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Andrew Cuomo is a Rat!

In Finance, New York, Politics on March 22, 2009 at 8:18 pm

You Dirty Rat

Does the timing of AIG bonus debate make sense to you?  It doesn’t make sense to me. The bonus issue first came up last November and the government dealt with it as a condition of funding for the original bailout.  In case you forgot, here is a summary of the compromises made last fall:

  • the incoming CEO, Edward Liddy, agreed to a $1 salary.
  • the outgoing 5 month CEO, Robert Willumstad, was forced to reject an unwarranted $22 million severance package.
  • the top seven executives agreed to pay freezes and no bonuses.
  • the next 50 highest-ranked executives agreed to forgo pay raises through 2009.
  • Paula Rosput Reynolds, the former CEO of Safeco Corp., was hired in October to lead AIG’s restructuring.  She agreed to no compensation in 2008 and further agreed her 2009 compensation would be directly tied to performance (i.e. sale of assets to repay the government bailout loan).
  • Liddy had already agreed to freeze $19 million that was contractually due to Willumstad’s predecessor, Martin Sullivan, who was forced out in June 2008.
  • Liddy also froze $600 million in discretionary bonuses for other executives.

At the time, Andrew Cuomo, the New York State Attorney General praised the insurer for having taken a “positive step” and deemed the moves by Liddy as “appropriate” given the $150 billion in aid AIG was receiving. So why then, did Cuomo send a letter to Barney Frank on March 17th reopening this can of worms? Hmmm.

In the March 17 letter, Cuomo discussed his ongoing investigation of AIG and reiterated his “positive step” comment regarding curtailment of discretionary bonuses. But he later claimed “dismay” at the fact that AIG made payments on its retention bonus plan.  Hmmm. If Cuomo’s office was conducting an “ongoing investigation” of AIG, why was he surprised to learn about a contractual obligation that had been put in place in December 2007 and was available for his review at the time of the original bailout?

Later on in the letter, he struck a tone of righteous indignation when he said, “Something is deeply wrong with this…”  I suspect, instead, that something is deeply wrong with Andrew Cuomo.  Let’s first go over a few facts.

  • The Retention Bonus Plan was put in place in December 2007.
  • The New York State Attorney General’s investigation into AIG dates back to 2005 when Spitzer ran the office.  They should be intimately familiar with the company.
  • Edward Liddy  & Paula Reynolds are new to AIG, but in less than six months, they have taken full control of the company.
  • Liddy & Reynolds have no incentive to hide information from Cuomo, Secretary Geithner, Congressman Dodd or their new owners, the American taxpayer.
  • AIG’s Financial Products Group was a highly specialized unit. They were an unregulated hybrid of an investment bank and an insurance company.
  • Key members held intricate knowledge of the complexities of its transactions and they could not easily be replaced.
  • The retention plan was put in place to keep key employees from abandoning ship or jumping ship to a competitor (like Chase, Barclays, Lehman or BofA).
  • At the time the agreement was signed, AIG employees had many job opportunities if it looked like AIG was going to go under.
  • The retention plan covered analysts, associates, vps and directors, effectively the worker bees, grunts and support personnel of the organization. Not senior executives.

and finally,

  • Andrew Cuomo wants to be Governor.

This AIG bonus debacle seems like a “staged” opportunity for Andrew Cuomo to generate headlines in advance of the 2010 gubernatorial race.  No other explanation makes sense.  Sure, the bonuses are outrageous, but so are the bonuses at Chase, Bank of America, Goldman Sachs & Morgan Stanley.  They all received government protection in some form or another; but Cuomo hasn’t rubbed salt in their wounds.  Why did he single out AIG? I think Cuomo borrowed a page from the Bill Clinton playbook. When asked by Dan Rather why he engaged in inappropriate relations with Monica Lewinsky, Clinton replied “I did it … because I could.” Oy vey!

The smoking gun resides on the Office of Attorney General website.  On March 16th, Andrew Cuomo wrote a letter to AIG’s CEO reiterating a prior request for the names of the employees who had received retention bonuses. I haven’t found that prior request but the statement alone confirms that Cuomo knew about the retention plan.  In the letter, he further requested  detailed contact information about bonus recipients and demanded it by 4:00pm that evening.  The notice period seems a tad unreasonable for even the most nimble of CEOs, but that is just an opinion.  Later that night, Cuomo issued a press release indicating that Liddy was unable to comply. But then, one day later, Cuomo wrote a letter to Barney Frank in which he detailed with exacting specificity who at AIG received a bonus, how much was received and the current employment status of each recipient.  Perhaps Liddy was able to comply, but did so after the 4pm deadline.  But that wouldn’t explain the March 17th letter.  Another alternative is that Cuomo had always planned to write the March 17th letter to expose the retention bonus issue for his own political gain.

