NOVEMBER 20, 2008
Before the Bust, These
CEOs Took Money Off the Table
The credit bubble has burst. The economy is
tanking. Investors in the U.S. stock market have lost more than $9 trillion
since its peak a year ago.
But in industries at the center of the
crisis, plenty of top officials managed to emerge with substantial fortunes.
Fifteen corporate chieftains of large
home-building and financial-services firms each reaped more than $100
million in cash compensation and proceeds from stock sales during the past
five years, according to a Wall Street Journal analysis. Four of those
executives, including the heads of Lehman Brothers Holdings Inc. and Bear
Stearns Cos., ran companies that have filed for bankruptcy protection or
seen their share prices fall more than 90% from their peak.
See how much the top 25 CEOs
received in cash and
The study, which examined filings at 120
public companies in such sectors as banking, mortgage finance, student
lending, stock brokerage and home building, showed that top executives and
directors of the firms cashed out a total of more than $21 billion during
The issue of compensation and other rewards
for corporate executives is front-and-center in the wake of the financial
meltdown. Congress has held several hearings attacking Wall Street
chieftains and others for perceived excesses given the state of their
companies and the economy. America's boardrooms also are wrestling with the
issue, trying to formulate pay plans that give proper long-term incentives.
Some experts say huge paydays inevitably
coincide with economic booms. In the tech bubble of the late 1990s, more
than 50 individuals each made more than $100 million from selling shares
just prior to the crash. Many had just founded companies that had never
turned a profit.
"The system tends to reward people for
participating in bubbles," says Roy C. Smith, a finance professor at New
York University's business school. Mr. Smith, a former partner of Goldman
Sachs Group Inc., says that almost nobody anticipated the recent collapse.
How WSJ Tallied the Survey
For its compensation
and stock-proceeds study, The Wall Street Journal used the
Standard & Poor's ExecuComp database to generate a list of
public companies in industries closely tied to the financial
Still, some firms are taking action to change
their compensation systems. This week,
Goldman Sachs, which recently received government funds, said its top
brass would forgo bonuses for this year. Swiss banking giant
UBS AG said it would hold some future compensation for executives in
escrow, and pay it out only for strong long-term performance.
Many executives highlighted in the Wall
Street Journal study defended their compensation, noting that the cash they
took out was tied to strong financial results and that shareholders
flourished along with them. Some officials executed regularly scheduled
sales of stock. Others exhibited good timing in stock sales, cashing out
shares months or years before the market's steep decline.
Most of those at the top of the list retained
far more shares than they sold, meaning that their paper losses exceed the
amount they took out of their companies. Some are founders or longtime
executives who had built up equity over decades. Others on the list left
their companies long before the crisis hit.
In a surprising finding, home-building
executives often made more money than better-known Wall Street titans. One
is Dwight Schar, chairman of
NVR Inc., a Reston, Va., home builder best known as the parent of Ryan
Homes. He made more than $625 million in the five years, nearly all of it
from selling stock. NVR's stock, though down 64% from its 2005 peak, has
held up better than that of many rivals, in part because the company didn't
buy vacant land on which to build its mostly midpriced homes.
Mr. Schar's own home these days is an 11-acre
oceanfront compound in Palm Beach, Fla., with a tennis court, and two pools,
purchased in 2004 and 2005 for $85.6 million from billionaire investor
Ronald O. Perelman, according to county officials. Through a spokesman, Mr.
Schar declined to comment.
In its study, the Journal analyzed the
compensation and stock sales of insiders at financial and housing-related
companies over a five year period. The study used compensation data from
Standard & Poor's ExecuComp and stock-trading information from
The goal was to determine how much cash
insiders actually collected, including salary, bonus, and cash realized from
stock-option exercises and open-market sales of stock. The tally doesn't
include paper profits from vesting of restricted stock or exercising
options, unless the executive sold the resulting shares.
By surveying entire industry groups, the
Journal's study includes some companies that are under intense regulatory
and law enforcement scrutiny because of their actions during the bubble. It
also includes firms merely swept up in the crisis, as well as those
performing well considering the economy.
