OCTOBER 31, 2008
Banks Owe Billions to
Financial giants getting injections of
federal cash owed their executives more than $40 billion for past years' pay
and pensions as of the end of 2007, a Wall Street Journal analysis shows.
The government is seeking to rein in
executive pay at banks getting federal money, and a leading congressman and
a state official have demanded that some of them make clear how much they
intend to pay in bonuses this year.
But overlooked in these efforts is the total
size of debts that financial firms receiving taxpayer assistance previously
incurred to their executives, which at some firms exceed what they owe in
pensions to their entire work forces.
The sums are mostly for special executive
pensions and deferred compensation, including bonuses, for prior years.
Because the liabilities include stock, they are subject to market
fluctuation. Given the stock-market decline of this year, some may have
Some examples: $11.8 billion at
Goldman Sachs Group Inc., $8.5 billion at
J.P. Morgan Chase & Co., and $10 billion to $12 billion at Morgan
Few firms report the size of these debts to
their executives. (Goldman is an exception.) In most cases, the Journal
calculated them by extrapolating from figures that the firms do have to
Most firms haven't set aside cash or stock
for these IOUs. They are a drag on current earnings and when the executives
depart, employers have to pay them out of corporate coffers.
The practice of incurring corporate IOUs for
executives' pensions and past pay is perfectly legal and is common in big
business, not limited to financial firms. But liabilities grew especially
high in the financial industry, with its tradition of lavish pay.
Deferring compensation appeals both to
employers, which save cash in the near term, and to executives, who delay
taxes and see their deferred-pay accounts grow, sometimes aided by matching
contributions. In some cases, firms give top executives high guaranteed
returns on these accounts.
The liabilities are an essentially hidden
obligation. Even when the debts to their executives total in the billions,
most companies lump them into "other liabilities"; only a few then identify
amounts attributable to deferred pay.
The Journal was able to approximate
companies' IOUs, in some cases, by looking at an amount they report as
deferred tax assets for "deferred compensation" or "employee benefits and
compensation." This figure shows how much a company expects to reap in tax
benefits when it ultimately pays the executives what it owes them.
J.P. Morgan, for instance, reported a $3.4
billion deferred tax asset for employee benefits in 2007. Assuming a 40%
combined federal and state tax rate -- and backing out obligations for
retiree health and other items -- implies the bank owed about $8.2 billion
to its own executives. A person familiar with the matter confirmed the
Applying the same technique to
Citigroup Inc. yields roughly a $5 billion IOU, primarily for restricted
stock of executives and eligible employees. Someone familiar with the matter
confirmed the estimate.
The Treasury is infusing $25 billion apiece
into J.P. Morgan and Citigroup as it seeks to get credit flowing. In return,
the federal government is getting preferred stock in the banks and warrants
to buy common shares. The Treasury is injecting $125 billion into nine big
banks and making a like amount available for other banks that apply.
It's imposing some restrictions on how they
pay top executives in the future, such as curtailing new "golden parachutes"
and barring a tax deduction for any one person's pay above $500,000. But the
rules won't affect what the banks already owe their executives or make these
opaque debts more transparent.
Asked about the Journal's calculation, the
Treasury said, "Every bank that accepts money through the Capital Purchase
Program must first agree to the compensation restrictions passed by Congress
just last month -- and every bank that is receiving money has done so."
Bear Stearns Cos., the first financial firm the U.S. backstopped, owed
its executives $1.7 billion for accrued employee compensation and benefits
at the start of the year, according to regulatory filings. When Bear Stearns
ran into trouble after investing heavily in risky mortgage-backed
securities, the government stepped in, arranging a sale of the firm and
taking responsibility for up to $29 billion of its losses.
The buyer, J.P. Morgan, says it will honor
the debt to Bear Stearns executives, which it said is shrunken because much
of it was in stock that sank in value.
J.P. Morgan will also honor deferred-pay
accounts at another institution it took over,
Washington Mutual Inc. It couldn't be determined how big this IOU is.
J.P. Morgan's move will leave the WaMu executives better off than holders of
that ailing thrift's debt and preferred stock, who are expected to see
little recovery. J.P. Morgan's share of the federal capital injection is $25
Obligations for executive pay are large for a
number of reasons. Even as companies have complained about the cost of
retiree benefits, they have been awarding larger pay and pensions to
executives. At Goldman, for example, the $11.8 billion obligation primarily
for deferred executive compensation dwarfed the liability for its
broad-based pension plan for all employees. That was just $399 million, and
fully funded with set-aside assets.
The deferred-compensation programs for
executives are like 401(k) plans on steroids. They create hypothetical
"accounts" into which executives can defer salaries, bonuses and restricted
stock awards. For top officers, employers often enhance the deferred pay
with matching contributions, and even assign an interest rate at which the
hypothetical account grows.
