, and with all due respect,

the price rises that occurred in the year 2006 were because of

subprime. So subprime created the price rise that is now putting

homeowners under water with loan-to-value ratios under one.

Mr. DAVIS OF VIRGINIA. Good point.

Chairman WAXMAN. Thank you, Mr. Davis of Virginia.

Mr. Yarmuth.

Mr. YARMUTH. Thank you, Mr. Chairman. And thanks to all the

witnesses. I come at this from a kind of schizophrenic perspective.

I was a journalist for many years and wrote columns. And I find

many of this—much of this information would be wonderful fuel for

columns. I mean, I could look at Mr. Prince getting a $10 million

bonus when his company lost $10 billion and say, that is a wonderful column and it is a wonderful one-liner.

But on the other hand, my father was a CEO of a Fortune 500

company. My brother is a CEO of a public company. And I know

that, in fact, that $10 billion loss could have been an excellent performance because if the company maybe was scheduled to lose $11

billion, then he might have saved the company $1 billion. So that

extra $990 million saved would have been worth it. So I guess my

question is that when we look at compensation and we can be—we

can interpret it many different ways, and Ms. Minow, you referenced that. I did a radio interview this morning, and I was asked

about this hearing. They said, what business is it of the government and where is the public stake in this? Now, separating the

housing crisis portion and just dealing with the overall broad question of employee—CEO compensation, what is the public stake in

this question?

Ms. MINOW. First, I would like to say, with regard to your hypo- thetical, I’m in favor of paying somebody $10 million for losing $1

billion less than he was scheduled to. As I mentioned earlier, when

we were talking about Occidental, I’m in favor of indexing pay to

the peer group or to the market as a whole. And I think that is

how you handled that problem.

With regard to the overall public interest, as I said, this undermines the credibility of our capitalist system. In global 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 that Congress should legislate how

much people get paid? Of course not. That has turned out to be a

mistake every time it has been tried. That is why my emphasis has

been on giving the market a chance to work by removing the obstacles to shareholder oversight.

Mr. YARMUTH. And would you repeat what some of those obstacles are?

Ms. MINOW. Sure. Right now—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 election when

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management picks the candidates, no one runs against them, and

management counts the votes. You know, I don’t know what other

country would consider that an election. Right now there is no way

for shareholders to remove directors. And so one of the policies that

I’m in favor of is what is called majority vote. That is someone

doesn’t get over 50 percent of the vote, they should not be allowed

to serve. That would allow shareholders to replace boards of directors and particularly Compensation Committees that agree to these

abusive plans.

Mr. YARMUTH. But isn’t the reality that most shareholders don’t

care enough and probably shouldn’t care that much if you have 100

shares of a company and you have a life or most of the stocks are

owned by mutual funds, institutional investors, that the actual

shareholders really don’t have any way of doing that anyway? I

mean, isn’t there a structural impediment to what—the kind of democracy you’re talking about?

Ms. MINOW. As you just indicated, more than half of the stock

in this country is held by institutional investors who actually are

very big, very smart, and very sophisticated and do know how to

vote. And as you can see, the votes have become more and more

rational over the past few years as there has been more scrutiny

of those votes.

Mr. YARMUTH. Dealing now on the foreclosure side and the impact on communities. I’ve talked to people around my community

in Louisville, Kentucky, and our foreclosures are up significantly

over the last 2 years. We’re now to 3,700, I think, for this past

year. And we were in the 500 to 600 range 2 years ago. But the

people I talked to in the banking industry in my community and

in the real estate community and the realtor community and also

in the home builders community say it has very little to do with

subprime mortgage, in my market, that this is much more a general economic squeeze issue than it is a subprime crisis. I understand that this differs around the country.

And, Mayor Lawrence, I understand it differs in your community.

But how much—have you been able to determine whether this

really—the subprime crisis is the major factor in the foreclosures

or whether it is a broader economic issue?

Ms. LAWRENCE. You’re absolutely right. There is a portion of it

that is directly related to subprime. But, however, our slump in the

housing market—if I lose my job, the norm was that I would sell

my home, readjust my financial situation, buy a cheaper home, and

make other options. Right now—usually the mortgage now is higher than the price of the home. And in addition to that, you can’t

sell the home. So then you have that component of this walk-away

which is something that is very new to communities, especially to

the middle class community. Someone will walk away from usually

the highest investment you have in your portfolio as an investor or

buyer.

The other thing that is happening is that when you look at the

job loss and the credit ratings—now, I will give you an example.

This is one that really kind of floored me. Two-family income, one

of the family members lost their job, couldn’t find a job and eventually found a job in Arizona. They couldn’t sell their house. They

walked away from the house. Their credit was still good, bought a

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house in Arizona and left the one that was here. One of the things

that come from that is zero down. If I have nothing, no equity or

nothing invested in a home, what am I losing? It is like having an

apartment, you just walk away from it. So there are a lot of components—I mean, our economy, the housing slump, the subprime, all

of that together is creating the crisis.

Mr. YARMUTH. Thank you very much.

Chairman WAXMAN. Mr. Yarmuth, your time is up.

Mr. Bilbray.

Mr. BILBRAY. Mr. Chairman, I’d like to yield my time to Mr. Issa.

Mr. ISSA. I thank the gentleman. Professor Wachter, I am

thrilled that you did such a great job of expressing sort of the history of how we got here. And somewhat rhetorical but I think important, when did you first write or publicly say that we were

heading for the meltdown that you now went through the whole

how we got there? When did you see it and say it?

Ms. WACHTER. 2005, in—beginning of 2006, the end of 2005.

Mr. ISSA. OK, which is interesting, because if you look on the

board here, Alan Greenspan almost at that exact same time, as

probably one of the most trusted economists in America, was saying that these products were still good. When did it become—obviously not then. But when did it in your mind become pretty universally understood by economists and the academic community that,

in fact, we had gone down the wrong road in allowing the growth

of subprime through these mechanisms?

Ms. WACHTER. Not yet today. We actually have well respected

economists on this panel, Tony Yezer, who would disagree. I think

he has just said that these are useful instruments.

Mr. ISSA. Well, I think he also said that the meltdown—I’ll get

back to you in a second. I’m going to very much give you both time

that I have. I think there is an important point here, though. All

the way back in 1977—and what I wanted—can you see that board

from where you are? I know it is a ways off. But all the way back

in 1977 when Mr. Waxman was not yet the chairman, the Congress

passed the Community Reinvestment Act. The median price of a

home was about $38,000. Today, it is, even after the shrinking, it

is around $217,000. There has been a steady escalation—this is the

national—I have to tell you, as a Californian, there has not been

a steady escalation. It has been up and down a little bit more. But

it is on the board now. That escalation—at some point, the question

is all the way back in 1977 and in 1993 and at each juncture, the

government—we on the dais take responsibility—said to banks and

other institutions, you must have a portfolio of these high risks,

you must find ways to get to underserved—underserved not because nobody wants to loan them money, but underserved because

they are less credit worthy. Do you believe that going forward, because you did a great job of telling us how we got here, that we

need to look at other mechanisms to deal with low-income or poorcredit individuals and their desire to have home ownership and

how we facilitate that when appropriate?

Ms. WACHTER. Thank you very much. It is an extremely important question. May I just as background—that chart looks like a

steady increase in house prices. The reality is you correct for inflation. House prices did not increase in the United States for conVerDate 11-MAY-2000 11:32 Oct 27, 2008 Jkt 000000 PO 00000 Frm 00132 Fmt 6633 Sfmt 6633 C:\DOCS\44914.TXT KATIE PsN: KATIE
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stant quality home until recently, until 2000. We actually have had

relatively steady, although slightly increasing about 1 percent a

year. There has been a dramatic rise nationally since 2000. I’ll

come back to that because that is related but not the essence of

your question.

The essence of your question has to do with homeownership, access to home ownership and the importance of increasing home

ownership for all in our society, those who may not be able to access it, also have opportunity to build wealth and have their——

Mr. ISSA. And I’m going to hold you at that point. The opportunity to build wealth, isn’t that an inherent problem that we

have—economists and yourself included—have come to assume

that somehow you leverage home ownership, you leverage the interest rate against inflation, against the appreciation in order to

create wealth? Here today are you willing to say that kind of

leveraging is what we should continue to encourage, or should we

look at home ownership as an 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 $38,000 to $228,000, 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—last 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 were introduced in 2000. This is not the legislation that Congress passed

with government insurance. It is the option ARMs. It is the

subprime teaser rate ARMs. It is these new instruments——

Mr. ISSA. I appreciate all that in your testimony. My question

really was, as late as 2005, you’ve got Alan Greenspan still saying

that these devices are a good thing.

Ms. WACHTER. 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 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 were invested by community lender banks. We’re talking about highly leveraged, negatively amortized ARMs, these subprime mortgages,

these teaser rate ARMs, all of these instruments are simply inappropriate. That doesn’t mean that they have to regulate it to zero.

But they became—their use was completely inappropriate in terms

of the importance in today’s—in the economy of these past years.

Today the market is completely shut down for much of this

subprime. We now have to be very careful that we don’t completely

shut off the liquidity for the appropriate use of adjustable rate

mortgages and jumbo loans. So we’re now in a different part of the

curve. But absolutely I’ve said in writing and I myself have a quarVerDate 11-MAY-2000 11:32 Oct 27, 2008 Jkt 000000 PO 00000 Frm 00133 Fmt 6633 Sfmt 6633 C:\DOCS\44914.TXT KATIE PsN: KATIE
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terly product that comes out which points to the inappropriateness

of these very mortgages.

Chairman WAXMAN. The gentleman’s time has expired.

The Chair recognizes himself for 5 minutes.

Ms. Minow, you’ve been critical of the corporate governance practices of Citigroup. During our committee’s investigation, we learned

that when the former CEO of Citigroup, Charles Prince, left the

company in November 2007, he was given a $10 million bonus in

cash. He wasn’t entitled to this because he had no employment contract with Citigroup.

Now, at the time Mr. Prince left Citigroup, the company was los- ing $10 billion as a result of decisions made while he was CEO. Did

this make sense? Was it appropriate to give Mr. Prince a $10 million bonus when Citigroup had just lost $10 billion?

Ms. MINOW. Mr. Chairman, I feel a little bad picking on him. I

don’t think it was appropriate. But his sins are so much smaller

than the other people we are talking about that it almost seems

like $10 million isn’t that much. Overall, his pay package was not

as far out of whack with performance as the other people that

we’ve been discussing. And I will say that it is not unusual for

CEOs without a contract to be given that kind of money because

the board feels bad about their exit, and it is not their bank account, so they’re happy to write a check on it.

Chairman WAXMAN. Well, from a shareholder perspective, what

rationale would there be to give a former CEO who had just presided over a loss a $10 billion, perks of $1.5 million, a cash bonus

of $10 million? From a shareholder—because the board is supposed

to represent the shareholders, aren’t they?

Ms. MINOW. That is my belief. It doesn’t always work that way.

From a shareholder perspective, I do not think it is possible to justify that payment.

Chairman WAXMAN. Mr. Galvin, you represent an institutional

investor. Do you have a comment on this?

Mr. GALVIN. Yes. I’m concerned about this because it continues—

the continuation of this practice or the acceptance of these practices may well lead to additional abuses in the future. One of the

big problems in the whole financial services area historically, I 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 we’ve all been speaking to this

morning as far as the housing market.

