Stumbling Toward Enlightenment

By LOUISE STORY and ERIC DASH

Thousands of top traders and bankers on Wall Street were awarded huge bonuses and pay packages last year, even as their employers were battered by the financial crisis. Nine of the financial firms that were among the largest recipients of federal bailout money paid about 5,000 of their traders and bankers bonuses of more than $1 million apiece for 2008, according to a report released Thursday by Andrew M. Cuomo, the New York attorney general.

Wall Street Bull

At Goldman Sachs, for example, bonuses of more than $1 million went to 953 traders and bankers, and Morgan Stanley awarded seven-figure bonuses to 428 employees. Even at weaker banks like Citigroup and Bank of America, million-dollar awards were distributed to hundreds of workers. The report is certain to intensify the growing debate over how, and how much, Wall Street bankers should be paid.

In January, President Obama called financial institutions “shameful” for giving themselves nearly $20 billion in bonuses as the economy was faltering and the government was spending billions to bail out financial institutions. On Friday, the House of Representatives may vote on a bill that would order bank regulators to restrict “inappropriate or imprudently risky” pay packages at larger banks.

Mr. Cuomo, who for months has criticized the companies over pay, said the bonuses were particularly galling because the banks survived the crisis with the government’s support. “If the bank lost money, where do you get the money to pay the bonus?” he said.

All the banks named in the report declined to comment.

Mr. Cuomo’s stance — that compensation for every employee in a financial firm should rise and fall in line with the company’s overall results — is not shared on Wall Street, which tends to reward employees based more on their individual performance. Otherwise, the thinking goes, top workers could easily leave for another firm that would reward them more directly for their personal contribution. Many banks partly base their bonuses on overall results, but Mr. Cuomo has said they should do so to a greater degree.

At Morgan Stanley, for example, compensation last year was more than seven times as large as the bank’s profit. In 2004 and 2005, when the stock markets were doing well, Morgan Stanley spent only two times its profits on compensation. Robert A. Profusek, a lawyer with the law firm Jones Day, which works with many of the large banks, said bank executives and boards spent considerable time deciding bonuses based on the value of workers to their companies.

“There’s this assumption that everyone was like drunken sailors passing out money without regard to the consequences or without giving it any thought,” Mr. Profusek said. “That wasn’t the case.”

Mr. Cuomo’s office did not study the correlation between all of the individual bonuses and the performance of the people who received them. Congressional leaders have introduced several other bills aimed at reining in the bank bonus culture. Federal regulators and a new government pay czar, Kenneth Feinberg, are also scrutinizing bank bonuses, which have fueled populist outrage. Incentives that led to large bonuses on Wall Street are often cited as a cause of the financial crisis.

Though it has been known for months that billions of dollars were spent on bonuses last year, it was unclear whether that money was spread widely or concentrated among a few workers. The report suggests that those roughly 5,000 people — a small subset of the industry — accounted for more than $5 billion in bonuses. At Goldman, just 200 people collectively were paid nearly $1 billion in total, and at Morgan Stanley, $577 million was shared by 101 people.

All told, the bonus pools at the nine banks that received bailout money was $32.6 billion, while those banks lost $81 billion. Some compensation experts questioned whether the bonuses should have been paid at all while the banks were receiving government aid.

“There are some real ethical questions given the bailouts and the precariousness of so many of these financial institutions,” said Jesse M. Brill, an outspoken pay critic who is the chairman of CompensationStandards.com, a research firm in California. “It’s troublesome that the old ways are so ingrained that it is very hard for them to shed them.”

The report does not include certain other highly paid employees, like brokers who are paid on commission. The report also does not include some bank subsidiaries, like the Phibro commodities trading unit at Citigroup, where one trader stands to collect $100 million for his work last year.

Now that most banks are making money again, hefty bonuses will probably be even more common this year. And many banks have increased salaries among highly paid workers so that they will not depend as heavily on bonuses. Banks typically do not disclose compensation figures beyond their total compensation expenses and the amounts paid to top five highly paid executives, but they turned over information on their bonus pools to a House committee and to Mr. Cuomo after the bailout last year.

