No recovery in sight...ethical recovery, that is.

Yesterday's big news was the report that "the pharmaceutical giant Pfizer agreed to pay $2.3 billion to settle civil and criminal allegations that it had illegally marketed its painkiller Bextra, which has been withdrawn. It was the largest health care fraud settlement and the largest criminal fine of any kind ever...The government charged that executives and sales representatives throughout Pfizer’s ranks planned and executed schemes to illegally market not only Bextra but also Geodon, an antipsychotic; Zyvox, an antibiotic; and Lyrica, which treats nerve pain. While the government said the fine was a record sum, the $2.3 billion fine amounts to less than three weeks of Pfizer’s sales. Much of the activities cited Wednesday occurred while Pfizer was in the midst of resolving allegations that it illegally marketed Neurontin, anepilepsy drug for which the company in 2004 paid a $430 million fine and signed a corporate integrity agreement — a companywide promise to behave...Almost every major drug maker has been accused in recent years of giving kickbacks to doctors or shortchanging federal programs. Prosecutors said that they had become so alarmed by the growing criminality in the industry that they had begun increasing fines into the billions of dollars and would more vigorously prosecute doctors as well...Mr. Loucks, the prosecutor, accused Pfizer of aggressive marketing tactics.“Among other things, Pfizer did the following: Pfizer invited doctors to consultant meetings, many in resort locations. Attendees expenses were paid; they received a fee just for being there,” he said. Such weekend getaways for doctors are still common throughout the drug and medical device industries..."

**********

The article does not even come close to the essential point that is missing in the story. The financial penalty is just taking some cash out of the earnings of the company- a little nick for shareholders who can use a Pfizer band-aid to forget. The managers who committed these crimes have not paid any penalty, and can continue working at Pfizer and commit similar acts again. This is the fundamental issue with Corporate America- no accountability for managers, especially at the top.

The Brave and Honest Few...

An interesting study out of Ohio State University...
Bravest' students do not cheat

I was talking to a senior manager at a large community hospital in Illinois last week about what she looked for when hiring new employees. I told her that I had some good students who could do internships at the hospital. She said that in addition to skill and aptitude, she looked for a highly ethical behavior- in fact, she rated it higher than other qualities. A student's attitude towards cheating and reporting cheating is one early indicator of ethical or unethical behavior.

Obama "Corsi"fied, like John Kerry

Jerome R Corsi is at it again. His latest book, 'The Obama Nation: Leftist Politics and the Cult of Personality' has made it to the top of the NYT best seller list. The NYT article "Obama campaign issues rebuttal to book's claims" makes the following points:
"...In an interview with The Associated Press, Corsi defended raising the issue of drugs without any evidence.''I don't need more,'' he said. ''I'm putting this question forward. I'm putting the evidence forward. Voters can make up their own minds.''
In a series of Web posts several years ago, Corsi said Pope John Paul II was senile and unconcerned about sexual molestation of boys, referred to Islam is ''a worthless, dangerous Satanic religion'' and suggested Kerry was secretly Jewish.
Corsi apologized for the remarks and now says he didn't mean them and was simply trying to provoke discussion.
''Obama Nation'' is published by Threshold Editions, a division of Simon & Schuster that is run by Mary Matalin, the former aide to Vice President Dick Cheney.
Corsi readily acknowledges the political goal of his book. He considers Obama a ''radical leftist'' who should not be elected president. Corsi said he has no plans to work against Obama with groups comparable to 2004's Swift Boat Veterans for Truth but said he would be willing to consider it."

This guy apparently has a Ph.D. from Harvard, the same school which awarded George Bush an MBA. In both these instances, education was divorced from the attainment of the degree. Both of them, like the Fox News hacks, do not take pride in their education, do not believe in doing thorough research, and thrive on making claims that appeal to the basest feelings of the citizenry...fear, hatred, suspicion, and bigotry,among others...(In Corsi's case, his book contents lead to this conclusion; in GWB's case, his publicly reported comments are the justification).

I just looked up Amazon.com and it lists Corsi's book as #2 on the best seller list overall, behind 'Breaking Dawn' and ahead of 'The Last Lecture.' It lists for $28 but is priced at $15.40, at a discount of 45%. Corsi's book got 164 five-star reviews and 260 one-star reviews, with an average 2 1/2 stars rating. The Last Lecture has a 4 1/2 stars rating.

Your choice: "Humans-Eat-Dogs World" (China) or "Humans-Share-Dogs World" (US/Europe)

Over the years my marketing students have come up with a number of innovative ideas and business models. Some of these have been turned into real products and/or services- very gratifying for a professor. Examples include an indoor Laser Tag arena and efficiently routed school buses for our College. One of my favorites is the 'Bow Wow Doggy Day Care" services firm, an idea my students came up with long before the concept became mainstream.

