Exposing Corruption and Preventing Abuse of Power

Big Businesses Offer Revolving Door Rewards

Treasury Secretary Jack Lew
President Barack Obama announcing former Citigroup executive Jack Lew as his nominee for Treasury Secretary.

During former Citigroup executive Jack Lew’s recent confirmation as Treasury Secretary, some people were surprised and troubled to learn that the big bank had promised him special financial awards if he left to take a job in the government. His employment contract was seen as rewarding him for passing through the revolving door and potentially easing a friend of the bank into a position of power.

But a review by the Project On Government Oversight shows that Lew’s deal with Citi was no anomaly.

Other major corporations also make it financially advantageous for executives to take government jobs, according to regulatory filings reviewed by POGO. Through their compensation policies, companies may be fueling the revolving door and making it easier for their alumni to gain influence over public policy.

Morgan Stanley’s executives have been eligible to receive a bonus—one that they would ordinarily forfeit for leaving the company prematurely—if they go to work for a “governmental department or agency, self-regulatory agency or other public service employer,” according to a company pay plan filed last year.

The Blackstone Group, a private equity firm, has stipulated that certain executive officers “will forfeit all unvested partnership units once [they are] no longer in our employ.”

However, an “officer who leaves our firm to accept specified types of positions in government service…will continue to vest in units as if he had not left our firm during the period of government service,” according to the clause, which POGO found in Blackstone’s 2010 annual report. (Whether the government would allow that is another question.)

Here's what you can get when you leave these Wall Street firms for a government job:

Morgan Stanley. A bonus you would ordinarily forfeit for leaving the company prematurely.

Goldman Sachs. A "lump sum cash payment."

JPMorgan Chase. Possible stock awards from long-term plans. Other rewards for a "bona fide full-time campaign."

Citigroup. Outstanding stock and a pro-rated incentive and retention award.

The Blackstone Group. You will "continue to vest in units as if [you] had not left our firm."

MF Global. Part of your retention bonus.

Fannie Mae. Qualification for a financial benefit.

Northern Trust. Access to all of your outstanding options.

Source: SEC filings.

And JPMorgan Chase’s executives could receive a stock award from their long-term plan if they accept “a full-time position in an elected or appointed office in local, state, or federal government...not reasonably anticipated to be a full-career position.”

JPMorgan also rewards executives who leave to run a “bona fide full-time campaign” for public office—although their “name must be on the primary or final public ballot for the election” in order to qualify, according to a company document filed last month.

Often, executives are required to wait years before collecting various forms of compensation, such as bonuses, stock option profits, or restricted stock awards. The idea is to discourage them from leaving and to tie some of their pay to the company’s long-term performance—partly to reduce incentives to goose short-term profits at the expense of the company’s long-term health.

If the employees leave the company before certain awards mature or “vest,” they can forfeit that compensation. But instead of losing their chips, some executives can cash them in early if they leave to take a position with the government, according to the filings reviewed by POGO.

At a time when Congress is considering a slate of nominees to serve in high-level positions across the federal government, these agreements underscore concerns raised by POGO and others about the revolving door between the government and big businesses.

These companies seem to be giving a special deal to executives who become government officials. In exchange, the companies may end up with friends in high places who understand their business, sympathize with it, and can craft policies in its favor.

At a minimum, these provisions show that the revolving door is such a fixture in Corporate America that it is written into the executive pay structure.

“It never hurts to have contacts in the government, and there are people (like Jack Lew) who may need to work in the private sector from time to time when the party in control changes in Washington,” David Yermack, a professor at New York University’s Stern School of Business, wrote in an email to POGO. “It would be a lot harder to attract them if they couldn’t be paid.”

While Lew’s nomination for Treasury Secretary was under consideration in the Senate, his compensation arrangements drew fire from some lawmakers. But POGO found that such arrangements are far from unusual. Companies offering these advantages include Wall Street giants that have a deep interest in the work of federal regulators.

Why would a company include this kind of clause in its pay plan?

A spokesperson for one company who talked to POGO on condition of anonymity said the answer is rooted in the tax code.

A tax law passed in 2004 banned companies from accelerating payments to employees from their long-term pay plans, with only a few exceptions, such as death or an “unforeseeable emergency.” There is also a “government service” exception. A “payment may be accelerated” to an executive who joins the government if an ethics official finds that “divestiture of the financial interest or termination of the financial arrangement is reasonably necessary” to comply with federal ethics rules, according to regulations issued by the Internal Revenue Service.