The last few years provide a “virtual laboratory” to test whether bankers’ pay moved in line with bank performance, Mr. Cuomo said. If it did, he said, the pay levels would have dropped off in 2007 and 2008 as bank profits fell. So far this year, Morgan Stanley has set aside about $7 billion for compensation — which includes salaries, bonuses and expenses like health care — even though it has reported quarterly losses.

At some banks last year, revenue fell to levels not seen in more than five years, but pay did not. At Citigroup, revenue was the lowest since 2002. But the amount the bank spent on compensation was higher than in any other year between 2003 and 2006. At Bank of America, revenue last year was at the same level as in 2006, and the bank kept the amount it paid to employees in line with 2006. Profit at the bank last year, however, was one-fifth of the level in 2006.

Still, regulators may have limited resources for keeping pay in check. Only banks that still have bailout money are subject to oversight by Mr. Feinberg, the pay czar. He will approve pay for the top 100 compensated employees at banks like Citigroup and Bank of America as well as automakers like General Motors.

By PETER S. GOODMAN
LOS ANGELES—Somewhere on earth, there must be a more difficult task than this: persuading American mortgage companies to lower payments for homeowners who can no longer afford their loans. But as Karina Montenegro struggles to accomplish this feat for a troubled borrower, she strains to imagine a more futile pursuit.

Ms. Montenegro, an intern at a local company that seeks loan modifications, dials Washington Mutual to check on the status of an application for a homeowner whose income has plummeted. She endures a Muzak-scored purgatory while on hold. Syrupy-voiced customer service representatives chide her for landing in the wrong department. She learns that the documents her company sent in have simply vanished—for the third time since November.

“I don’t know what happened,” says a customer service officer who identifies himself as Chris. “I don’t know if there was a glitch in the system, whether it was transferred from one call center to the other.” Think of the documents as being part of a pile massing inside the bank, Chris suggests. “This pile is not going to be moved forward at any point in time.”

Ms. Montenegro and her colleagues suffer these sorts of excruciating exchanges all day long. It is a potent indication of the difficulties afflicting the $75 billion taxpayer-financed program created by the Obama administration in an effort to avoid foreclosure for as many as four million distressed homeowners. Under the plan, the government offers mortgage companies $1,000 for each loan they agree to modify, then another $1,000 a year for up to three years.

Hanging in the balance is more than the fate of individual homeowners. The administration portrays its mortgage program as a crucial piece of its broader effort to restore vigor to the economy. If the effort fails, foreclosures will continue to surge and home prices will probably keep falling, sowing fresh losses in the financial system and threatening to crimp credit anew for businesses and households.

Yet in the four months since the Treasury Department announced the program, millions of new homeowners have slipped into delinquency and foreclosure. For now, progress is constrained by the limited capacities of mortgage servicing companies, said Michael S. Barr, the assistant Treasury secretary for financial institutions. He offered the first signs of the administration’s impatience with the institutions that control home loans.

“They need to do a much better job on the basic management and operational side of their firms,” Mr. Barr said. “What we’ve been pushing the servicers to do is improve their infrastructure to make sure their call centers are doing a better job. The level of training is not there yet.”

The administration still does not know how many mortgages have been modified under the program. In a recent interview, Mr. Barr estimated the number at “over 50,000,” explaining that precise figures must wait for a soon-to-be-completed tracking system. By the end of August, the program should produce 20,000 loan modifications a week, he said.

Tom Kelly, a spokesman for JPMorgan Chase, which now owns Washington Mutual, affirmed the administration’s criticism. “We’ve done a lot,” he said, noting that the bank has added 950 loan counselors since the beginning of the year, bringing the total to 3,500. “But we’ve got a lot more to do.”

