Chronicle of A Death Foretold II

A handful of AIG executives took home $165 million in bonuses last year, when their company was bailed out with about $170 billion of taxpayers’ money. This revelation has caused public anger and controversy over executive compensation. Indeed, the U.S.’s compensation culture, which encourages executives to take risk with little concern of accountability, has precipitated the current financial crisis. Compensation is about rewards and accountability. And without accountability, compensation will be tantamount to fraud. In this respect, fiscal 2006 was the crucial year, when the country’s banks continued to ease their remuneration practices in a desperate move to stay on the gravy train, which, fueled by subprime mortgages and CDOs, began to turn the last corner of its collision course.

-. Washington Mutual, Inc.

In fiscal 2006, Washington Mutual, Inc. removed a regulatory-compliance goal from its set of bonus metrics. With the connivance of the board, Washington Mutual executives have since maneuvered to keep their jobs and bonuses, instead of taking on the credit crunch head-on. Two decisions in April 2008 by the board prompted shareholder action. In the month, the Human Resources Committee decided to exclude subprime mortgage-related losses from the metrics for executive bonuses. Washington Mutual passed up merger negotiations with JPMorgan Chase & Co in favor of $7 billion in capital injections from a consortium led by private equity TPG. A merger between the two financial institutions, which is about the size of the capital infusion in value, could have greatly improved shareholder interests at Washington Mutual, while the deal with TPG has diluted existing shares.

At the AGM in 2008, Washington Mutual shareholders had little option but to approve the plan because it was the only recapitalization plan put before them. However, they successfully unseated Mary E. Pugh, the non-independent outside director, who chaired the board committee responsible for asset quality, and had the board retract its decision to exclude subprime losses from bonus calculations. Shareholders could not stop executives from taking home hefty paychecks until the bank’s last days. In September 2008, Washington Mutual agreed with Alan H Fisherman, the new CEO replacing Kerry Killinger, to pay a salary of $1 million and 3.65 times base salary in bonuses and other cash and stock payouts. About 18 days after Mr. Fisherman’s appointment, the bank collapsed and was eventually acquired by JPMorgan Chase & Co, following a brief takeover of its assets by the federal government.

-. IndyMac Bancorp, Inc.

In fiscal 2006, at IndyMac Bancorp, Inc., the board’s Management Development and Compensation Committee gave up the right to reduce the amounts of executive bonuses if regulatory ratings worsened or if certain strategic criteria were not met. In the same year, 45% of IndyMac Bank’s CEO Richard H. Wohl’s cash bonus was tied to a single metric vaguely termed “mortgage professionals.” The metric appears to have referred to as Mr. Wohl’s ability to hire and retain mortgage professionals.

As late as fiscal 2006, IndyMac’s compensation metrics included many pro-shareholder factors such as ROE and TRS. In fiscal 2007, when its stock began to fall substantially, the bank scrapped all existing metrics, in what it said is to weigh “IndyMac’s pay for performance principles against the need to motivate and retain the management team to successfully adapt IndyMac’s business to the new mortgage environment and to rebuild IndyMac’s business and financial model.” In other words, the bank renounced the bedrock principles of compensation policy to retain the very management team that pushed it into crisis. In that year, all named executives were paid bonuses. In July 2008, IndyMac became nationalized after extensive financial losses.