Mortgage Millionaires to Answer to Congress

March 6, 2008 — -- Three CEOs who made millions of dollars off the housing market -- even as homeowners and their companies started to suffer -- are expected to testify before Congress Friday about why they deserved such large compensation packages.

Countrywide Financial Corp. chairman and chief executive officer Angelo Mozilo, former Merrill Lynch CEO E. Stanley O'Neal and Charles Prince, former chairman and CEO of Citigroup, have all been asked to tell Congress whether they believe their pay was justified.

Take Mozilo.

As CEO of Countrywide, the nation's largest lender, he stands to make millions if Bank of America's proposed $4 billion acquisition of his company goes through.

Facing mounting public opposition, Mozilo has already said that he would give up $37.5 million of severance pay, fees and benefits linked to his expected departure after the Bank of America deal closes. He also gave up some other benefits, such as use of the company's aircraft.

But he still won't leave empty-handed. Separate from his severance package, Mozilo will still keep various retirement benefits and deferred compensation already earned. Those add up to about $44 million.

And there is more.

Mozilo sold more than $127 million in stock options early on in 2007. Those sales came before he announced a $388 million write-down on profits and Countrywide's growing problems became apparent. As the company's troubles continued, Mozilo kept selling shares, cashing out an additional $30 million in options.

Now Congress wants to know whether he deserves such payouts, especially given that thousands of Americans have lost their homes and his company's stock has plunged, losing more than 78 percent of its value in 2007.

As the mortgage market has collapsed, Countrywide has foreclosed on 90,000 loans, has laid off more than 11,400 people and has reported a loss of $704 million in 2007, its first annual loss in more than 30 years.

"According to recent press reports, if Bank of America completes its proposed purchase of Countrywide Financial, you stand to collect tens of millions of dollars in severance payments and other compensation," Rep. Henry Waxman, D-Calif., chairman of the House Committee on Oversight and Government Reform, wrote to Mozilo when asking him to testify.

"I request that you be prepared to provide your perspective on this reported pay package," Waxman continued. "You should plan to address how it aligns with the interests of Countrywide's shareholders and whether this level of compensation is justified in light of your company's recent performance and its role in the national mortgage crisis."

But Congress isn't just asking the CEOs about their big compensation packages. Waxman has asked some of the people who approved these payouts to testify at the hearing, scheduled for 10 a.m. Friday.

In a letter to John Finnegan, chairman of the compensation committee at Merrill Lynch, Waxman told Finnegan that he was being invited to testify because he is the "individual most familiar with the compensation arrangements for former CEO Stanley O'Neal."

"You should plan to address how Mr. O'Neal's compensation was determined and on what basis the Merrill Lynch board of directors decided to approve his pay package," Waxman wrote.

Nell Minow, editor and co-founder of The Corporate Library, which tracks executive compensation, said that people don't mind executives making a lot of money when the company and employees are doing well.

"It's when the shareholders, customers and employees are not doing well and the CEOs are doing well that people get upset and feel that the system isn't working and that it's hard to justify in market terms," said Minow, who is scheduled to testify Friday.

"What makes this hearing important to me is that this is the first time that they are bringing in not just the CEOs -- which is important -- but they are bringing in the board members that approved these pay packages," Minow added. "That is where the focus should be."

Secretary of the Commonwealth William F. Galvin, Massachusetts' top securities regulator, is also expected to testify.

Galvin has used his office to investigate the role that some of the nation's largest investment banks had in selling subprime mortgages to investors and how much information about the risk was disclosed.

"The nature of the financial instruments is artificial. They were contrived. They don't make a lot of sense," Galvin said. "The risk that they engendered was far more excessive than was explained in many instances to the investors, whether they be municipalities or individuals."

Galvin's office has accused a unit of Bear Stearns of failing to disclose to investors a conflict of interest in its trading with two Bear Stearns-managed hedge funds that collapsed because of poor subprime investments.

The secretary also accused Merrill Lynch of fraud and misrepresentation Feb. 1, a day after the firm agreed to reimburse the city of Springfield, Mass., $13.9 million in a dispute over a subprime-related investment that went bad.

Galvin's office alleges that Merrill Lynch made unsuitably risky investments on behalf of Springfield without permission.

"The failure here isn't just the excesses on the part of the people in the industry who nevertheless profited greatly out of it," Galvin told ABC News. "It's also a failure of the federal regulators and the market regulators to examine what was going on."

Galvin said the financial firms had "complete and utter disregard for their customers."

But now, he said, the focus must be on how to prevent another similar meltdown. He questioned whether similar problems could come out of the oil or wheat markets.

"This isn't just a case of find out who did it -- I think [the congressional committee] can probably figure it out -- but also who didn't do it," he said. "What didn't the federal regulators do? Why was this bubble allowed to proceed?"