I was reflecting on this as I read the article "An Idea Whose Time Has Come: The Time-Share Dog Monica Had 2 Families, 2 Names, Much Love; Boston Bans Short Pooch Leases" in today's WSJ. My mind turned to the accounting aspect of this concept.

• Shared Capital Asset. It appears that for some people a dog is just a capital asset- something whose ownership can be divided up across multiple owners. As an asset it can be traded, and eventually "disposed off" for its salvage value
• Lease with an option to buy. The article cites examples of people who took out dogs on the "short-term" plan and liked them so much they kept them for the long term. This appears to be akin to the dating game- only the counter-party (the dog) has no say in the matter
• A 'contract' worker doing all the work a regular employee does...the problem that companies like Microsoft and FedEx ran into. In this case the 'shared' dog is expected to provide everything a 'fully owned' dog does to its owner, but the shared dog's contract can be 'terminated at will without any due compensation.'

While the discussion is about dogs, the concept can be extended to other pets as well.

Of course, for an even more tasty bite - a few weeks ago, the Chinese government banned dog meat at its 112 official Olympic restaurants. This was done in order to avoid offending the fine sensibilities of the visitors.

Just one more illustration of the premise that the humans mind can scale the highest peaks and sink to the lowest depths. Doggone it!

Not 'Intel Inside' but 'Rotten Inside'- Even the sky is not the limit to Corporate Greed

The WSJ, in a rare display of investigative journalism, unearthed and reported yet another "slick" move by some corporations to pay more to executives and avoid taxes.

"Companies Tap Pension Plans To Fund Executive Benefits Little-Known Move Uses Tax Break Meant For Rank and File."

The first two paragraphs say it all:
"At a time when scores of companies are freezing pensions for their workers, some are quietly converting their pension plans into resources to finance their executives' retirement benefits and pay.

In recent years, companies from Intel Corp. to CenturyTel Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives' supplemental benefits and compensation."

At a time when these and other companies have eliminated pension plans for new employees and restricted contributions or eliminated them for long time employees, they have shifted the long term payment obligations for senior managers on to the Pension Plans. These moves unduly benefit the senior managers and also reduce the tax payments to the government- a double whammy for the tax payer employee.

This is yet another reason for me to stress even more the ethical aspects of business, especially to accounting and finance majors. Unfortunately my job is nearly impossible when the students see this type of egregious behavior by the "leading companies."

"Demolishing" the Taxpayers - the Murdoch/WSJ way

On July 30, the Murdoch Sham Paper WSJ ran an article titled "How to Shake Off the Mortgage Mess." According to CNBC's count, the federal government has already made roughly $1.4 trillion available to refinance mortgage debt since the housing meltdown began. The main idea in this story is that the government should buy up houses and demolish them to reduce physical supply of houses. This article concludes by saying "So far, Washington has put its political capital into trying to refinance salvageable homes for unsalvageable homeowners, when a relevant policy would consist of judiciously buying unsalvageable houses and demolishing them. Fannie and Freddie's strength is housing market software: They could be put to work devising a least-cost, maximum-bang strategy for demolishing unoccupied homes to preserve as much value as possible for the homeowners and mortgage creditors who remain.

Of course, right now their overriding imperative is to avoid recognizing losses rather than rushing toward them -- which is why Fannie and Freddie should be nationalized (and later privatized). One way or the other, taxpayers will end up owning thousands of unwanted houses. It's not too soon to begin limiting our costs."

So Murdoch and his gang want the taxpayers to take on the burden of this mortgage mess, which was created by the leaders of the financial institutions while the latter enjoy their vacations in their private islands. Not only that, but these ethically crooked people want the government to demolish good livable housing and reduce its value to 0.

The question is - when will the U.S. public wise up to what is going on?

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.

Budget Deficits Justified by Intellectual Deficits

Today's news brought a couple of contrasting headlines.

First, AP reported that "US deficit soaring to record half-trillion dollars as Bush leaves; sagging economy blamed." Apparently, "government's budget deficit will hit $482 billion in the 2009 budget year that will be inherited by Democrat Barack Obama or Republican John McCain, the White House estimated Monday. That figure is sure to rise after adding the tens of billions of dollars in additional Iraq war funding it doesn't include, and the total could be higher yet if the economy fails to recover as the administration predicts." Then the article repeats the White House view that this budget deficit would be around 3% of the GDP.
In FY 2007, the total interest expense paid by the U.S. Government was nearly $430 BILLION,on an average debt of 8,778 BILLION - an approximate interest rate of 4.9%.

A 2009 deficit of $550 billion (a conservative $68B for the war funding) will increase outstanding debt by more than 6%, and will increase the interest expense by $27 Billion per year at the 4.9% interest rate.