But it also is, what are we learning from this? What are we

doing about—to make sure this type of problem doesn’t occur

again? One of the issues that came up in the context of Congressman Issa’s questions is the whole issue of securitization. The reason this big pool of money was available was because of

securitization. Severing the link between a specific value for a

home and, in fact, the pool of money that was available that fostered the abuse of loans that were just chronicled by the professor.

So the question is, if you continue to reward people for making mistakes, if you continue to reward people for screwing up, you know

what? They’re going to screw up again. It may be in a different conVerDate 11-MAY-2000 11:32 Oct 27, 2008 Jkt 000000 PO 00000 Frm 00134 Fmt 6633 Sfmt 6633 C:\DOCS\44914.TXT KATIE PsN: KATIE
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text, a different company, but it is going to happen. And the question is, what are we doing about it? And I’m particularly concerned

when it affects things that are essential to life, shelter, fuel, things

that we all need and things that destroy our economy overall. And

I think that is what we’re seeing now.

Chairman WAXMAN. Well, it has enormous impact on the economy and on communities, as we’ve heard from Mayor Lawrence. It

has a rippling effect in confidence in the whole economic system.

But I’m not picking on anybody.

Ms. Minow, when I ask about these 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 retirement to 401(k) plans. That means investment in public corporations. And therefore, they want American

corporations to succeed. Is this giving the right incentives for corporations to succeed when we’re overcompensating the executives

in a way that doesn’t seem to have a rationality to it?

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

Ms. WACHTER. Well, I do think it is extremely important that, as

Mr. Galvin said, that the incentives be in place and we do need to

seriously look at the lessons learned from this crisis. This crisis is

the first one that has involved homes in America as well as individual—not large investors only, but small investors, pension funds,

cities. And it is coming home to cities in two ways in communities,

both housing and funding. So it is really grave concern for cities.

We must learn the lessons. And if the decisionmakers don’t have

failure incentives to watch success in terms of their own personal

remuneration, then, indeed, the mistakes will be made again.

Chairman WAXMAN. And we’re not discussing this whole question

in the abstract because we’re talking about a specific crisis that has

resulted from these—from these collateralized loans. And you’ve

studied that. Can you tell us in layman’s terms how the practices

of Merrill Lynch and Citigroup and other investment banks contributed to this mortgage crisis?

Ms. WACHTER. On the one hand, they were innovators and that

is their job. And on the other hand, they were creating high-risk

instruments, and that is their job. So, actually, on some levels, they

were doing the job. But the question we have to ask is two: One,

as a society, do we want to allow and encourage the home to be

backed by very volatile, risky investments that will actually potentially cause not only the people who were securitized by these instruments, that borrowed these, but indeed all homeowners to be

exposed to this kind of risk? We are the only country in the world

that is so exposed.

Chairman WAXMAN. Well, 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 willing 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

the Carol Loomis article from Fortune Magazine be included in the

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record because it is pertinent to this portion—the pay and compensation portion.

[The information referred to follows:]

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Chairman WAXMAN. Without objection, it will be made part of

the record. We’ll take a 5-minute break while our next panel comes

in to take their places.

[Recess.]

Chairman WAXMAN. The meeting of the committee will please

come back to order. On our second panel, we will hear testimony

from Mr. Charles Prince, the former chairman and chief executive

officer of Citigroup, Inc.; Mr. Richard D. Parsons, chairman of Time

Warner and the chairman of Citigroup’s Personnel and Compensation Committee; Mr. E. Stanley O’Neal, the former chairman and

chief executive officer of Merrill Lynch; Mr. John D. Finnegan,

chairman of the Management Development and Compensation

Committee for Merrill Lynch and the chairman and chief executive

officer of the Chubb Corp.; Mr. Angelo Mozilo, chairman and chief

executive officer and co-founder of Countrywide Financial Corp.;

and Mr. Harley Snyder, the chairman of the Countrywide Compensation Committee, as well as that company’s lead director.

Among other real estate ventures, Mr. Snyder is the president of

HCS, Inc.

We’re pleased to welcome all of you to our hearing. I appreciate

your being here. It is the practice of this committee that all witnesses that testify before us do so under oath. So now that you’re

seated, I would like to request that you stand up and please raise

your right hands.

[Witnesses sworn.]

Chairman WAXMAN. The record will indicate that each of the witnesses answered in the affirmative. Your prepared statements will

be in the record in full. We will have a clock that right now has

a red light on, but it will be 5 minutes: green for 4; yellow for 1;

and then, it will turn red at the end of 5 minutes. When you see

that, we’d like to ask you to summarize, if you would, but we’re not

going to be so strict that we’re going to cut anybody off.

Mr. Prince——

Mr. DAVIS OF VIRGINIA. Mr. Chairman, can I just ask unanimous

consent that we enter the minority memorandum in the record that

is containing discussion of the timeline of the subprime crisis?

[The information referred to follows:]

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Chairman WAXMAN. All of the memos prepared by staffs and the

committee will be entered into the record. Without objection, so ordered.

Mr. Prince, we’re going to start with you. There is a button on

the base of the mic. Be sure it is on and have it close enough so

that it can pick everything up.

STATEMENTS OF CHARLES PRINCE, FORMER CHAIRMAN AND

CEO, CITIGROUP; RICHARD D. PARSONS, CHAIR, PERSONNEL

AND COMPENSATION COMMITTEE, CITIGROUP; E. STANLEY

O’NEAL, FORMER CHAIRMAN AND CEO, MERRILL LYNCH;

JOHN D. FINNEGAN, CHAIR, MANAGEMENT DEVELOPMENT

AND COMPENSATION COMMITTEE, MERRILL LYNCH; ANGELO R. MOZILO, FOUNDER AND CEO, COUNTRYWIDE FINANCIAL CORP.; AND HARLEY W. SNYDER, CHAIR, COMPENSATION COMMITTEE, COUNTRYWIDE FINANCIAL CORP.

STATEMENT OF CHARLES PRINCE

Mr. PRINCE. Chairman Waxman, Congressman Davis, and members of the committee, good afternoon.

In November of last year, I voluntarily stepped down as

Citigroup’s chairman and chief executive officer. I started working

for the company as an attorney at one of Citigroup’s predecessors

in 1979. Over nearly 30 years I worked my way up first to general

counsel, then to chief administrative officer, chief operating officer,

chief executive officer of one of Citigroup’s major businesses and,

finally, to CEO and then chairman of the board.

As the first member of my family to go to college, I’m extremely

grateful for the opportunities that Citigroup gave to me. I also am

truly proud of Citigroup and its employees. It is a company that

I helped to build. When I started the company, it had about 60,000

employees, made about $20 million a year in profit. In 2006, my

last full year as CEO, we had about 325,000 employees and we

made about $20 billion in profit. The first 6 months of 2007 were

the best 6 months in the company’s 200-year history. I’m proud of

what I accomplished. To be a part of Citigroup for nearly 30 years

and finally to serve as its CEO was a true honor and privilege.

During my tenure as CEO, Citigroup achieved several noteworthy accomplishments. I’ll give one or two examples. As one example, we repaired our extremely important relationships with regulators around the world. Citigroup is a company that is regulated

in almost every way and in almost every country that we operate

in. And these relationships, unfortunately, had deteriorated. In addition, early in 2005, we embarked on a comprehensive corporate

governance and ethics initiative, something we called the five-point

plan, which focused on expanding employee training, enhancing the

emphasis on talent and development, strengthening performance

appraisals and connecting ethical conduct directly to compensation,

improving communication and tightening internal controls. I took

the lead in designing the implementing the five-point plan. And

each year I met with more than 50,000 of our employees to emphasize the high priority Citigroup placed then and places now on ethics and best business practices.

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Citigroup’s efforts on this front have been recognized. Over the

past several years, the Institutional Shareholder Services, the leading independent analyst on corporate governance, including executive compensation decisionmaking, has rated Citigroup’s corporate

governance practices in the top 10 percent of all S&P 500 companies. In 2007, ISS rated Citigroup in the top 2 percent of diversified

financial 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

law 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 you’ll hear in more

detail from Mr. Parsons in just a moment. The board conducts an

independent assessment of executive performance and relies on a

fully 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 sell down. Over

time, we would experience exactly what the shareholders experienced. And that is exactly what happened to me.

Now 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 in 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, Citigroup 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, we 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 development.

Mr. Chairman, in light of the red light, I’ll skip that if I may and

finish up? Yeah?

Personally I’ve spoken out on mortgage issues. Just last year, in

an address to the Greenlining Institute in Los Angeles, I criticized

the current patchwork of regulatory rules that permit certain mortgage brokers and lenders to pursue regulatory arbitrage, seeking

out areas of weaker banking regulation often to the detriment of

consumers, and called for closing the regulatory loopholes that permit these issues to develop.

I recognize how incredibly fortunate I am to have had the opportunity to lead Citigroup. It is never easy to retire from a company

to which one has devoted one’s entire career. And my retirement

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from Citigroup was no exception. Last fall it became apparent that

the risk models which Citigroup, the various rating agencies and

frankly the rest of the financial community had used to assess certain mortgage-backed securities were wrong. As CEO, I was ultimately responsible for the actions of the company, including the

risk models that we used. While I wasn’t the trader and I wasn’t

the risk officer, I was the chief executive officer. And this happened

on my watch. In the interest of the company I had worked so hard

to build, I immediately submitted my resignation and the board of

directors accepted it a few days later. I recognize some questions

have been raised about my compensation, much of the information

that has been reported is incomplete or inaccurate, and I welcome

the opportunity to provide the committee with the complete information. Thank you.

[The prepared statement of Mr. Prince follows:]

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Chairman WAXMAN. Thank you very much, Mr. Prince.

Mr. Parsons.

Mr. PARSONS. Mr. Chairman——

Chairman WAXMAN. There is a button on the base of the mic.

STATEMENT OF RICHARD D. PARSONS

Mr. PARSONS. Mr. Chairman, Mr. Ranking Minority Member,

and distinguished members of the committee. I’m Richard Parsons,

and I’m the chairman of Time Warner. I appear before you today,

however, in my capacity as a member of the Citigroup board of directors and chairman of the board’s Personnel and Compensation

Committee to address your questions about executive compensation.

Executive compensation levels, particularly in the financial services arena, are driven by highly competitive markets to attract and

retain talent. The competition for talent is especially for a company

with the scope and scale of Citigroup, the leading global financial

services company competing, serving customers and conducting

business in more than 100 countries around the world. A compensation approach that allows Citi to attract and retain the top

financial services industry talent around the world is a core responsibility of the Compensation Committee.

I believe good corporate governance requires that public companies be as transparent as we can be about the processes we use to

determine executive compensation. We strive to make the descriptions of our compensation philosophy and process that are contained in our public filings clear, 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 grow, 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, as well

as qualitative. Individual rewards reflect the overall performance of

the company, as well as the performance of an executive’s particular business. Further, we are concerned with more than just Citi’s

short-term financial results. A large portion of executive compensation is tied directly to the creation of long-term shareholder value.

We consider nonfinancial measures as well, including the ability

to execute strategic alternatives, to maintain regulatory relationships, to position the company for future growth and to invest in

and deliver first-rate customer service, to navigate complex legal

issues and to develop talent. While these measures may not

produce immediate financial results, they are still very important

factors that help drive Citi’s long-term success and build long-term

value for shareholders.

