InvESGuard - Guarding investments one post at a time.

InvesGuard- New Scorecard Added – Occidental Petroleum (OXY)

2009-10-15T13:44:00.001-04:00

New Scorecard Added – Occidental Petroleum (OXY)

Company Name: Occidental Petroleum (OXY)

Industry: Oil & Gas Producers

InvesGuard has just released a Corporate Governance scorecard for Occidental Petroleum. (OXY). Devon Energy scores well in its Internal Control Environment. Its Compensation practices need to be strengthened. It also needs to increase the level of its Social and Environmental reporting.

( Click here to view Occidental’s scorecard)

Given that it is a Oil & Gas Producer, Occidental’s poor showing on the Environmental and Social Commitment front could be of concern in the long term. Another concern from a long term perspective, is compensation. For a CEO, who as the proxy quotes has “Implemented a cost-cutting initiative in advance of world-wide economic deterioration” to take home a record breaking $65 million is both contra indicative to his cost cutting efforts as well as detrimental to increasing shareholder value.

From a reporting perspective, Occidental publishes certain mandated information on Emissions and certain other environmental metrics. But other critical metrics such as percentage of oil spill recovered are not reported in its Social Responsibility Report. nor is does it make a public commitment by participation in such collaborative initiatives like the UN Global Compact. More information about Occidental Petroleum’s Social and Environmental impact can be found on Occidental’s Company Page , under the “Social and Environmental” Tab.

Also of concern is the presence of a Board Executive Committee. This committee has been granted broad powers and is chaired by Dr Irani- Occidental’s CEO. Although this committee held no meetings during 2008, such a situation can intensify the dilemma of excessive CEO power versus a fully empowered one.

The company does however perform well across our Internal Control Environment criteria and demonstrates a well developed Audit mechanism with committee members that are not overextended.

Occidental’s Overview and Scorecard

Other companies covered by InvesGuard in the Oil & Gas Producers industry include:

- Vaalco Energy

- Chesapeake Energy

- Conoco Phillips

- Devon Energy Corp

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Have you 'Stimul(us)ated' enough today?

2009-02-17T09:44:00.009-05:00

This blog has transitioned into a full website offering non financial research. You can find more blog posts and research on www.invesguard.com

I think I contributed to the American economy yesterday. I bought clothes worth $79.78c from Old Navy. All in the name of 'stimulating' the economy ofcourse...

Well if you look at the stimulus plan in detail ( I don't think you can though..it's over a 1000 pages long) but if you did and if you also heard the Treasury Secretary's "plan" on reviving the economy, you would probably understand why it's upto regular folks like us to stimulate the economy.... While some believe that we should leave stimulating the economy to the government, i hold the opposite view. Well... not an extremely opposite view... I mean you needn't go bankrupt to stimulate...but a few indulgences here and there would be just what the doctor ordered for this ailing economy.

In any case, I thought I would note some interesting facts on Prez Obama's plan including some that could directly affect some of us:(easier than reading 1000 pages, no?)

It appears to be the longest congressional vote in history after requiring 5-hours and 17 minutes.
An income tax credit of upto $400 for individuals and $800 for couples in 2009 and 2010. Individuals earning upto $75,000 and couples upto $150,000 will qualify for a full credit.
First time homebuyers will be able to claim a tax credit of upto $8,000 for purchaszes made by Dec1, 2009.
Accelerated depreciation for businesses.
More highways and bridges than mass transit ,which is expected to ceate close to 835,000 jobs.
Money for high speed rail was quadrupled to $8 billion...wholly inadequate by some accounts, California estimates it will cost $45 billion to build its high speed rail.
For the jobless, the federal government would offer premium subsidies by paying 65% of the cost of group health benefits under the Cobra law for upto 9 months.
7 Democrats joined 76 Republicans to oppose the bill in the House.
According to an analysis by the Congressional Budget Office, over 74% of the money will be spent in the next 18 months.

These and more details can be viewed in a concise and easy to read image here. (Courtesy the New York Times.)

Live Blogging- CEO's Questioned on Allocation of TARP funds.

2009-02-11T10:10:00.014-05:00

Watch CEO's of large banks who received TARP funds being questioned over their allocation of these funds at http://www.cspan.org/Watch/C-SPAN3_wm.aspx

We will be live blogging so check back often...

10.15 a.m. No action yet...politicians cat fighting over time allocation to get their 2 bits in....

10.35 a.m. CEO's start their prepared testimony...basically defending themselves...
from the kind of information that these CEO's are presenting, it looks like their lawyers have done a great job!
Citi CEO has requested his Board to pay him a $1 salary and no bonus till the bank returns to profitability.

11.21 Rep Kanjorski- When did you first realize that there is a huge problem, what did you do?

BOA CEO Lewis- August 2007 timeframe the then treasury secretary contacted us....
Goldman CEO Blankfein- Before August 2007.

Rep Kanjorski- What do you see in the future? Have we failed?
No time for answer.

11.30 Rep Waters- Since you received TARP funds have you increased credit card interest rates?
BOA- Yes increased credit card rates to 9% customers
Citi- Yes
did you reduce the amt of credit available to customers?
None
Rep Waters to BOA- Do you have a loss mitigation department offshore?
BOA CEO- I dont know
You have to be 2 months behind to receive loan modifications?
None.
According to Rep Waters BOA & CITI received processing fees for receiving TARP funds. (None of the CEO's quite understood this...)

11.40a.m. Responding to a question, CITI CEO claims that Citi is successful at helping its mortgage customers if customers talk to them, open up to them.
Rep Maloney- Questions BOA CEO on the issue that has been on everybody's min...Merill's multi billion $$ bonuses.

Shocking Markopolos Testimony on Madoff Ponzi Scheme.