Often, it is a generous rate. At
Freddie Mac, executives earned 9.25% on their deferred-pay accounts in
2007, regulatory filings show -- a better deal than regular employees of the
mortgage buyer could get in a 401(k). Since all this money is tax-deferred,
the Treasury, and by extension the U.S. taxpayer, subsidizes the accounts.
In addition, because assets are rarely set
aside for executive IOUs, they have a greater impact on firms' earnings than
rank-and-file pension plans, which by law must be funded.
Bank of America Corp.'s $1.3 billion liability for supplemental
executive pensions reduced earnings by $104 million in 2007, filings show.
By contrast, the bank's regular pension plan is overfunded, and the surplus
helped the plan contribute $32 million to earnings last year.
While disclosing its liability for executive
pensions, the bank doesn't disclose its IOU executives' deferred
compensation, and it couldn't be calculated. The bank's share of the federal
capital injection is $25 billion.
Bank of America has agreed to acquire
Merrill Lynch & Co. Merrill is a rare example of a firm that has set
aside assets for its deferred-pay obligation: $2.2 billion, matching the
liability. Morgan Stanley also says its liability for executives' deferred
pay is largely funded.
To be sure, deferred-compensation accounts
can shrink. Those of lower-level executives usually track a mutual fund, and
decline if it does. Often the accounts include restricted shares, which also
may lose value, especially this year. To the extent financial-firm
executives were being paid in restricted stock, many have lost huge amounts
of wealth in this year's stock-market plunge.
The value of Morgan Stanley Chief Executive
John Mack's deferred-compensation account declined by $1.3 million in fiscal
2007, to $19.9 million; much of it was in company shares. Mr. Mack didn't
accept a bonus in 2007.
Executives can even lose their deferred pay
altogether if their employer ends up in bankruptcy court. When
Lehman Brothers Holdings Inc. filed for bankruptcy last month, most
executives became unsecured creditors. The government didn't come to
In assessing liabilities, the Journal
examined federal year-end 2007 filings by the first nine banks to get
capital injections, plus six other banks and financial firms embroiled in
the financial crisis. In many cases, the firms didn't report enough data to
estimate their obligations to executives. As for identifying amounts due
individual executives, company filings provided a look at only the top few,
and not a full picture of what they were owed.
Just as banks aren't the only financial firms
getting federal aid amid the crisis, they aren't the only ones facing
scrutiny of their compensation programs.
American International Group Inc. agreed to suspend payment of deferred
pay for some former top executives pending a review by New York state
Attorney General Andrew Cuomo. Mr. Cuomo is also demanding to know this
year's bonus plans for the first nine banks getting federal cash, as is
House Oversight Committee Chairman Henry Waxman.
Among the payouts AIG agreed not to make are
disbursements from a $600 million bonus pool for executives of a unit that
ran up huge losses with complex financial products. AIG also is suspending
$19 million of deferred compensation for Martin Sullivan, whom AIG ousted as
chief executive in June. His successor as CEO, Robert Willumstad, who left
when the U.S. stepped in to rescue AIG in September, has said he's forgoing
$22 million in severance because he wasn't there long enough to execute his
strategy for AIG.
However, the giant insurer -- whose total
liability for its executives' deferred pay couldn't be calculated -- says
most of the managers will receive the compensation. "Of course, we'll be
looking at all these to make sure they're consistent with the requirement of
the program," said spokesman Nicholas Ashooh.
AIG isn't eligible for the government's
capital-injection plan, since it's not a bank, but it's getting plenty of
U.S. aid of another sort. The Treasury has made $123 billion of credit
available, a little more than two-thirds of which AIG has borrowed so far.
Fannie Mae and Freddie Mac also don't get in on the capital-injection
plan for banks. But under a federal "conservatorship," the Treasury agreed
to provide each with up to $100 billion of capital if needed. In return, the
government got preferred shares in the firms and the right to acquire nearly
80% of them.
Their regulator, the Federal Housing Finance
Agency, says it will bar golden-parachute severance payouts to the mortgage
buyers' ousted chief executives. The executives remain eligible for their
Fannie Mae had a liability of roughly $500
million for executive pensions and deferred compensation at the end of 2007,
judging by the size of its deferred tax assets. A spokesman for the firm
wouldn't discuss the estimate or whether the executives would get the
At Freddie Mac, most will. "Deferred
compensation belongs to the officers who earned it," said Shawn Flaherty, a
Indeed, in September Freddie Mac made its
deferred-compensation plan more flexible, allowing executives to receive
their money earlier than initially spelled out. "Officers were nervous about
market changes," said Ms. Flaherty. "We wanted a retention tool for top
Write to Ellen E. Schultz at
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