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Posts Tagged ‘Financial Crisis Inquiry Commission’

How 11 Corporate Titans Profited After Failure

Posted by Admin on July 2, 2011

http://finance.yahoo.com/news/How-11-Corporate-Titans-usnews-474283494.html;_ylt=AjjNXi1Y.GKn6p4xRqU5.zWr9HQA;_ylu=X3oDMTE2YmhlNWFzBHBrZwNpZC0xNzU3MjMEcG9zAzEEc2VjA01lZGlhSENNBHZlcgM5;_ylg=X3oDMTMwdW8wam81BGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDNTc0YzJlZmMtNDhkNS0zYzMxLWJhZTEtNzFmOWZkY2ExYWM4BHBzdGNhdANlbnRlcnRhaW5tZW50BHB0A3N0b3J5cGFnZQ–;_ylv=3?x=0

, On Wednesday June 29, 2011, 3:24 pm EDT

In this economy, there aren’t too many second chances. But if you’re a corporate titan, fortune may smile on you more than once, even if you damage your firm or even imperil its existence.

The last several years have been tumultuous in corporate America, as a financial crisis rippled through the economy and other disasters brought shame upon once-admired firms. The recession that coincided with the financial crisis has cost the U.S. economy about seven million jobs and left the whole nation slogging through a weak, unconvincing recovery. Yet a number of disgraced CEOs and other grounded high-flyers have fared surprisingly well, either landing plum jobs with new employers or securing golden parachutes that guarantee a luxurious retirement–or both. That’s not always the case. In his 2004 book Why Smart Executives Fail, Dartmouth professor Sydney Finkelstein found that of 51 “failed” CEOs, only two ever got hired again by an existing firm. The rest started their own firms, became consultants, or slunk into retirement. Today, by contrast, companies seem more willing to hire executives with black marks on their resumes.

[In Pictures: 11 Business Leaders Who Profited After Failure.]

Of the 11 corporate “up-failers” on our list, none has been accused of crimes or illegalities, and virtually all of them attribute their controversial performance as business leaders to factors beyond their control. Yet critics blame them for problems that deeply damaged the firms they once ran or helped run. Here are some of the former CEOs and other corporate honchos who seem to have stumbled upward after being involved in some of the most notorious corporate episodes of the last decade:

Martin Sullivan, former CEO of AIG. Sullivan replaced longtime AIG chief Hank Greenburg in 2005, and presided over many of the decisions that led to the insurance giant’s collapse in 2008, the year he was forced out. Under Sullivan’s watch, for instance, AIG issued billions of dollars’ worth of insurance on highly risky mortgage-related derivatives, which left AIG seeking the biggest bailout in corporate history when those derivatives plunged in value and AIG was unable to honor its commitments.

Where he is now: British insurance firm Willis Group named Sullivan its deputy chairman last year and put him in charge of a new global-services division. Research site Footnoted.com reports that Sullivan will earn a base salary of $750,000 and be eligible for a 2011 bonus of more than $1 million. If he stays for three years, he’ll also be able to cash in company stock worth at least another $4 million.

Tony Hayward, former CEO of BP. Hayward’s three-year tenure atop the British oil giant ended in 2010, following the Deepwater Horizon disaster in the Gulf of Mexico, which killed 11 workers, fouled the Gulf with oil, and forced BP to set aside a whopping $41 billion for cleanup, litigation, penalties, and other costs. Hayward got a year’s salary when he left–about $1.7 million–and held onto BP stock that could be worth millions more.

Where he is now: Hayward recently launched a new energy firm in the U.K. called Vallares, which raised more than $2 billion in a public offering. The firm plans to use that money to buy and operate energy firms in emerging markets.

Mark Hurd, former CEO of Hewlett-Packard. After five years as HP’s top honcho, Hurd’s career seemed to quickly unravel in August 2010 after allegations surfaced of misconduct relating to a personal relationship. Hurd abruptly resigned, with a $12.2 million cash payout from H-P and stock options worth $30 million more, according to the Associated Press. A shareholder lawsuit against H-P–which is still ongoing–argues that the technology giant overpaid the departing CEO.

Where he is now: A month after Hurd left H-P, Oracle hired him as president, with pay that could top $10 million per year.

[See Career Lessons from Conan O’Brien.]

