Pension Funds Fired Up About Subprime Mortgage Write-Downs

Union coalition asks Merrill Lynch, Citigroup directors for explanations of their risk-assessment ‘failures’

By Dennis Schaal

A coalition of union pension funds isn’t ready to write off the billions of dollars in Merrill Lynch and Citigroup subprime mortgage-related write-downs as simply the cost of doing business in a turbulent lending market.

The CtW Investment Group, a division of Change to Win, a union coalition that pressures companies on accountability issues, called on four Merrill Lynch directors to divulge any steps they took to shield shareholders from the mortgage-related risk that led Merrill Lynch to write down more than $18 billion related to exposure to subprime mortgages and various mortgage-backed debt securities in the second half of 2007.

The union pension funds, which have some $1.4 trillion in assets and are Merrill Lynch and Citigroup shareholders, sent letters to members of Merrill Lynch’s Finance Committee asking for details on how they handled the risk inherent in the company’s exposure to subprime mortgages.

The four Merrill Lynch directors are not up for reelection, so absent “a compelling explanation” or a finance committee reshuffling, the CtW Investment Group called on shareholders to withhold votes from Nominating Committee Chair Armando Codina when Codina is up for reelection this year. The nominating committee was responsible for appointing the finance committee members, the CtW Investment Group stated.

Feeling the heat from the massive write-downs, Merrill Lynch created a co-chief risk officer position and announced Jan. 17 that it had appointed Noel Donohoe, previously chief operating officer of Dune Capital Management, to the post. Donohoe will share the risk management function with Edmond Moriarty, who took up his position in September. Both report to chairman and CEO John Thain.

The CtW Investment Group, citing Citigroup’s failure to protect shareholders from exposure to subprime mortgage risks, also asked for explanations of their risk-assessment strategies from five Citigroup directors. The coalition said it will recommend that shareholders vote against these directors when they are up for reelection this year if the explanations are inadequate.

In the fourth quarter, Citigroup took some $22 billion in pre-tax write-downs related to exposure to subprime mortgages and mortgage-tied debt securities.

Change to Win Coalition unions have some 6 million members. The unions include the Teamsters, Laborers’ International Union, Service Employees International Union, United Brotherhood of Carpenters and Joiners, the United Farm Workers and the United Food and Commercial Workers.