For example, Charles Schwab, chairman and
founder of the brokerage company that bears his name, realized $817 million
over the five years, almost all through stock sales. A spokesman says Mr.
Schwab, 72, regularly sells stock to diversify his holdings and pursue
charitable activities, and still holds a 17% stake. Schwab shares are up
over the past five years and have held up well in the downturn. Mr. Schwab
and his wife have established a charitable foundation that gives millions
annually to help children with learning disabilities, among other causes.
Six of those who made more than $100 million
headed home builders, the Journal analysis found. One is Robert Toll, CEO of
Toll Brothers Inc., a Horsham, Pa., firm known for building deluxe
suburban homes. Mr. Toll and brother Bruce Toll, a company director,
together garnered $773 million in compensation and stock proceeds over the
A big chunk of Robert Toll's stock sales were
in a one-month period just as Toll Brothers' stock roared to its all-time
peak in mid-2005. It's off 73% since then. A Toll Brothers spokeswoman
declined to discuss the timing of stock sales. She said the CEO's
compensation is based on performance and that his stock gains resulted from
equity he built up as a founder of the company.
The list includes some familiar names, such
as Angelo Mozilo, who realized $471 million during the five-year period as
he piloted Countrywide Financial Corp. into a leading subprime lender. Amid
huge losses, Countrywide was sold earlier this year to Bank of America Corp.
Mr. Mozilo defended his pay before Congress earlier this year, saying his
compensation was tied to performance and he had built up equity over decades
as a founder.
Some who made large sums before the recent
crisis don't appear on the list because their wealth isn't detailed in
securities filings. These include hedge fund chiefs, Wall Street traders,
and executives who sold their companies outright.
In 2006, Herbert and Marion Sandler reaped
more than $2 billion selling their mortgage lender, Golden West Financial
Wachovia Corp. Analysts have said losses in Golden West's loan portfolio
contributed to Wachovia's subsequent downfall. Wells Fargo & Co. has agreed
to buy Wachovia.
Mr. Sandler, 77, defends Golden West's
underwriting and says its loan losses weren't big enough to bring down
Wachovia. Mr. Sandler, who pledges to give the proceeds of the sale to
charity, adds that he held on to an "extremely material" amount of Wachovia
stock, which lost 90% of its value since early 2007. "If we had foreseen
what was going to happen, we would have sold all our stock," he says.
The Sandlers' sale of their company has been
well publicized. Others who profited have kept a low profile, including the
Chad Dreier, Ryland Group
R. Chad Dreier, 61, chairman and chief
Ryland Group Inc., a Calabasas, Calif., home builder, made $181 million
over the five-year period. Specializing in mid-range homes, Ryland did well
in the boom, entering into hot markets, such as Las Vegas and Ft. Myers,
Fla. Most of its buyers financed homes through Ryland's in-house mortgage
unit, some through controversial interest-only mortgages.
Mr. Dreier's bonuses, many tied to short-term
profits, totaled $31.2 million in 2005 and 2006 alone. Ryland paid him
another $20.5 million over the five years to cover some of his tax bills. He
made another $85 million from stock sales, most of them regularly scheduled.
Next door to his
4,900-square-foot hilltop house in Santa Barbara, Calif., a Dreier
private company owns an office building that houses Mr. Dreier's collection
of baseball cards, sports memorabilia, gems, minerals and other items. State
records say he owns several cars, including a 2004 Porsche coupe worth
$448,000. Mr. Dreier has donated at least $6.5 million to Loyola Marymount
After posting huge profits during the bubble
years, Ryland has reported hefty losses since last year amid plunging home
sales. Its stock price is down 85% from its 2005 closing high.
Through a spokesman, Mr. Dreier declined
comment. The spokesman says Mr. Dreier's pay was "very closely tied to
performance." He adds that the housing business is cyclical, and the Ryland
chief's pay has sharply declined with the market.
