CEO Group - Corrupt, Egregious, and Odious Group

A Socialistic Solution to Protect "Capitalistic" Managers

Right after I had written a blog about corruption, I read the following in the Wall Street Journal, a.k.a. the Murdoch's Opinion Piece.

"Displaced-Worker Aid Is Proposed CEO Group Backs $22 Billion Package,Funded by Taxes By DEBORAH SOLOMON
July 30, 2008; Page A12
A policy paper commissioned by the chief executives of the nation's largest financial-services companies recommends a huge expansion in programs to assist workers displaced by international trade, with the $22 billion price tag financed through tax increases. The Financial Services Forum paper comes amid a growing backlash against global trade that has threatened to curtail U.S. trade agreements. The banking, investment and other CEOs who belong to the group have consistently cited protectionism as the leading threat to continued U.S. and global economic growth."

The Doha round of WTO talks collapsed yesterday because U.S., on the one hand and China and India on the other could not agree on a range of issues.
The CEOs, who have personally benefited greatly from trading and specifically from outsourcing, want to continue it and make it look like a win-win for everyone. However, to pull the wool over people's eyes, they want to the Government to provide aid to 'displaced workers'- an insulting phrase for people who have been fired. These are the same CEOs who got the dividend tax eliminated, got a cap on capital gains at 15%, and have also benefited from lower income tax rates- personal and corporate.
And now, they want to shift the burden for the problem they have created, to the public taxpayer, when the government is running a $500 Billion deficit next year. They are proposing funding this aid from taxes, while gleefully exploiting tax loopholes?
Business may not have any responsibility for creating employment, in which case it should come out and flatly say so. But using and discarding people like inanimate objects, and then couching it in slick language makes one sick.
A sad commentary on the business leaders.

Capitalism for the C_Os, Socialism for the Rest of Us

*This article lost some formatting when I pasted it into this blog. Read the original version here*

In 2004 I had written some articles on financial engineering 101, accounting and accountability, official fudging of data, and why management needs to treat financial statements with respect, which were published on PrudentBear.com. I later followed up this theme with an article in July 2005 titled “Assessing the Demand for Residential Real Estate” that, in hindsight, was prescient. The present article reflects on the actions taken by public and private sector leaders to navigate the current financial maelstrom, and revisits the thesis put forth in the earlier articles that integrity is being tested - that of buyers, lenders, builders, investors, public officials, and the public at large.

Back in 2005 the CEOs of some residential construction companies were on television’s “financial news” programs taking about their companies and emphasizing the following two points.

1. This time, the housing market is not as sensitive to increases in interest rates as in the past, especially since the rates are at historically low levels. The point being emphasized is that the rates can go higher (another 200 basis points?) before having a significant impact on home sales.
2. The housing market is all about SUPPLY and DEMAND.

The fall-out in the financial sector and in the broader economy from the financial innovations of the past five years, especially in housing and associated financial industries is apparently far from over. I had written in 2005 that “…the magnitude of the unfulfilled demand for housing combined with financial new product development can keep the current housing boom going for a few more years. However these new financial products have yet to stand the test of the vagaries of the environment- an economic downturn or an interest rate spike or other events that may cause lenders to pull in the reins. To understand the magnitude of the impact of a constrained lending environment it is useful to look at the sharp decline in prices of telecommunications stocks in 2001-2002 as investors became more risk-averse. Some companies went bankrupt and those left holding the bag (like the author) did not receive any bailout from the government…..Part of the bet is that with the scale of liabilities of the mortgage industry, especially the GSEs, the Fed and the government will bail out the financial sector from any disasters, shifting the burden to the public. As alluded to by others, ‘character’ is being tested - that of buyers, lenders, builders, investors, and the public at large.”