Moreover, Citi focuses not just on the business results achieved

by senior executives but on how they do business. As part of its

business culture, Citi believes each employee has certain responsibilities to customers, to one another and to the enterprise itself.

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And it evaluates its senior executives and other employees on how

well they meet those responsibilities. Compensation decisions for

senior executives at Citi are the result of independent review and

analysis undertaken by the Personnel and Compensation Committee, which consists solely of independent directors. The committee

regularly reviews the company’s compensation programs, evaluates

performance and determines compensation of the CEO 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 data provided by the company and compensation consultants. In addition, the Compensation Committee uses an independent outside consultant who does no other work for Citi and reports

directly to the Compensation Committee to review, analyze and advise the committee about its compensation decision—about its compensation decisions, including whether those decisions are reasonable.

The committee is well aware that executive compensation must

be competitive with pay at peer companies if Citi 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,

we 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 Electric,

Goldman Sachs, JPMorgan Chase and 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 collectively help determine compensation

decisions.

The committee does 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.

My statement is on file. I will simply conclude by saying that we

appreciate the opportunity to be here today to address the questions of this committee and as they relate to how we at Citi go

about determining compensation measures. Thank you.

[The prepared statement of Mr. Parsons follows:]

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Chairman WAXMAN. Thank you very much for your testimony.

Mr. O’Neal.

STATEMENT OF E. STANLEY O’NEAL

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 luck, hard work and opportunity that I think can only exist in this country.

My grandfather, James O’Neal, was born into slavery in 1861.

He was eventually able to carve out a life for himself and his family through hard work and perseverance. Over time, he acquired

some farmland and was able to donate a small parcel for the construction of a one-room schoolhouse in a small town in rural Alabama called Wedowee. 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. When I was 13 my father moved us to Atlanta so he could take

a job in a factory at General Motors nearby. For a time, we lived

in a Federal housing project, which was all my parents could afford. Eventually they were able to save enough money to make a

down payment on their first house. They lived in that house for 30

years, eventually paying off the mortgage.

Watching my parents work and save to afford their own home

gave me an appreciation of the unique pride and satisfaction that

comes with home ownership. I worked my way through college by

working at the same GM factory where my father had worked.

In 1987, I joined Merrill Lynch and spent close to the next 21

years of my life there, eventually being named president in the

summer of 2001. Within weeks of becoming president, Merrill

Lynch and the American economy faced a crisis. When terrorists

attacked the World Trade Center on September 11th, we had to

evacuate all 9,000 of our employees from our offices directly across

from the Twin Towers. Over the following days and weeks I led the

firm’s efforts to assist its employees and to manage its business in

the aftermath of the attacks. Our employees were scattered in locations throughout New York and New Jersey, and at the time many

people thought that the future of Merrill Lynch was in doubt. But

we survived, and in fact we flourished.

After I became CEO I led Merrill through a period of rapid

growth. Our revenues grew dramatically from $18.3 billion in 2002

to $32.7 billion in 2006. Net income more than quadrupled from

$1.7 billion to $7.6 billion. Shareholder return on equity virtually

tripled from 7.5 percent in 2002 to 21.3 percent in 2006. And our

stock price rose from $28 in October 2002 to $97 in January 2007.

And even with the losses sustained in the second half of last year

and the broad-based sell-off in financial service stocks over the last

few months, Merrill Lynch closed yesterday at a price 60 percent

higher than it was at its low 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 payVerDate 11-MAY-2000 11:32 Oct 27, 2008 Jkt 000000 PO 00000 Frm 00187 Fmt 6633 Sfmt 6633 C:\DOCS\44914.TXT KATIE PsN: KATIE
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ing many individuals high, not just senior executives. Most of my

compensation consisted of restricted stock and options, and I was

required to hold the majority of the stock I was awarded. My assets

and my compensation increased only when shareholders and employees benefited and decreased when it did not. In fact, I initiated

a requirement that senior management hold at least 75 percent of

the stock and options that were awarded.

It is important to note that the compensation of senior management at Merrill Lynch was determined by the Board of Directors

upon recommendation of the Compensation Committee, which is

composed exclusively of independent directors, and an independent

and rigorous process was used, and pay levels were determined

consistent with levels in the industry generally. Performance was

measured against targets such as revenues, return on equity, and

some strategic objectives, all established at the beginning of each

year.

In 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, as well as 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-called 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 to 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-called payout upon retirement. But

having given me a significant part of my compensation in stock and

options, the Board ensured that my personal financial interests

were closely aligned with those of the shareholders of the company.

To the extent that Merrill’s stock has decreased in value since my

departure, so too has the value of the consideration I received.

I am not aware of any fact that should raise a concern about

whether there was an appropriate process in place for determining

senior executive compensation at Merrill. The company recruited

sophisticated, independent individuals to its board through a careful nominating procedure. To my knowledge, the independent directors of the Compensation Committee compensated senior management in accordance with their independent judgment about the

company’s performance.

I just want to end by saying that because of my own personal

history, I understand, as well as anyone, the importance of home

ownership, not only financially, but also socially, emotionally, and

I would never do anything knowingly that would deny anyone else

that privilege.

[The prepared statement of Mr. O’Neal follows:]

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Chairman WAXMAN. Thank you very much, Mr. O’Neal.

Mr. Finnegan.

STATEMENT OF JOHN FINNEGAN

Mr. FINNEGAN. Chairman Waxman, Ranking Minority Member

Davis, and members of this distinguished committee, I thank you

for the opportunity to testify before you today. I am the chairman

of the Board and chief executive officer of the Chubb Corp. I became a member of Merrill Lynch’s Board of Directors and a member of the Board’s Management Development and Compensation

Committee in 2004. I became chairman of the Compensation Committee in April 2007.

Mr. Chairman, your letter requests that I address how the compensation of Merrill Lynch’s former chairman and chief executive

officer, Stanley O’Neal, was determined and the basis for Mr.

O’Neal’s separation agreement. As requested, I will summarize

here and explain in greater detail in my written statement the

process employed by the Compensation Committee.

I will start by addressing two important factual matters: First,

Mr. O’Neal’s 2007 compensation, and second, other compensation

amounts earned in prior years to which Mr. O’Neal was entitled

when he left the company.

With respect to 2007, the Board determined unanimously that

Mr. O’Neal would receive no bonus of any kind for 2007 and no

severance payment. For executives at Mr. O’Neal’s level, the bonus

constitutes the overwhelming proportion of annual compensation.

Mr. O’Neal’s total compensation for 2007 was only his base salary,

which had been paid biweekly during the year until his termination on October 30th. Aside from his base salary, a compensation

of benefits retained by Mr. O’Neal at his departure had been

earned and awarded to him in prior years. The $161 million figure

disclosed in our public filings, and highlighted by the media at the

time of his departure reflects compensation and benefits, over 80

percent Merrill stock, all earned over the course of his career at

Merrill Lynch prior to his separation from the company.

O’Neal accomplished a great deal for Merrill Lynch in the years

before 2007. He was elected president and COO in July 2001. Immediately prior to Mr. O’Neal’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’Neal’s leadership positioned the company for what was to

be a period of significant growth and profitability. Over this period,

Mr. O’Neal’s leadership qualities and achievements were widely

recognized by the markets, clients, 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 beginning of each

year and continues throughout the year. The committee develops

its annual compensation determination for senior management

with three primary objectives in mind. First, we pay for performance. Second, we try to ensure that compensation for the company’s

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executives is competitive with that of key competitors in our industry. And third, we emphasize stock-based compensation, support

alignment of our executives’ financial interests with those of shareholders, and to encourage retention.

Returning to the specifics regarding Mr. O’Neal in the fall of

2007, as chairman of the Compensation Committee, I presided over

the process that the Board used to determine his separation agreement. The Board determined that while 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

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 2002 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 legacy is marred by deep losses in very specific

parts of our business, the overall health and vitality of the rest of

the company’s global franchise is due in large part to the strength

of leadership and direction that he provided. And Mr. O’Neal’s compensation from 2002 to 2006 reflect these results. In 2007, when

tangible results were not delivered, Mr. O’Neal lost his job and received no bonus and no severance.

Thank you 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.

[The prepared statement of Mr. Finnegan follows:]

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Chairman WAXMAN. Thank you very much, Mr. Finnegan. Mr.

Mozilo.

STATEMENT OF ANGELO R. MOZILO

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 single 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 which under my contract I was to receive

upon the closing of 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 I 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 40-year period of service. I waived my severance benefits because I didn’t want the issue of my change of control payments to impede the important task of completing the BofA’s acquisition of Countrywide, a transaction that I believe is critical for our

40,000-plus 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 me, with

shareholders by making our compensation primarily performance

based, mainly tied to earnings per share and share price appreciation. Since 1982, 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 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, as a stock price appreciated, the value of

my personal holdings also grew in value.

Since I planned to retire at the end of my contract, which expired

in 2006, and based upon the advice and guidance of my financial

adviser, starting in 2004 I commenced a process of exercising options earned in earlier years. Notwithstanding these sales, today I

remain one of the largest individual shareholders with approximately 6.5 million shares in vested options. In short, as our company did well, I did well, as did our shareholders. But when our

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company did not do well, like in 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 literally 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.

I am 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 their homes. Although subprime loans never exceeded

more than 10 percent of our business, at 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 stable or increasing home prices.

In 2007 we helped more than 81,000 families avoid foreclosure,

completed more than 50,000 loan modifications, and refinanced

more than 50,000 subprime borrowers into prime or agency eligible

loans. In addition, we committed $16 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

NOW alliance and have partnered with over 40 home ownership

counseling agencies around the country, including NACA and

ACORN.

I am concerned that the recent tightening of underwriting criteria has potentially gone too far. 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.

Finally, 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 1990’s 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.

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 we come through this difficult time that at the end

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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.

[The prepared statement of Mr. Mozilo follows:]

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Chairman WAXMAN. Thank you very much Mr. Mozilo. Mr. Snyder.

STATEMENT OF HARLEY W. SNYDER

Mr. SNYDER. Chairman Waxman, Ranking Member Davis, members of the committee, my name is Harley Snyder from Valparaiso,

IN. I spent my entire adult life in the real estate business and related real estate industries. I am a director of the National Association of Realtors and served as president of that association in 1983.

I’m a member of the Board of Countrywide Financial Corp., and I

currently serve as the lead director and Chair of the Compensation

Committee.

The committee 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 fully

supportive of the steps taken by the company management to significantly increase our own efforts to help and to work with the

community groups, government and others in our industry to assist

homeowners.

I will in the short term, with the short-term 10-month contract,

I would like to begin discussion of that. The Board negotiated with

Mr. Mozilo in 2004. Mr. Mozilo had an employment agreement that

was set to expire in February 2006. The contract expired at the end

of February because the company’s fiscal year end was previously

the last day of February. After the company changed its fiscal year,

the Compensation Committee, which at the time I was a member

of though not the Chair, thought that it made sense to have the

expiration date of the contract changed as well. As such, the Board

asked Mr. Mozilo to postpone his anticipated retirement from fulltime CEO duties for approximately 10 months. Given our objectives

and the short-term duration of the extension, we reached a conclusion that the most practical and appropriate business approach was

to simply extend the contract on the same underlying economic

terms and conditions. These terms included an incentive bonus program that was tied to the earnings per share performance of the

company which was consistent with a program structure that had

previously been approved by the shareholders on at least two separate occasions. The Board also awarded Mr. Mozilo additional payment in consideration of his agreeing to contract extension and

postponing his retirement.