The total Receipts or Revenues for FY 2007 were $2,568 Billion dollars. The Receipts for FY 2008 are projected to be lower, at $2,521 Billion dollars. The OMB projects receipts to rise in FY 2009 to nearly $2,700 Billion. Even if we give this optimistic (foolish) forecast credibility, the total Interest Expense of approximately $450 Billion in FY2009 will account for 16.7% of receipts.

Would any fiscally responsible bank lend money to a person who is already paying more than 16% of his or her income in interest on existing debt? Whose debt level is more than 3 times his or her annual income? And the debt is 'unsecured?' Banks lending money without looking at these metrics is the primary reason behind the current financial crisis.

Sen. McCain, in his supposed 'straight talk,' says that he will balance the budget upon taking office by

• cutting pork - something he never truly cut in his twenty five years plus in Congress because he actually loves 'pork'
  
• cuting taxes for wealthy individuals and businesses- the' supply side economics' actions that GWB and Ronald Reagan have embraced and saddled us with the current big deficit problem
• Committing to keeping troops in Iraq for 'as long as it takes, even hundred years'- though how this reduces the deficit is yet to be explained

Mr. Obama wants to achieve deficit reduction by

• Selectively repealing Bush tax cuts
• Increasing tax cuts for the lower income people
• Reducing troop levels in Iraq but increasing them in Afghanistan
• Increasing public spending.

Again, what is implicit is that Mr. Obama waves a magic wand and the deficits disappear.

Debt as a % of GDP is misleading and simply fools people. What is fundamentally important is the revenue picture and the interest payments as a % of revenue. No one looks at a company's financial statements and looks at interest payments as a % of GDP.

Story # 2:
WSJ reported today that "India's Swelling Deficit Has Potential to Set Off Cascading Economic Trouble. "The writers criticize the Indian Government for running up a deficit "that could hurt much-needed investment in India's ramshackle infrastructure, boost inflation and undermine growth." It deplores a proposed once-a-decade salary increase that Standard & Poor's estimates could mean pay increases of as much as 40% for 2.9 million central government employees.
The money is going to government servants who have been historically underpaid and have had to deal with the skyrocketing inflation.

Both these articles show the partisan nature of the business news media, with little care of intellectual honesty. The politicians have a vested incentive to prevent the public from 'getting educated' and 'thinking about the problems.' The major mass media support the politicians because they have a vested interest in exploiting the gullible public.

The Onus of Promoting an "Ownership Society," and Business Week Predictions

As I was going through my old collection of business magazines, I came across the following articles from Business Week:

A Prescription For Health-Care Reform (9/20/2004). Glenn Hubbard wrote that "An "Ownership Society" agenda has taken center stage in President George W. Bush's agenda for a second term, with proposals for Personal Accounts in Social Security, expanded incentives to save for retirement, and Personal Reemployment Accounts to aid workers in finding a new job. But a central plank of this agenda, and one that can be enhanced to improve markets for health care, is already law: the Health Savings Accounts (HSAs) passed in the recent Medicare reform." Nearly four years later, none of the three proposals put forth by Dr. Hubbard have seen the light of the day; in fact they have been dead for a while. It is rather scary to think of the consequences if people had put their "Personal Accounts" funds into the equity market as it was reaching a top, only to see the sharp downturn due to the credit crisis.

The September 20, 2004 Business Week issue had an article on tax code titled "What A "Fairer" Tax Code Might Look Like: A reelected Bush may rework the existing system -- or try for a consumption tax. " It says that "President George W. Bush has the tax code back in his sights -- but this time he's not just talking about tax cuts. In his Sept. 2 speech to the Republican National Convention and on the stump since, he has called for making the tax system "fairer, simpler, and more pro-growth" than the current 'complicated mess.' "
Another rosy forecast for a second Bush term. This forecast proved to be very taxing.

America's Stark Fiscal Choice. Another article in the same issue says that "While President Bush's soaring campaign rhetoric promises Americans that they can have it all -- new and expanded tax credits for private health, savings, and retirement accounts plus big permanent tax cuts -- the reality is beginning to bite. The cost of these ambitious plans, on top of committed expenditures for the new Medicare drug benefit, the war in Iraq, homeland security, agriculture, energy, highways, education, and more, will add trillions of dollars to a federal budget deficit already spinning out of control. Responsible Republicans are beginning to say that Bush must make a choice between his radical plan to change Social Security, health care, and savings programs and making his first-term tax cuts permanent. The wise choice would be to go with entitlement reform. America is facing a severe crisis as its health-care system cracks and the baby boomers approach retirement. "

The "business" publications like BW and WSJ painted such a rosy forecast of the Bush second term- however the results speak for themselves. Perhaps the greatest disaster Bush's eight years have wreaked is the creation and destruction of hopes and dreams in millions of people, both in the U.S. and abroad- especially that of home ownership. Prudent progress towards it was derailed by the financial innovators, the Fed, and the Government.

