Rewarding Failure: Part Two
by Ted Sares
--The credit crunch has brought down everything from deeply indebted companies to overextended lenders to over-leveraged borrowers to the economy as a whole. While the administration's recent pump priming efforts may provide a reprieve, the jury is out on its long term impact.
As this entire mess rapidly evolved, Countrywide Financial Corporation came to the forefront. Founded in New York 38 years ago by Angelo R. Mozilo and David Loeb, Countrywide became a $500 billion home loan powerhouse with over 60,000 employees, 900 offices and assets of $200 billion. As the mortgage market soared beginning in 2000, no company went after growth in home loans more aggressively than Countrywide, and its stock price was up 561 percent over the 10 years, ending last December. It was at the top of firms who aided borrowers in achieving the "American Dream" of home ownership. In so doing, Mozilo pushed his sales force to write risky loans long after alarm bells began sounding, while at the same time taking home enormous paychecks.
Times have changed. Like many rivals (including Citigroup, Washington Mutual and Merrill Lynch), this California-based giant has been badly hurt by falling home prices, rising defaults and tight capital markets. The meltdown of financial giants has parralleled that of Britney Spears. Each catastrophe seems to be followed by another one.
In the meantime, the American dream has morphed to the American nightmare. Property owners who were fortunate enough to avoid foreclosure have taken sizable percentage hits on their home equity. Those who now want to sell may not be able to do so any time soon without shorting their own mortgage, particularly if home values drop below their current outstanding mortgage balances. Countrywide found itself laying off almost 20 percent of its 60,000-person work force in an effort to stay financially afloat. Early in January, it reported that foreclosures and late payments rose in December to the highest on record, sending its shares plummeting to their lowest point in nearly 13 years. Rumors of bankruptcy became rife. Countrywide recently traded around $6. Fifty two weeks ago, it traded at around $45. Then, on Jan. 11, a possible bankruptcy bullet was dodged when Bank of America announced its plans to buy Countrywide for $4.1 billion in stock, a takeover that will both rescue the giant mortgage lender and expand the financial services empire of the nation's largest consumer bank. Other large financial companies have also been aided by cash infusions from such faraway places as the Abu Dhabi Investment Authority (ADIA).
But what about accountability? What about those in charge of these giant companies?
Symptomatic of a problem at far too many public companies, where executive pay is only remotely linked to actual performance, Angelo Mozilo's pay was staggering. He made $160 million in 2005 and $120 million in 2006. Now, his soon-to-be-received severance package is just plain obscene. If and when Bank of America completes its purchase of Countrywide, the tanned Mozilo reportedly will collect tens of millions of dollars in severance payments. Some put the amount at $115 million in severance-related compensation. He will have two pensions, get accelerated payments of stock options, free rides on the company jet, and have his country club dues paid until 2011.
This is just the latest clear example of rewarding failure. After all, if executives are paid more for high performance because their compensation is supposedly tied to performance, then logic dictates they should get less in the way of severance for poor performance -- if not for outright failure.
Excess severance payments were just one of the many symptoms of the corporate accounting scandals that occurred between 2001 and 2003 (and which I wrote about in "Rewarding Failure: Part One"). Enron was the poster child then and Countrywide appears to hold that mantle today. Nothing seems to have changed, notwithstanding the Sarbanes-Oxley Act of 2002. Indeed, these juicy packages are likely indicative that a company's board of directors is fast asleep at the switch.
What's the cure? In the extreme, some argue for legislative remedy, but the thought of politicians micromanaging corporate compensation is frightening. Some politicians have even called upon Mozilo to donate a portion of his generous package to aid subprime borrowers facing foreclosure.
While these politicians bring up valid issues, they miss an important part of the problem: executive overcompensation is a corporate governance issue, not a populist one. Angelo Mozilo's excessive pay didn't come from the subprime borrowers who are facing foreclosure; it came out of the hands of the company's shareholders, the rightful owners of corporate assets. However, if the board members (who more often than not are similarly highly paid senior executives from other companies) don't wake up and show some backbone in holding the line on CEO contacts that contain obscene severance terms, they just might get a cure that is far worse than the illness. If they don't self correct, others are liable to do it for them.
More and more, these episodes seem to be classic examples of how the elite reward the elite, of how powerful people can bend or rewrite the rules to fit the games they play and somehow rationalize it, but in the process, they are tempting fate. If they don't slow down this in-your-face display of slurping at the corporate trough, they may soon see the whites of the politician's eyes.
As for Mozilo, yes, he needs to be vetted, but urging him to donate the money to distressed home owners is nothing more than a politically inspired sound byte.
Ted Sares is the author of the recently published book Boxing is my Sanctuary and welcomes feedback. He can be reached at email@example.com
Ted Sares may be contacted at http://www.tedsares.com firstname.lastname@example.org
Ted Sares is a private investor who lives and wites in the White Mountain area of Northern New Hampshire with his wife Holly and dogs Kater and Jackdog. He writes a bi-weekly column for a local newspaper and many of his other pieces are widely published.