Daniel Meyers, First Marblehead
Wall Street once had a voracious appetite for
student-loan debt. Ten insiders at
First Marblehead Corp. seized the opening, receiving a total of about
$660 million, mostly through stock sales over five years.
Based in Boston, First Marblehead specializes
in "private student loans." Students take out the loans if they've exhausted
the cheaper government-backed variety. As with subprime mortgages, those
with poor credit histories must pay higher interest rates.
First Marblehead helped big banks, such as
Bank of America and J.P. Morgan Chase & Co., put together student-loan
programs. First Marblehead earned rich fees assembling and servicing
packages of the debt sold to investors.
Chief Executive Daniel Meyers, a 46-year-old
former arbitrage and derivatives trader, received almost $96 million in cash
compensation and proceeds from stock sales over five years. Lee Jacobson, a
First Marblehead spokesman, notes that Mr. Meyers co-founded the company in
1991 and didn't sell any shares until First Marblehead's October 2003
initial public offering.
In 2004, Mr. Meyers bought a Spanish-style
villa in Newport, R.I., the summer retreat of industrialists a century ago.
He paid $10.3 million for the estate, on 45 acres with sweeping views of the
Atlantic. Mr. Meyers tore down the villa and is constructing a
five-building, 38,000-square-foot compound called Seaward with a carriage
house, a guest house and a caretaker's cottage. Mr. Meyers also owns a
66-foot sailing yacht, which he recently raced to a win at the famed Newport
Regatta. In 2004, Mr. Meyers made a $22 million gift to the University of
Virginia's Curry School of Education.
Leslie Alexander, the 65-year-old owner of
the Houston Rockets and until recently a First Marblehead director, cashed
out $288 million in stock over the five-year period.
In the credit crunch, First Marblehead's
business ground to a halt after investors abandoned private student loans,
which are experiencing rising defaults. Shares recently sold for about 75
cents apiece, down 99% from their January 2007 peak. The company's
stock-market value is now roughly $75 million, about one-ninth of the amount
that insiders cashed out of the company.
Mr. Jacobson notes that Mr. Alexander still
owns 18.5% of First Marblehead, and Mr. Meyers retains 7%. He adds: "Both
men have suffered significant losses alongside other long-term holders of
New Century Financial
Robert K. Cole, Edward Gotschall and Brad
Morrice, three mortgage industry veterans, founded New Century Financial
Corp. in 1995. By the peak of the boom, it was the nation's second-largest
The Irvine, Calif.-based company promoted
mortgages that customers could apply for by merely stating their income with
Over four years, the three executives
received cash compensation and stock proceeds totaling $74 million,
including estimates of their 2006 pay cited in a report by a court-appointed
investigator after the company filed for bankruptcy protection. Mr. Cole,
who was CEO for some of the period, lives in a 9,200-square-foot oceanfront
home in Laguna Beach, Calif., that has a tax value of $30 million.
New Century Financial executives have been
known as generous philanthropists in California. Mr. Gotschall's foundation
gave $3 million in 2005 to a local hospital, which is naming a trauma center
after his family.
In 2007, New Century filed for bankruptcy
protection. New Century has said its accounting is under investigation by
the Securities and Exchange Commission and the Justice Department.
In March, the court-appointed investigator
filed a report in U.S. Bankruptcy Court in Delaware, alleging the company
engaged in imprudent business practices and improper accounting, though he
found insufficient evidence to determine earnings manipulation. Calling New
Century's mortgage business "a ticking time bomb," he faulted the company
for tying pay to loan volume and disregarding mortgage quality. The examiner
said creditors had grounds to try to recover millions of dollars of bonuses
paid in 2005 and 2006.
Manny Abascal, an attorney for Mr. Cole, said
the founders' compensation was approved by outside directors and was "fully
disclosed to investors." Mr. Abascal said the founders "held onto the vast
majority of their stock, and collectively lost approximately $200 million"
when the company failed.