Out of Breath with the BnB 1-2 Punch

Today, Dr. Ben 'Helicopter' Bernanke and President Bush both talked about the economy, albeit at different venues.
According to the NYT, "In testimony before the Senate Banking Committee, Mr. Bernanke avoided the word “recession” in characterizing the current economy, noting instead that consumer spending and exports were keeping growth “at a sluggish pace” while the housing sector “continues to weaken.”

He added that spending for personal goods had “advanced at a modest pace so far this year, generally holding up somewhat better than might have been expected given the array of forces weighing on household finances and attitudes.”

While the risks to the overall economy were still “skewed to the downside,” he said, inflation “seems likely to move temporarily higher in the near term.”"

The same article quotes Mr. Bush as saying in a press conference that "“My hope is — is that people take a deep breath and realize that their deposits are protected by our government,” the president said. He added that economic growth “was not the growth we’d like” but expressed confidence that the country would overcome “a time of uncertainty.” The nation’s troubled financial system is "basically sound," he added." When a reporter asked what the short-term advice for Americans was in light of the high gas prices, Bush's main response was "There is no immediate fix. This took us a while to get in this problem; there is no short-term solution. I think it was in the Rose Garden where I issued this brilliant statement: If I had a magic wand -- but the President doesn't have a magic wand. You just can't say, low gas. It took us a while to get here and we need to have a good strategy to get out of it."

While Dr. Ben, along with Hank and Cox, is taking extra-ordinary measures to bail out and lend a helping hand to the financial and quasi-financial institutions with public money, Mr. Bush thinks that people should a deep breath and keep the faith. Perhaps he should add that by singing 'Don't Worry, be Happy" everything would be all right.

Ben, Bush and Hank's "The Song Remains the Same" - Me no Mea Culpa...

The NYT reports that "Ben S. Bernanke, the Federal Reserve chairman, and Treasury Secretary Henry M. Paulson Jr. told Congress on Thursday that new regulatory powers are needed to insulate the national economy from damage if a big Wall Street firm collapses."

So far, no one- neither President Bush, nor Mr. Paulson nor any of the previous Treasury Secretaries nor any of the CEOs of the home builders, mortgage brokers, or banks nor any of the regulators- has accepted blame or taken responsibility for his or her role in creating the current credit crisis and an ethical crisis. Quite a few people, including myself, had sounded warnings as early as 2004 and 2005 about the crooked practices used to juice up the mortgage market and the basic bet that the government will bail out the risk takers. While this is exactly what has happened, there is no public outcry about the culpability of the leaders. The American public, myself included, sorely needs an education in accountability- or have we progressed to a higher level where we do not want accountability?
Another example:
Charles Prince, the guy who led Citi to its current miseries, under whose reign Citi committed a number of grossly unethical acts, and who was effectively fired from Citi, was elected to Xerox Corporation's Board of Directors. Great Reward for a Job Well Done!

2004 American Jobs Creation Act - Wall Street (Journal) and Main Street

On July 1 the WSJ, run by Rupert Murdoch and his News Corporation, ran an article titled "Corporate Tax Cut Windfall." The authors lavishly praised the 2004 American Jobs Creation Act, and suggested that the dramatic lowering of the corporate tax rate on repatriated earnings was a great success.
I wrote a response to this article, which the WSJ predictably chose not to print. I am putting it up here for interested readers. (I will note that 'double taxation' and whether corporations should be taxed at all are separate issues that are not considered here.)
***
Dear Madam or Sir,

In your Editorial Opinion article titled "Corporate Tax Cut Windfall"
(July 1, 2008) you praise the 2004 American Jobs Creation Act and cite IRS
data that showed 'more than 800 U.S. corporations repatriated $362
billion from foreign operations.' You also claim that these dollars are
now being invested in the U.S., rather than remaining in Europe or China.

To be intellectually honest, you have to first determine how many
incremental American Jobs were created, because that is THE title and the
objective of the Act. Secondly, regarding your claim that these dollars
are being invested in the U.S., you have to first determine how many
investment opportunities were being left on the table by these 800
companies in 2003/2004 because they were short of dollars or capital,
prior to the Act. I am also curious about the methodology used to
differentiate the use of this repatriated money from the use of cash from
operations or from other sources by the companies.

Schools, not Students, should be 'Booked!'

Being an academician who teaches business and takes ethics seriously, I read with dismay the article "As Textbooks Go 'Custom,' Students Pay" in the WSJ. According to this report some professors are creating "custom" textbooks for their courses. Students cannot buy these books the used book market, and usually cannot sell them after completion of the course. The 'bottom line' is that academic departments get a 'kickback' from the publishers in the form of royalties.

