by Deb Cupples | Just weeks ago, investment-banking giant Lehman Brothers filed for bankruptcy protection. It's the biggest bankruptcy in U.S. history (bigger than Enron's and WorldCom's) and has had toxic effects on our nation's economy.
Lehman's shareholders are likely unhappy about the laws (or lack of laws) that enabled such massive redistribution of shareholder wealth. Yes, company money belongs to the shareholders, though many executives don't seem to grasp that.
Yesterday, the House Oversight Committee held a hearing on Lehman's bankruptcy. Mr. Fuld's $300+ million is the tip of the offensive-information iceberg.
As Lehman headed toward a collapse this year, the human beings that made Lehman's business decisions chose to devote more than $10 billion to employee bonuses, stock buybacks, and dividend payments.
That $10 billion could have instead gone toward shoring up the company -- which, presumably, is what shareholders would have wanted.
Redistributing shareholder wealth is not unusual for the human beings making business decisions for a falling company. Enron, for example, filed bankruptcy in December 2001: that year, Enron's decision makers paid 152 execs and managers a collective $800 million.
As well as CEO, Mr. Fuld was (and may still be) chairman of Lehman's Board of Directors. Typically, a company's Board is who sets executive pay. Yes, conflicting interests seemed to exist: on one hand, Mr. Fuld had a duty to protect shareholders' interests; on the other hand, he had a personal interest in getting high pay.
Mr. Fuld's $300+ million seems like a drop in the bucket, but Mr. Fuld is only one person. Consider how Lehman's Board enabled other execs to pocket oodles of Lehman shareholders' dollars.
Last month, for example, just four days before Lehman declared bankruptcy, one Lehman official proposed giving a combined $23.2 million in special payments to just three Lehman execs who were leaving their jobs (two were fired, and one was planning to quit in December).
Those three execs would not miss any meals if such parting gifts had been withheld. In 2006 and 2007, those three execs' compensation was, collectively, about $99 million (an average of $33 million each).
If you had "only" $10 million in CDs
earning only 3% interest, your pre-tax income on that money would be
about $300,000 a year.
I could live comfortably on that amount without ever spending the principle. So could many of Lehman's individual shareholders.
Lehman had some 28,000 employees in more than 60 offices and 28 countries. Dozens -- perhaps hundreds -- of those employees were on the executive or management level and got huge compensation packages via bonuses or stock grants that Lehman's Board (headed by Mr. Fuld) had approved.
The big question: was Lehman's Board and executives more focused on increasing their personal wealth or generating wealth for Lehman's shareholders?
That question could be asked about execs and Board members of AIG, Fannie Mae, Freddie Mac, Bear Stearns, Merrill Lynch.... Actually, that question should be asked about execs and Board members of all publicly traded companies.
Back to Lehman: in June, Judith Vale (a Lehman subsidiary’s executive) urged Lehman's Board to not give bonuses to top executives this year. Ms. Vale thought that withholding bonuses would 1) significantly reduce company expenses, and 2) show the world that Lehman executives were not shirking accountability.
In response, Mr. Fuld and another board member actually mocked Ms. Vale’s seemingly valid suggestion. (See emails)
During the Oversight Committee hearing, Mr. Fuld said that he takes "full responsibility" for his past decisions -- whatever that means. Given that Mr. Fuld had presided over Lehman's collapse, he would have been laughed out of the hearing room if he'd said otherwise.
Despite his gestural acceptance of responsibility, Mr. Fuld largely blamed outside forces for Lehman's collapse. He even claimed that he hadn't foreseen the looming consequences of allowing the company to make terribly risky investments.
Rep. Waxman's opening statement casts doubt on Mr. Fuld's claim:
"Other documents obtained by the Committee undermine Mr. Fuld's contention that
Lehman was overwhelmed by forces outside its control. One internal analysis reveals that Lehman 'saw warning signs' but 'did not move early/fast enough' and lacked "discipline about capital allocation." [i.e., lacked discipline re: the spending of cash]
Among the outside forces that Mr. Fuld blamed were naked short-selling and market manipulation by others.
Mr. Fuld may be right about the short-selling and market manipulation. Even if he is, that doesn't change the fact that Mr. Fuld -- and perhaps hundreds of Lehman executives -- drained billions of shareholder dollars out of the company: money that the company could have used to try to prevent the collapse.
As they often do when the Oversight Committee democrats dare to investigate big corporations, Republican members blasted the Committee just for investigating Lehman. Some Republicans think the Committee should instead investigate AIG, Fannie Mae, and Freddie Mac.
First, the committee has already scheduled a hearing involving AIG (for today, Oct. 7, 10 am). Apparently, disgruntled Republican members hadn't received the memo (I got the press release last week).
Second, it's not an either-or proposition. Many companies -- actually, the human beings that cause companies to act -- played a part in our nation's economic crises. The Oversight Committee could investigate all of those players.
I suspect that Committee Chairman Henry Waxman will eventually investigate Fannie and Freddie, too -- but the Committee can probe only so many companies at once, given that such probes usually involve hundreds or thousands of pages of documents.
Memeorandum has commentary.
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