The Compensation Committee was advised by the Pearl Meyer

consulting firm during these negotiations. On the specific question

of extending his contract at the existing economic terms, we further

sought and received an opinion from the executive compensation

consulting firm of Hewitt Associates.

When the contract extension was signed, we expected Mr. Mozilo

would retire as CEO in December 2006. It turned out that during

that year the Board determined that the company would be best

served by having Mr. Mozilo continue as CEO rather than retiring

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as he had planned. By then the individual that we thought would

succeed Mr. Mozilo as CEO had left the company. Accordingly, we

once again asked Mr. Mozilo to postpone his retirement.

As with many companies the Board’s compensation philosophy

had continued to evolve to reflect changes in compensation practices and norms. During the 2006 negotiations, we made significant

changes to Mr. Mozilo’s contract. We substantially reduced the

guaranteed portion of Mr. Mozilo’s cash compensation by decreasing his base salary from nearly $2.9 million to $1.9 million annually. The new contract also included provisions that would require

that certain return on equity and net income targets be met before

he would be eligible to receive an annual bonus. A maximum cap

was also added to the bonus payout, and a portion of the annual

equity-based award was made in restricted stock 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 12 percent or greater. The balance of his equity award was paid in 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 with the earlier contract, we 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 community 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, or Fortune, which had

headlined an article on the company, ‘‘Meet the 23,000 Percent

Stock.’’ This was also recognized in the banking and mortgage communities, which honored Angelo with American Bankers Lifetime

Achievement Award.

Recently, Mr. Mozilo made the decision independently to voluntarily forego severance payments that he would have been entitled

to receive under his contract in the event the Bank of America

transaction closes. That was his decision. And the Board simply entered into an agreement with Mr. Mozilo to implement his decision.

Mr. Chairman, that concludes my remarks, and I stand prepared

to the best of my ability to respond to your questions.

[The prepared statement of Mr. Snyder follows:]

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Chairman WAXMAN. Thank you very much, Mr. Snyder, and all

of you. We 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 mortgage crisis. Both you in your

roles as CEO and board 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 2006, for instance, before the mortgage crisis erupted,

Mr. Mozilo filed a stock trading plan, and this plan allowed him

to sell 350,000 shares per month. Over the next few months, Mr.

Mozilo revised his plan twice. In December he amended his plan

so that he could sell 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 million shares for $150 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 stated

in my verbal remarks, the goal was to reduce my holdings because

of my retirement. I ended up with 61⁄2 million shares. We were trying to sell half the holdings, so it may be around that number.

Chairman WAXMAN. Mr. Mozilo, you had good timing because

Countrywide’s stock has fallen nearly 90 percent since you amended your stock trading plan. But what is most unusual about these

sales may be that they occurred at the same time that Countrywide

decided to spend $2.5 billion to buy its stock back. Countrywide

didn’t have enough money to buy back the stock, so it actually borrowed $1.5 billion to finance the stock repurchases. The stock

buyback plan appeared to have a significant effect on

Countrywide’s stock. The plan was announced on October 24, 2006,

when Countrywide’s stock was selling at $37.33. By February,

Countrywide’s stock had increased in value to $45 a share.

Mr. Mozilo, help me understand why these stock sales were in

the best interest of shareholders. You were using shareholder and

borrowed money to buy back Countrywide’s stocks and keep the

price up, at the same time you were selling your own personal

shares. How did this help the shareholders?

Mr. MOZILO. Well, first of all, I would like to frame it the way

it was. As I stated in my verbal remarks, I started in 2004 with

the pending 10b(5–1) plans and reason why I went that route rather than selling all the stock at once, as 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

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held over 10 years, that were expiring. So the first group of options

had to be sold, 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, no relationship whatsoever.

Again, if one was to do that, they would just take advantage of that

event and sell all the stock at one time. And of course the result

of that had ended up not selling a significant amount of shares

with the stock severely depressed.

Second, 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. We are a company for 30 some odd years that was a user of capital and never

accumulated it. We invested it in our own business, a servicing

business. We came to the point where the company was exceedingly profitable, generating capital, and the question in any company is what is the best use of that capital? How do you provide

the greatest return to the shareholders? The buyback of that stock

was designed to increase return on equity for our shareholders.

There is a variety of ways of doing it. And you can replace that

type of capital with borrowings. That happened some time ago. I

am not familiar with all of the mechanics that we went through.

But the purpose of it was to benefit the shareholders and increase

the return on equity.

Chairman WAXMAN. I want to ask you to look at what happened.

It was an absolute disaster for Countrywide and its shareholders

because Countrywide’s stock fell through the floor after February

2007. It is now worth only $5.20 per share and in fact the stock

price has dropped 87 percent since its peak. We don’t have exact

figures, but it looks like Countrywide’s shareholders lost almost all

of the $2.5 billion the company spent on repurchasing shares when

you were selling stock.

Mr. Snyder, our investigation has shown that it wasn’t just Mr.

Mozilo who was selling shares during this time period. It was also

the board members. One board member exercised 228,000 options

between November 2006 and June 2007, making almost $7 million.

In fact, you sold yourself 170,000 shares in 2006 for more than $6

million. And you sold 20,000 shares in December 2006 during the

stock buyback, earning more than $800,000.

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

Mr. SNYDER. Mr. Chairman, the shareholders had the same opportunity to sell their stock as we had. Our stocks were sold, my

stocks, like Mr. Mozilo’s, were sold under a 10b51 plan 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, Mr. Chairman,

that I sold stock at a price in November, December 2006. Had I

waited 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 apVerDate 11-MAY-2000 11:32 Oct 27, 2008 Jkt 000000 PO 00000 Frm 00242 Fmt 6633 Sfmt 6633 C:\DOCS\44914.TXT KATIE PsN: KATIE
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proval of the General Counsel before altering their stock trading

plans. Mr. Parsons, if the CEO of Citigroup proposed to sell $150 million worth of stock at the same time Citigroup was engaged in a

massive stock buyback, would this raise any red flags for you?

Mr. PARSONS. Well, Mr. Chairman, as you’ve pointed out, we

have procedures in place that would first flag it, second, cause

counsel to opine on it, and perhaps more importantly to your question—I didn’t address it in my opening remarks, it 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 literally

billions, they wouldn’t be in a position to move on that level of

stock that you just indicated.

But beyond that answer, what we would do, I am sure, is we

would consult with counsel, we would consult to understand the

reasons, and we would make a judgment based on the facts as we

found them then.

Chairman WAXMAN. And you would do that to protect the shareholders, isn’t that the whole idea?

Mr. PARSONS. And the process. And the process, if you will. Because frequently appearance is equally important with substance

and reality.

Chairman WAXMAN. Mr. Finnegan, you are a board member at

Merrill Lynch. I am going to ask you the same questions.

Would this kind of transaction raise a red flag for you?

Mr. FINNEGAN. Let me echo Mr. Parsons’ remarks first. The fact

is that we have stock retention requirements, so it would be purely

hypothetical. Mr. O’Neal never had that kind of stock holdings that

Mr. Mozilo had such that he could have been selling $150 million

worth of stock and complying with our stock retention requirements. Like at Citi, if Mr. O’Neal wanted to sell stock, he would

have come to the Compensation Committee, and we would have

talked to the General Counsel, and it would have required approval. Again the magnitude here, because of the difference in

stock holdings, really, you know, isn’t—wouldn’t have been 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 selling stock when you are doing a stock buyback. Stock

buybacks are put in place, 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 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 WAXMAN. Here is the problem I have with stock sales.

Mr. Mozilo and Mr. Snyder seem to be saying two completely inVerDate 11-MAY-2000 11:32 Oct 27, 2008 Jkt 000000 PO 00000 Frm 00243 Fmt 6633 Sfmt 6633 C:\DOCS\44914.TXT KATIE PsN: KATIE
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consistent things. You tell 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 years.

I was going to retire. Almost all of my net worth was in Countrywide. I had come to a point on diversifying my investments, my assets, and at that point came to 2004, and I consistently followed

that plan. It was my belief that every time I set the plan in place,

one, it is not my belief, it is fact, that the shareholders knew exactly what I knew. I set them in place after earnings were announced and any plans were announced. They were aware of the

buyback. They were aware of earnings in the previous quarter. And

our projections for the ensuing years demonstrated that we were

going to increase capital because the company was doing extremely

well throughout that whole period of time.

Chairman WAXMAN. I think the reason Mr. Parsons indicated it

might not look good is the whole example of what happened with

Enron. Because with Enron, they were selling the stock, the executives were selling the stock, and they often had knowledge that no

one else would have, and I think all of this is still being investigated. But the appearance is not a good appearance if you are

telling the shareholders it is a good investment to buy the stock for

the corporation at the same time you are selling the stock to benefit yourself at that higher price.

Mr. MOZILO. I think again the investors, who are mostly institutions, made the decision to buy or sell the stock based upon the information we provided. I never asked anybody to buy the stock.

Nor did I ask anybody to sell the stock. We presented our performance, we had a 30-year performance of no losses.

Chairman WAXMAN. Well, my time here has expired. But I must

say your timing is awfully good for yourself but not particularly for

some of the other shareholders.

Mr. Davis.

Mr. DAVIS OF VIRGINIA. Let me just say this is not an Enron situation. This is a 10b51. This is in fact to protect people. Enron was

insider trading. I was a general counsel for a public company before I came to Congress and I just have a different bent and understanding of this.

Longstanding law is under a case that goes back almost a century, the Dodge Brothers v. Ford Motor Company. Corporations

exist to make money for their shareholders. 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. Well, sir, it happens to be true that our practices

and procedures are congruent with the Business Roundtable. I

think we got there first. I think we actually got there before they

did.

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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, were yours in accordance with—did you look at

the compensation package with Mr. O’Neal?

Mr. FINNEGAN. Yes, sir.

Chairman WAXMAN. Is it also congruent?

Mr. FINNEGAN. Yes, sir. Again, we developed our own practices,

but I would say they are largely congruent with the Business

Roundtable.

Mr. DAVIS OF VIRGINIA. 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 packages, when

the company does poorly the CEO also takes a hit. It costs the CEO

money because their compensation goes up, 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 well. Shareholders, including unions’ pension funds, State employee pension funds, retirees, global 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. Yes.

Mr. DAVIS OF VIRGINIA. Not unlike, by the way, movie stars or

professional athletes who will negotiate a deal and if they have a

bad year—like down here in Washington we have seen a lot of bad

professional athletes’ deals where they are over—Albert Bell comes

to mind—$14 million for sitting on the bench all year and you are

stuck with it. And in this case I don’t think anybody was given a

bonus for this, but their compensation, as I understand it, was basically preordained under their deals. And some of the money that

they got was basically what they had accumulated through the

years in deferred compensation.

Mr. Parson, is that correct basically?

Mr. PARSONS. In the main, sir. In the case of Mr. Prince, there

was in fact a bonus component to his separation. I won’t call it severance. At the time of his separation we had to make a calculation

as to what, if any, bonus Mr. Prince would be entitled to for the

year 2007. We made a judgment, but that judgment was consistent

with your earlier stated principle that when the shareholders don’t

do well, the executives don’t do well and his bonus was basically

leveraged off of the loss of value of shareholders.