The tax law was drafted in part as a response to the Enron scandal. In the weeks leading up to its bankruptcy, Enron had paid its executives $53 million in accelerated payments, according to a 2003 investigative report by the Joint Committee on Taxation. “[M]any executives...reaped substantial gains from their compensation arrangements,” the report said, while “Enron’s rank and file employees in many cases lost virtually all of their retirement savings.”

Other company spokespeople did not respond to POGO’s requests for comment or declined to comment.

Professor Yermack told POGO there’s another reason for companies to include “government service” clauses in their long-term pay plans. The plans were intended to deter executives from going to work for competitors, and companies carve out exceptions because joining the government isn’t the same as going to work for a rival business.

The basic issue is that a company does not want to continue paying you while you go to work for a competitor, but they are ruling out the idea that working for the government would be a form of competition.

“The basic issue is that a company does not want to continue paying you while you go to work for a competitor, but they are ruling out the idea that working for the government would be a form of competition,” Yermack told POGO.

A former senior executive and government official who spoke with POGO on background echoed this point. “Most employment contracts are intended to keep the person from leaving,” he said, but “most companies take the position that going into the government isn’t the same as going to a competitor.”

The former executive said many such clauses were added in the aftermath of a revolving door scandal involving Boeing.

In the early 1980s, five employees left Boeing to accept senior government positions. The employees received “severance payments” from Boeing—$485,000 in total—because the “shifts required forgoing the higher salaries that each employee would have earned at Boeing and also severing all financial connection with the company,” according to a 1990 Supreme Court decision. (The Court held that Boeing did not illegally supplement the employees’ federal salaries because none of the employees had started working for the government at the time of the payments.)

Many employment agreements now stipulate in advance that such payments must be accelerated to executives who go to work for the government, the former executive told POGO. That way an executive doesn’t have to forfeit his long-term pay benefits if he accepts a government position before those benefits vest. These clauses “are pretty standard, particularly for anybody who’s ever been in the government,” he said.

Recent press reports and congressional inquiries have focused on Treasury Secretary Lew’s 2006 employment agreement with Citigroup. The agreement came to light during Lew’s confirmation hearing before the Senate Finance Committee. (The Committee also focused on a payment Lew received from a different former employer, NYU. “Tax-exempt New York University paid Mr. Lew an over $900,000 salary, paid his mortgage, and paid him a substantial $685,000 severance payment,” said Senator Charles Grassley (R-IA).)

Jonathan Weil at Bloomberg obtained and posted a copy of the Citigroup agreement. It described certain emoluments Lew could receive if he left the company to accept a “full-time high level position with the United States government or regulatory body.” One was a pro-rated incentive and retention award. Another was outstanding stock that would ordinarily vest over time.

Citigroup paid Lew nearly $1.1 million in yearly “salary and discretionary cash comp,” according to a financial disclosure report he filed when he joined the State Department in 2009. But that wasn’t all. In the disclosure, Lew said he held between $250,000 and $500,000 in “[u]nvested restricted Citigroup stock.” In another document related to his federal appointment, Lew said “Citigroup will vest my restricted stock.”

Senator Orrin Hatch
Senator Orrin Hatch has asked former Wall Street executives whether their contracts were consistent with efforts to "close the revolving door."

At Lew’s confirmation hearing for Treasury Secretary last month, Senator Orrin Hatch (R-UT) asked whether the government position clause is “consistent with President Obama’s efforts to... ‘close the revolving door that carries special interest influence in and out of the government.’”

Lew had requested the provision because of his “long history of public service, and interest in potentially returning to it,” he explained in response to follow-up questions from Senator Hatch. “I believe Citigroup agreed to include it...to discourage employees from leaving and joining competitors,” he said.

POGO found a similar clause in a 2001 employment agreement between Citigroup and Stanley Fischer, who became the company’s vice chairman under Robert Rubin. “After two years of continuous employment with the Company, in the event that you terminate your employment for purposes of accepting a high level position with a U.S. or international governmental or regulatory body, then your outstanding stock options and restricted stock awards shall vest upon your termination of employment,” the agreement said. Fischer is currently the governor of the Bank of Israel; some commentators have mentioned him as a possible successor to Ben Bernanke, Chairman of the Federal Reserve.

In other Citigroup agreements, the exception has covered careers beyond government service. As early as 2004, Citigroup’s boilerplate language for a variety of stock awards stated that executives who left the company would still be eligible for an award if they resigned to pursue a “continuing full-time career in either government service, for a bona fide charitable institution, or as a teacher at a bona fide educational institution.”

