In 2006 the CEO of Bear Stern, James Caynes, received a compensation package of $34 million. The following year Bear Stern cost the taxpayers $2.7 billion. In 2006, the CEO of Lehman Brothers received a compensation package of $27 million. On September 15, 2008, Lehman Brothers filed for bankruptcy. The collapse of Lehman Brothers is seen by many as the key event that sparked the Global Financial Crisis. In 2006, the CEO of Citigroup, Charles Prince, received a compensation package of $25 million. Since then the stock price has fallen from $50 a share to $3.5 a share. The CEO of Countrywide Financial, Angelo Mozilo, did even better. His compensation package was $43 million. Angelo Mozilo and two other top executives were charged by the Security and Exchange Commission (SEC) with fraud. According to the SEC, from 2005 through 2007, Countrywide Financial engaged in an unprecedented expansion of its underwriting guidelines and was writing riskier and riskier loans, which these senior executives were warned might ultimately curtail the company's ability to sell them. Countrywide Financial was the third biggest originator of subprime mortgages and the nation's leader in subprime mortgage-backed securities. The tragedy is that these individuals did not make decisions that were in their companies' best interests. In this SLP, answer the following questions:
• Why did the executives make these decisions?
• What caused the relation between the CEO and the stockholders to go so badly awry?
• Discuss in terms of the principle-agent problem and suggest a way firms can avoid this type of situation.