Now, let us examine the actions by the Federal Reserve Bank (the Fed) to “grease” the liquidity wheel over the past year. Some of the steps taken by the Fed are listed blow.
1. It has lowered the Fed Funds Rate from 5.25% in Aug 2007 to 2% by the end of April 2008, the fastest ramp down in rates since 1990.
2. It has provided numerous offerings of $75 billion, $50 billion and $30 billion in 28-day credit through the Term Auction Facility, or TAF. According to the Fed, TAF auctions are very similar to open market operations, but conducted with depository institutions rather than primary dealers and against a much broader range of collateral than is accepted in standard open market operations (Italics are by the writer). With a wink and a nod, this shifts the risk to the public.
3. It has lowered the rate on discount-window loans to banks.
4. In March, it started a series of repurchase transactions with terms of roughly 28 days and cumulating to up to $100 billion. Primary dealers could deliver as collateral any securities eligible in conventional open market operations. Additionally, the Federal Reserve introduced the Term Securities Lending Facility (TSLF), which allows primary dealers to exchange less-liquid securities for Treasury securities for terms of 28 days at an auction-determined fee. Recently, the Federal Reserve expanded the list of securities eligible for such transactions to include all AAA/Aaa-rated asset-backed securities. Given the cloud hanging over the ratings agencies, this is again a blatant shift of the risk and the burden to the public.
5. It bailed out Bear Stearns by lending $29 Billion to JPMorgan Chase and taking on Bear Stearns assets. This was done, in the words of Chairman Ben Bernanke, “to prevent a disorderly failure of Bear Stearns and the unpredictable but likely severe consequences for market functioning and the broader economy.” The Fed can normally only lend through its discount window to banks. Under Section 13-3 of the Federal Reserve Act, added in 1932, it can lend to “individuals, partnerships, or corporations” with the approval of not less than five governors, provided “such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions.” Now investment banks can relax with the knowledge that the fed can bail them out anytime, anyplace.
6. It used its emergency power to create the Primary Dealer Credit Facility (PDCF) which allows primary dealers to borrow at the same rate at which depository institutions can access the discount window, with the borrowings able to be secured by a broad range of investment-grade securities.

As Dwight Cass and Jeffrey Goldfarb note in an article titled “Why is the ‘Discount’ Free?” in the Wall Street Journal (June 12, 2008), the option given by the Fed to the banks, investment banks and the brokers to access the discount window at the lowered rate has value. But the Fed is giving this option (or insurance) for free. Any ordinary person will not get any insurance without a premium. Some criticism has been leveled against the Fed for encouraging ‘moral hazard’ with these steps, implying that it will embolden banks and dealers to take greater risks with the assurance of a Fed bail-out. However it is instructive to look at how these companies were led to the current state by their allegedly hardworking officers, the C_Os, particularly the CEOs.

Five Year Cumulative Compensation for the CEOs of a sample of Financial Institutions
2003 to 2007

Company	CEO(s)	Salary+Bonus 2003-2007	Total Compensation 2003-2007	Average per year 2003-2007
Merrill Lynch	Mr. O'Neal and Mr. Thain	$ 64,341,923	$ 226,474,013	$45,294,803
Countrywide Financial	Mr. Mozilo	$ 68,907,774	$ 137,505,901	$27,501,180
Bear Stearns	Mr. Cayne	$ 51,932,623	$ 128,056,532	$25,611,306
Citigroup	Mr. Prince and Mr. Pandit	$ 33,427,344	$ 113,758,846	$22,751,769
Fannie Mae	Mr. Raines and Mr. Mudd	$ 14,347,931	$ 63,357,081	$12,671,416
Freddie Mac	Mr. Syron	$ 15,054,231	$ 59,565,891	$11,913,178

Data from SEC filings and company reports
Notes:
• The salary plus bonus is the “direct cash” part of the compensation received by the CEOs.
• Upon his departure from Citigroup in November, Mr. Prince left with approximately $68 million, while Mr. O'Neal collected about $161 million after he stepped down in October at Merrill Lynch.
• Countrywide's Mozilo was to collect a windfall of $115 million dollars after his firm agreed in January to a sale to Bank of America. After facing criticism he generously offered to forfeit $37.5 million in payments tied to the deal.
• John Thain, who became the CEO of Merrill Lynch on Dec. 1, 2007, got a package of $83 million.
• Morgan Stanley CEO John Mack received a total of $41.7 million for 2007.
• Mr. Pandit, appointed as CEO of Citigroup in December 2007, received about $165.2 million in connection with the sale of Old Lane Partners to Citigroup. He received an additional $2.7 million in the roughly six months he served as head of Citigroup's investment bank and alternative investments group. In January, he was given a sign-on grant of stock and performance-based options worth over $48 million.

