[House Hearing, 110 Congress]
[From the U.S. Government Printing Office]




                               before the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION


                             MARCH 7, 2008


                           Serial No. 110-81


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                               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/


                 HENRY A. WAXMAN, California, Chairman
EDOLPHUS TOWNS, New York             TOM DAVIS, Virginia
PAUL E. KANJORSKI, Pennsylvania      DAN BURTON, Indiana
ELIJAH E. CUMMINGS, Maryland         JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio             JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois             MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts       TODD RUSSELL PLATTS, Pennsylvania
WM. LACY CLAY, Missouri              CHRIS CANNON, Utah
DIANE E. WATSON, California          JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts      MICHAEL R. TURNER, Ohio
BRIAN HIGGINS, New York              DARRELL E. ISSA, California
JOHN A. YARMUTH, Kentucky            KENNY MARCHANT, Texas
BRUCE L. BRALEY, Iowa                LYNN A. WESTMORELAND, Georgia
    Columbia                         VIRGINIA FOXX, North Carolina
BETTY McCOLLUM, Minnesota            BRIAN P. BILBRAY, California
JIM COOPER, Tennessee                BILL SALI, Idaho
CHRIS VAN HOLLEN, Maryland           JIM JORDAN, Ohio
PAUL W. HODES, New Hampshire
------ ------

                     Phil Schiliro, Chief of Staff
                      Phil Barnett, Staff Director
                       Earley Green, Chief Clerk
               Lawrence Halloran, Minority Staff Director

                            C O N T E N T S

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
    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



                         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 
    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 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 
    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.
    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 
    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 









    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 
    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, 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 
    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 
    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:]






























    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.



    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 long-term loan performance is central to the outcome we 
see today of unprecedented foreclosure rates in an economy that 
is, as of now, not in recession.
    The current crisis is a textbook demonstration of how 
misaligned incentives can cause financial markets to 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 drove up compensation and, therefore, provided 
incentives to produce throughout the subprime mortgage supply 
chain. Long-term 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 
volume-driven 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-
to-value 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 rating 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 high-yield 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 
    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, 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.


    Mr. Galvin. Good morning. I am William F. Galvin, Secretary 
of State and chief securities regulator of the Commonwealth of 
    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 
hard-earned 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 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-money-
down 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 purchased 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 
    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 
    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 
    [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.


    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 
    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, and, if not, we shut the water off to 
avoid freezing pipes, which will cause additional damage to the 
    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 
    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.


    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 
    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 
    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 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 
    [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 
    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 
    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.
    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. 
    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 
    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 
    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 
    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 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 
    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, 
    Mr. Yezer. I'm sorry. When did you say he got the 
    Mr. Issa. According to--I did some quick work here. Total 
compensation of $64 million----
    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 
    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. 
    Mr. Yezer. If this company----
    Mr. Issa. I have limited time. I appreciate your answering 
    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, 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 
    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 
    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 
    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.
    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?
    Ms. Minow. Yes. I would define the term to say numbers that 
had to be corrected later on either because of poor judgment or 
    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.
    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 
    Ms. Minow. First, I would like to say, with regard to your 
hypothetical, 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 
    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 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 
    And, Mayor Lawrence, I understand it differs in your 
    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 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. 
    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 poor-credit 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 constant 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 
    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 quarterly 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 
losing $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 context, 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 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.
    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.



    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.
    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 
    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 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.


    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 
    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. 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 
    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.


    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 paying 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.


    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 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 
    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. 


    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 
    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 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 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. 


    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 full-time 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 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 
    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 
    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 
    [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 6\1/2\ 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 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 
    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 
    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 approval 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 
    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 inconsistent 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 
    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.
    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 
    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 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. 
    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?
    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 
    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 
    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 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 
    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 
    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 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 
    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 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 
    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 
    Now I am curious to know your thoughts on this matter, 
especially you, Mr. Mozilo, with your long history in the 
mortgage industry, your leadership on these 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.
    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 
    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' 
    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 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 
    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. 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 
    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, 
    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 
    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 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 
    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?
    Mr. Snyder. I was a member of the Compensation Committee, 
    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 
    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 
    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 medium-sized companies like BB&T and SunTrust, 
according to the documents we have. He wanted the salary to be 
based on compensation paid to the head of Goldman Sachs and 
Bank of America.
    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. 
    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 
    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?
    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 
    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 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 
    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 
    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 
good-faith 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.
    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 
    Chairman Waxman. Thank you, Mr. Cummings.
    Mr. Towns.
    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 
    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 
    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 
    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.
    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 
    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 
compensation 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 
    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 of the people we're giving mortgages to don't make 
the first installment payment. Didn't that ever come to your 
    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?''
    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 
    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 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 
    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 
    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.
    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 
    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 
    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.
    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.
    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 
    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 
    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 $1\1/2\ 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 
    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. 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 
    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 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 
    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. 
    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:]
    [GRAPHIC] [TIFF OMITTED] T4914.190
    [GRAPHIC] [TIFF OMITTED] T4914.191
    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 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 
    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 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 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 
    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 
    [Whereupon, at 2:26 p.m., the committee was adjourned.]
    [Additional information submitted for the hearing record