I have used custom books for my graduate courses and for some advanced undergraduate courses, using services like Xanedu or University Readers. For the advanced courses, there is often no appropriate text, and the reading materials I prescribe include chapters from different texts, case studies, journal articles and other material. I don't expect a student to resell this book, so the resale value is irrelevant to me. However, I don't take any royalties or bribes, even if it goes to the department.

Some departments have argued that these royalties from publishers help subsidize other valuable areas. It is precisely this type of argument that guts the development of a sound ethical base in students. And then folks wonder why there is widespread cheating in every sphere of life. The recent story involving GMAT takers and the website Scoretop- GMAC and FBI expose test cheats, should be reminder to all those in academia to practice ethics first and then to enforce them ruthlessly.

Government says, Media relays

One of the reasons for the problems in our democracy is the "Cheerleader Of Washington (the Government)" or COW role played by the Media. The recent manifestation of this behavior is in the reporting of the 'Employment Situation Summary' data released by the Bureau of Labor Statistics. This BLS press release leads off with "Nonfarm payroll employment continued to trend down in June (-62,000), while the unemployment rate held at 5.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment continued to fall in construction, manufacturing, and employment services, while health care and mining added jobs. Average hourly earnings rose by 6 cents, or 0.3 percent, over the month." Nowhere does the press release say these these numbers are not 'actual' numbers but are only ESTIMATES. In fact BLS used 177,000 in June (217000 in May) as the number of jobs ESTIMATED to be created using the Birth/Death Model. No one can verify the creation of these jobs. Without these phantom jobs, the number of jobs lost could have been much grimmer.

One can understand the government trying to spin its way out of bad news with obfuscation. Not one of the major media reports-including
New York Times: Outlook Darker as Jobs Are Lost,
BBC: US loses 62,000 jobs during June,
Wall Street Journal: Payrolls Shrank Again in June; Jobless Rate Steady at 5.5%,

and the others used the word 'estimated' in reporting the government released data. The media outlets report the government data as 'gospel.' The average reader or the viewer is left with the impression that 62,000 is the 'actual' number of jobs lost. The true number could be lower or higher, but it is the perception that counts.

This same behavior is displayed by the media in reporting other forms of data released by the government. As usual, a modified version of 'Caveat Emptor' applies- the Information Receiver should be Suspicious (IRS).

Threading the Ethics Line

Early in my career, I happened to discuss business ethics with the CEO of the company where I worked after a meeting got over. In that meeting we had talked about the CEO of one of our competitors who was being jailed for his company's unethical behavior- offering bribes. Our CEO was one of the founders of the company, and was highly revered by everyone in the industry for his contributions and ethics. His message to me was that we all know the line that separates right from wrong. His advice to me was not to come close to the line or try to push the envelope. Stay far away from it, was his advice.

I have come across some stories recently that illustrate the importance of this principle. Companies and people who run them are still doing 'funny' things to try to evade legal obligations, or are trying to push the envelope.

Story # 1: Amazon.com
Under current law, online retailers like Amazon need not collect state sales tax in states where they don't have any 'physical' presence. But they are required to do so in states where they have physical facilities. These facilities could include stores, warehouses, and distribution centers.
Amazon has not collected sales tax in states like Pennsylvania and Texas even though it has warehouses or distribution centers in those states. These facilities are technically not owned by Amazon, but by wholly-owned subsidiaries of Amazon. The company is arguing that 'it' does not have physical presence in those states.

More details here.

Story # 2: Pharmaceutical Industry Lobbying
The Center for Public Integrity published an ulcer-inducing article titled "A Record Year for the Pharmaceutical Lobby in '07 - Washington's largest lobby racks up another banner year on Capitol Hill" on June 24, 2008. In that report it states that "Washington's largest lobby, the pharmaceutical industry, racked up another banner year on Capitol Hill in 2007, backed by a record $168 million lobbying effort..... Among the industry's successes: getting two controversial laws extended and thwarting congressional efforts to restrict media ads for prescription drugs."
Apparently "among the industry's top achievements:

• blocking the importation of inexpensive drugs from other countries;
• protecting pharmaceutical patents both within the United States and abroad; and
• ensuring greater market access for pharmaceutical companies in international free trade agreements. "

But the best pill of all is the "Best Pharmaceuticals for Children Act" that was signed into law in 2007. This law grants additional patent protection for six months to drug makers to encourage testing appropriate medicines in children. The Center reports that "A joint investigation by the Center and HDNet's Dan Rather Reports last year found that half of the top 20 blockbuster drugs in 2006 were given six month extensions under this law. Included were drugs not usually associated with children's health, among them two top-selling anti-cholesterol drugs, Pfizer's Lipitor and Merck's Zocor, and Sanofi-Aventis's popular sleep inducer Ambien."

Story # 3: Countrywide CEO Mazullo: What's a friend for? A friend in need is a friend in'deed.'