Cuomo’s behavior was at best underhanded, at worst disingenuous and rogue. Neither the Treasury Secretary nor Congressman Chris Dodd, both of whom are intimately involved in the supervision of AIG, were informed of Cuomo’s actions. Nor were either men a party to the March 16th and March 17th letters. This is clearly a case of a local official not working in partnership with the Federal government.  To paraphrase President Obama’s stump speech “the challenges of our financial system exceed the capacity of a broken system to fix them.”  The President and his staff are under a great deal of pressure and the last thing they need is a rogue politician calling in audible.  New Yorkers deserve better as do AIG, government official and American taxpayers. This stunt smells of investigative misconduct on the part of an ambitious politician.  I could not be more clear: the Office of the Attorney General knew about the retention bonuses; Andrew Cuomo, nevertheless, sought to exploit public outrage with a “gotcha PR campaign” of his own.

Some might assume that because the Attorney General is related to a former Governor and because he is also a member, however peripheral, of the Kennedy clan, he stands on solid political footing. But that is not the case.  In 2002, then candidate Cuomo was put in the Democratic doghouse, especially by black voters, when he kept raising money after having lost the Democratic primary for Governor against H. Carl McCall. McCall lost the race to Pataki and Cuomo earned the moniker of “bad-Democrat.”His persona took another hit one year later after public allegations of his wife’s infidelity proved to be true.

Things, however, started to turn around. In 2006, Cuomo resuscitated his self-pitying victim image long enough to squeak a victory in the primary for his current job against an equally, though intellectually, impotent Mark Green. His come-back was furthered when he won the general election against a controversy-laden Jeanine Pirro. But recently, current Governor David Paterson twice passed him over as a candidate to replace Hilary Clinton as New York’s junior Senator. Given the quest to follow in his “deddy’s” footsteps, Andrew Cuomo’s motives for leading an ineffectual but populist movement against AIG should become extremely clear.

While Cuomo may be New York’s rising star, AIG’s value has moved in the opposite direction.  In late February, MetLife made an $11.2 billion offer to acquire an AIG life insurance unit.  Apparently Met doesn’t pay because they later hinted the price could be lowered to $8 billion due to concerns about the brand. Thanks Andrew! Maybe they had advance warning of an upcoming PR stunt. Perhaps, they sensed a change in the public view of AIG and felt it would affect clients whose policies come up for renewal. Thanks again Andrew.  A competing bid had been sought from AXA but it appears AIG has been unsuccessful in getting a fair price. Once more, thanks Andrew! AIG has since suspended negotiations on the sale of the unit, forcing Tim Geithner, the United States Treasury and American taxpayers to have to wait for a partial repayment of the bailout loan.

In summary, Cuomo’s public relations stunt may very well have cost the American taxpayers at least $3 billion in lost value, not including the time value attributable to a delay in the sale of AIG assets.

Again, thanks Andrew! Good luck in 2010.

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I Agree | I Disagree | I’m Not Sure

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Why Good Mortgages Go Bad

In Finance, Lifestyle on March 21, 2009 at 11:27 pm

There was a time when the banker who approved a loan was the banker who opened the account, handled deposits, accepted the payments and issued a handshake when the debt was retired. Those days have long gone.  With the advent of teller-less transactions and electronic transfers, the movement of money has become so fast that nobody can afford the time to get to know you anymore. The bank on Wall Street whose tagline was “The right relationship is everything” was a liar.  That statement couldn’t be farther from the truth, because there are no relationships in the financial sector anymore.  Everything is a transaction.  And this, my fellow Americans, is at the heart of our financial problems today.

Specialization of duties was supposed to improve efficiency in the banking sector. But instead all it did was add complexity to a system that was already hard to understand. The pace of financial innovation was too fast for even the smartest and brightest of accountants and financiers.  Sufficient checks and balances were never put into place and this vacuum of mutual accountability is what allowed the barons of greed to corrupt America’s once proud banking infrastructure.  I do not envy the challenges faced by Tim Geithner; he carries a heavy load.

There are so many moving parts that comprise a loan transaction.  While no one entity was responsible for creating the house of cards, an attitude of indifference at all levels was absolutely responsible for tipping it over.  In any mortgage transaction, there are even more moving parts and the risk of system collapse was greater which each successful transaction.  Everybody was making money and no one thought to ‘slow things the fuck down’ because they assumed some other entity would do it instead.

