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For Immediate Release: July 14, 2005

Contact:	Steve Adamske, 202-225-7141

REP. FRANK EXTENSION OF REMARKS ON THE WAGES OF FAILURE ON WALL STREET

(Extension of Remarks - July 14, 2005)

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Mr. FRANK of Massachusetts. Mr. Speaker, one of the gravest weaknesses in our financial system is the growing pattern of grossly excessive compensation which the leaders of some major firms are paying themselves, with the acquiescence of passive boards of directors. The issues raised by the extraordinarily large pay packages some top executives are granting themselves go beyond simply the inappropriateness of people enriching themselves at the expense of their stockholders and their employees. Increasing inequality in income distribution in this country has broader policy implications, and there is also the growing problem of perverse incentives that result from executives receiving grossly disproportionate compensation based on decisions they themselves take. That is, it is clear that some of the accounting abuses we have seen, and some decisions to sell large companies to others are being influenced not by the basic economics of these situations, but by the extent to which top decision-makers personally profit from these decisions.

One of the most egregious recent examples is the $32 million payment made to the co-president of Morgan Stanley, Stephen Crawford, for work of only a few months as part of the upheaval that led to the ouster of Philip Purcell. In the New York Times on Wednesday, July 13, there is an excellent editorial on this subject, which notes that ``stockholders and employees are properly seething at the deal cut for Mr. Crawford . . . by a board that was oblivious to protecting the bank's reputation as it over-rewarded his fealty to Philip Purcell . . .''

Mr. Speaker, I believe that this is a subject which Congress must address. In particular, we must act to find ways to press boards of directors to do more to safeguard stockholders and employees from excessive compensation abuse, and we should in particular be looking at ways to curb the extent to which these sorts of compensation schemes based on various contingencies give perverse incentives to decision-makers. I and others on the Financial Services Committee will be offering some legislative proposals in this regard, and I offer the New York Times editorial here for Members' edification as an example of why some action is necessary in this regard. [From the New York Times, July 13, 2005]

 

THE WAGES OF FAILURE ON WALL STREET

Words like golden parachute hardly do justice to the stunning $32 million worth of a not-so-fond adieu engineered at Morgan Stanley, the troubled Wall Street securities giant, for its departing co-president, Stephen Crawford. Stockholders and employees are properly seething at the deal cut for Mr. Crawford--after a mere three months on the job--by a board that was oblivious to protecting the bank's reputation as it over-rewarded his fealty to Philip Purcell, the chief executive who was driven out in a messy power struggle last month.

The board majority appointed by Mr. Purcell opened the bidding on failure's rewards by ushering Mr. Purcell to the exit with a $43 million sweetener. Now others from his team of loyalists--sycophants is the term outraged critics prefer--are lining up to walk the platinum plank behind Mr. Crawford, who never ran a business division at the bank yet rose to the top as Mr. Purcell's attentive protégé.

Mere groundlings juggling finances at their neighborhood A.T.M.'s must pause slack-jawed at how Wall Street insiders are so ludicrously compensated for plain failure at steering their companies. Few of life's losers land so affluently.

The repair task now falls to John Mack, the new chief executive and Morgan Stanley veteran. Facing a furor among stockholders and staff over the severance machinations, Mr. Mack had second thoughts about his own guaranteed salary of up to $25 million, so he is instead invoking a merit-pay standard for himself. This amounts to innovation at Morgan Stanley, where dozens of bankers, traders and managers quit when the Purcell team ascended and ensconced their own in top positions even as the bank lagged behind its competitors.

Mr. Mack is already seeking the return of the more respected departees who ran profitable divisions. He has retained the other Purcell co-president, Zoe Cruz; she was smart enough to turn down the board's garish compensation package.

The new chief won't get far with recovery, however, unless he impresses workers and investors with a fresh dedication to merit. That has to begin with the departure of the current directors--on terms worth no more than their true value in having compounded the turmoil at Morgan Stanley.
 

 

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The Committee oversees all components of the nation's housing and financial services sectors including banking, insurance, real estate, public and assisted housing, and securities. The Committee continually reviews the laws and programs relating to the U.S. Department of Housing and Urban Development, the Federal Reserve Bank, the Federal Deposit Insurance Corporation, Fannie Mae and Freddie Mac, and international development and finance agencies such as the World Bank and the International Monetary Fund. The Committee also ensures enforcement of housing and consumer protection laws such as the U.S. Housing Act, the Truth In Lending Act, the Housing and Community Development Act, the Fair Credit Reporting Act, the Real Estate Settlement Procedures Act, the Community Reinvestment Act, and financial privacy laws.