Bert H. Deixler, an attorney for Mr. Morrice,
said his client was "among the biggest victims of the collapse" of New
Century, which he said was due to an "unforseen worldwide debt and liquidity
crisis." An attorney for Mr. Gotschall declined comment.
Michael Gooch, GFI Group
Michael Gooch made a fortune from the booming
trade in credit-default swaps and other complex financial instruments now
being blamed for fueling the financial crisis.
Mr. Gooch, 50, is chief executive of
GFI Group Inc., a leading broker of credit-default swaps. An immigrant
from England, Mr. Gooch founded New York-based GFI two decades ago. It went
public in 2005, and its stock nearly quintupled by late 2007.
Credit-default swaps are private contracts,
similar to insurance, that pay investors when a bond or company defaults.
While boosters say swaps are a valuable hedging tool, critics call them a
toxic invention that fanned the flames of the mortgage meltdown. With the
swaps market contracting and Congress calling for regulation, GFI's stock
price has tumbled, recently closing nearly 90% below its high of last
Mr. Gooch, through a holding company, sold
about $77 million in stock, most of it in May 2006. He says the aim was to
diversify his personal investments. "In May 2006, nobody could have
predicted the credit bust," he says. He also notes that his holding company
still owns 43% of GFI's stock, and that trading credit derivatives is only a
part of GFI's business.
Not long after GFI went public, Mr. Gooch
152-foot sailing yacht that had been listed for sale at $12.9 million.
Mr. Gooch lives in a 10,000-square-foot,
seven-bedroom house on the water in Rumson, N.J, with an elevator, pool and
tennis court. He also owns a waterfront home in Delray Beach, Fla., and a
Colorado ski condo.
Unlike some executives, who used shares in
their companies as collateral to borrow money and then were forced to sell
in the downturn, Mr. Gooch says his only major debt is a $1 million
mortgage. "It could be paid off with the spare change in my bank account,"
Write to Mark Maremont at
Hechinger at email@example.com
and Maurice Tamman at
How the Journal Tallied
the Payday Survey
For its compensation
and stock-proceeds study, The Wall Street Journal used the Standard &
Poor's ExecuComp database to generate a list of public companies in
industries closely tied to the financial crisis.
The list included banks, mortgage-finance
companies, mortgage insurers, student-loan firms, multiline insurers,
investment banks, brokers, and home builders.
The paper excluded the smallest companies,
based on stock-market value at the end of 2005, winnowing the list to
about 120 firms.
To find cash compensation paid to top
executives at these firms, the Journal used data compiled by ExecuComp,
which gathers executive-pay information filed by companies with the
Securities and Exchange Commission.
The analysis included each company's most
recently reported five fiscal years of compensation information.
Companies are required to file pay
information for their most highly-paid officers, usually the top five.
The Journal counted only certain categories
of pay, including salary, bonus, payouts from long-term incentive plans
and miscellaneous compensation that experts consider equivalent to cash.
It didn't include any cash paid to directors.
The Journal also didn't include the value
of exit packages for any executives unless those sums were reported in
annual pay tables.
To determine the value extracted from stock
sales, the Journal relied on data from InsiderScore.com, which analyzes
information on stock purchases, sales, option exercises and other
transactions filed with the SEC.
The analysis sought to look only at
individual executives and directors, not institutional owners.
For each individual, InsiderScore toted up
the gross value of stock sales, then subtracted any out-of-pocket
expenditures in the period, including open-market purchases of stock and
the cost of exercising stock options.
The tally didn't include paper profits from
vesting of restricted stock or exercising options, unless the executive
sold the resulting shares.
It also didn't attempt to estimate the
original purchase price, or basis, for any shares sold in the period.
The study included stock transactions from
July 1, 2003, through June 30, 2008.
For CEOs or former CEOs of the 120
companies, the Journal generated a list of those who made the most by
adding the sums each person received in the two categories. The paper also
generated a total of all cash compensation and stock proceeds extracted by
top executives and directors of the 120 companies.
óMark Maremont and
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