The WSJ, in an article titled "Countrywide CEO Helped Many Get Loans" reports that Mr. Angelo Mozilo, when he was the chief executive of Countrywide Financial Corp., helped his "Friends" get mortgage loans even when some of them would have been disqualified under standard company policies. These "friends" include the daughter of a casino manager and her fiancé, Indiana Pacers center Rik Smits, San Francisco 49ers offensive lineman Harris Barton, two senators and two former CEOs of mortgage buyer Fannie Mae. Hey, it is "someone else's money, isn't it?"

Core competency of Our Nation (CON)

It is quite common now to find commentators vilifying OPEC, India, China, and others for the oil crisis and stating that we can achieve energy independence by drilling off-shore and in ANWR. There is a lot of angst expressed regarding the trade deficit we have with other nations, particularly China.
One of our core competencies that we can leverage into a valuable export commodity (and achieve independence) is marketing of the political system and its actions. Some readers may question this competency when the approval ratings of the President (23%, according to LA Times/Bloomberg poll, 6/19/2008-6/23/2008) and of Congress ( 19%, according to FOX/Opinion Dynamics RV poll, 6/17/2008-6/18/2008) are lower than the water table in the California desert. The key is to comprehend what the ratings would be in the absence of the exceptional marketing skills deployed by the politicians.

As an example, in 2004, I had written about a new bill Congress had passed, the "American Jobs Creation Act of 2004" in an article titled "LEARNING FROM THE BEST- CREATIVE BRANDING CAMPAIGNS BY GOVERNMENT AND CONGRESS." In that piece I stated that "One of the items in this bill allows a U.S. corporation with a stake in certain foreign corporations may make a one-time election this year to shift foreign earnings to their U.S. headquarters at an effective 5.25% rate, instead of the typical 35% corporate rate. Another item reduces excise taxes on the sale of bows and arrows, fishing tackle boxes and sonar fish finders. While these initiatives might have been hard to sell on a stand-alone basis, the branding power of the JOBS bill enhances the marketing of them. This bill has been actively promoted by corporations and legislators alike as a key driver for job growth, since there are attractive elements for many constituencies."

The results of that bill are summarized in a New York Times article on 6/24/2008 titled "A One-Time Tax Break Saved 843 U.S. Corporations $265 Billion." There is no evidence that jobs were created due to this bill, primarily because this bill was directed towards multi-nationals. These firms never walked away from domestic investment opportunities because of lack of cash. Instead, they have been investing in emerging markets because that's where they are finding growth. Since money repatriated under the bill cannot be distinguished from money generated through operations, it is hard to identify how the money has been deployed. But large companies have been buying back stock in massive quantities, doing M&A, and giving massive dividends to shareholders. For example, in 2004, soon after the Bill was signed, Microsoft gave $32 billion in cash as a special dividend and announced a four year stock buyback of nearly the same amount.
The pharma companies saved healthy amounts of money, with Pfizer repatriating $37 billion and Merck $15 billion. IBM repatriated $9.5 billion. This was the American Jobs Creation Act of 2004.

Politicians of all stripes are reviled everywhere. But the players in other countries can pay us to learn our CON and portray themselves as PRO citizenry while getting their pockets lined with lobbyists' generosity. This should appeal to elected leaders and wanting-to-be-elected leaders in many countries including China, President Bush's Katrina-gate images not withstanding.

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.”

Great Stories on Going Green and Sustainability

The IHT has some interesting stories on sustainability and going green.
Definitely worth reading.

Companies save money through waste reduction

By Sonia Kolesnikov-Jessop

Multinational companies are increasingly recognizing that waste management can save them money.

Airports struggle to reduce their pollution

By Sarah J. Wachter

Air travel worldwide is poised to keep on growing, and more passengers will mean more flights, more road traffic to and from airports, and increased use of ground service equipment and auxiliary plane power.

U.S. switch to digital TV raises specter of toxic dumping of old sets

By Erica Gies

A U.S. law ending analog TV transmission in February 2009 could result in a mountain of electronic waste from the 11 percent to 20 percent of U.S. households that rely on an antenna to receive analog broadcasts.

Greece struggles to reduce its trash

By Niki Kitsantonis

The country is trying to find solutions to a colossal garbage problem as recycling fails to take off and landfills fill up and expand, posing serious health and safety risks.

Sweden turning sewage into a gasoline substitute

By James Kanter

Goteborg is among dozens of Swedish municipalities with facilities that transform sewage waste into enough biogas to run thousands of cars and buses.

• Brazilian ethanol industry feels winds of change

The huge hybrid: A new twist on SUV's finds few takers

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.

Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved

CEO = Creatively Endowed with stock Options

Recently Mark Cuban, the owner of Dallas Mavericks, was in the news for suggesting that CEOs be paid in cash. Apparently, Mr. Cuban did not read my articles written back on April 27 and on June 14, 2004 on this subject, published on prudentbear.com. The articles are reproduced here for interested readers.

Management ought to treat Financial Statements with Respect
April 27, 2004

Dr. Gurram Gopal is Assistant Professor of Business Administration Elmhurst College, Elmhurst, IL There has been a lot of discussion lately regarding the expensing of stock options by corporations and with the first quarter's earnings season under way, this issue takes on added importance. Executives like Craig Barrett of Intel Corporation, Ms. Carleton Fiorina of Hewlett Packard and John Chambers of Cisco Systems have argued against the expensing of stock options granted to managers and employees, as there is no "accurate" method for valuing the options. On the flip side financial analysts and some mutual fund managers have argued for expensing, citing the need for "more transparent" corporate reporting. In line with this view the Financial Accounting Standards Board has recently announced a proposal to require publicly traded companies to record as a compensation expense all forms of share-based payments to employees, including employee stock options. The value of this stock compensation would "generally be measured at fair value at the grant date." Ostensibly the determination of "fair value" is left to the companies. Both these arguments ignore the fundamental purposes of financial statements of public corporations. Financial Statements of corporations are intended to serve several purposes. In part they are supposed to disclose the "assets" and the "liabilities" of the company, using "real" and verifiable data wherever possible. They are also expected to inform the investors as to how their money has been used by management and the benefits delivered to them, the owners of the company. To this latter point, the financial statements are a "report card" on management's performance. Investors already have "one strike" against them- the "report card" on management is "prepared" by management. It is simply unconscionable to pollute this report card further by giving management the ability to "value" options or other non-cash compensation that they either provide for themselves, or that they receive from the board (often with "assistance" from management). Financial Statements should be considered "sacred" and treated with respect- clearly not something that has been done in the era of the off-balance sheet financings and other shenanigans. All "money" coming in and going out should be in the form of cash. Would Intel accept stock options printed by Hewlett Packard management as payment in lieu of cash when Hewlett Packard buys its processors? I don't think so. Will Intel management pay a supplier like Applied Materials in Intel stock options when it purchases Applied Materials' equipment? Quite unlikely. The accounting of revenues in "cash" is a key ingredient in financial statements. Similar attention needs to be paid to all expense items. All compensation provided to employees, management, and the board should be accounted for in the form of cash. No company management should be in the business of printing and issuing its own stock options. If indeed management (and employees) need extra motivation in addition to a fair market cash compensation, this has to be done while keeping the financial statements sacrosanct. Here is a suggestion- if the board decides to provide stock options (or other products) to a manager these should come out of the "total cash compensation" for that person. The board can take a part of the "cash" compensation and buy stock options in the open market on Wall Street and give them to the manager. Quite a few bankers would be more than willing to create and sell stock options to a company for cash- they currently price and sell call options that are available to investors on a daily basis. Since the company is paying cash for the options it is providing to managers and employees, there is no question as to the "valuation" of the options. The valuation problem and the associated risk are now shifted to Wall Street, which specializes in this area and does this on a daily basis. This is the "only" way to ensure that investors get a "true" picture of the compensation paid to management, which is the key part of performance evaluation. A simpler mechanism is for the board to take part of a manager's cash compensation, purchase the company's stock in the open market, and provide that stock to the manager, with the requirement that the stock be held for a pre-determined duration before the manager can sell the shares. The key element here is that whether the board rewards a manager in the form of options or stock, these have to be "purchased" in the open market, not printed by the company. There is an underlying philosophical question as to why management needs to be "incented," in addition to getting paid handsomely, to do a "job." It is not at all clear whether stock options are effective in motivating management and employees in an ethical manner (WorldCom and Enron come to mind). In order to determine if the "incremental" value provided to the shareholders is a sufficient "return" on the "incremental" cost of stock options we need to know the "exact cost" of the stock options. What happened to the good old (ethical) value of doing a job well because you are getting paid for it, in cash?