Each one of the above institutions has taken write-downs of billions of dollars and shrunk its balance sheet. According to Reuters, banks and other financial institutions globally have written down more than $400 billion of assets during this financial crisis. Recently, Lehman wrote off $3.7 billion in assets in its second quarter. Merrill Lynch has written off more than $30 billion in assets over the past year. Citigroup took $14 billion in write-downs in the first quarter of 2008, on top of $18.1 billion in the previous quarter. Despite these write-downs it is difficult to gauge the true extent of damage and the fair value of remaining assets. Some, if not all, of these institutions still have off-balance sheet investments and associated liabilities. It is also not clear if these institutions have determined the fair market value of the items remaining on the asset side, as the investment vehicles have become quite complex and difficult to assess, or are simply not marketable under current conditions. As an example, there is a difference of $1.1 billion between the value Lehman Brothers Holdings assigned to some assets in its first quarter conference call and what it reported in its subsequent quarterly SEC filings (Wall Street Journal, June 12, 2008). Additionally, the financial crisis wrought by these institutions has created major shocks throughout the economy and wreaked havoc on many people’s lives.

How did the ‘system’ reward this rather ‘capital’ performance? The CEOs cleaned up handsomely for driving and encouraging financial innovation, for deceptive and often fraudulent business practices, for exploitation of the ‘buyer beware’ maxim, and for other unsavory and unethical practices. In their world of capitalism, there is no ‘downside risk’ other than forfeiting some future potential earnings at that particular institution. Even the Government Sponsored Entities (GSEs) have become rotten to the core like their non-GSE peers. None of these leaders have paid back, or have been asked to pay back, their winnings from this rigged ‘heads I win tails I win some more’ coin tosses. The public is forced to bail out the institutions - socialism is thrust upon it.

Of course, the buck does not stop with the CEOs but goes right into the palms and pockets of the elected ‘lead’ers. Lawmakers up on Capitol Hill are finalizing the so-called 'Credit Suisse Plan' plan to bail out the banks and the borrowers, not with the politicians’ or the bankers’ money but with the hard-earned money of the taxpayers. The New York Times describes the bill and the Washington Post explains how this bill came about. Key aspects of the plan are listed below.
• It allows qualified mortgage holders to refinance into more affordable, 30-year fixed-rate loans with a federal guarantee.
• First-time buyers receive a refundable tax credit of up to $8,000, or 10 percent of the value of a home, on purchases of unoccupied housing.
• Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants, can purchase loans up to $625,000 from lenders. The previous limit was $417,000. This will allow lenders to make more reckless mortgages.
• The bill allocates $150 million towards counseling for borrowers to prevent foreclosure.
• In a foreclosure, lenders lose 40 to 60 percent of the loan. Under this bill the tax payers picks up the tab as long as the lenders agree to reduce the principal balance of loans to roughly 85 percent of each property’s current value.
• Nearly $4 billion in grants to communities with high foreclosure rates to buy and rehabilitate vacant properties.
The public should hold President Bush and his administration accountable for reckless encouragement of an “ownership society.” He stated in 2003 that "This Administration will constantly strive to promote an ownership society in America. We want more people owning their own home. It is in our national interest that more people own their own home. After all, if you own your own home, you have a vital stake in the future of our country." The White House website brags about home ownership in President Bush’s Record of Accomplishments. The very first highlight is that “The US homeownership rate reached a record 69.2 percent in the second quarter of 2004. The number of homeowners in the United States reached 73.4 million, the most ever.” It should be updated to reveal that in the first quarter of 2008, the homeownership rate was 67.8% and declining. In the fourth quarter of 2000, homeownership was 67.5%. By the time President Bush leaves office, the rate could well be below what he inherited. In the meantime he accomplished the wonderful feat of creating an ownership society – transferring wealth to the wealthy.

When leaders including C_Os and elected leaders combine this gross exhibition of looting with lavish posthumous paydays (see the Wall Street Journal article titled ‘Companies Promise CEOs Lavish Posthumous Paydays’) they define modern capitalism. The question is how long will the public continue to practice the socialism that supports this generosity towards the capitalists? As an educator, it is becoming almost impossible to impart ethical behavior to students in light of this behavior. However, even under these dark ominous clouds it is fascinating to listen to Muhammad Yunus, the Nobel Peace Prize winner and founder of Grameen Bank discuss micro-finance during his interview with Paul Solman (Online Newshour, PBS).