Stanley O’Neal, former CEO of Merrill Lynch. O’Neal spent much of his career at Merrill Lynch and became CEO in 2002, presiding over the company as it began to place huge bets on subprime mortgages and risky derivatives that generated billions in losses, nearly sank the firm, and led to a takeover by Bank of America in 2008. In 2006–the year Merrill made many of the deals that led to its downfall–O’Neal earned $91 million, according to the Financial Crisis Inquiry Commission. When O’Neal resigned in 2007, Merrill gave him a severance package worth another $161 million.

Where he is now: In 2008, after O’Neal left Merrill, Alcoa named him to its board of directors.

Dow Kim, former head of global markets and investment banking for Merrill Lynch. From 2003 to 2007, Kim oversaw a vast increase in the amount of collateralized debt obligations Merrill created and sold, eventually making Merrill the No. 1 Wall Street issuer of these controversial derivatives tied to mortgages, according to the FCIC. Those CDOs eventually led to billions in losses and severely weakened the firm. Kim left Merrill Lynch in the middle of 2007–shortly before its losses began to mushroom–receiving more than $35 million for his work in 2006, according to the FCIC, a paycheck second only O’Neal’s during that fateful year.

Where he is now: After leaving Merrill Lynch, Kim tried to start a hedge fund, which struggled to attract investors amidst the 2008 financial crisis.

Charles Prince, former CEO of Citigroup. Like Stan O’Neal at Merrill Lynch, Prince spent his four years as CEO of Citi trying to capitalize on the boom in subprime mortgages and exotic derivatives linked to them. He resigned in 2007 as those risky bets began to unravel, leading to gargantuan losses that would ultimately require a $45 billion government bailout (which Citigroup later repaid). Citi gave Prince a severance package worth $36 million when he left, on top of the $43 million he had already earned as CEO, according to the FCIC.

Where he is now: Keeping a low profile.

[See How to Recover From a Career Flameout.]

Thomas Maheras, former co-CEO of Citigroup’s investment bank. Maheras helped catapult Citigroup from a bit player in the market for lucrative but risky CDOs into one of the world’s top originators, along with Merrill Lynch. He resigned from Citigroup in October 2007, as the securities his division created began to lose value and generate losses that would eventually overwhelm Citi. Maheras earned more than $34 million for his work at Citi in 2006, his last full year at the bank, according to the FCIC.

Where he is now: In 2008, Discover Financial Services named Maheras a director. He also started a private investing firm called Tegean Capital Management.

Jeffrey Peek, former CEO of CIT Group. Peek arrived at CIT in 2003 and began to convert the sleepy, small-business lender into a broader financial-services firm with expanded portfolios of student loans and subprime mortgages. That turned out to be a bad move, needless to say, and CIT declared bankruptcy in 2009, with Peek resigning shortly afterward. Peek earned about $27 million at CIT through 2008, according to Forbes, but CIT’s acceptance of $2.3 billion in government bailout money prevented him from claiming a severance package when he resigned. Peek’s wife Liz, meanwhile, famously wrote the anonymous “Confessions of a TARP Wife” for Portfolio, which turned out to be a deep embarrassment when her identity as the author was revealed. CIT’s bankruptcy filing meant taxpayers were out the $2.3 billion they had extended to the firm.

Where he is now: Last year Barclay’s hired Peek to be one of its top investment bankers.

John Thain, former CEO of Merrill Lynch. Thain’s illustrious Wall Street career seemed impeccable until he replaced Stan O’Neal as Merrill Lynch’s CEO in 2007. Thain tried in vain to keep Merrill’s losses under control, finally guiding the crippled firm into the arms of Bank of America in 2008. That may have been inevitable, but Thain drew criticism for several events under his watch, including a million-dollar renovation of his office (which he ultimately paid for himself) and $3.6 billion in bonuses granted to Merrill bankers during a year in which the firm nearly collapsed and required federal bailout money to survive. Thain, once thought to be a contender for the top job at the new Bank of America, was instead forced out of the merged firm in early 2009.

Where he is now: A year after Thain left Merrill Lynch, Wall Street’s revolving door ushered him into the top job at CIT, which had emerged from a prepackaged bankruptcy. His pay at CIT: $6 million per year in cash and stock, plus an annual bonus of up to $1.5 million.

[See 10 Steps to Fine-Tune Your Retirement Plan.]

