Finance Fatcats Live Large as Firms Crumble

September 17, 2008— -- It is one of the ironies of the subprime mortgage crisis that while millions of people stand to lose their homes because they can no longer afford to pay their mortgage, the people at the top of the financial institutions that wrote the loans or packaged the risky debt on Wall Street are still tucking themselves in at night, safe and sound inside some very ritzy real estate.

On Monday Lehman Brothers declared bankruptcy, and late Tuesday night AIG, the largest insurance firm in the world, was essentially taken over by the federal government in an effort, the government explained, to stave off further disruption to the economy.

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Thousands of employees are prepping their resumes and many more people are left to contemplate their dwindling nest eggs. But for the companies' executives, men who months ago were given multi-million dollar bonuses despite peering the devastation on the horizon, there is little to worry about.

When Lehman Brothers declared bankruptcy on Monday, the company left about 25,000 workers worldwide in the lurch, wondering where their next paycheck will come from. CEO Richard Fuld, on the other hand, can contemplate his next move from a lavish home in Greenwich, Conn. The multi-million dollar manse has 20 rooms and includes an indoor squash court. Fuld and his wife regularly make the ArtNews list of Top Collectors for their interest in "works on paper, especially postwar art." And Fuld has some pretty powerful friends. He managed to get no less a luminary than Bill Clinton to give the commencement address at Middlebury College last year. Fuld's son was graduating.

Fuld has been with Lehman Brothers for 39 years, acting as CEO for 15. And like most CEOs, he could count on a healthy compensation package. According to Forbes Magazine, Fuld ranked number No. 11 in CEO compensation, raking in $354 million dollars over five years, with an annual compensation including salary and stocks believed to be hovering in the $63 million dollar range.

And that's not an unusual payout, according to Dave Schmidt of James F. Reda and Associates, an executive pay consulting firm. "Salary is generally under a million, something like $750,000, and then there are long-term incentives like stock and stock options that are paid out in the form of bonuses," said Schmidt. Of course there are often other incentives built into a CEO's contract too, like a car and driver, travel on the company jet, security, legal fees, financial planning, even tax preparation -- all on the company dime.

Wealthy Compensation for Financial Executives

Annual compensation in the multi-million dollar-range enabled Fuld to call more than one swanky address home. In addition to the Greenwich estate, the Fulds own an apartment at 640 Park Avenue -- one of Manhattan's most prestigious buildings. A real estate listing boasts that a similar full-floor apartment has five working fireplaces, parquet de Versailles floors, six staff rooms, a library and "ample closets."

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James Cayne, former chief executive of the now-defunct investment banking firm Bear Stearns, who regularly showed up on Forbes' list of the 400 Richest Americans, recently purchased two adjacent apartments at the Plaza with to-die-for views of Central Park and a price tag in the neighborhood of $27 million dollars. Under Cayne's leadership, the company came within hours of failing, until JP Morgan Chase agreed to pay $10 a share for the struggling company with the help of about $30 billion in federal credit. Cayne promptly sold all of his stock and netted a reported $60 million.

It remains to be seen what sort of compensation package Robert Willumstad, CEO of AIG, the world's largest insurance company, will get now. On Tuesday, the Fed promised to back loans to the teetering company to the tune of $85 billion, in exchange for 80 percent of its stock.

Willumstad owns homes on Park Ave in Manhattan; on Long Island, N.Y.; and in Vermont. According to BusinessWeek, in July his minimum cash bonus for 2008 was set at $4 million and his target bonus was set at $8 million.

"I think people are supposed to take away from this that something is incredibly wrong with the system. Sometimes there seems to be incredible reward for failure, " said Kevin Murphy, a professor of finance at USC's Marshall School. Murphy is an expert in executive compensation and said that over the last 15 years or so, compensation in the financial services sector has skyrocketed.

Take Fannie Mae and Freddie Mac.

CEOs Remain Rich Despite Taxpayer Bailout and Job Losses

Taxpayers are now footing the bill for a bailout of these mortgage and insurance giants and employees of these companies may lose their jobs, and have lost millions in their stock ownership plans. Shares of Fannie Mae are now trading at about 48 cents, down from a high over the past year of just over $70. Still, last year, according to Equilar, an executive compensation research firm, CEO Daniel Mudd received about $14 million in total compensation

And despite his companies' financial woes, Mudd beds down in a 22-room Washington mansion that includes a wine cellar, a home theater, a fountain and landscaped gardens.

In 2006, Freddie Mac's CFO, Anthony Piszel, bought a reported $3.6 million, five-bedroom, 8-bath Colonial in Great Falls, Va., that is situated on five acres "with a lake, a floating staircase and two kitchens." Freddie Mac's shares are hovering around 25 cents a share.

Despite steering their companies into financial disaster, the CEOs of Fannie Mae and Freddie Mac stand to make even more money up to a reported $25 million in so-called golden parachute packages. (The Federal Finance Housing Agency just said that it will block such payments, but that may not be the end of the story -- "I would be shocked if the CEOs don't sue to get those payments," said Murphy.)

The issue of executive compensation and the lavish lifestyle that often accompanies it become more of an issue during an economic downturn, according to Kevin Murphy. "People pay very little attention to executive pay… It wasn't until the markets started dropping and these guys exercised their options that everybody sat up and took notice. People tend to be very forgiving of compensation when it's tied to performance but when the performance isn't there…"

For purely palatial, it may be hard to top Merrill Lynch CEO John Thain's house in Rye, N.Y. Fourteen bedrooms? Check. Swimming pools? Check. Tennis Courts? Check. Lake stocked with fish? Check. The compound is reportedly so big that it spans two different towns, Harrison and Rye. It's believed to be worth close to $10 million.

John Thain has been CEO of Merrill Lynch for less than a year. He received a $15 million cash bonus when he signed on with the struggling company. Just last weekend, Thain engineered the sale of the 94-year-old financial services firm to Bank of America. Thain stands to make an estimated $9 million off that deal.