Bonus Bonanzas Should End with Bailouts

The U.S. Treasury is spending some $700 billion or more in taxpayer funds to bail out scores of financial institutions that helped get us into this credit mess.

Now it turns out that a large chunk of this money may be going for executive bonuses. Where is the justice?

Elected officials including New York State Attorney General Andrew Cuomo and Rep. Henry Waxman are right to demand answers from these institutions about their plans to spend taxpayer money for bonuses, particularly since the government has taken big equity stakes in many of them.

“Taxpayers are, in many ways, now like shareholders of your company, and your firm has a responsibility to them,” said Cuomo in a press release.

I totally agree. These banks should not be allowed to soak up federal funds and use the money to pay out large bonuses to those executives who got their banks into trouble to begin with through risky and ill-advised strategies.

While bonuses are often viewed as part of Wall Street compensation packages, executives should not be entitled to them if it can be proved that strategies they promoted failed, particularly at a time when shareholders and employees suffered as a result. It is time for the boards of directors of these banks to take a harder line on these payments.

Boards have a responsibility to shareholders – not just to senior managers. Rather than allowing managements be paid huge bonuses, they should make senior managements accountable for their performances.

Targeting egregious executive compensation on Wall Street and elsewhere, such as at Fannie Mae, Freddie Mac and AIG, is long overdue. I hope that these measures lead to lasting changes in how compensation packages are designed. It is extremely detrimental to our economy when executives bail out of their companies with millions of dollars in payouts for failed leadership.

There is some evidence that the tide is turning against executives who soak up egregious sums of compensation from institutions that stumble.

From 2006 to 2008, the number of Fortune 100 companies that have disclosed clawback policies has increased, according to executive compensation firm Equilar. But still more needs to be done. Clawback policies generally allow companies to seize compensation in the event of a financial restatement or ethical misconduct, according to Equilar, an executive compensation firm.

These days, we have seen much evidence that the seeds for many financial firms’ recent stumbles were sown years before. And in many cases, it could have been avoided with prudent risk management policies. For instance, the AIG Financial Products division for years had been writing insurance policies on mortgage backed securities, known as credit default swaps. But it was only recently that these bonds began defaulting, leading to colossal losses for AIG which required a government takeover of the firm, backed with $120 billion in taxpayer dollars.

Faced with a legal challenge from the New York State Attorney General, AIG agreed last month to freeze any payments to former CEO Martin Sullivan’s $19 million employment contract. The AG also froze any payments out of a $600 million deferred compensation and bonus pool to AIG’s Financial Products unit, including payments to Joseph Cassano who headed the unit and whose share was about $69 million, Cuomo said in a press release.

Regulators also said they are blocking multi-million dollar payouts to the CEOs of both Fannie Mae and Freddie Mac.

But there is clearly more to be done. National City Corp., the giant Midwest bank that stumbled badly from investments in subprime mortgages over the last year, paid its former CEO David Daberko a total of $64.8 million from 1991 to 2007 in salary, benefits and stock option payouts, according to Equilar.

It was Daberko who presided over the bank’s aggressive push into subprime mortgages over the last half-dozen years which ultimately caused millions of dollars in losses, virtually forcing its sale to PNC Financial for a fire sale price this month, according to news reports.

And according to a recent shareholder lawsuit, Kerry Killinger, the CEO of the failed banking giant Washington Mutual, received over $33 million in total compensation, including at least $7 million in bonuses from 2005 to 2007 at a time when the bank was pushing forward into subprime lending that ultimately caused its demise.

Killinger, who was ousted by WaMu just weeks before the bank was seized by regulators in September, was entitled to a cash severance bonus of $16.5 million as part of his contract, SEC filings show. Should he receive this bonus for leading a bank that lost tens of billions of dollars in shareholder value along with the loss of thousands of jobs?

It is obvious that clawback provisions should be mandatory for all executive contracts these days in light of these debacles. Why should shareholders pay bonuses to executives who drove their institutions off cliffs?

Through my new advocacy initiative, United Shareholders of America, I am working to change laws to make executives more accountable for their performance or lack thereof. But it is only when large numbers join this cause that we will be empowered to change laws in Washington and state capitals that favor managements over shareholders, who are the true owners of corporations.

I am asking that you sign up for the campaign on my blog, the Icahn Report, Put your name in the top right corner and join United Shareholders of America. It costs you nothing and may produce the changes we so desperately need.

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About Carl Icahn 29 Articles

Carl Icahn is an American billionaire financier, corporate raider, and private equity investor.

Mr. Icahn is the Chairman of Icahn Enterprises, a diversified holding company engaged in a variety of businesses, including investment management, metals, real estate, and consumer goods. He has been the Chairman of American Railcar Industries since 1994 and a Director of Blockbuster since May 2005. He became Chairman of ImClone Systems in 2006. In January 2008, he became the Chairman of Federal-Mogul.

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