Steven Newman, CEO of Transocean. Newman enjoyed a rewarding year in 2010, even though his firm’s Deepwater Horizon oil-drilling rig–which was leased to BP–blew up on April 20, 2010, killing 11 workers and triggering the huge oil spill into the Gulf of Mexico. Newman had taken over as Transocean CEO barely a month earlier, yet he had been president of the firm before that, and Transocean awarded him $5.8 million in total compensation for 2010. Newman’s pay included a “safety bonus” of nearly $100,000, which he earned because Transocean “achieved an exemplary statistical safety record as measured by our total recordable incident rate,” according to a company filing with the SEC. After an uproar, Transocean said its top executives would donate their safety bonuses to a memorial fund for the families of the 11 workers killed in the Gulf explosion. Research firm GMIRatings points out that Transocean also gave its outgoing CEO, Robert L. Long–who left right before the Gulf disaster–an exit package worth about $21 million.

Where he is now: Still CEO of Transocean.

Don Blankenship, former CEO of Massey Energy. Blankenship and the firm he had run for two decades became enormously controversial after a gas explosion at Massey’s Upper Big Branch coal mine in West Virginia on April 5, 2010, killed 29 miners. The explosion came after inspectors had repeatedly cited Massey for safety violations at the mine, and it impaired the company’s profitability. Massey swung from a $104 million profit in 2009 to a $167 million loss in 2010, and subsequently merged with Alpha Natural Resources. The combative Blankenship endured a 2010 pay cut of more than 40 percent, but as Footnoted.com pointed out, he also got a $14.4 million severance package, plus a $7 million pension and $32.1 million in deferred compensation. It’s good to be CEO. Even a dethroned CEO.

Where he is now: Retired.

Twitter: @rickjnewman

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Financial Macrophilia and Shrinking the Banks

Posted by Admin on December 7, 2010

The big bank problem won’t go away anytime soon. There is a simple reason: financial institutions as huge and diversified as our modern universal banks are a persistently lurking threat to financial stability because if any one of them goes down we will have a major systemic problem and, as sure as night follows day, the need for another bailout. And, given their complexity, the risk of such catastrophic failure is likely to be greater than with smaller, less permutatively connected and more easily liquidated financial institutions.

America ducked this problem with the Dodd-Frank Act, though not before a valiant effort by some Senators to address the issue. Europe took some strong action to address it when the European Commission insisted that ING be broken apart and the British government insisted on some downsizing for Lloyds Bank. This week the issue returned.

First, it was reported that British banks threatened to move their headquarters to other countries if faced with the demand that they be broken into smaller units. Then one of the chief issuers of this threat lost his job. Today the British Independent Commission on Banking suggested in a lengthy issues paper that the government should use its ownership stake (read bailout investment) in the Royal Bank of Scotland, Lloyds and other banks to “restructure” them (read break them up). The chairman of the Commission, Sir John Vickers, is quoted in the Financial Times to have said of threats by bankers to pack up toys and leave:

[O]n the idea put about that banking operations would leave the UK if resulting reforms were uncongenial to banks, I sometimes wonder if those who say this realise how sharp a conflict they are suggesting between the interests of the banks and the public interest.

Modular structures, as championed by one of the leading thinkers on the subject, Andy Haldane of the Bank of England (see his “Regulation or prohibition: the $100 billion question”, are the way to go in reducing our global financial system to greater stability. Now the Commission is taking this idea very seriously.

What will we do in the United States? Is macrophilia too overwhelming an obsession or will we have the courage to look at the situation objectively as well, before the collapse of one of the behemoths leads to another round of claims that “we could not have seen it coming”?

The Financial Crisis Inquiry Commission still has time to deal with the issue in its report, expected in November. It has so far shown itself to be a little more willing to address the issue directly than the Congress or Treasury Department so we might still see some November fireworks.

COMMENTS SECTION

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Isn’t it interesting this has been the biggest factor to increasing our recent deficit, but not a word from the Tea Party on the Bailouts, other than to say they are against the TARP, which as horrid as it was, was probably the only option to save us from the abyss???

I mean, for example, have we heard the old hag running for Senator in Nevada say a single word about capital reserve requirements for banks?? And Christine O’Donnell??? Are you kidding me??? If you talked to her about capital reserve requirements O’Donnell would probably tell you she thought that banks should have the freedom to put big letters or small letters on their logo.

We’ll never know what would have happened if Paulson hadn’t pushed for the $700billion, and as angry as it still makes me to this day, I don’t think we would’ve wanted to risk that coin flip.

