CEO greed at its worse…a disgusting examination of who we really work for

January 23, 2009 · Posted in Featured, Finance, Financial Crisis, Government, People in the news, Personal Blogs, Politics, Rant, Social Change, Society, Things to think about, Thoughts on the economy · 1 Comment 

The news is ghastly and literally makes you sick to your stomach.   Once again, a large corporate CEO has been exposed and details are coming forward concerning John Thain.  Thain is the recently ousted chief exec at Merrill Lynch after news of his extravagant spending has come to light.   We need people to lead and companies need quality CEOs to guide the culture and direction of its employees, but this is grounds for a free range turkey shoot.

I don’t know how to react to this but I’m almost forced to pull at heart strings because I don’t know how our system will change.  If you analyze what this man did and what potential repercussions it has on other people, it is completely and utterly criminal.  I mean in the same category as a masked gunman robbing a bank, robbing an elderly couple on the street, or simply robbing hard working human beings of their dignity.

He’s not the only one who has plundered corporate finances on meaningless and material objects.   Dennis Kozlowski, former CEO of Tyco, was jailed for his elaborate spending.  He once arranged a birthday party for his wife in a tropical location, hired Jimmy Buffet to perform, had a fountain with flowing vodka, waiters dressed in togas, and had a life size cake of his wife made with exploding candy breasts, no kidding.  He used company money.  At times, the stories are humorous but only so if the economy is good and people have jobs.

Considering the economic struggles of Americans right now – this hits home with me.  It hits home with me because my family has been impacted by the economy and we’ve been impacted by health issues.  This is not a sob story or an attempt to make someone feel sorry for another person, but rather a look at how this man’s actions actually have a trickle down effect to others – as if he actually pulled out the financial rug himself.

Here is a lay out of what he did and theoretically how it impacts the rest of us paupers:

Hires White House decorator guru Michael  Smith to decorate his corporate office at $800,000, which is about the same as sixteen Merrill Lynch analysts making $50,000 who were laid off when ML announced a 10% workforce reduction in 2008.

Area rugs valued at $131,000, which is roughly the value of a first time home for a young family which are now left with a mortgage payment and no income.

Guests chairs valued at $87,000, which equates to the salary of a highly skilled network administrator losing his IT job.

Wall sconces at $2700, which equates to about six months of the average COBRA payments for a laid off worker who has no other health coverage.

A credenza valued at $68,000 – another salaried employee – gone.

A $1400 trash can – again another mortgage payment- gone.

Do not forgot the $4 billion in executive bonuses which he paid out as Merrill Lynch was being purchased by Bank of America.    This was billions (billions!) of dollars handed out to individuals who didn’t even have the leadership capability to keep ML afloat.   BofA has just recently received $25 billion in bailout funds just prior to the take over of Merrill Lynch.  Thank god our government stepped in and helped with the financial burden caused by that huge ass $13,000 chandelier hanging in Thain’s office !

This rant could go on and on.  The damage has been done and it is most likely Thain will get a nice pension payout from BofA execs under the table unless it becomes public news – which if he does – it will.   If he does- it may be time for me to run naked down the street because apparently you can get away with anything in this country.  Hopefully, it does not happen and the man slithers back into his life outside of his corporate crime spree.   It’s nothing more than a crime spree considering Merrill Lynch was a sinking ship and pink slips were being handed out.

A CEO is hired based on his or her credentials and seemingly a perfect fit for the organization –  so they are compensated nicely.   The problem is that the methodology of “salary” is relative to all employees within the company.  The assembly line worker making $40,000 still wants to be paid if the company does not do well.  The same goes for the CEO as they don’t want their value depreciated by a falling stock price just as much as the worker in the office.   Hell, if you had $40 or $50 billion in stock value – you’d probably not even wink at someone walking in with a chair valued at more than a car.  Board of Directors are creating invincible, highly compensated money churning robots with no regard for those people who hold very fragile roles within the framework of a corporation.   It’s a reality, we work in an At Will employment environment which is dictated by the behavior of the market.  Good market= jobs, bad market= layoffs.   But, can the spending be justified when employees are being escorted out the door, salaries are lost, and families forced to suffer a little bit until something better comes along?  Many people never get that second chance to recover, but this slimy pig will.

This irresponsible corporate spending is virtually untouched by any current laws governing corporate responsibility.    How does this type of criminal “free” spending not fall under any Sarbanes Oxley guidelines?  There is no accounting oversight even though , based on the books, this spending looks certified.    The legislation apparently only concerns itself with whether or not the spending is reported as “complete” and “accurate”.     I do not understand how the SEC can’t hold the power to freeze the payment for outlandish office decor – is this not considered a “large” or “unusual” payment?

A road warrior consultant can’t spend over $30 on an out of town dinner, but John Thain can do this.

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An Open Letter to Hank Paulson: Uncertainty & the Banks, What to do now

November 20, 2008 · Posted in Entertainment, Featured, Finance, Financial Crisis, People in the news, Political Issues, Politics, Social Issues, Society, Things to think about, Thoughts on the economy · 4 Comments 

Mr. Paulson:

The capital injections by the Treasury have not done anything to inspire confidence in the banking system by investors or to incentivize banks to start making new loans.

I recognize that it is too much to expect banks to run out and start expanding their balance sheets by writing new loans with so much uncertainty with respect to losses and impact on their capital.

Now that fears are spreading with respect to the commercial real estate market and the consumer loan market, the ability of banks to look at new business is further hampered.

We need to do something decisive and since so many are putting forth ideas, I want to put one out for your consideration.

The problem with the banking system is the continued uncertainty over asset values.  Due to the huge leverage of the banks a small decrease in asset values can blow through ALL of the capital in the banking system including the $125 billion given to the 7 largest banks and billions more given to the smaller banks.