Vladimir Vishmid, a self-employed computer engineer, has submitted three applications to modify the loan on his home in Los Angeles, but his agent has been told none of them can be located.

Two days in Los Angeles—where a loan modification company allowed a reporter to listen as its agents contacted mortgage servicers provided the firm not be named—starkly illustrated the problems. The company charges homeowners $3,000, typically upfront, as it seeks to persuade lenders to rewrite loan documents so as to lower monthly payments. The company says it refunds the money when it fails to secure a modification.

For Ms. Montenegro, a college student at the University of Southern California, her summer job makes for fitting symmetry. In high school, she worked as a clerk at a Washington Mutual branch in Downey, Calif., which specialized in mortgages that invited customers to make such tiny payments that their balances increased. Many homeowners did not understand the terms: Once they owed a lot more than their house was worth, their payments spiked. Now, that day has come, and Ms. Montenegro is working the other side. She calls WaMu, as the bank is known, trying to cut deals.

Among her clients is Vladimir Vishmid, who owes $490,000 on the mortgage for his three-bedroom home in the Sherman Oaks section of Los Angeles. Mr. Vishmid’s income as a self-employed computer engineer has plummeted, making it hard for him to make his $2,542 monthly payments. He is current on his loan, he says, but behind on his car insurance and utilities. Software on Ms. Montenegro’s computer logs the details of the three applications her company has submitted for Mr. Vishmid. Chris, the WaMu representative, is telling her to send in No. 4.

“Personally, I’d submit a new file,” Chris counsels. “I’m telling you honestly, anything over 30 days is a new submission for us.”

For Ms. Montenegro, “honestly” is one of those words marinated in so much irony that her eyes roll. Two weeks earlier, she called the bank to check on the file and was told it was being reviewed. Now, it has disappeared.

“So, if I wouldn’t have called, we wouldn’t have known?” Ms. Montenegro scolds.

“It would have just sat in the queue and nothing would have happened,” Chris says. “I wish I had a better explanation.”

In the same office, Ms. Montenegro’s colleague, Sean Milotta, has run into a problem on a loan billed by American Home Mortgage Servicing. Though the borrower appears eligible for the Obama administration plan, the company refuses to take an application because the loan is owned by an investor who is unwilling to absorb a loss.

In another office down the hall, Ramin Lavi, 27, has picked up the file of Alice Descovich, who is seeking to shave down the $708,000 she owes on a mortgage serviced by WaMu for her home in Alameda, Calif. As the interest rates reset in coming months, it will become even harder for her to make the payments, which are now $4,400 a month. A note in the system shows that the bank confirmed receiving documents on April 29—pay stubs, tax returns, a letter disclosing her hardship, bank statements. Since then, the company has been waiting for WaMu to review the file. But when Mr. Lavi calls, a representative coolly discloses that the application has been rejected because one document, a proof-of-insurance form, is missing. He must start over.

“The file had been submitted properly, and you didn’t put the pieces together,” Mr. Lavi says, his body quivering with anger. “I’m not going to stand in line again for another six months.” He demands to speak to a supervisor, but the representative says none is free. He hangs up and redials, hoping to land in a different call center. Eventually, he reaches Chase’s executive offices, where Becky takes over the call.

“We’re not taking cases now,” she says calmly.

“Why was I transferred to you?” Mr. Lavi asks. Becky does not know. He implores her to keep the file open while he faxes in the lone missing document.

“Impossible,” she says, warning of “the sheer amount of papers coming in.”

Another agent, Lee Wasser, props his feet on an adjacent desk chair as he waits on hold for more than 20 minutes to speak with GMAC Mortgage. His clients, Dean and Nancy Piercy, owe $380,000 on the loan for their home in Shasta Lake, Calif. A logger, Mr. Piercy has lost work hours, making it hard for them keep up with their $2,048 monthly payment—soon set to rise. Mr. Wasser has already negotiated a solution: GMAC will accept only $270,000 in repayment, allowing the couple to get a fixed rate mortgage from another bank.