Paul Solman: “And so there will be enough investors in the world to invest in these funds to make them continue to operate, even though they're not as profitable as they could be?”

Muhammad Yunus: “It was not profitable at all, non-loss, non-dividend companies. That's what the social business is all about. So you came here to do good. It's a clean idea.”

Gross Behavior: Collecting the Loot even after death

And one more reason to stay away from COMCAST, DISNEY, and VERIZON...

I will write a longer article on the sheer audacity of current leaders to loot the public, but this headline should make everyone pause and reflect on the direction this country is headed.

Companies Promise CEOs Lavish Posthumous Paydays

Article is reproduced below, for ease of reading.

Companies Promise CEOs
Lavish Posthumous Paydays

Options Vest, Insurance Flows;
Even Salaries May Continue

By MARK MAREMONT
See Corrections & Amplifications below.
June 10, 2008; Page A1

You still can't take it with you. But some executives have arranged for the next best thing: huge corporate payouts to their heirs if they die in office.

PARTING GIFTS

See a chart of benefits for some CEOs if they die in office.

Take Eugene Isenberg, the 78-year-old chief executive of Nabors Industries Ltd. If Mr. Isenberg died tomorrow, Nabors would owe his estate a "severance" payment of at least $263.6 million, company filings show. That's more than the first-quarter earnings at the Houston oil-service company.

Dozens of other companies offer lush death-benefit packages to their top executives, according to a Wall Street Journal review of federal filings. Many companies accelerate unvested stock awards after a death, which by itself can amount to tens of millions of dollars. Some promise giant posthumous severance payouts, supercharged pensions or even a continuation of executives' salaries or bonuses for years after they're dead.

The CEO of Shaw Group Inc. is in line to be paid $17 million for not competing with the engineering and construction company after he dies.

Lockheed Martin Corp.'s top officer didn't even need to die to get a death benefit; Lockheed paid out the sum, about $1 million, in March while he was still very much alive.

Death benefits, sometimes called golden coffins, have been around for years, but until recently the amounts were often impossible to determine or were shrouded in the fog of proxy-statement language. A federal rule change 18 months ago required companies to be clearer about what they're obliged to pay if top executives end their employment, under various circumstances.

A death of a CEO or chairman often is a traumatic event, both for the family and for the suddenly leaderless company. But compensation critics say that's no reason to lose sight of the pay-for-performance principle that many boards now espouse. And they call death benefits the ultimate in pay that isn't based on performance.

Companies defend the practice as an appropriate way to take care of an executive's family after an unexpected death. They also note that the benefits often are negotiated as part of a pay package that has many components. In many cases, compensation attorneys say, death benefits are really a form of deferred compensation, structured partly for estate-planning or tax reasons.

Companies often say one goal of their pay packages is to keep executives from leaving. But "if the executive is dead, you're certainly not retaining them," says Steven Hall, an executive-pay consultant in New York.

Mr. Hall says death benefits have become more controversial in recent years: "Shareholders say, 'Why should we write a big check to a CEO who's been quite well paid all along?' He should have bought life insurance."

At many companies, a top executive's death does trigger a big insurance payout to heirs -- on a policy the company paid for.

A $3 million life insurance policy is just a minor part of the death benefits that XTO Energy Inc. provides to its CEO, Bob R. Simpson.

Had Mr. Simpson died on Dec. 31, according to the natural-gas producer's latest proxy statement, XTO would have owed his heirs a $111 million "bonus." Stock options that the 59-year-old executive had been granted, but that weren't yet vested, would immediately vest, bringing his heirs an additional $20.5 million.

The Fort Worth, Texas, company also would have owed $4.4 million in salary for its deceased employee. And his death would trigger a $158,400 payment listed as a "car allowance."

A spokesman for XTO didn't return calls seeking comment.

A salary-after-death provision has just been scrapped at Comcast Corp. The board in late December had renewed a provision that gave Ralph J. Roberts, the 88-year-old chairman of its executive committee, his $2 million annual salary for five years after his death. But in February, Comcast canceled the deal amid criticism from a big shareholder, Chieftain Capital Management. David Cohen, a Comcast executive vice president, said Mr. Roberts voluntarily relinquished the benefit, in a move that had been under consideration for some time.