Mr. DAVIS OF VIRGINIA. What troubles me about it is the 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 mortgage lenders. You can

look at the appraisers. You can look at the Fed itself in some statements they made praising this as an innovative avenue to be able

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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, if your CEOs had made nothing

during this time, I don’t think it would have saved one home or

any decisions would have been different. That is what—that is my

understanding of what I take away from this hearing.

But I am going to yield the balance of our time to Mr. Issa.

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 still have in Citibank? How

many shares do you still own approximately that are subject to the

performance of the company you were so critical in for so many

years?

Mr. PRINCE. I own about a million shares. And except for a few

shares I sold in 1999 I haven’t ever sold any shares.

Mr. ISSA. So the fact is you were aligned with the performance

of an organization, 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 $17.3 million, according to our

figures, as a result of his board membership and stock appreciation. But more importantly, I understand that at the time Mr.

Prince offered his resignation, Bob Rubin was saying, ‘‘don’t let him

go, we need him at the helm’’; isn’t that roughly true?

Mr. PARSONS. My recollection.

Mr. ISSA. OK, 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, at 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 were 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 21

years plus affiliated with Merrill Lynch?

Mr. O’NEAL. That is correct.

Mr. ISSA. Now isn’t it true that roughly—and these 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?

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Mr. O’NEAL. I think that is approximately correct.

Mr. ISSA. OK. Mr. Finnegan, I will go to you. I am going to assume that the employees, stockbrokers, people particularly in the

retail end at Merrill Lynch, they are going to be very active in the

upcoming board decisions and so on, but this was a sophisticated

group that understood 10b5s, 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, we are not going to find a villain today at Merrill

Lynch. OK.

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 $100 million that they quote you got out.

Let me ask a couple of questions. If I put, let’s say, $10,000 in in

1982 into your company, my figures show that I would have made

$230 million when I sold that stock the same day that your 10b5

allowed you to sell. Is that right roughly?

Mr. MOZILO. USA Today did an article on that.

Mr. ISSA. OK, so what we are talking about is a man at the helm 40 years building a company, and the $10,000 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 10b5, as I understand it—Mr. Snyder, I am going to sort of go

to you a little bit—10b5 is an instrument designed to protect the

stockholders and to cause sales made, particularly during not open

periods, to be arm’s length. Isn’t that right?

Mr. SNYDER. Absolutely, Congressman.

Mr. ISSA. And the open periods, if either one of you, that occurred at Countrywide, were they typically the 7 to 10 days or a

little longer often in which there was no reason to close the trading

window?

Mr. SNYDER. I’m sorry, Congressman?

Mr. ISSA. In other words, is your quarterly ‘‘open to sell periods’’

that occur in public companies, do you happen to know, Mr. Mozilo,

do you know, did you typically have an open period every quarter?

Mr. MOZILO. We 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 were being made, if you will, under

the scheduled 10b5, if you had sold them on those days, would

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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?

Mr. MOZILO. If I had just sold it then without engaging in a

10b51, yes, it would have been substantially higher because the

last 10b51 came to zero, as the stock dropped, because I would not

sell under $28 a share. That was built into my 10b51.

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 foundation in the

past. These are part of a public process. There is transparency on

those very filings and on each of 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 sales, because again my

choice was to sell 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 do 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 still have skin 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 make you the victims if I could possibly

blame the meltdown on you. I really would love to do it. It would

make it easy on us because we wouldn’t be culpable—you had exercised exactly the types 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 led to a

meltdown of subprime.

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 WAXMAN. Gentleman’s time has expired. Mr.

Yarmuth.

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 think there are some questions here that really 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 think we are

dealing with a totally different picture here, and so I 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

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very generously and severance packages that are outside the comprehension of most Americans.

But there is a bigger picture that I think concerns my constituents, many of them and many people throughout the country, because they look at the enormous salaries, and I am not referring

to any one of you specifically, and I will reiterate that no one is

accusing any of you of doing even anything unethical not to speak

of illegal, but when we see a situation in which corporate executives make tens of millions of dollars for enhancing stock price and

at the same time we see layoffs of 3,000 employees, we see companies moved overseas, we see plants closed and companies merged

and jobs ended in this country, we see an income picture nationally

in which over the last 5 or 6 years all of the income growth in this

country has gone to the top 5 percent of the population and none

to the remaining 95 percent, and you all know the numbers in

terms of disparity of executive salaries versus employees salaries

and how that has gone over the last few decades from a factor of

30 times to now pick a number, 400, 500 times are various estimates. So my question is all of you have had experience with Compensation Committees and some of you are on them.

When you meet in these Compensation Committees, is there any

discussion of the impact that your decisions have on essentially

consumer attitudes about the relative value of what you are paying

your executives and what the average worker in your company

makes, what that does to employee morale, what your impact on

communities might have if you tie compensation to stock performance, which often means that you close plants and sever jobs. I

want to know from those of you, Mr. Prince, Mr. Parsons, Mr.

O’Neal, if these type of conversations take place, or is this all about

how you enhance the executive salaries and executive compensation? Mr. Prince, you want to deal with it first?

Mr. PRINCE. I will, Congressman. You are raising very important

and significant societal issues, and I would say that there was a

trend perhaps 10, 15 years ago to broaden 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 entities 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 is, 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, as it may have been in the

mortgage situation, more than just on one small company or one

community. Mr. Parsons, would you like to respond?

Mr. PARSONS. Well, the specific response to the question asked

was yes. We in the Citigroup Compensation Committee actually

discussed the very question that you are raising. Where is the balance point? How do we remain competitive without contributing to

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something that could be tearing at the fabric of society? So, yes, 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 globally leading enterprise, and

in so doing, we have to be competitive with what it takes to get

that talent, and we have to orient it toward pay for performance.

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, we 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 flaws, the market economy still 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 afternoon,

but Mr. Prince is the first college graduate in his family. Mr.

O’Neal is the grandson of a slave. 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.

We 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 WAXMAN. Thank you, Mr. Yarmuth. Your time has expired.

Mr. McHenry.

Mr. MCHENRY. Thank you, Mr. Chairman. I serve on the Financial Services Committee, so I follow 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 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,

as the largest individual gain in Wall Street history in any 1 year.

Now here is a hedge fund manager who bets against the 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 called

Center for Responsible Lending.

Mr. Paulson gave them a $15 million gift in order to encourage

them to advocate for more restrictive lending practices when it

comes to the mortgage industry; in particular, forcing public policy

that would force, allow bankruptcy judges to cram down the value

of mortgages. So therefore companies like your former companies

would lose more money under this proposition, therefore he would

receive more benefits, Mr. Paulson would receive more financial

gain 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 inVerDate 11-MAY-2000 11:32 Oct 27, 2008 Jkt 000000 PO 00000 Frm 00250 Fmt 6633 Sfmt 6633 C:\DOCS\44914.TXT KATIE PsN: KATIE
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dustry, your leadership on these innovations, 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. Well, 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 own homes because I

think that is what drives families and drives neighborhoods and

drives communities and drives this country, and to the extent that

these restrictions now relative to underwriting has materially impacted the ability of low and moderate income and minorities to

own a home, this kind of action you are talking about—I didn’t

know anything about Paulson. I know another Paulson, but it is

not the same person—that it is discouraging to me. You know, the

capitalistic system when not abused is a wonderful system, but

when abused it is terrible. And I was unaware of this hedge fund

and what it did and the contribution to the nonprofit, the alleged

nonprofit to impact underwriting.

The problem we face is, and again in my remarks I stated it is

the deterioration of value of homes. As values were going up, we

had no problem. We had no delinquencies and no foreclosures because people had options, because people run into three things in

their lives generally, loss of job, loss of marriage, loss of health.

When that happens, and they own a home, and it impacts their income, they generally have a way out, sell the house, refinance, do

something. That equity that they have in the homes is virtually

wiped out, and that is what is exacerbating this whole foreclosure

problem.

I think it is despicable for people to play on the troubles of others. In fact in Countrywide’s case one of the most disturbing things

is that we have not individuals who are calling to try to take advantage of these low priced homes now, but speculators accumulating dollars. It is horrible.

Mr. MCHENRY. My time is wrapping up here. Can you just answer yes or no. Do you profit by people losing their homes?

Mr. MOZILO. By the billions of dollars that we have written off,

the answer is clearly no.

Mr. MCHENRY. Mr. O’Neal, did your firm profit by people losing

their homes?

Mr. O’NEAL. Clearly, no.

Mr. MCHENRY. Mr. Prince, did your firm?

Mr. PRINCE. Absolutely not.

Mr. MCHENRY. Let me ask the Compensation Committee Chairs

here a question, simple yes or no answer. Mr. Parsons, Mr.

Finnegan, Mr. Snyder, do you seek to pay your CEOs—let me ask

this way. Do you try to get the best performance with the least

amount of cost to your shareholders when you hire executives?

Meaning, do you seek to pay them a lot more for bad performance

or do you seek to get the best performance with the least amount

of costs?

Mr. PARSONS. The latter, sir.

Mr. MCHENRY. Mr. Finnegan.

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Mr. FINNEGAN. Yes, sir. We clearly seek to pay for performance

and to pay no more than the market would demand.

Mr. MCHENRY. Mr. Snyder.

Mr. SNYDER. Clearly the latter.

Mr. MCHENRY. So clearly the idea is you get the largest value

per shareholder as possible, therefore the initial understanding of

this hearing, the initial premise of this hearing is false, that you

actually are trying to do the best interests for your shareholders.

Thank you for testifying.

Chairman WAXMAN. Gentleman’s time has expired.

Mr. Welch.

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.

Mr. Prince, when you were chief executive, was one of your principal responsibilities 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. With all due respect, Congressman, we didn’t plunge

into the subprime market. But clearly our risk model did not forecast what happened.

Mr. WELCH. Now my understanding is Goldman Sachs in fact

dodged the bullet and perhaps as a peer to folks at Goldman Sachs

you could perhaps, with, the benefit of reflection, tell 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. Well, Congressman, that is a good question. Alone

among the major participants on Wall Street, Goldman Sachs, as

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——

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, you were a chief executive of one of our major American companies—to manage risk of

shareholders’ assets?

Mr. PARSONS. To oversee the maintenance of a risk-management

function, and particularly in a financial services institution, yes,

that’s an important responsibility.

Mr. WELCH. And with respect to some of these—risk management would include that, if you are going to extend credit, that you

would have an assessment of the credit-worthiness of the borrower,

which is not a moral term, it’s an ability-to-repay term, correct?

Mr. PARSONS. Yes. Now, this is a much more, as you know, Mr.

Congressman, nuanced problem than the question implies, because

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there are people who make the initial lending judgment and then

those instruments get rolled into 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 having a little 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 table. 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 some

did get it right. Goldman Sachs did get it right. And 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 lot 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 I know

you take all this seriously.

What happened to focusing on an assessment of risk when loans

that were being extended were no money down, no requirement

that you show ability 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 were 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. Well, 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 failure, right? If the only financial services player that anyone can identify who dodged this bullet——

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 blame. But

each of us in our own 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 systemwide. We’re asking what you could do as a CEO, what one

could do as the chair of a Compensation Committee.

