Seven To Ten

The mammoth pay and disastrous performance of Countrywide Financial’s Angelo Mozilo, Citigroup’s Chuck Prince, and Merrill Lynch’s Stan O’Neal should be enough to make the public furious. Each CEO departed with $100-million-plus compensation after misadventures with subprime mortgages.

Now add the economic slowdown to the mix; ordinary Americans are worried about making ends meet while failed pooh-bahs rake it in.

The problem is that corporate boards can always find a way to pay the boss whatever they like. Over the past 25 years CEO pay has risen regardless of the economic or political climate. It rises faster than corporate profits, economic growth, or average workforce compensation.

A recent study by the compensation consulting firm DolmatConnell & Partners found that CEO pay in the companies of the Dow Jones industrials increased at a blowout 15.1% annual rate over the past decade.

A more sensible alternative to the current compensation system would require CEOs to own a lot of company stock. If the stock is given to the boss, his salary and bonus should be docked to reflect its value.

As for bonuses, they should be based on improving a company’s cash earnings relative to its cost of capital, not to more easily manipulated measures like earnings per share. They should not be capped, but they should be banked - unavailable to the CEO for some period of years - to prevent short-term gaming.

Citigroup delivered another quarter of devastating results, losing more than $5 billion due to troubles in its fixed-income business and higher consumer credit costs, adding it would cut an additional 9,000 jobs.

The New York-based company also recorded more than $15 billion in writedowns, with the lion’s share coming from subprime-related direct exposures. But investors cheered the news, sending shares of Citigroup more than 6% in early trading, as the results were not as bad as some had feared.

Citi, however, did surprise analysts by delivering better-than-expected top line growth. The company said revenue rose sharply to $13.22 billion from the previous quarter, still it remained at just about half of what it was a year ago.

At the same time, Friday’s results paled in comparison to the eye-popping $9.83 billion quarterly loss the company suffered three months ago - the worst ever recorded in the 196-year history of the firm and its predecessors.

Citigroup CEO Vikram Pandit said he was not happy about the results, but noted that he believed that efforts to cut costs, sell non-core businesses and beef up risk management would pay off.

“I think you will see we are taking all the action you’d want us to take to maximize the value of this franchise,” said Pandit.

Since Pandit’s ascension to the CEO post in December, management has made great strides in shaping up what some critics have called the company’s bloated corporate structure.

On Thursday, Citi announced it would sell its commercial lending and leasing business to General Electric for an undisclosed amount. The company has also announced other major moves including the sale of Diners Club International and its stake in Brazilian credit card company Redecard SA.

Citigroup’s results wrap up what has been a particularly tough week of results for the nation’s largest financial firms. Merrill Lynch recorded a loss of $1.96 billion, after about $6.6 billion in new writedowns. The company also said it planned to cut about 3,000 more jobs.

Wachovia Corp. surprised Wall Street Monday with a first-quarter loss of $350 million, while Washington Mutual reported a loss of $1.1 billion, or $1.40 a share, on Tuesday. JPMorgan Chase topped Wall Street expectations after reporting earnings of $2.4 billion. Still the results were just half of what they were a year ago.

Citi and Merrill are expected to announce another series of writedowns due to eroding values of mortgage-backed securities and leveraged loan portfolios. Other areas, like home equity loans, have shown increasing signs of deterioration too.

The question now is how bad do losses get? The numbers, in some cases, are really disastrous. To make matters worse, consumer spending has slowed and unemployment has increased - driving bigger losses in banks’ consumer-related businesses such as credit card, small business and even their commercial real estate portfolios. As a result, banks are having to set aside more money for potential loan losses.

Washington Mutual revealed on Tuesday that it had to set aside $3.5 billion in loan loss provisions and could be staring at a loss of $14 billion by year end.

The bad news isn’t limited to loan portfolios, either. When the Federal Reserve aggressively cut interest rates earlier this year, the expectation was the cuts would boost banks’ net interest margins, a key measure of the profit banks make from taking in deposits and lending them back out.

But competition for customers has been so tough that banks have been unable to cut their deposit rates as much as they would have in the past. At the same time, companies with sizeable investment banking divisions like Citigroup, JP Morgan and Merrill Lynch are expected to be hit by a slowdown in merger and initial public offering activity. Merger advisory and equity underwriting are two key sources of lucrative fees for investment banks.