As long as these assets are on their balance sheets, this situation remains unresolved and there is no place to go with these assets.  This is a cancer in the system and must be removed.

The U.S. Treasury is not moving forward with the TARP.  I think this is due to the complexity of the problem as well as the current environment in Congress and I understand your position.

But, with all due respect to you, I do not believe that you can wait and throw this off to the new Administration.

So, where do we go from here? 

I think the U.S. Treasury should convene the largest banks in the country, lock them in a room, with the following mandate:

1) The U.S. Treasury (UST) is going to capitalize a special purpose vehicle (SPV) – a new company – with $100 billion in cash.  UST will own the common stock of the SPV.

2) The banks (I use banks for ease, this could include insurance companies) – are going to contribute $1 trillion of assets to this vehicle with limits for each bank based on size.  The banks and UST will agree on what assets can be contributed and as a group the banks and UST will agree on the value of the assets to be contributed.

The assets that are allowed to be contributed will be broad asset classes, not one-off derivative deals and such.  Commercial mortgages, residential mortgages, consumer loans, large corporate and commercial loans (Shared National Credits, loans broadly held by banks) etc.

The $1 trillion of assets will not be contributed at “market value” nor will it be contributed at “par” value (the original value of the asset).  It will be contributed at a value that reflects the expected recovery of those assets over the life of the assets discounted back to the present (the “Intrinsic Value”).  

3) In addition to the $100 billion of capital injected into the vehicle by the U.S. Treasury the banks will make the following contributions:

a) For each $10 dollars of assets they contribute to the SPV they will contribute $1.00 of common stock.

Combining the $100 billion of cash and the $100 billion of common stock contributed by the participating banks the SPV will end up with $200 billion of capital, which should increase with the stock price of the banks.

b) In addition, the banks will place in escrow $1.00 of common stock for each $10.00 of assets contributed to the SPV.

The stock placed in escrow will be issued to the U.S. Treasury or liquidated at some future date to compensate the U.S. Treasury for any losses from its investment in the SPV and a minimum preferred return.  To the extent recoveries on the SPV exceed the intrinsic value estimate, this is the UST profit on the enterprise and the banks recover the shares placed in escrow.  The shares placed in the SPV are, again, part of the value to the UST from this endeavor.

3) The banks will receive a senior note equal to the value of the assets contributed to the SPC, paying interest at a rate which is equal to the yield on the collective assets of the SPV less operating costs.  The banks will also bear responsibility for providing knowledgeable employees – at their cost – to the SPV to manage these assets.  The SPV will have a Board comprised of respected individuals on a bipartisan basis.

The value in this idea is two fold:

First, by the banks getting a lot of these assets off their balance sheets they reduce the uncertainty in the system which should allow the stock market to re-value the equity based on the core business and not the “unknowns” associated with these assets.

Second, the security which the banks take back from the SPV will be worth more than the value of the loans on their balance sheet.  Consider this hypothetical example:

1) The banks contribute assets, collectively priced by the market at 50% of the par value of the security;

2) A conservative analysis (5% drop in GDP next year and 1.5% growth thereafter, or something like this) suggests that the intrinsic value of the assets is actually 70% of par;

3) The banks contribute these class of securities to the SPV for $1 trillion at the determined 70% “intrinsic value” (the face value contributed will exceed $1 trillion, but the value is greater than the mark to market value);

4) Now let’s say the actual recovery on these securities is $800 billion, the banks hold a senior security on this asset and thus would have first recourse to the $800 billion;

5) The SPV would however have the $100 billion of UST capital and $100 billion (at current market prices) of a portfolio of bank stocks to satisfy the SPV obligations to the banks.

As a result of this structure, the SPV senior securities taken back by the banks would have a tremendous cushion to absorb losses and still be worth par value to the banks which participate.  The break-even recovery in this example is 56% on the original par or face values of the securities contributed.  This should provide considerable ability for the new SPV senior securities on the bank balance sheets to be valued at Par.  This will enhance the asset quality of the banks and likely allow them to mark up asset values on their balance sheets.  

This is how the UST gets the “bang for the buck” that you referenced when you said the TARP could not serve its purpose.

The banks would be healthier as a result of this structure and thus the stock they contribute as capital and to the escrow should be a good store of value.

THE KEY MERIT OF THIS IDEA IS THAT IT REPLACES ILLIQUID ASSETS WHICH NO ONE CAN VALUE WITH A SINGLE ASSET THAT HAS ADDITIONAL SUPPORT AND SHOULD THUS BE WORTH PAR.

The taxpayer is protected by the escrowed stock that the banks contributed to participate.  The escrowed securities first go to compensate the UST dollar for dollar on losses and then up to a preferred rate of return.  Any appreciation in the stocks is split with 50% staying with the UST and the rest returned to the banks.

Since no one will buy bank stocks right now – everyone, I mean everyone who has bought bank stocks in the last two years has been killed – this allows the banks to effectively RECAPITALIZE themselves with some assistance from the UST.

By getting a large part of the troubled assets off the balance sheets of the banks, placing it into a vehicle that is NOT PUBLIC (thus it can sit and hold these securities without concern for the “mark to market” accounting) and replacing those assets with a single security whose credit has been enhanced partly by the UST and partly by the banks themselves, you will dramatically reduce the uncertainty in the banking system.

The banks will still have some troubled assets which due to the unique characteristics of those assets are not appropriate for the SPV.  But the idea here is that by reducing the MAGNITUDE of the problems the banks are facing and enhancing the asset quality of the banks through this program you leave them in a better position to take the write-off on those assets or to work them out themselves.

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