Other firms have also offered rewards for a wide range of post-employment moves.

For instance, Northern Trust, an investment company that manages more than $750 billion in assets, has a provision in its 2013 executive stock option plan stating that employees can access all of their outstanding options if they leave the company to accept employment “at any U.S. Federal, state or local government, any non-U.S. government, any supranational or international organization, any self-regulatory organization, or any agency or instrumentality of any such government or organization, or any other employer determined to be a Government Employer.”

Then there’s MF Global, famous for its sudden collapse in 2011.

Jon Corzine
Jon S. Corzine, former chairman and chief executive of MF Global.

In a 2011 amended employment agreement for Jon S. Corzine to be its chairman and chief executive, MF Global said it would pay part of his $1.5 million retention bonus if he left “in order to accept employment at any U.S. Federal, state or local government, any agency or instrumentality of any such government, or a widely recognized non-governmental or public policy organization.” Theo Francis at Footnoted observed at the time that the clause “would seem to encompass anything from the World Bank presidency to a fellowship at the Brookings Institution or a gig at Princeton University, where [Corzine’s] already been a visiting professor.”

Corzine personifies the revolving door and its potential consequences. Earlier in his career, he headed the investment firm Goldman Sachs. He dipped into his personal fortune to run for office and served as a U.S. senator from New Jersey and governor of the state. Later, under Corzine’s leadership, MF Global fought successfully to blunt a proposed regulation that would have imposed tighter controls on the use of customer funds. According to The New York Times, he personally lobbied regulators. Subsequently, while he was at the helm, the firm filed for bankruptcy. As detailed in a November 2012 report by the House Financial Services Committee, MF Global had lost track of $1.6 billion of its customers’ money. (In January, a bankruptcy judge approved a plan that would allow customers to recover most of their missing money.)

And then there’s Goldman Sachs. The Wall Street powerhouse has written a broadly worded exception into pay plans.

For instance, a 2010 Goldman filing describing a long-term incentive plan said Goldman executives could receive a “lump sum cash payment” if they accepted “employment at any U.S. Federal, state or local government, any non-U.S. government, any supranational or international organization, any self-regulatory organization, or any agency or instrumentality of any such government or organization, or any other employer determined by the Committee.”

The Goldman plan, like a number of others mentioned in this report, said eligible employees could receive such payouts if their new employment posed a conflict of interest, implying that they would have to sever financial ties with the company in question.

Revolving door clauses showed up years ago in employment contracts at one of the companies most closely associated with Washington’s revolving door: Fannie Mae, the giant mortgage finance company.

Franklin Raines
Franklin Raines, former chairman and CEO of Fannie Mae.

Franklin D. Raines, who served as chairman and CEO of Fannie Mae from 1999 through 2004, qualified for a financial benefit if he left the company to accept an “appointment to a senior position in the U.S. Federal Government.”

Raines had worked as an investment banker at Lazard and served as Director of the Office of Management and Budget in the Clinton Administration. He made millions at Fannie Mae before stepping down amid government investigations into the company’s alleged accounting irregularities. Several years later, Fannie Mae acknowledged in a regulatory filing that it had overstated earnings by $6.3 billion.

The same clause was included in the contract of Daniel H. Mudd, who served as Fannie Mae’s CEO from 2005 until September 2008, when the government seized control of the company and forced him out.

In recent years, Mudd has been fighting charges by the Securities and Exchange Commission (SEC) that he and other Fannie and Freddie executives “approved of misleading statements claiming the companies had minimal holdings of higher-risk mortgage loans, including subprime loans.”

Mudd and other former executives named in this report did not respond to POGO’s requests or declined to comment for the record.

Fannie Mae was famous for working Washington to its advantage. It wielded exceptional political clout, showing how companies might benefit from having once or future government officials in their executive suite. With considerable success, Fannie Mae opposed efforts to subject it to stronger oversight. A 2006 report by a federal regulator said the company’s senior management did its best to make sure that “Fannie Mae would essentially regulate itself.”

That did not turn out well. During the financial crisis of 2008, the company was essentially taken over by the government and has been propped up with billions of dollars in taxpayer aid.

Related considerations seemed to inform congressional criticism of Lew’s compensation from Citigroup. In a statement, Senator Grassley said: “What we have seen so far is that Mr. Lew was very good at getting paid by taxpayer-supported institutions. Citigroup received a taxpayer-funded bailout and gave Mr. Lew a piece of it on his way out the door.”

Now, as Treasury Secretary, Lew is one of Citigroup’s Washington overseers.

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