Financial Engineering 101

June 14, 2004

Ten laws of 21st century financial science: A core course in Financial Engineering Dr. Gurram Gopal is Assistant Professor of Business Administration Elmhurst College, Elmhurst, IL As visitors of this site are well-aware there are many developments in the financial and political arenas that give cause for concern. Included are the war on Iraq ( “International Perspective” by Marshall Auerback), the notion of increased wealth due to higher asset prices (A Grotesque Misnomer, by Dr. Kurt Richebächer) and the easy credit fostered by the Fed (Money and The Flip-side of Speculator De-leveraging, by Doug Noland). Right along these lines is the quarterly "Flow of Funds" report issued by the Federal Reserve last Thursday where it reported that U.S. household wealth grew to a record-high $45.2 trillion in the first quarter of 2004, boosted by rising real estate and mutual fund values. At our college’s commencement ceremony a few days ago, as I was contemplating on these events and the responsibility of Colleges and Universities in developing the “ human geniuses” that have driven these developments my attention turned to the discipline du jour- “Financial Engineering.” Back in the dark ages (the seventies) when I was in college, engineering referred to the application of scientific principles, especially those related to the properties of matter, to create physical products useful to the human race. How grossly ignorant have I been all these years! We have come up with “software engineering” to bestow scientific grandeur to the practice of writing software (hacking). Nowadays leading educational institutions like Columbia, MIT, Northwestern, etc. all offer programs leading to degrees in “Financial Engineering.” I have started preparing my course material for FE 101, Ten laws of twenty-first century financial science (revised 2004). Law #1. Laws of supply and demand do not work when a financial institution borrows money (e.g. when Al G. is your Pal.) Application: You would expect that as you borrow more, the marginal rate would rise. WRONG! See the growth in the borrowings related to the “carry” trade and the interest rate policies of Al’s Banks. Law #2. The American taxpayers, a.k.a. the Government, are there to bail you out if you make a mistake, so no amount of risk is unacceptable. Of course making large political contributions does help in some sticky situations. Applications: Government’s $15 billion airline bailout bill, signed by President Bush on September 22, Orange County’s Bankruptcy in 1994, President Bush’s S&L bailout plan in 1989. Law #3. Be patriotic and support the American taxpayers by bundling all your credit offerings and reselling them to the government or to the GSEs. This provides you with idiot-proof free insurance. Application: See the mortgage lenders, mortgage-backed securities (MBS) and government-sponsored enterprises (GSEs) like the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac). Law #4. Rates on secured debt should be higher than those on unsecured debt. Application: Interest Rates on home equity lines should be higher than credit card rates. I received a pre-approved home equity loan from my bank at a 4.25% rate (three years), and simultaneously a pre-approved credit card application with 0% APR on purchases and balance transfers for one year. Apply a recursive process to the credit cards (i.e. move balances to a new credit card when the one-year time expires on the old one) to see that you may not have to pay any interest on those purchases. Law #5. No one has ever gone broke by underestimating the intellect of the public. It is your duty to create products that take advantage of this fact. Application: New “financial engineering products” in the home buying industry- 0% cash down mortgages, current account mortgages, cash back mortgages, etc. Law #6. Balance sheet assets of the company are meant for the personal benefit of you and your fellow managers, and the Balance sheet liabilities are for the shareholders to pay. Applications: Use of corporate jets for personal travel, luxury apartments purchased or leased by corporations for personal use by its senior executives, GE granting extraordinary benefits for life to former CEO Jack Welch. United Airlines deserves special mention for hiring a new CEO Glenn Tilton in September 2002 with a $3 million signing bonus, a pay of $950,000 a year, creating a trust valued at $4.5 million to replace the retirement plan at Chevron Texaco that he forfeited, and three months later he takes UAL into bankruptcy. Law #7. The Current Assets account of your employer is there to pay any fines those pesky regulatory and other governmental agencies might impose for your violations. Applications: Citigroup’s Settlement on WorldCom Class Action Litigation for $1.64 Billion After-Tax. The $1.4 billion settlement between the biggest U.S. brokerages and securities regulators regarding the issuance of misleading stock recommendations and handing out new shares to curry favor with corporate clients. The broad agreement does not include the punishment of any Wall Street analysts or executives who supervised them. Bank of America and Fleet Boston ‘s $675 million settlement of allegations of improper mutual-fund trading. Law #8. Debt remains senior to Equity, but Management Claims are senior to Debt. Application: Kmart Chairman James B. Adamson’s salary of $1.5 million and a sign-on bonus of $2.5 million in 2002 along with perks like weekly flights to Florida on corporate aircraft; a car and driver in Michigan, New York and Florida; hotel lodging in Metro Detroit and financial counseling. At the same time holders of pre-bankruptcy debt received 40 cents, in cash, for each dollar of the debt they held. Common stock holders can frame their worthless stock certificates in a nifty new frame designed by Martha available at any Kmart store. Law #9. Option valuation models like Black-Scholes do not work for options and other derivatives issued by your firm to its management and employees. They are useful, however, in determining the value of derivatives when they are not part of your company’s compensation packages. Application: John Chambers of Cisco has in excess of 39 million unexercised options, but companies like Cisco and Intel claim that there are no reliable methods for valuing these options. Law #10. When the public trusts you with their money, they want YOU to get risk-free rewards while THEY are saddled with all the risk. Application: Highly paid, poor performing CEOs, mutual fund managers, etc. Once you have mastered these ten laws, you can then take FE 201: TAPS (Taking Advantage of People’s Stupidity) and FE 202: SITS (Sock it To Shareholders).