The Wall Street Journal recently reported that the U.S. mortgage crisis is “comparable to some of the biggest financial disasters of the past half-century.”  At the epicenter of this crisis are a set of financial institutions whose massive failure to manage mortgage-related risk not only destroyed billions in shareholder value, but also destabilized the global capital markets and precipitated a credit crunch that now threatens to throw the U.S. economy into recession.

The boards of directors at these firms bear ultimately responsibility.  Specifically, while it is the CEO’s job to manage risk, the NYSE listing requirements mandate that it is the responsibility of the board’s audit committee or other designated committee to review the firm’s major financial risks and assess the steps management has taken to control such exposure.  The banks’ board failures are especially egregious since it was apparent by mid-2005 that mortgage lenders were loosening lending standards and an overheated U.S housing market was at risk of collapse. 

CtW will recommend that shareholders vote against those directors most culpable. Our initial focus is on the six U.S. banks that suffered the largest losses:  Bank of America, Citigroup, Merrill Lynch, Morgan Stanley, Wachovia, and Washington Mutual. Together, these firms destroyed over $254 billion in shareholder value between January 31, 2007 and January 31, 2008 due to a failure to manage mortgage risk.  According to Bloomberg, these are also the six U.S. banks that reported the largest write-downs and credit losses on mortgage-related investments in 2007.

In preparation for the 2008 director elections at these firms, CtW has called on individual directors on the relevant risk committee at each bank to describe what they did to assess their firm’s mortgage-related risk and satisfy themselves that management was properly controlling such exposure.  CtW will recommend that shareholders vote against those directors that fail to provide a compelling response.  All six firms have majority vote policies for director elections.

This website contains more detailed background and information how shareholders can make their voices heard.