America’s financial collapse was a creation of our own undoing.  While it is easy to point to Bernie Madoff or AIG for the failures of the system, their trepasses don’t scratch the surface of what is at the heart of the problem.  We are the problem. We, you and me, can at times be our own worst enemies. Until we take a good look at our contribution in creating the monster, there won’t be anything Secretary Geithner, President Obama, Sarah Palin or Rush Limbaugh will be able to do to save us from ourselves.  So where shall I start? The following is my list of culprits and the reasons they are in desperate need of an attitude adjustment.

  1. homebuyers, especially the snot-nosed yuppies who want what they want, when the they want it and at any cost.
  2. the friends of homebuyers, who compete socially with their friends and one-up each other, resulting in peer-pressure to buy more house than they can afford.
  3. mummy and deddy, who spoil their kids with down payments for houses instead of teaching them the value of savings, trade-offs and deferred gratification.
  4. real estate brokers, who create a false sense of scarcity and urgency to drive up the values of homes and ultimately increase commissions.
  5. renovation contractors, who underbid to get a job then underdeliver until the promise of more payment is made from the proceeds of an unnecessary second loan.
  6. mortgage brokers, who steer borrowers into loan products, some of which may be unsuitable.
  7. home appraisers, whose payments are made by the mortgage brokers and lenders and whose compensation volume is tied to successful loan placements.
  8. boiler room telemarketers, who targeted the elderly with 30 year cash-back loans as a supplement to an underfunded retirement and social security.
  9. local governments, who don’t investigate local corruption because of the additional tax income generated by a corrupt system.
  10. lenders, who sell approved loans into a secondary market and bare little, if any, of the risk for the ones that go bad.
  11. subprime lenders, who compete with traditional lenders for traditional mortgage clients by offering ‘too good to be true’ teaser deals which end up being just that.
  12. moneycenter banks, who set up single-purpose corporate entities that package the loans into a new financial instrument that gets resold into a tertiary market.
  13. financial engineers, who bundle the new financial instruments with cute ‘tricks’ like credit enhancement, over-collateralization and tranches as a portable hedge against risk.
  14. insurance companies, who sell a credit enhancement product but don’t set up internal controls to limit exposures, monitor performance of the product or hedge the impact on the rest of the organization
  15. re-insurance companies, who use one financial ‘trick’ to hedge the risk of another financial ‘trick’ not realizing that, as a result of their being 4x removed from the original transaction, they’ve inadvertently doubled or tripled down on the same risk.
  16. rating agencies, whose investment-banker-wannabe underpaid salaried staff can’t tell the difference between a true credit enhancement and ‘lipstick on a pig’
  17. television networks, who canceled classics like One Day at a Time, Good Times, Alice & M*A*S*H in favor of aspirational shows like Dallas & Dynasty, effectively shaming the ‘have-nots’ for how little they actually have.
  18. financial regulators, underpaid, understaffed, underfunded beaurocrats who are  underinformed as to the newest financial innovations on wall street
  19. legislative overseers, who are as financially illiterate as homebuyers
  20. legislative aids, who spend less time on policy and governance issues (despite Ivy League political science degrees) and more time on raising funds and getting their boss re-elected so they don’t have to go into the private sector and ‘get a real job.’
  21. hedge fund managers, who think their Harvard & Wharton MBAs render them invincible so they start their own firms and lure investors by promising a higher return than is statistically possible, ceteris paribus.
  22. Robin Leach, whose Lifestyles of the Rich & Famous showed the ‘haves’ in America how little they actually have.
  23. hedge fund investors, who aren’t satisfied with the consistent 8% returns of the equity markets yet miraculously expect to achieve higher returns without higher risk.
  24. financial media, who are journalists at heart but eventually succumb to the market’s incessant demand for entertainment over information.
  25. lifestyle media, who stimulate demand for house and home products by encouraging a sense of entitlement while understating the responsibilities of homeownership with programs like ‘Extreme Home Makeover’ and ‘Design on a Dime.’
  26. real estate speculators, who played a game of hot potato by entering into ‘no-money-down, interest-only, balloon payment’ exotic (read toxic) loans but mistimed the market, abandoned the property, left the banks holding the bag and then pointed the finger at government-sponsored working class homeownership programs when the crisis was made public.
  27. people, who believe everything they see and hear, then act on what they believe; all without applying a scintilla of common sense or asking someone who knows better.
  28. Other _____________________________________

I can’t stress it enough. America’s financial collapse was a creation of our own undoing.  While it is easy to point to Bernie Madoff or AIG for the failures of the system, their trepasses don’t scratch the surface of what is at the heart of the problem.  We are the problem. We, you and me, can at times be our own worst enemies. Until we take a good look at our contribution in creating the monster, there won’t be anything Secretary Geithner, President Obama, Sarah Palin or Rush Limbaugh will be able to do to save us from ourselves.

