AFL-CIO: CEOs' Pay Packages Played Role in Mortgage Crisis

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By Judith Burns

Washington - Labor union officials, who blame the nation's mortgage mess in part on runaway executive pay, are calling for Congress to adopt a "say on pay" bill that would let shareholders weigh in on CEO compensation.

Chief executives at Countrywide Financial and Washington Mutual Inc. were paid "obscene amounts" even when their company's performance faltered as subprime borrowers defaulted on home mortgage loans, AFL-CIO Secretary- Treasurer Richard Trumka said at a press briefing Monday. The bad loans devalued mortgage-backed securities tied to them, leading to large write-downs in assets at a number of financial firms..

Countrywide Chief Executive Angelo Mozilo, Washington Mutual CEO Kerry Killinger, former Bear Stearns Cos. CEO James Cayne, and former Citigroup Inc. CEO Charles Prince were among those rewarded lavishly for betting on risky loans, according to labor officials. Mozilo and Cayne are also chairmen.

"When the house of cards fell, they didn't pay for it, we did," said Trumka.

Killinger's 2008 bonus excludes consideration of loan loss provisions, restructuring costs and expenses related to foreclosed assets, according to AFL-CIO officials, shielding him from any pain related to mortgage losses.

Lenders encouraged excessive risk-taking by rewarding CEOs for short-term gains in revenue and return on equity, said Daniel Pedrotty, who heads the AFL-CIO investment office.

"The orientation was all wrong at these companies," said Pedrotty.

Labor officials urged lenders to rethink their approach and compensate top executives based on risk-adjusted, longer-term measures, such as total shareholder return over periods as long as five years. Unions also want corporate boards to adopt proposals for a "responsible" approach to CEO compensation and severance packages that would not tie the board's hands in the future.

Executive Paywatch, an online database that the AFL-CIO debuted in 1997, includes a new feature this year allowing users to compare CEO pay to corporate financial performance over periods of one, three and five years, and union officials said results demonstrate the gap between lofty pay and slumping performance. The executive compensation data includes results reported to the Securities and Exchange Commission as well as the AFL-CIO's own calculations, which include stock-based compensation when granted, rather than when received, an approach union officials think is superior to the SEC's tally.

Washington can help, too, according to AFL-CIO officials, who called for a moratorium on home foreclosures and changes that would require subprime mortgages with short-term "teaser" rates to be converted to 30-year loans carrying the original, low teaser rate.

On the pay front, labor union officials said they hope Senate lawmakers will act this year on legislation requiring public companies to give shareholders an advisory vote on CEO compensation. A "say on pay" bill has cleared the House of Representatives but the Senate is yet to take up the matter.

Trumka also faulted a 1999 law removing longstanding barriers between investment and commercial banking and called for the U.S. "to go back and re- regulate" in this area. He described a recently released Treasury Department blueprint for financial regulatory reform as "a step backwards" that favors a deregulatory approach.

A more liberal SEC stance on "proxy access" would be welcome as well, according to Pedrotty. The SEC split along party lines last year on the issue of whether shareholders should have the right to place their own nominees for corporate boards on the company's proxy ballots, and ultimately voted to bar such access. Critics say that makes it harder and costlier to bring fresh blood into boardrooms.