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Lawrence,
Good of you to highlight what the UK is investigating, although, I’m afraid as with Senator Dodds initial radical overhaul plans, the UK Commissions findings will amount to little – the City is indeed that strong in the governing party.

That said, an a most salient point for us to bare in mind is this little known fact: The UK’s casino banks/ too-big-to-fail exist solely due to the fact of the UK and USA bank bailouts, had these not occurred, all would have become insolvent and failed – this applies to HSBC, Barclays and RBS, HSBC being a special case in that it is listed in both Hong Kong and London.

Now, at the moment, all casino banks/TBTFs are the beneficiaries of near zero interest rates in the UK, USA and Euro Zone, all engage in borrowing funds from their respective central banks and purchasing sovereign debt issued by their national governments, thus earning a risk free 2-3%.

Now, just suppose Barclays Bank was to de-list and move to the Cayman Isles to avoid any form of regulation and enjoy low taxation of earnings/profits. For starters, its balance sheet could not rely on a 2-3% risk free return, the implied notion that the government would step in if it went pear shaped would be gone, hence, its use of wholesale market funds would increase, costs of CDSs for its counterparties would increase, and basically, in a September 2008 style crisis the bank would implode.

The reality is this, would the UK now actually welcome Citigroup to list on the LSE, and vice-versa, which nation would like to gamble on having to bailout a TBTF for the pleasure of earning a few pennies a year in corporate.

Shout as they may, without the implied backdrop of the state behind them, most TBTFs could not conduct business as they have, there shareholders would not stand for it – I mean, imagine bondholders and shareholders losing all their capital, be it in shares, corporate bonds or business deposits.

As with the IIF paper in May suggesting Basel III was a calamity and its imposition lead to a global depression, its really all posturing and hyperbole.

My own view is simple, call their bluff and see what the market does next, given the costs all tax payers have been forced to incur, the resultant loss of earnings due to a recession caused by the TBTFs, the loss of jobs and all other hidden subsidies they receive, it would be cheaper in the long run for sovereign states to actually ask their TBTF’s to move elsewhere, the cost savings alone would pay for those who lost their jobs to enjoy lavish lifestyles if distributed solely between them.

Utter nonsense, and crass nonsense at that.

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Hi Chris,

I very much do get your drift and you make an excellent point about the risk premium Barclays and others would have to pay. It is all mostly bluster and bloviating, with Josef Ackermann losing all credibility this week in a related context by now complaining about a “race to the top”! It is as if these people are so intoxicated by power and ego that they can’t even think straight. Yet we continue to drift, like deer in the headlights, toward identified disaster while doing nothing about it.

Thanks for your thoughtful post. I now appreciate entirely why the threat to move is such baloney.

Lawrence

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Troubled Asset Relief Program – TARP Definition

What Does Troubled Asset Relief Program – TARP Mean?
A government program created for the establishment and management of a Treasury fund, in an attempt to curb the ongoing financial crisis of 2007-2008. The TARP gives the U.S. Treasury purchasing power of $700 billion to buy up mortgage backed securities (MBS) from institutions across the country, in an attempt to create liquidity and un-seize the money markets. The fund was created by a bill that was made law on October 3, 2008 with the passage of H.R. 1424 enacting the Emergency Economic Stabilization Act of 2008. The Treasury will be given $250 billion immediately, and the President must certify additional funds as they are needed. The additional funds will be distributed as $100 billion, and then as the final $350 billion is given, Congress has the right to not approve the additional amounts.

Investopedia explains Troubled Asset Relief Program – TARP
Global credit markets came to a near stand still in September 2008, as several major financial institutions, such as Lehman Brothers, Fannie Mae, Freddie Mac and American International Group, went under. In a few surprising moves, heavyweights Goldman Sachs and Morgan Stanley even changed their charter to become commercial banks, in an attempt to stabilize their capital situation. The bailout will attempt to increase the liquidity of the secondary mortgage markets by purchasing the illiquid MBS, and through that, reducing the potential losses that could be felt by the institutions who currently own them.

In October of 2008, revisions to the program were announced by Treasury Secretary Paulson and President Bush; allowing for the first $250 billion to be used to buy equity stakes in nine major U.S. banks, and many smaller banks. This program demands that companies involved lose some tax benefits, and in many cases incur limits on executive compensation.

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