Is Executive Pay Really the Problem

In Finance on March 21, 2009 at 7:19 pm

Recent discussions about bonuses for AIG executives inspired me to give more thought to the role of executive pay in American business.  I recognize that financial literacy is sorely lacking and this is one topic where more clarity is needed.  First, a few facts on CEO pay:

  • A CEO who commands a hefty compensation package doesn’t earn it all in cash.
  • Most Fortune 500 chief executives earn between $350,000 and $3m in the cash portion of their total compensation.
  • The IRS allows a company to deduct up to $1 million of executive compensation for for tax purposes. So unless a CEO has extraordinary skills, s/he is unlikely to earn a cash salary much higher than that million dollar mark.
  • The cash component of the bonus, which averages $4m to $5m and usually tops out at $10m, is almost always tied to the achievement of agreed upon and verifiable milestones.
  • The remainder of CEO compensation is in the form of stocks and options, whose value is subject to change at any point in time.
  • Some portion of the bonus and equity components may be unachievable, due to market conditions, vesting restrictions, strike prices on options, blah blah blah.
  • Very few executives actually earn the “marquis” compensation that is published.

Overall, this structure of executive compensation (base salary + performance bonus + equity) reflects good corporate governance. Tying the bulk of CEO pay to performance milestones aligns their interests with that of investors. It also leads to positive results.  The average American may not know the finer details of executive pay; no one explains it properly and this information doesn’t sell newspapers, draw YouTube viewership or generate Facebook posts. But, this is the truth, so help me God.

Some clarity is also needed on the AIG bonuses being debated.  In a service economy, there is a role for retention bonuses, believe it or not.  Unlike in manufacturing, the business executive is the product.  Unlike in manufacturing, value is created from the thoughts, unique abilities and relationships of that business executive.  Unlike in manufacturing, the value of a business executive is not easily replaced. The fact that business executives, invariably a company’s most valued asset, can walk out the door at any time, creates a continuity problem.  Because the loss of key executives can bring any service institution to its knees, many companies rely on retention bonuses as an economic incentive (read contractual bribe) to achieve loyalty.  It is actually an efficient market solution; it’s also the nature of the beast.

On average, chief executives, like politicians, start out with good intentions.  If they fall, it is more likely the result of their having been corrupted by the machinations of a broken system than anything else.  What is needed in American business are structural and regulatory safeguards that fix the system and keep good executives from going rogue or ‘breaking bad.’  One example of a break in the system may be finance-driven strategy.  CEOs whose compensation is heavily tied to stock price tend to manage for the short term at the expense of long term growth.  This was a problem when I was an M&A banker and it is still a problem now.  A FIX IS SORELY NEEDED.  Another problem may be the prisoner’s dilemma of employee turnover. “Why should I be loyal, creative or efficient if I suspect everyone else isn’t?”  A FIX IS SORELY NEEDED. Another  problem may be stacked boards and poor internal oversight. Again, A FIX IS SORELY NEEDED.  And there are many more.

In my humble opinion, CEO pay is not the problem. Retention bonuses are also not the problem. I stipulate that there is greed and incompetence in the system and recognize that Madoff, that thief, ripped us off. These topics, indeed, sell newspapers but they don’t address the root causes of our down economy. The real problem is baked into the fabric of how we see ourselves, live our lives and make everyday decisions. Until we address our tendency towards myopia and lack of empathy for other economic stakeholders, we cannot begin to fix the problems in our system.

Self-interest is a powerful motivator and it is the essential catalyst for innovation, progress and growth. But capitalism, at its purest, has limits.  With the exception of the German Empire, the First Reich (think Gutenberg & Martin Luther, not Hitler), every great empire has been overtaken by attacks from within.  Civil war is the likely result of any society purely focused on self-interest. Similarly, mutiny is the more likely fate of a pirate than is retirement. The fathers of our Revolution recognized this and took steps to build the American Empire on a more solid foundation.  The rocks on which our society stands are mutual accountability, systems of checks and balances and limits against the perpetual consolidation of power, status and wealth. Fixing the American economy involves a return to these fundamental values.

As a banker, I conducted due diligence on healthy and bankrupt companies, many were turn-around situations and a few were downright houses-of-cards, perhaps too many. Overall, I remain convinced that business executives are inherently good and that they are adequately compensated. Interviews of employees and mid-level managers at bankrupt companies are surprisingly easy to conduct; many can’t wait for a restructuring consultant to ask about the kinks in the company’s armor. They can all identify the economic weak joints and information bottlenecks as well as discern the value creators from the fraudulent fiefdoms of fear and control. [I’m so dramatic, I know.] Although they know the problems of the company, most ignore them because they feel powerless to implement real solutions. This is the tragedy of American business.  Only by fixing the incentive, empowerment, reporting and regulatory systems that impact all levels of performance within our companies can we work our way out of this economic quagmire and restore faith in market-based systems.

