A woman talks on a cellphone inside Lehman Bros. headquarters in New York… (Jeremy Bales, Bloomberg )
Calls for reforming Wall Street pay packages reverberated across Washington and the financial district following the disclosure that 50 Lehman Bros. employees were awarded nearly $700 million in the year before the investment bank collapsed.
Lawmakers and other experts said disclosure at major banks and other financial institutions should be beefed up significantly, in part to spotlight potential risks that employees may be taking in their pursuit of super-sized paychecks.
The Times reported Friday that dozens of lesser-known traders and others at Lehman were allotted pay ranging from $8.2 million to $51.3 million in 2007, including one person who earned more than the chief executive and 42 people who were awarded at least $10 million.
The 50 employees were awarded more than $1.6 billion in cash and stock in the three years preceding Lehman's demise in September 2008.
"It never ceases to amaze me," said Phil Angelides, chairman of the Financial Crisis Inquiry Commission. "You clearly have corporate leadership that's out of control, reckless without accountability and, in the course of driving the firm over the cliff, they're taking as much money as they can out of it."
Angelides, who led the commission's investigation of the 2008 global financial crisis, said the pay packages were unconscionable and should prompt policymakers to reexamine executive compensation rules.
Public companies are required each year to report the compensation of their top five corporate officers. That gives a good overview of compensation at most firms, given that a few top managers typically earn the most, with a sharp drop-off for other employees.
The Lehman employees did not collect all the compensation allotted to them because the firm tumbled into a record-setting bankruptcy that rendered its stock worthless. Still, the details of their packages became public only because they were released in the bankruptcy proceedings.
"They hide behind the guidelines that say the top five officers must disclose how much money they make," said William Cohan, who has written several books about Wall Street abuses. "You miss all these trader types and private-equity guys and derivatives salesmen who are making much more, and who you never know about."
Lehman filed for Chapter 11 protection in September 2008 in the largest bankruptcy in U.S. history, sparking a panic across Wall Street that played a big role in the financial crisis that threatened the global economy. The investment bank buckled after betting heavily on subprime mortgages to people with shaky credit, which became worthless as housing prices tumbled and the borrowers stopped paying their loans.
Rep. Brad Sherman (D-Sherman Oaks) said the Securities and Exchange Commission should require public companies to disclose the names of all employees who are paid more than $5 million a year to prevent the type of huge compensation packages given by Lehman.
Sherman, a member of the House Financial Services Committee, said he wasn't surprised that some people at Lehman made large amounts of money. But he was surprised at how many were bringing home huge paychecks.
"That many people over $10 million is shocking," he said.
In 2006, the SEC did not act on a proposal to require disclosure for three additional employees who are not officers if they make more than any of the top executives. Entertainment firms lobbied against the plan, arguing that it would invade the privacy of big stars, such as news anchor Katie Couric, who aren't involved in management.
"We need to see the disclosure, and if the SEC doesn't do what's necessary for the economy because they're concerned about Katie Couric, we ought to by legislation instruct them to do it," Sherman said.
SEC Chairwoman Mary Schapiro was not immediately available for comment.
Rep. Peter Welch (D-Vt.) said he would like to see the SEC require companies to disclose their 50 highest-paid employees.
"The fact that these outsized salaries were concealed means another element of risk was concealed," Welch said. "The issue is about minimizing risk. It's not about prying into private salaries."
A Wall Street trade group disputed the need for additional compensation disclosure.
Investment banks have adjusted their activities since 2008 "to make sure they are not engaging in those practices that the failed institutions engaged in," said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable.
Evidence that some firms paid large bonuses before they went under caused surviving companies to be more cautious, he said.
Additionally, increased oversight of compensation practices by the Federal Reserve has heightened the attention of financial institutions to the need "to make sure that employees are not incentivized to take excessive risks."