Before the Bust, These CEOs Took Money Off the Table
By Mark Maremont, John Hechinger and Maurice Tamman
The Wall Street Journal
Thursday, November 20, 2008
The credit bubble has burst. The economy is tanking.
Investors in the
stock market have lost more than $9 trillion since its peak a
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.
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 period.
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
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
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
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
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
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
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 five-year period.
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
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
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 Corp., to
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
Dreier, Ryland GroupR. 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
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
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
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 MarbleheadWall 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
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.
helped big banks, such as Bank of America and J.P. Morgan Chase
& Co., put together student-loan programs. First
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
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 FinancialRobert 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 subprime lender.
The Irvine, Calif.-based company promoted mortgages that
customers could apply for by merely stating their income with no
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
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
Michael Gooch, GFI GroupMichael Gooch made a fortune from the
booming trade in credit-default swaps and other complex
financial instruments now being blamed for fueling the financial
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 November.
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 bought a
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
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," he says.
Write to Mark Maremont at
John Hechinger at
firstname.lastname@example.org and Maurice Tamman at