[Congressional Record (Bound Edition), Volume 151 (2005), Part 12]
[Extensions of Remarks]
[Page 16133]
[From the U.S. Government Publishing Office, www.gpo.gov]




                  THE WAGES OF FAILURE ON WALL STREET

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                           HON. BARNEY FRANK

                            of massachusetts

                    in the house of representatives

                        Thursday, July 14, 2005

  Mr. FRANK of Massachusetts. Mr. Speaker, one of the gravest 
weaknesses in our financial system is the growing pattern of grossly 
excessive compensation which the leaders of some major firms are paying 
themselves, with the acquiescence of passive boards of directors. The 
issues raised by the extraordinarily large pay packages some top 
executives are granting themselves go beyond simply the 
inappropriateness of people enriching themselves at the expense of 
their stockholders and their employees. Increasing inequality in income 
distribution in this country has broader policy implications, and there 
is also the growing problem of perverse incentives that result from 
executives receiving grossly disproportionate compensation based on 
decisions they themselves take. That is, it is clear that some of the 
accounting abuses we have seen, and some decisions to sell large 
companies to others are being influenced not by the basic economics of 
these situations, but by the extent to which top decision-makers 
personally profit from these decisions.
  One of the most egregious recent examples is the $32 million payment 
made to the co-president of Morgan Stanley, Stephen Crawford, for work 
of only a few months as part of the upheaval that led to the ouster of 
Philip Purcell. In the New York Times on Wednesday, July 13, there is 
an excellent editorial on this subject, which notes that ``stockholders 
and employees are properly seething at the deal cut for Mr. Crawford . 
. . by a board that was oblivious to protecting the bank's reputation 
as it over-rewarded his fealty to Philip Purcell . . . .''
  Mr. Speaker, I believe that this is a subject which Congress must 
address. In particular, we must act to find ways to press boards of 
directors to do more to safeguard stockholders and employees from 
excessive compensation abuse, and we should in particular be looking at 
ways to curb the extent to which these sorts of compensation schemes 
based on various contingencies give perverse incentives to decision-
makers. I and others on the Financial Services Committee will be 
offering some legislative proposals in this regard, and I offer the New 
York Times editorial here for Members' edification as an example of why 
some action is necessary in this regard.

                [From the New York Times, July 13, 2005]

                  The Wages of Failure on Wall Street

       Words like golden parachute hardly do justice to the 
     stunning $32 million worth of a not-so-fond adieu engineered 
     at Morgan Stanley, the troubled Wall Street securities giant, 
     for its departing co-president, Stephen Crawford. 
     Stockholders and employees are properly seething at the deal 
     cut for Mr. Crawford--after a mere three months on the job--
     by a board that was oblivious to protecting the bank's 
     reputation as it over-rewarded his fealty to Philip Purcell, 
     the chief executive who was driven out in a messy power 
     struggle last month.
       The board majority appointed by Mr. Purcell opened the 
     bidding on failure's rewards by ushering Mr. Purcell to the 
     exit with a $43 million sweetener. Now others from his team 
     of loyalists--sycophants is the term outraged critics 
     prefer--are lining up to walk the platinum plank behind Mr. 
     Crawford, who never ran a business division at the bank yet 
     rose to the top as Mr. Purcell's attentive protege.
       Mere groundlings juggling finances at their neighborhood 
     A.T.M.'s must pause slack-jawed at how Wall Street insiders 
     are so ludicrously compensated for plain failure at steering 
     their companies. Few of life's losers land so affluently.
       The repair task now falls to John Mack, the new chief 
     executive and Morgan Stanley veteran. Facing a furor among 
     stockholders and staff over the severance machinations, Mr. 
     Mack had second thoughts about his own guaranteed salary of 
     up to $25 million, so he is instead invoking a merit-pay 
     standard for himself. This amounts to innovation at Morgan 
     Stanley, where dozens of bankers, traders and managers quit 
     when the Purcell team ascended and ensconced their own in top 
     positions even as the bank lagged behind its competitors.
       Mr. Mack is already seeking the return of the more 
     respected departees who ran profitable divisions. He has 
     retained the other Purcell co-president, Zoe Cruz; she was 
     smart enough to turn down the board's garish compensation 
     package.
       The new chief won't get far with recovery, however, unless 
     he impresses workers and investors with a fresh dedication to 
     merit. That has to begin with the departure of the current 
     directors--on terms worth no more than their true value in 
     having compounded the turmoil at Morgan Stanley.

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