Still, as of Dec. 31, Mr. Roberts was entitled to an estimated $87 million in posthumous benefits from the Philadelphia-based cable-television company. Most of it consisted of continued company funding of joint life insurance covering him and his wife, filings show. The insurance would pay a total of $130 million to their estates after both are deceased.

Salary Keeps Coming

Comcast is still committed to paying the salary of Mr. Roberts's son, CEO Brian L. Roberts, for five years after his death in office, along with his bonus for five years. The potential payout was valued at more than $60 million on Dec. 31.

The 48-year-old CEO's heirs would also receive $223 million from his company-funded life insurance. And the heirs would be entitled to an acceleration of stock awards and other payments, which would have totaled $14 million had he died on the last day of 2007.

"We think the compensation has been grossly too high already" at Comcast, said Glenn Greenberg, a partner at Chieftain Capital. "There's no need to pay them more when they're dead." Chieftain has been seeking the ouster of the younger Mr. Roberts and the end of a two-tier stock arrangement that gives the Roberts family voting power beyond the number of shares it holds.

Comcast's Mr. Cohen called the five years of postmortem salary and bonus for the chief executive "fair and reasonable." He noted that many large companies offer death benefits.

As for the large company-funded life-insurance policies, Mr. Cohen said the burden of making the payout would fall on an insurer, not Comcast. He said part of the CEO's life insurance is term insurance Comcast bought at favorable rates, and that the company discloses this insurance's annual $415,000 cost to Comcast in yearly pay tables.

Pay consultants trace one of the earliest golden coffins to Armand Hammer of Occidental Petroleum Corp. His contract called for his salary to be paid until his 99th year, whether he was alive or dead. He died at 92 in 1990.

Another early beneficiary was Steven J. Ross, the late chairman and co-CEO of Time Warner Inc., who died in 1992 at age 65. His contract called for the company to pay his salary and bonus for three years after his death. It also gave his heirs nine years to exercise stock options on 7.2 million shares, a package estimated at the time of death to be worth between $75 million and $300 million.

Today, most public companies include death benefits with other types of termination-related pay due their CEOs, with variations for whether the person is fired, becomes disabled or dies in office. Death benefits are layered on top of pensions, vested stock awards and deferred compensation, which for most CEOs already amount to large sums.

Rupert Murdoch, the 77-year-old chairman and CEO of News Corp., parent of Dow Jones & Co., which publishes The Wall Street Journal, doesn't have an employment contract. News Corp. filings show that on June 30, his death would have triggered $1.37 million in payments to his beneficiaries. The beneficiaries of News Corp.'s 57-year-old president, Peter Chernin, would have been entitled to a $5 million payout of company-funded life insurance plus $31.9 million in acceleration of equity awards and other benefits had he died June 30. A spokeswoman for News Corp. confirmed the numbers and declined further comment.

A recent study of 93 big companies found that 17% offered severance-style death benefits to their chief executives in 2006, while 40% provided corporate-funded life insurance. Equilar Inc., a research firm in Redwood Shores, Calif., did the study.

CEO deaths, though uncommon, do happen. McDonald's Corp. faced two in nine months. James Cantalupo died suddenly in April 2004 at age 60. The board awarded him a $1.8 million "discretionary bonus" and waived other rules to give his estate an early $790,000 payout of a long-term award.

His 43-year-old successor, Charles Bell, had cancer surgery just two weeks after taking over and was gravely ill for part of his brief tenure. He stepped down after seven months and died two months after that. The company then gave his estate a $3.2 million bonus.

Vesting Upon Death

Though not all companies provide it, the most common posthumous benefit is acceleration of unvested stock options and grants of restricted stock. The rationale is that if the executive hadn't died, he or she would probably have stayed long enough for the awards to vest.

At Occidental Petroleum, the successor to Mr. Hammer, Ray R. Irani, would get immediate vesting of all of his options, restricted stock and performance-related awards if he died on the job. It's a benefit Occidental's filings said was worth $101.9 million as of Dec. 31.