Mr. PARSONS. As was pointed out, I think by the chairman or,

if not, by the ranking member, you’re asking an accountability

question. And as you know, each of the CEOs who were running

companies that hit this iceberg, in his own way, has taken accountability, had accountability imposed on 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.

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Because while we had one and we thought it was robust, we, as

an institution, missed this pitch.

Mr. WELCH. All right. Thank you.

Chairman WAXMAN. The gentleman’s time has expired.

Mr. Cannon.

Mr. CANNON. First of all, I would like to apologize 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 let 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 thank you for coming down here and

taking your time.

We had a hearing yesterday where Mr. Chertoff was asked to

have his staff stand up, and a couple of our members of the committee pointed out that he only had white men working for him.

And it was a big issue that actually didn’t really relate to much.

But I make that point to say that you guys on this panel are an

amazing panel, 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 with 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 really great. And so there’s an incentive to be assiduous and

work and in developing the skills 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.

Thank you. Let me ask Mr. Finnegan a couple of 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 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 second, 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 was a function of future stock performance.

I think it worked very well. I mean, in Mr. O’Neal’s case, for a

number of years, he benefited from the fact the stock went up after

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receiving the award. But in 2007, when Merrill Lynch stock declined precipitously, he suffered an economic penalty which probably today is about $125 million.

Mr. CANNON. So that the $161 million he took out, none of that

was a severance bonus?

Mr. FINNEGAN. Out of the $161 million Mr. O’Neal took away as

part of his departure, all but $30 million of it—we had $130 million

of it essentially related to prior stock period awards based on previous awards, $5 million was deferred comp and retirement plan

benefits to which he was entitled, and $25 million 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’Neal was a principal factor in

creating.

Mr. FINNEGAN. All of the $161 million related to prior period performance and all were amounts to which Mr. O’Neal was entitled

as a retirement-eligible employee.

Mr. CANNON. Let me get one more question in, while I still have

some time.

On page 17 of the majority’s supplemental memo, the majority

states that, ‘‘The biggest decision the board made upon Mr. O’Neal

departure was his decision to allow him to retire rather than to terminate him for cause.’’ That’s quoting the majority’s supplemental

memo.

Is that true? In fact, let me just drop a couple of questions——

Mr. FINNEGAN. That was the determinant decision, as it relates

to Mr. O’Neal’s package as he left. For Mr. O’Neal to have forfeited

the bulk of his awards, which were the stock awards, we 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 executives at Merrill

Lynch, with respect to the stock awards—are very specific and basically cover misconduct, not unsatisfactory future financial performance.

Mr. CANNON. Thank you.

Chairman WAXMAN. The gentleman’s time has expired.

Mr. CANNON. I yield back, Mr. Chairman.

Chairman WAXMAN. We have several other Members who want

to ask questions in 5-minute rounds. But let me ask if any of you

need a break, a little recess? Don’t be embarrassed.

OK. If not, then we’re going to continue.

Ms. Norton.

Ms. NORTON. Thank you, Mr. Chairman.

First of all, I want to thank all 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?

248

Mr. SNYDER. I was a member of the Compensation Committee,

ma’am.

Ms. NORTON. It’s in that role that I want to question you.

Countrywide hired a compensation consultant—that does seem 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 overpaid.

At that point, a competing consultant was brought in. John England from Towers Perrin was hired by Countrywide. First, it’s important to try to establish who John England worked for, believed

he was working for, and, for that matter, who Mr. Mozilo believed

he was working for. Of course, in today’s paper, Towers 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, let me quote from an e-mail you wrote, October 15,

2006, to Countrywide’s general counsel, ‘‘approximately 2 weeks

ago, 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 John England, consultant of Towers Perrin.’’

Your e-mail, Mr. Mozilo, says that Mr. England was brought in

to serve as your consultant. Isn’t that correct? I mean, isn’t that

what those words seem to mean?

Mr. MOZILO. You know, I’d like to just give a little 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 Mr. England from another life. 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 wasn’t he

assisting you? How can Mr. Mozilo be self-dealing about his own

compensation?

Mr. SNYDER. In fact, Congresswoman, the at-that-time chair of

the Compensation Committee suggested to Mr. Mozilo that he hire

an attorney and a consultant, or secure the services of an attorney

and a consultant, to advise him in the contract discussions.

Ms. NORTON. Well, who paid for him?

Mr. SNYDER. I’m sorry?

Ms. NORTON. Did the company pay this additional consultant?

Mr. SNYDER. The company engaged Mr. England for the purposes

of advising Mr. Mozilo, yes, 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.

Ms. NORTON. Now, I note that Mr. Mozilo’s consultant proposed

many, many changes—this is a consultant he brought in about his

salary—many changes in the compensation package that had been

recommended by the company’s consultant. For example, he did not

want the salary compared to the salaries paid to CEOs in mediumsized 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.

249

And he wanted Mr. Mozilo to get a $15 million sign-on equity

award. Now, that’s really interesting. He’s a founder of the company, and he’s getting a sign-on award of $15 million.

In one e-mail, this second consultant said he was unhappy with

the board proposal because—oh, I’m sorry—I believe this is Mr.

Mozilo, said he was unhappy with the board proposal because it did

not achieve a maximum opportunity for Mr. Mozilo.

Now, look, 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 package is at issue, pay for it to advise, and

then adopt the compensation package of Mr. Mozilo’s agent?

Mr. SNYDER. Congresswoman, Mr. Zimmerman was—his services

were 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, Congresswoman. We did not.

In fact, Mr. Mozilo’s annual compensation was reduced from $2.9

million annually to $1.9 million.

Ms. NORTON. It was increased above what your own 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 was——

Ms. NORTON. Which consultant?

Mr. SNYDER. Mr. Zimmerman of Hewitt Associates, at that time

Exequity.

Chairman WAXMAN. The gentlelady’s time has expired.

But just for the record, Mr. Finnegan, is this the same Mr. England that Merrill Lynch hired to advise Merrill Lynch in setting

Mr. O’Neal’s compensation as CEO?

Mr. FINNEGAN. Merrill Lynch hired Mr. England I think in 2003

before I was on the Compensation Committee.

Chairman WAXMAN. Mr. Issa.

Mr. ISSA. Mr. Snyder, I just want to followup on the gentlelady’s

question. Were you desirous of keeping your 40-year tenured CEO

for a period of time longer?

Mr. SNYDER. Congressman, the short answer is yes, but I’d like

to take a moment to explain.

Mr. ISSA. Well, no, no. I’m just trying to correct her, as I really

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?

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Mr. SNYDER. Typically, the chairman’s compensation has always

been approved by the shareholders, yes.

Mr. ISSA. OK. 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 were represented by their

experts. You came to a common number, and the stockholders

agreed on it.

Mr. SNYDER. Yes.

Mr. ISSA. OK. I apologize, but I want to move on to a couple

other areas.

Mr. Parsons and Mr. Prince, I’m going to come back to you for

a second, and actually Mr. O’Neal. Now, I guess, Secretary Paulson

but, in 2005, then Goldman Sachs CEO was Paulson, and he

earned $16.4 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 really go to Mr. Parsons and Mr.

Finnegan—I mean, it sounds like Goldman has good years and people make a lot of money and, in later years, maybe they don’t make

as much. They link it to compensation, and even though they

dodged the bullet, 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. Would 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.

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. OK, and I grabbed it from Forbes, so we’ll just assume

for a moment that those numbers are as good as we can get.

And, Mr. Chairman, I’d like to insert into the record any corrections if we find better numbers.

I want to kind of do a recap, because this is going to be my last

round here, and we’ll 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 will, 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 simply aligned the dollars

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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?

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 2007 from the Dallas Federal Reserve be included in the record, because it’s very pertinent

to this cycle of the Subchapter S.

Chairman WAXMAN. Without objection, that will be the order.

[The information referred to follows:]

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Mr. ISSA. And, finally, I would like to close—none of you were in

Cleveland with me less than a year ago when Mr. Kucinich, the

chairman of my subcommittee, worked on this very issue of the

availability of home loans to underserved communities and the

growing default rate in Cleveland. We drove through and we saw

the boarded-up homes, and we saw the fact that this thing was becoming a meltdown in Cleveland.

But I want to note for the record, Mr. Chairman, that, at that

hearing, one of the most important things that came up again and

again and again was that the people of Cleveland were asking at

that time for greater availability of money to finance homes. So

just as $70,000 homes were being walked away from because they

couldn’t make the payments, we were being asked to find ways to

finance home affordability.

Mr. Chairman, I would urge us both to work on a bipartisan

basis to find solutions going forward for home availability and affordability, since, clearly, the model of simply throwing money at

it even if they are risky and, in fact, ultimately not stable if the

home values go down hasn’t worked, that we work together as Government to try to find a solution that’s sustainable.

And, with that, I thank the gentleman and yield back.

Chairman WAXMAN. The gentleman’s time has expired.

Mr. Cummings.

Mr. CUMMINGS. Thank you very much, Mr. Chairman.

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, you make profit at one point and then

you don’t make profit.

The bottom line is that there are people that are being put out

of their houses—people in my district. Read the 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.

When Shirley Mutterman and her husband were buying their

first home in Fauquier County, VA, Countrywide gave them a goodfaith estimate for a fixed interest rate of 6.25 percent over 30

years. They were 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 11.25 percent 15-year

fixed rate second mortgage. At closing, their only options were to

walk away from the house they found and pay a penalty or sign

the loans that Countrywide presented. They chose to sign, and they

are now on the verge of losing their home.

And I know that what happens at the chief executive level, we

have a tendency to say—some chief executives say, well, that happened down below. Other ones say, it happened under my watch,

and so therefore I take responsibility.

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But I want to hold that and I want to go to something else, because Mr. Issa makes this sound like it’s just some lightweight isolated thing, some business practices just didn’t go right, and so

therefore some people should not hold some 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 really 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 don’t know who does.

And listen to this. In 2003, less than 5 percent of Countrywide’s

loans were paid to subprime borrowers, those at greater risk of default. But by 2006, this number doubled. Countrywide made more

than $120 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 percentage of

adjustable loans in Countrywide portfolio jumped over 50 percent

by 2005. That’s a massive increase.

Moreover, your company began offering a new product called pay

option ARM. These loans allow homeowners to choose how much

they would repay. When they couldn’t cover the interest rates, the

principal the homeowner owed increased, in effect digging them

deeper into a hole, like quicksand.

We 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 field, 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, still, we’ve got this thing going around, ring around the rosy,

as if there should not be a connection between compensation and

what happens when we have this kind of conduct.

Now, I don’t know all the answers, and I’ve got a feeling that

we’re not going to get all the answers in a hearing like this. But

I’m hoping that, when all the dust settles, that we are able to protect the American people, that person who is reaching out there

just trying to have a little piece of the American dream—and while

I worry about the executives and I know that, you know, the $250

million that you might make and whatever is important, I worry

about this whole culture where the little guy gets squeezed and,

the next thing, he has nothing but a debt—not a house, a debt—

and then the parachute just drifts on up the golf course.

So I’m hoping that the SEC will look into this, I hope that all

the agencies will look into it very carefully, so that we can make

sure that there is true balance, so that person in my district is able

to fulfill his or her dream and for future generations.

Chairman WAXMAN. Thank you, Mr. Cummings.

Mr. Towns.

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Mr. TOWNS. Thank you very much, Mr. Chairman.

