The CEO Fallacy

The CEO as a unique corporate asset fallacy ignores the contributions and talents of all the other professional administrators in a large organization. These are the people who operate and maintain the functions of the day to day SG&A (selling, general and administrative) operations.

You know who they are - the people that actually cut the checks, create and execute the contracts, order the raw materials, manage the nuts and bolts of production, coordinate the temporary storage in-house of the finished products, and arrange for their delivery to the customers who pay for these goods when they require them.

This is how Bob Nardelli can go from being a CEO apprentice at GE, a financial conglomerate, to CEO of Home Depot, a hardware retailer, to CEO of Chrysler, an auto manufacturer, without missing a beat.

Ironically, the last CEO of Merrill Lynch, Stanley O'Neal, got his original executive suite experience in the finance side of the auto manufacturing business before coming over to the investment business to count beans.

Believing that there are only a few uniquely qualified individuals that can helm these companies defies all available logic.

The deal to merge Merrill Lynch could only have happened if Merrill survived long enough to consummate it, and if the purchaser had enough cash to tender at closing. Thain didn't raise the the 10 billion from his Rolodex to keep the doors at Merrill open - the U.S. taxpayers, vis a vis Henry Paulson, were the only people willing to risk this kind of scratch on a company that was selling its assets at an 80% discount to face value to try and stay liquid.

Bank of America didn't have the billions on hand it needed to hold up its end of the merger - there was no place on the open market at that time, or even now, that was going to give them the 15 billion they got, other than the TARP fund at the Treasury department.

I don't know if you remember that weekend (in all honesty, I had to refresh my memory of the details by looking it up myself) but Merrill Lynch CEO John Thain went into the weekend thinking he was going to BUY Lehman Brothers at a discount. But Merrill's financial position turned out to be so weak that Paulson had to twist Bank of America's arm to take Merrill before the markets opened the next Monday.

Bank of America could have gotten the same assets for a lot less a week or two later, because the markets were already gearing up to pound Merrill. The $29 a share they paid was a premium over market by $9 a share - something else that looked like it had Paulson's fingerprints on it.

The reason why I am taking the time to write about this is because what I am seeing out here are people who are beginning to do a very human thing - have sympathy for a man who may have a family, who may have committed to obligations that he now can't pay without getting that money. This is a fundamental problem in our society right now, this notion of the CEO as a "super administrator" who doesn't have to have any skin in the game.

Bad decision making and poor performance by their companies should result in harsh outcomes for these guys. When Delta Airlines here in Atlanta went bankrupt, the executives made more money while the company was in bankruptcy than they did when the company was making money.

Mr. Thain might have to sell his home or investment property at a steep discount because nobody is paying full price right now for real estate. His kids may have to go to public schools. He might not be able to meet the margin calls on his portfolio. He might find himself looking at a severely decimated retirement account.

My mother will tell you, "I really can't have a whole lot of sympathy for you if you're down to your last million."

When you face those kinds of real life risks, it sharpens your vision. It also makes you negotiate more salary upfront, and forces you to adopt a less expensive lifestyle or less extensive investment portfolio.

It is unconscionable for me to worry about the problems of this rich man or his buddies. If he doesn't work another day in his life, enough money has gone through his hands to assure him of a lifetime of decent food, shelter, and clothing. If his entire existence has been predicated on never hitting a bump in the road, well, then maybe he shouldn't have been a CEO in the first place.

For what Thain accomplished last year, you or I could have sat at his desk and done the same thing. Reducing headcount or figuring which asset to sell next doesn't really require an MBA. The people who report to CEO's not only do the grunt work - they will recommend a course of action for him to take at no extra charge.

So we ought to get us one of these CEO gigs. I bet we could get through a whole year with only a few stock phrases.

"So run those options by me again?"

"Let HR have a look before we go any further with this."

"Is legal on board?"

"Shoot that to the CFO so he can scrub the numbers."

"So the statement I'm going with on the conference call lines up with the press release, right?"

"I like the way you're thinking here, but we're going to have to review it to see if its headed in the direction we're trying to take the company."

"I thought I told you I needed to see a 20% cut in operating expenses?"

"And if I can get the entire board behind this, the adoption of these new policies will strengthen our customer relationships by aligning our core competencies with our mission statement."

"I'll have to get back to you on that one."

"We're looking into it."

"Our initial timeline on this particular milestone may have been a little aggressive, so we're going adjust our forecast on getting this completed from first quarter to third quarter."

"Due to recent challenges and unforeseen market events, we are going to readjust our earnings expectation for the year slightly downward, but expect to rebound by the second quarter."

Hell - I look good in suit, and can contort my face to whatever level of gravitas is needed to convey the right amount of earnestness for a photo shoot or an interview. Maybe I'll give this CEO thing a whirl.

The worst that can happen is...well, I guess the worst that can happen is if they keep me on, because if they fire me...


...I think I'll take my golden parachute money in small bills.

SEC Fails To Regulate "Me, Me, Me" Brokerages

I was talking to S. Wednesday night during a commercial break, while we were waiting for Screaming Sean Hannity, who was oddly subdued, to resume interviewing Sarah Palin. I'd just come in from smoking a cigar and reading the New York Times - well, I'd smoked the cigar, but I hadn't gotten very far in the paper, not after I'd read in more detail what had happened at AIG.