A spokesman for the company said that amount "isn't a death benefit per se -- it's what his family would get upon his death." The spokesman, Richard Kline, added that the only reason the unvested awards are so valuable is the stock's superb performance under Dr. Irani's leadership.

The CEO is already wealthy. Dr. Irani has earned more than $700 million from Occidental since 1992, including profits on stock-option exercises, according to Standard & Poor's ExecuComp.

Multiple Stock Awards

An unusual death provision appears in the contract of the CEO of Plains Exploration & Production Co., James C. Flores. If he dies in office, his heirs get a giant payout from restricted-stock awards that Mr. Flores hasn't yet been granted.

The board of the Houston oil-and-gas concern has promised Mr. Flores annual grants of 300,000 shares of restricted stock through 2015, as part of a "long-term retention and deferral agreement." Had he died at the end of last year, company filings say, his estate would have been entitled to seven future years of stock awards -- 2.1 million shares then valued at $113 million -- all of which would be vested.

His death on Dec. 31 also would have triggered $53 million in additional benefits, mostly from acceleration of already granted awards that hadn't yet vested.

In an interview, Mr. Flores said he cut the restricted-stock deal when Plains stock was about one-eighth its current price, when "it wasn't that much money." He also said his years of promised restricted-share grants provide a continuing incentive for him to focus on the company's stock price. "It's a retention clause. It allows me to work and earn it every year," he said.

An Early Payment

At Lockheed Martin, the company recently eliminated a "post-retirement death benefit" for top executives but gave the executives the money anyhow. For its 56-year-old CEO, Robert J. Stevens, that meant an extra $1 million payment in March.

A spokesman for Lockheed Martin, Jeffery Adams, said the company canceled the plan as part of a broader effort to eliminate "nonperformance-based compensation programs." As to why it paid out the death benefit to a still-living executive, Mr. Adams said Lockheed "thought it was appropriate to compensate officers who would have otherwise expected to be eligible for the benefit following retirement."

As of the end of last year, the Lockheed CEO was eligible for an additional $48 million in death benefits, from acceleration of stock awards and long-term incentive plans, Lockheed filings show.

'Noncompete' Agreement

Companies often have "noncompete" agreements with top executives that bar them from joining a competitor after they leave. Shaw Group has one. The Baton Rouge, La., company would pay $17 million to CEO James M. Bernhard Jr. "not to compete with us for a two-year period following termination of employment," its latest proxy statement says.

The pay for not competing would still be due if Mr. Bernhard were dead, a footnote shows. Shaw officials didn't respond to requests for comment.

At Nabors, Mr. Isenberg, who is chairman as well as CEO, has long been one of the highest-paid executives in the U.S. His compensation from 1992 to the end of last year totaled more than $500 million, according to company filings and Standard & Poor's ExecuComp.

The oil-service company reported first-quarter net income of $230.5 million -- or less than the severance payment Mr. Isenberg would have been due had he died in office Dec. 31. Nabors, which is registered in Bermuda but has headquarters in Houston, has a market value of about $12.7 billion.

The death payout "is a great present to his estate, but it would be very costly to shareholders and it would be a big hit to the company's balance sheet," said Richard Ferlauto of the American Federation of State, County and Municipal Employees, where he is director of corporate governance and pension investment. Mr. Ferlauto's union backed a shareholder proposal to rein in another executive-pay benefit at Nabors, which was defeated at the company's annual meeting a week ago.

A spokesman for Nabors, Denny Smith, said the size of Mr. Isenberg's death benefit has grown because, under his employment contract, it is linked to the company's performance. Strong cash flow and earnings in 2006 resulted in a substantial increase in the benefit, he said.

The size of Mr. Isenberg's severance benefit has contributed to boardroom tensions in recent years, according to people familiar with the situation. They say directors have tried to renegotiate the package but haven't been able to come to an agreement with Mr. Isenberg.

The Nabors spokesman, Mr. Smith, denied there is any friction on the board. He said directors and executives are "actively working to restructure" the contract and hope to reach an accommodation that is in the best interests of shareholders.

Write to Mark Maremont at mark.maremont@wsj.com¹

Corrections & Amplifications

John M. Barth retired as chief executive of Johnson Controls Inc. on Sept. 30, 2007. A table accompanying a Tuesday page-one article about executive death benefits failed to note his retirement in some editions.

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