But that suddenly is in disarray. The Piercys have been making their payments, but GMAC has been putting their checks aside, holding the money as “loss mitigation fees,” until their application is completed. It has notified credit bureaus that their loan is more than 90 days delinquent, which has lowered their credit score, disqualifying them for the next mortgage.

Mr. Wasser reaches GMAC’s loss mitigation department. He asks for the delinquency to be removed from their status. But that must be handled by a different department: customer service. He is transferred there, where Jessica picks up the call.

“We are not going to amend,” she says, after a strained back and forth. If Mr. Wasser wants it otherwise, he will have to talk to loss mitigation.

“I just talked to them five minutes ago,” he tells Jessica.

“No, you didn’t.”

“Are you accusing me of lying?”

Mr. Wasser asks for Jessica’s employee identification number, but the line goes dead. Jessica has apparently hung up.

Watch your credit limits, and try the new online savings tools.
By Janice Lieberman, From Reader’s Digest

Credit card companies giveth, and credit card companies taketh away. And now they’re reducing credit limits without advance notice. That’s what happened to Virginia Barlow, MD. She bought a computer monitor online, but it wasn’t until Christmas Eve that the Coudersport, Pennsylvania, resident learned her card had been declined and her son wouldn’t be getting his present.

American Express, it turned out, had reduced her $9,000 limit to $7,600. The purchase of the monitor would have put her over her limit. American Express confirmed that Barlow had no missed payments or delinquencies. Rather, it was her payment history with other lenders that prompted the company to lower her limit. (American Express admits it is carefully monitoring cardholders: The company recently offered some customers $300 to pay off—and cancel—their Amex accounts.) Frustrated, Barlow plans to pay her balance in full and cut up her card.

Linda Sherry, a spokesperson for Consumer Action, says companies are simply trying to manage their risk. To protect your credit score, Sherry suggests, do the following: Ask why your balance was reduced. If you’ve been paying your bill on time, ask if the decision can be reversed. If not, ask if any fees can be waived until you’ve reduced your balance below your new limit.

Come July 2010, Federal Reserve rules will require lenders to give 45 days’ notice before changing the terms of an account. Until then, check your balances and limits every month.

How to Pay It Down
While most American households owe around $2,000 on their credit cards, about 15 percent owe more than $9,000. Figuring a 14 percent rate, they’re paying over $1,000 in interest a year. Many have no idea how to dig their way out.

DebtGoal, a free online debt-management service, can help with that. Once you type in your creditors and amounts owed, DebtGoal sets up a payment plan and a target date to end your debt. Track your progress with charts and graphs, e-mail experts, and exchange tips with other users. For $10 a month, DebtGoal will upload your account information and update your debt plan daily; by year’s end, it will pay the bills automatically too.

A certified public accountant in Le Mars, Iowa, started the New Year with $50,000 in credit card debt. He found money-managing tools time-consuming and switched to DebtGoal. In three months, he has paid off $20,000 of his debt. “The program is very user-friendly,” he says.

Home Security Alert
It’s hard to believe, but $3 will open just about any door with a conventional pin tumbler lock. All you need is a special bump key, widely available on the Internet. Security expert Marc Weber Tobias says these keys are legal and simple to produce. “Even a 15-year-old kid can do it, and it’s almost impossible to prevent their distribution or use,” he says.

His advice? Make sure the perimeter of your house is well lit, and install a high-security lock like the Kwikset SmartKey ($30) or the Schlage Primus ($75 to $100).

Have You Switched?
On June 12, all TV stations will broadcast in digital, but there are still 3.8 million households with analog TVs. If your set doesn’t have a digital tuner (check the labels on the back), you’ll need a converter box, which costs $40 to $60. Go to dtv2009.gov before July 31 for a $40-off coupon (you’re entitled to two per family). The coupons expire 90 days after they’re mailed.

3 Sites for Savings

Watch Janice Lieberman on the Today show and send her your questions.