Let me begin by thanking all of you for being here.

You know, I want to start out with some very basic kinds of

stuff, because I must admit that I’m having some problems here,

because I get the feeling that it’s ‘‘you scratch my back, I’ll scratch

your back.’’ I mean, I’m getting that feeling here, and that, to me,

is not good.

Let me begin by just asking you, Mr. Parsons, you are the CEO

of Time Warner. And, of course, in Citigroup, you actually chaired

the compensation board. And those are two very different companies. With Citi, it’s the financial service business, and with Time

Warner, you are in the media business. Some people might look at

that and say, ‘‘He doesn’t know anything about finance. He’s just

in there because all the CEOs are taking care of each other.

They’re scratching each other’s backs.’’

What do you say to somebody like that? Because, after all, I

mean, your company is all together different from the company

that you were serving on the compensation board for.

Mr. PARSONS. Well, I can think of many different answers, but

I’ll try to confine myself to the one that’s perhaps most relevant.

First of all, although I currently—well, actually, currently I’m

the chairman of Time Warner. I was the CEO until the end of last

year.

Mr. TOWNS. If you could pull that closer to you. I can’t quite hear

you.

Mr. PARSONS. I say, while currently the chairman of Time Warner, I was the CEO for many years, until the end of last year. Prior

to joining Time Warner, I was the chairman and CEO of Dime

Bank Corp, which was the fourth-largest financial services thrift in

the United States. And so I had extensive financial services background. So I know something about the business.

But second 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 global 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, 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. TOWNS. Thank you.

Mr. Finnegan, I want to raise the same question with you.

Thank you very much, Mr. Parsons.

Mr. FINNEGAN. Sir, I ran Chubb Corp., which is an insurance

company and financial services business, and prior to that I was

CFO and CEO of GMAC, which is a major diversified financial

services company.

Mr. TOWNS. Mr. Snyder.

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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 bonus formula was approved

by the shareholders, not the contract. So I want to clarify that

point.

But in specific answer to your question, Congressman, I prior to

my service with Countrywide, I served on two different bank

boards, I was chair of a mutual fund board. I have been involved

with the financial services community for all of my career, which

spans more than 50 years.

Mr. TOWNS. Let me just very quickly—my time is running here.

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 $10 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. Well, yeah, there’s a substantial number of executives that have pension plans. So I’m not the only one that gets it.

There’s a substantial number of employees that get it.

But I wanted to retire. That was my desire, to retire. And, unfortunately, I made the decision to stay on, and that was the basis

by which that agreement was made.

Mr. TOWNS. How can you explain that to the shareholders, why you took a $10 million stock award and now you are getting $3 million retirement? I mean, how do you explain that?

Mr. MOZILO. Well the stock award was over a 3-year period from

2006, I believe, to 2009. And it was performance-based, so I had

to perform for the shareholders in order to receive the value of

that. It was not a gift of $10 million. It had performance-based aspects to it. I had to stay; I had to provide a return on equity to

the shareholders. I had a large number of requirements in order

for it to be realized. Actually, very little of it will be realized, as

a result of what has happened.

Chairman WAXMAN. The gentleman’s time has expired. Thank

you, Mr. Towns.

Mr. TOWNS. Thank you, Mr. Chairman.

Chairman WAXMAN. Mr. Kanjorski.

Mr. KANJORSKI. Thank you very much, Mr. Chairman.

Let me make a comment. I actually don’t know why you’re all

here today, other than the fact that you had the lack of good fortune to serve in organizations and in positions that haven’t done

very successfully in the last 18 months. That’s hardly why we

should hold you up and beat you too badly. 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? OK.

I was wondering whether or not you are familiar enough with

your tax consequences to tell us whether or not most of the comVerDate 11-MAY-2000 11:32 Oct 27, 2008 Jkt 000000 PO 00000 Frm 00271 Fmt 6633 Sfmt 6633 C:\DOCS\44914.TXT KATIE PsN: KATIE
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pensation you’ve received, as I’ve discerned it 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. KANJORSKI. OK. How about anybody else? Did anyone else

get the advantage of just capital gains?

Mr. O’NEAL. No.

Mr. KANJORSKI. Now, we 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 Mr. Paulson with

that hedge fund making $3 billion or $4 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 15 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. Would that

shock any of you?

It must shock one of you. You think our system should allow absolute unlimited—and if the Congress and the American people are

stupid enough to not tax these people or these things, someone

should walk away with a trillion-dollar income?

Mr. MOZILO. I think, as 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 we 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——

Mr. KANJORSKI. Well, we just heard you criticizing one of our fellow Members, someone selling short in the market and making $3

billion or $4 billion, as if that were a sinful act in a capitalist system. I never learned that in school.

Mr. MOZILO. No, I didn’t criticize the amount of money he made.

I criticized what he was doing.

Mr. KANJORSKI. 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. KANJORSKI. 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 Co., 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.

Now, with the brilliance that we have at this table and the other

hundreds of executives around this country, I can’t believe that

somebody didn’t say, wow, we may have a problem if 18 percent

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of the people we’re giving mortgages to don’t make the first installment payment. Didn’t that ever come to your attention?

Mr. Prince, your bank was in trouble. Didn’t you get any reports

that there were such horrific failures in the system?

Mr. PRINCE. I think, Congressman, that, in all honesty, by the

time some of those reports surfaced, in the spring of 2007, most of

the damage had already been done. That is the——

Mr. KANJORSKI. When do you think the damage occurred?

Mr. PRINCE. Well, I think, honestly, that the lending patterns

began to deteriorate pretty significantly in 2006. And so, by the

time——

Mr. KANJORSKI. 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

we 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? Why didn’t they see this?

Do you have an answer, Mr. Mozilo? You ran the company with

the largest number of these. Did you participate in putting pools

together?

Mr. MOZILO. Yes, we did, certainly we did. As Mr. Prince points

out, these things happen over time, so you are not finding out

instantaneously——

Mr. KANJORSKI. No, no, this is for the year 2006.

Mr. MOZILO. Yes, right. And we immediately—first of all, we investigated each of these loans, as to what the cause of it was. And

it was a variety of causes. One was——

Mr. KANJORSKI. Mostly 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 lot of it was fraud.

Mr. KANJORSKI. How long did it take you to come up with the

understanding that there was this type of an 18 percent failure

rate before you sent the word down the line, ‘‘Check all of these

loans or future loans for these characteristics so we don’t have this

horrendous failure?’’

Mr. MOZILO. Yes, immediately—within the first—if we don’t get

payment the first month, we’re contacting the borrower. And that’s

part of what we do. And we are adjusting our——

Mr. KANJORSKI. I understand you do to the mortgage holder. But

don’t you put all those together in statistics and say, ‘‘These packages we are selling now are failing at such a horrific rate that

they’ll never last and there will be total decimation of our business

and of these mortgages?’’

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Chairman WAXMAN. The gentleman’s time has expired, but

please answer the question.

Mr. MOZILO. As has been pointed out, these mortgages are put

in very complex securities and have a lot 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 security holder.

Chairman WAXMAN. All Members have had a chance to ask a

first round of questions, and some Members have indicated they

want to ask a second round of questions. Should we continue on,

or should we have a break?

Continue on. OK.

Ms. Norton, I want to recognize you for 5 minutes.

Ms. NORTON. Thank you, Mr. Chairman.

Mr. Parsons, I’m continuing the line of questions that most interest me, and that is the role of the board and the Compensation

Committee, because this is all the shareholders have to represent

them.

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. Prince is the only one who received

a bonus in a year when all of these companies were experiencing

multibillion-dollar losses.

Now, understand my question. This was not a golden 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 was 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 bonus served the fiduciary interests

of the shareholders of Citicorp?

Mr. PARSONS. Yes, I do, Madam Congresswoman.

Ms. NORTON. Please explain.

Mr. PARSONS. As simply as I can put it, you’re correct, 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’m sorry?

Mr. PARSONS. Mr. Prince, who is—I was agreeing with your assessment that——

Chairman WAXMAN. Mr. Parsons, your voice is too soft. Pull the

microphone right up to your lips.

Mr. PARSONS. At the time that Mr. Prince tendered his resignation, he had, in effect, put in a period of time over 2007, I’ll call

it 10 months, that we had to make a judgment 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 like Citi and the other entities up here consists essentially of

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two parts: one, a base salary and, No. 2, 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. Well, no, you’re saying—can you just aggregate

that for me? Because you’re making a statement as if that was necessary in order to compensate him for the year 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 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. $1 million a year.

Ms. NORTON. So he got 10 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 [continuing]. 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 10 times that amount in bonus.

Mr. PARSONS. So how did that happen? Here are the matters

that the committee considered in making a judgment.

Now, you characterize the company as having failed. In point of fact, Citigroup made almost $4 billion in 2007. They did have major

write-offs, but the company was profitable. Indeed, many parts of

the company had experienced record levels of performance. Only

one part of the company really 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 quarters

preceding the quarter that led to his resignation were two of the

most profitable in 200-year history of Citi. We had improved relations with all of our regulators around 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.

Ms. NORTON. I can understand. The size of the bonus is interesting to me. But let me ask you about the board that had to decide

this. Because if the board decides we’re going to give him 10 times

what his salary was this year, even 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.

Mr. PARSONS. I will do my best to be brief.

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Essentially, the determination was made by the Compensation

Committee based on the factors I told you. And while it may have

been 10 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.

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

offering a bonus to Mr. Prince when he resigned.

Thank you.

Chairman WAXMAN. Thank you, Ms. Norton.

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, VA. And sadly, they suffer today perhaps because

they did not look into the detail or maybe they were 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, you renegotiated your compensation package with the board at Countrywide. The documents

obtained by the committee indicated that you were unhappy with

the pay package.

Let me put up an e-mail you wrote to your compensation consultant—and you can put that up—on October 20, 2006. And let me

tell you what you said, ‘‘At this stage in my life at Countrywide,

this process is no longer about money but more about respect, an

acknowledgement of my accomplishments. Boards have been placed

under enormous pressure by the left-wing, anti-business press and

the envious leaders of unions and other so-called CEO comp watchers. I strongly believe that, a decade from now, 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.’’

What did you mean by that?

Mr. MOZILO. Well, 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.

I apologize for that memo, but it was as the result of a dialog

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. And I understand that. 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.

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And according to the documents, you were 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.

Let me show you another e-mail you wrote to your compensation

consultant, this one on November 23, 2006, ‘‘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.’’

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, ‘‘The board must understand that, if I were to retire

today, I would receive approximately $15 million in deferred comp,

get directors fees and be able to liquidate my 12 million shares

without restriction.’’

Mr. Mozilo, you made an enormous amount of money. And that’s

great, that’s wonderful, God bless you. According to the documents

reviewed by the committee, you’ve made almost $250 million in

compensation and collected $406 million from the sale of Countrywide stock.

Why was it so important to you that Countrywide pay the taxes

on your wife’s travel on a Countrywide jet?

And I just want you to understand that, again, the reason why

this gets to me so badly is because, just a few weeks ago, I held

a forum where we were trying to help people in my district renegotiate their Countrywide loans, and they were on the doorstep of

foreclosure, some of them with tears in their eyes. And, you know,

they’re worried about their wives too. They were worried about

where their wives were going to cook and where they were going

to sleep.