The first commercial was for Pacific Life, the insurance company with the trademark scene they show of the whale diving into the ocean, its massive tail flipping over as it disappeared beneath the surface. I was instantly hot, not at Palin, but at the snow job I was smelling from the press about the AIG situation.

"You know, I'm no economist, no insurance company analyst, but when was the last time you heard of a major insurance company going under?"

S. had been on conference calls all day. She didn't answer at first, patting the dog beside her, with a look on her face that said "negro, I am through thinking for the day". When I opened my mouth to continue, I guess she figured I wasn't going to shut up about it unless she gave some kind of response. "Can't think of any."

"EXACTLY!", I said. "'Cause insurance companies have to have a certain amount of reserves to cover the losses their policyholders could have."

"But they do more than just insurance. They're all over the world doing all kinds of stuff."

"So what? Those are subsidiaries. Separate books."

"But don't they invest the reserves?"

"Yeah, but they can't put them into just anything. Insurance companies are some of the most boring investors out there. Even Warren Buffet doesn't screw around with that shit."

I may not have had a degree in economics, but I'd taken the Series 7 test enough times to know that the insurance industry's obligation to its clients required it to keep enough capital in reserve to cover claims - what the ratio was I had no idea, but I knew that for a company that size it should have been substantial.

Karl Rove's fat face popped up on the screen after the interview, looking like the cat who ate the canary that was George Bush's presidency. He proceeded to carry water for McCain, smirking as he lambasted Obama for taking contributions from Fannie Mae and Freddie Mac, the two institutions that were now high on each candidates reform list. When he sat his fat ass up there and blamed the ENTIRE financial crisis on the alleged shortcomings of the underwriting process, I had to get up and walk away.

You couldn't even get Desktop Underwriter, the proprietary underwriting system we use to determine whether or not a loan could even qualify to be sold to Fannie or Freddie, to take a sub-prime borrower. Alt-A products were as exotic as they got outside of FHA, and nobody was even doing any volume in FHA until last year, when there was no where else to take credit challenged (broke with low credit score) borrowers.

Blaming the government sponsored entities (GSE's) for the mortgage crisis was like blaming the U.S. Mint for your gambling losses in Vegas because they printed up the money. Subprime lenders went under because the default rate on the paper they were holding was ten times higher than the GSE's.

I fumed over this all that night and into yesterday, until I saw THIS headline at one of the sites I frequent:

Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers

By the time I'd gotten through the second paragraph:

"The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults."

I started to get my equilibrium back. I knew damn well you couldn't have a collapse of this magnitude just because a few more loans than usual were late (default in mortgage biz lingo isn't the same as an actual foreclosure - it can also mean the loan is in technical default because the mortgagor is way behind). Over 95% of all mortgages purchased by the GSE's were still being paid on time.

I read a little further. A smile crept across my face:

"The so-called net capital rule was created in 1975 to allow the SEC to oversee broker-dealers, or companies that trade securities for customers as well as their own accounts. The net capital rule requires that broker dealers limit their debt-to-net capital ratio to 12-to-1, although they must issue an early warning if they begin approaching this limit, and are forced to stop trading if they exceed it, so broker dealers often keep their debt-to-net capital ratios much lower."

A couple more paragraphs down, I hollered "I knew there was some kind of bullshit going on!"

"Using computerized models, the SEC, under its new Consolidated Supervised Entities program, allowed broker dealers to increase their debt-to-net-capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1. It also removed the method for applying haircuts, relying instead on another math-based model for calculating risk that led to a much smaller discount."

Only five companies were eligible for this program when it was rolled out in 2004. Guess who these five firms were?

Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley.

The first thing that came to my mind when I read this was a quote I'd created as a part of a series of quotes that were sprinkled throughout a fictional story I'd published a couple of years back called The Black Folks Guide To Survival:

"White folks, and white men in particular, have always found ways to alter, bend, or just totally ignore the rules they've made up when something doesn't suit them."

Real life wasn't imitating art here - I'd simply expressed as directly as possible facts that we all already knew to be in existence. And here was the SEC chairman, proving my assertion once again.

While you were on the internet at work, scrolling past ads extolling the wisdom, foresight and prudence of the companies managing your retirement money, your SEC chairman was waving his magic money wand over the capital accounts of these companies, effectively doubling or tripling their buying power without the addition of one red cent of actual money to their coffers.

He turned the cash they had into supercurrency.

If you've been in the financial services game long enough, even on the retail side, like I have, you had to learn the "Four C's" of a lending transaction - character, capacity, credit, and collateral. Ignoring any one of these items means you can't properly qualify the risk in front of you. In this case, the argument was and will continue to be that the track record and the reputation these companies possessed was the deciding factor in making a decision like this. THIS was the same criteria we used to make stated income loans.

Which made reading this morning's latest SEC announcement on The New York Times website temporarily banning short selling of financial stocks all the more ironic. The quotes from the chairman got me so jacked up I didn't even need any coffee this morning:

"The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets"

Market manipulation is now the enemy, after you manipulated the make-sense rules that were already in place? Are these motherfuckers smoking crack?

The phrase "alter, bend, or just totally ignore the rules they've made up" will be reverberating through my head for the next few days as I watch these politicians and industry regulators who know better continue to point fingers at Fannie Mae, Freddie Mac, and the subprime mortgage lenders who have closed down.


What do they think we are, idiots?


Yep.