Fallout: The Financial Crisis

Bank execs still cash in on the way out

Steve Henn Jun 11, 2009
Fallout: The Financial Crisis

Bank execs still cash in on the way out

Steve Henn Jun 11, 2009


Kai Ryssdal: Before the administration’s big announcement yesterday about its latest idea for executive compensation reform, its third try at it by the way, Congress had already spoken. Laws are already in effect that limit golden parachutes for banks that accept federal aid. But that hasn’t stopped a lot of banks from paying huge sums to executives who are on their way out the door. Marketplace’s Steve Henn reports now in a collaboration with the investigative newsroom ProPublica.

STEVE HENN: Mac Whittle built the bank, the Southern Financial Group, from the ground up. He founded it in the 80s and then bet heavily on the Florida real-estate market during the boom.

When the bust hit, large shareholders like Jack McMullen saw their stock investments collapse.

JACK McMullen: It went from $25 a share down to a low of I think about 65 cents.

McMullen says he lost more than a million dollars. And by late October it was obvious to him Southern Financial needed government aid to survive. The same day the bank applied for to the Troubled Asset Relief Program it also moved up the retirement date for Whittle, its CEO.

McMullen: They sent him out the door with $17 million.

Investors like McMullen were furious. If Whittle had stayed on after the bank accepted federal aid, his golden parachute would have been considerably smaller.

But despite TARP’s ban on lavish severance packages, big payments for departing executives have continued.

Paul Hodgson is at the Corporate Library, a consulting firm that tracks executive compensation.

PAUL Hodgson: Almost as soon as these regulations came out, there were concerns that companies would immediately employ consultants to try and find a way around it.

In February Congress tightened the screws, banning all severance payments for top executives, and yesterday the administration issued new rules. But many banks already found ways around the ban.

Associated Banc Corp, based in the upper Midwest, took half a billion dollars in federal aid last fall. Then this May it paid its chief operating officer, Lisa Binder, $1.6 million to leave. But don’t call it a golden parachute. Instead, Binder signed an agreement not to compete against the bank. The Corporate Library’s Hodgson calls that cheating.

Hodgson: This is obviously a move on their part to somehow get around semantically the clause in the TARP regulations that prohibits payment for doing nothing.

In Virginia, Hampton Roads Bancshares took more than $80 million in federal aid, then paid it’s departing CEO Jack Gibson $1.3 million. The bank’s also paying for Gibson’s car and his golf club membership.

But this deal wasn’t a severance either. According to the bank, it’s a three-year consulting contract with a twist. Gibson was paid entirely upfront. And the bank says the Treasury Department signed off on the deal.

JAMES Reda: The consulting agreement is a tried and true way of not calling something a severance.

James Reda is a New York based compensation expert. He says sometimes it’s worth it to keep a former-CEO on the payroll but…

Reda: My experience has been that after about six or seven months, he or she runs out of things to do and it kinda becomes a sham at that point.

Starting this week Kenneth Feinberg, a prominent Washington lawyer, will begin serving as the so-called special master for executive compensation for TARP. Gene Sperling is an economist and advisor to Treasury Secretary Tim Geithner. He says Fienberg will have considerable power.

GENE Sperling: He will have the authority to review the compensation plans for the companies who we have described as receiving exceptional assistance.

Companies like AIG and GM. But more than 500 banks that have received TARP money are not going to be supervised by Fienberg.

In the past six months more than half-a-dozen of those banks have paid executives to leave. One bank bought its former CEO’s house, others have offered to defer guaranteed payments. And it’s unclear if Treasury can or will do anything to get this money back.

In Washington, I’m Steve Henn for Marketplace.

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