But I’m just curious——

Mr. MOZILO. First of all, I understand exactly what you are saying. Again, I’ve spent a good part of my life dealing with the issue

of homeownership, particularly among lower-income and minority

people. I understand more than anyone else the importance of

homeownership. My dad didn’t buy his first home until he was over

50 years old and died a few years later. I understand the difficulty

of making payments, because I interviewed many of these buyers

to make these loans at the beginning of Countrywide. I serviced

many of these loans. I collected the payments. I understand, as you

do, the importance of homeownership and the trials and tribulations people go through. And that’s why we’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 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 really 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.

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As for the wife issue, you know, in comparison, it sounds out of

whack today because it is out of whack today, in today’s world. In

2006, things were fantastic. The company had 30 straight years of

increased earnings—one of the most successful 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 her there? And the way it worked

out on the travel was, if she had to come, which was rarely because

we had five kids and nine grandkids and she stays home, but if she

did, I had to pay an enormous amount of—a substantial amount of

money to have her on that plane with me.

And that’s how the issue came up. It came up with my colleague

who was the second in command of the company, and I wrote the

memo. In today’s world, I would never write that memo.

Mr. CUMMINGS. I appreciate it. Thank you, Mr. Chairman.

Chairman WAXMAN. The gentleman’s time has expired. Mr. Cannon, do you want to——

Mr. CANNON. Thank you, Mr. Chairman. Yes.

Chairman WAXMAN. The gentleman is recognized.

Mr. CANNON. Mr. Mozilo, can I followup on this a little bit now?

My understanding is that Countrywide is shrinking in most of its

areas. But do you have any areas of the company that are actually

growing larger?

Mr. MOZILO. Yes. We have a very large insurance operation, casualty and life insurance company, that is doing extremely well.

Balboa Life and Casualty. We bought it back in November 2000—

1999. It is doing extremely well.

Mr. CANNON. Do you have any divisions that are growing?

Mr. MOZILO. I’m sorry?

Mr. CANNON. Within Countrywide, the lending area, do you have

divisions of Countrywide that are growing? Like your——

Mr. MOZILO. You know, in most areas it is either stable to

shrinking.

Mr. CANNON. Are your—you’ve just been talking——

Mr. MOZILO. Do you mean like homeowners? Those areas? It is

all growing. I mean, we have almost 4,000 people today versus in

2004, maybe 200 or 300 who are solely working on the issue that

the Congressman raised. These are serious issues, a serious impact

on lives. So we—our servicing area—we’re servicing $11⁄2 trillion

worth of mortgages. 9 million customers, and today many of whom

are in problems—so that 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.

Mr. CANNON. You talked a little bit about your history and when

your dad bought his first home. There is a lot of data out there that

indicates that families that own homes do better. Their children do

better in school, their children do better in life. I suspect that is

part of what motivates you here, is it not?

Mr. MOZILO. You know, I think my background certainly motivates me as it does I’m sure each of the CEOs here at the table.

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But I have—since I spent a good part of my life in the field interviewing borrowers for loan applications, I get it. I understand what

it means to Hispanic families who 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 and they have various jobs, but they

can’t give you the formal type of verifications 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 car retail business. This is a very important thing to me. This is the mission. And

I take it very seriously.

Mr. CANNON. And we are at the highest rate of home ownership

in the history of America today, are we not?

Mr. MOZILO. We are now. But that’s when—my verbal remarks,

I’m concerned we’re going to go the other way.

Mr. CANNON. Well, I really hope that you’re really 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 ‘‘New York Times’’ piece by Gretchen Morgenson

that was entitled ‘‘Inside the Countrywide Lending Spree?’’

Mr. MOZILO. I’m familiar with it. She has written several articles.

Mr. CANNON. In that article, she said providing the best loan

possible to your customers was not always the main goal. Have you

had a chance to respond to that article? Would you like to now?

Mr. MOZILO. We’d be happy to provide the committee with—we

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 lose, the borrower loses, the

community loses and we lose.

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, we had this amazing, remarkable

time in American history caused by a confluence of events, including availability of capital, but also the securitization, 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 on

that, Mr. Mozilo?

Mr. MOZILO. I think what came to mind when you were 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

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period. And that was the very foundation of which Countrywide operated under, with access to liquidity. And all of that disappeared

and there was 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 constituents can solve their problems and America doesn’t crater. Thank you and I yield back.

Chairman WAXMAN. The gentleman’s time has expired. Mr. Issa.

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 did

not want to mislead anyone.

Ms. NORTON. Would 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 who

have had serious problems with their subprime mortgages. I have

my own constituents here in the District of Columbia. Could I 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 call. And if there are any issues whatsoever, call

me directly. That’s what I do.

Ms. NORTON. Is your number on there, Mr. Mozilo?

Mr. MOZILO. I’ll give it to you. I’ll be happy to give it to you.

Ms. NORTON. Thank you.

Mr. ISSA. Thank you. And in reclaiming my time, I trust we’ll do

that one off the air. Mr. Chairman, I would ask unanimous consent

to include in the record a number of charts and information related

to performance of various funds that include these types of mortgage backed securities, including Merrill Lynch, BlackRock and

others.

Chairman WAXMAN. Without objection, it will be made part of

the record.

[The information referred to follows:]

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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 relationship 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 time 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

dais recognize that often travel with a spouse on official business

can in fact be very much good business, good for America and good

for the profits of the company, depending upon which side of this

dais you’re on.

I think it is important again to sort of wrap things up here. And

my hope is that we would try to have an understanding. Everything that I’ve asked to have submitted to the record virtually, including this memorandum or this chart showing the—virtually—

and these are median prices. These are not snapshots or current

sales. But the median price of a home exceeding inflation at a national level in California, exceeding it by nearly twice what it does

on a national basis has gone on almost unrelentlessly on a national

basis. A little bit of a dip in the early 1990’s. And I know all of

you got to see a part of that. Everything that I’ve asked to have

submitted to the record, I think former Fed Chairman Greenspan,

Chairman Bernanke, all made the assumption that in fact creditworthiness had to do with wives—you know, marriages, jobs and

health. I don’t believe that until recently we on the dais and certainly not you there thought that, in fact, underlying value of

homes would ultimately be what began a cycle downward. And I

would like to put out one question because this is a learned group

here today and I’d like to have your input.

Should this committee and the Congress, the government look

at—as we do with the Fed chairman who looks at inflation and he

looks at the money supply and that money supply related to inflation and jobs, he tries to participate in a regulation so that we not

overheat the economy and that we in fact try to not have deep recessions. Should an agency of the government or, if you will, an

agency set up by the government like 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 we’ve learned

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about overheating the growth in home loans and thus the rise in

the value and obviously what we’re dealing with today?

Mr. MOZILO. I think that anything—I think we should explore

any potential possibility to avoid what we have just—what we’re

going through. And by the way, I don’t think that bullet has fully

passed yet, whether it be Goldman or anybody else. I don’t think

that bullet has completely arrived. But I do believe we should

study ways 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 toward a bipartisan effort to keep these boom-and-bust occurrences from occurring.

Thank you, Mr. Chairman. I yield back.

Chairman WAXMAN. The gentleman’s time has expired. The

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

Mr. Finnegan, in October 2007, Merrill Lynch’s board faced a difficult decision about Mr. O’Neal’s ongoing role at the company.

Under his leadership as CEO, the company invested heavily in the

mortgage market and was suffering record losses as a result of

these choices. The board concluded it was time to end Mr. O’Neal’s

relationship with Merrill Lynch, then had to make a decision about

whether to treat his departure as a termination or allow him to retire. Despite the company’s financial difficulties, the board did not

terminate Mr. O’Neal. Instead they allowed him to resign and then

retire from the company. And that decision allowed him to collect

a retirement package worth $161 million, including stock and options that had not vested. I can understand the instinct of wanting

to allow Mr. O’Neal to retire, but it had real financial repercussions. If the board had fired him for cause, he would have received

over $6 million—nothing to sneeze at—in deferred compensation

and standard retirement benefits. But he would not have received

$131 million in stock and options or an executive annuity worth

$24 million because these had not vested. What was the rationale

for letting Mr. O’Neal retire with $131 million in unvested stock instead of terminating him and recouping this money for the shareholders?

Mr. FINNEGAN. Sir, the stock awards that Mr. O’Neal had received and which were unvested were governed by certain provisions related to retirement eligibility and cause. Essentially Mr.

O’Neal had sufficient points in terms of age and years of service

to leave the company and take those stock awards with him unless

we could terminate him for cause. The provisions related to cause

covered misconduct. They did not cover unsatisfactory financial results.

Chairman WAXMAN. Now, why didn’t the contract allow the

board to fire him for cause? You were the one who wrote the terms

of the contract. So isn’t this a boot strap argument you can’t fire

for cause, it isn’t in the contract but you wrote the contract and

didn’t provide for that?

Mr. FINNEGAN. Well, sir, Mr. O’Neal didn’t have a contract individually. The contract I’m referring to is the agreement between

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Merrill Lynch and all of its executives, 10,000 executives who are

covered by this stock award program. Mr. O’Neal’s provisions are

not unique. The cause provisions in the stock awards are part of

Mr. O’Neal and 10,000 other people and are also generally consistent with the type of cause provisions you see in the industry and

American corporations in general.

Chairman WAXMAN. Well, I don’t see that in most people’s jobs.

If there is cause, they get fired. Now you’re saying it wasn’t just

Mr. O’Neal, but many other executives. Your company lost $2.4 billion in the third quarter, $10.3 billion in the fourth quarter, the

largest quarterly lost in the company’s history. You recorded

writedowns of $7.9 billion in the third quarter, $11.5 billion in the

fourth quarter. By the end of last year, your stock had plummeted

45 percent from its high in the previous January. If that doesn’t

qualify as poor performance, 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. FINNEGAN. No, sir. I think the consequences were pretty dramatic. Mr. O’Neal lost his job. He got no severance, he got no

bonus. And because he was forced to retain stock in the company,

he suffered about a $120 million economic penalty.

Chairman WAXMAN. And 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’Neal 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 liquidity 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 had the most responsibility. I have no problem with paying for success, but it looks like

when you’re a CEO, you get paid for failure. Even if you’re the

CEO of the largest home loan company, the company perhaps most

responsible for the mortgage crisis in the country can make $120

million in stock sales when your shareholders are losing 80 percent

of their value.

Now, I thank all of you for being here. And I want to say to Mr.

O’Neal and Mr. Prince and Mr. Mozilo what I said in my opening

statement. You’re all classic American success stories. You have

tremendous accomplishments. You’ve all made enormous contributions to our country. But 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 dollars. It cost people their homes,

it cost other people their jobs. It seems like everyone is hurting except for you. In our first hearing in December on this issue of compensation for executives, we looked at the conflicts of interest

among compensation consultants. We shined the light on that problem. As a result, corporate practices are beginning to change. I

hope this hearing will also have the same effect. This is the first

congressional hearing ever to look at how CEOs are compensated

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when their companies are losing billions. And 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 need to be

better mechanisms for accountability. Without this, our economy

will remain vulnerable to the kind of economic disruptions we’re

now experiencing.

I thank you all for being here and I hope you’ll all learn from

the exchange of information. You’ve been very generous with your

time. That concludes our business, and we stand adjourned.

[Whereupon, at 2:26 p.m., the committee was adjourned.]

[Additional information submitted for the hearing record follows:]

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