It is going to take a concerted effort on all our parts since there are no silver bullet solutions in business anymore.  Paraphrasing Benjamin Franklin, “we must all hang together, or most assuredly, we shall be hanged separately.” Well the economy is doing to us what King George could not do to the colonists.  Until we recognize that we are in this together, AIG executive, government worker and consumer alike, we’ll just continue to spin of our wheels, build monuments of nothing and cross expensive bridges to nowhere.

Why Old Navy Gets A Pass

In Business on March 20, 2009 at 10:14 pm

This week, everybody gets a pass. I gave Jackie Mason a pass for calling the President of the United States a ‘schwartza’ and Lou Dobbs got a pass for doing ‘chink’ impressions on national radio.  I even gave Obama a pass for his insensitive comment about Special Olympics.

The gaffes are forgivable if a real effort can be made to understand why they occur. Given the predominant imagery of the day, I don’t think older Americans  see the rest of the country as an extension of themselves. I remember in the Godfather movies how ‘la familia’ was everything; a strike against one of us was a strike against all of us.  While this theme applies for all Americans,  younger people seem to have a much broader definition of what constitutes family.  Apparently they understand that we are all in this together.  Until the perspectives of older Americans change, they will continue to make fun of others and risk continued rudeness and insensitivity.

In America, many older whites view blacks as foreigners or immigrants or something else that is completely different than just a darker version of themselves. Likewise, many straight people make fun of gays because they see themselves as more different than the same. Even Mr. Athletic, POTUS, His Excellency Barack Obama, proved that he is vulnerable to slights against groups that he sees as different from himself. It has become as American as apple pie. Old Navy, the Grandpa Munster of the Gap Inc. family, is no different.

So this is what I think happened.  They needed a campaign to raise awareness for the brand. Given the current social environment, race-baiting proved to be the strategy of choice. Just like Adrian Brody, who, without precedent, violated a married Halle Berry the night of the Oscars with an un-invited kiss, the clothing chain sought to gain attention by reinforcing the historical dominance of white people over blacks. In many cases, they were merely tapping into the underlying fear and resentment felt by whites after having elected a black President. This campaign allowed Old Navy to kill two birds with one stone. They can work their name into the public discourse and at the same time, reassure reluctant whites that their concerns are being heard. Did anyone notice that the black female mannequin’s name is Michelle? No comment.

But I am going to give Old Navy a pass. Yes, I was annoyed, the way I get annoyed when I hear the buzz of a pesky fly in the room.  But seriously, my time is limited and I have bigger fish to fry. Incidentally, in case you were wondering, the parts of the commercial that would have annoyed me the most are as follows:

  • a white person strips the dress off the black woman
  • a white man feels entitled to ogle her and openly make comments about her
  • the white man isn’t embarassed that his wife is standing next to him
  • the white man’s wife is powerless to stop her husband’s insensitivity
  • the black husband is emasculated when he tries to protect his wife’s honor
  • the black child, a boy, is made to witness the objectification of his mother
  • the black boy is made to endure his father’s powerlessness in the situation
  • the black woman’s comment suggests embracing of her sudden nudity
  • commercial viewers are left to assume acceptance of this behavior

All these points would have made my blood boil were it not for two things.  First, my black and white friends are equally outraged by this visual depiction; many mentioned it before I commented on Twitter.  Second, my friends are very happy with President Obama, as are the majority of Americans.  This ad may subliminally address the concerns of old people, but it did a poor job of reaching the store’s target audience, young people.  In short, it was a swing and a miss.

So Old Navy gets a pass; like Jackie Mason & Lou Dobbs, they’re irrelevant. The baby boomer dinosaurs in that division’s marketing department will soon be fired. It is simply a matter of time before it becomes painfully clear to the top brass that, like John McCain, Old Navy ‘just doesn’t get it.’  I mean, c’mon… their brand identity has ‘old’ written all over it.

In a way, I feel bad for the personnel at this once-respected retail chain.  The world has changed, my friends. I wish Gap Inc. the best of luck in breathing life into the decrepid corpse of the Old Navy brand. In the words of Lee Iacocca, you either LEAD, FOLLOW or GET  OUT OF THE WAY! In the case of Old Navy, the third choice may be Gap Inc.’s best option.