2009-02-03T22:15:00.004-05:00

Mr Markopolos, the whistleblower in the Bernie Madoff Ponzi scheme, is due to testify before the House of Representatives- Committee on Financial Services on Feb 4th.

A copy of his testimony has been made public in advance......at 65 pages long, it is at once facinating and shocking.

Check it out for yourself here.

Super Bowl, Innovative Severance, etc.

2009-02-02T07:32:00.017-05:00

First a word or two about the Super Bowl. To be honest, I am not a huge fan of American Football....I follow cricket and on occasion, some basketball. The only reason I look forward to the Super Bowl is for the ads. The mega hype surrounding these ads is strong enough to compel me to tune in. I am an enthusiastic supporter and participant of online polls that vote for the Best and Worst ads. This year CareerBuilder.com's 'Tips' ad has been voted as the Best and the Worst Ad on WSJ.com. See it for yourself here.

Now lets get down to business.....

This blog has often noted irregular, bloated or ridiculous severance payments to senior executives ....these agreements are getting more and more innovative, not to mention costly for companies and shareholders. Here is another one I found for New York & Company.

Mr. Richard Crystal has consented to extend his employment agreement until Feb 11th, 2011 without a salary increase...the kind man has also given up his severance payment of $3.9 million which he might have received in 2011 if his employment agreement did not get extended at that time. One might think.....there has to be a catch somewhere, right? I mean the man works at the same 'measly' salary of about a million bucks and agrees to waive severance.

But wait....here is the catch. In exchange for 'waiving' his severance, New York & Company's shareholders have to shell out $2 million between now and 2011. It's been termed as a 'signing bonus' for Mr.Richard Crystal. Signing bonus for an existing CEO? In today's hardpressed times? After announcing a cut of 310 jobs in January of this month?

As he put it himself while announcing the job cuts and store closings earlier last month,"These are unprecedented times in the retail industry and across many other industries and geographic regions."

The times may be unprecedented, Mr.Crystal but so is your modified employment agreement.

Banks Participating in TARP.

2009-01-31T16:18:00.005-05:00

I have noticed many visitors to my blog looking for details on banks that are participating in the U.S. Government's TARP program. In the past i have made lists and posted these lists. But obviously, this information keeps changing, so I thought the best thing would be for me to point visitors to the WSJ's Interactive Graphic (subscription not required)where the most current list of banks participating in TARP has been compiled. I have also created a link to 'List of Banks Participating in TARP' in my Bloglist (right sidebar) for easy access. Check back often for updates.

Severance Payments- An Issue of Size or Accounting?

2009-01-26T10:08:00.012-05:00

The past several weeks have seen an unusual increase in the number of severance agreements that are being put together as soon as an executive announces his resignation. I blogged on the severance package at Maidenform last week that included executive outplacement services in addition to a lumpsum cash payout and other benefits.

Some of these severance agreements have also been entered into the same day as the resignation date.

H&R Block had a similar situation that was revealed by the company's 8-K filed on January 23rd. In the filing, H&R Block announced the resignation of Steven Tait, President of its subsidiary "RSM McGladrey Business Services, Inc." on January 21st. On the same day, H&R Block entered into a generous Seperation Agreement with him. Under this agreement, Mr. Tait will not only receive a lumpsum cash amount of $827,668 but will also be entitled to a short term incentive bonus for 2009 ( this inspite of Mr.Tait retiring in April of 2009) as well as full vesting of his 163,788 options as well as other outstanding share options.

Is this an obscene amount? Probably not in a market and economy that is anything unlike the one we are facing today... but in a situation where every industry and sector is clinging on to its dear life, the last thing we need is another well padded severance package for an already wallet fattened executive.

Other than the fact that such large payments stand out like sore thumbs, (gold digits nevertheless!), what I would like to understand is how do these companies just charge such expenses? Aren't these expenses to be planned out, provided for in the books and then charged off against the provision? How do you meet your forecasts with charges like these cropping up at the drop of the hat. H&R Block had a similar situation when Mr.Mark Ernst resigned as Chairman, President and CEO of one of its subsidiaries' HRB Management, as well as with the resignation of William L. Trubeck the ex-CFO at the end of 2007. Mr Ernst was paid a lump sum cash severance payment of a whopping $2,550,000 in addition to other benefits and Mr.Trubeck an amount of $900,000. As in the case of Mr. Tait, the severance agreement was entered into on the same date as Mr. Ernst's resignation date and in the case of Mr.Trubeck the severance agreement was dated after the resignation date but before his termination date.

2009-01-23T10:43:00.005-05:00

My Friday reading

1. John Thain's excesses Here is a partial list of Thain's 'indulgences' for his office:
a. $35,000 for something called a "commode on legs.”
b. $68,000 for a "19th Century Credenza" in his office.
c.$230,000 to his driver for one year’s work.

2. Potential change in India's foreign investment policy for the airlines industry

3. Windows 7 versus Vista

4. Japanese Ponzi Scheme unearthed

5. Vatican on YouTube

More Uncertainty for Citi Employees

2009-01-20T20:50:00.005-05:00

As can be expected, with all the changes happening over at Citi, there has been an increase in the number of SEC forms filed by the company. Such filings are expected to provide a greater degree of transparency and disclosure.

But a recent 8-k filing by Citi group provided hardly any 'transparency'. The filing referred to the Citi- Morgan Stanley joint venture. It stated "Citi and Morgan Stanley have agreed to certain general principles regarding the parties’ intended treatment of Citi and Morgan Stanley employees who transfer to the Joint Venture..."

There were no additional details on such what these "general principles" might be. Isn't the intention of filing an 8-K to provide full and complete information to the public? It is hard to imagine that they are still working out the specifics.

As per the Joint Venture agreement, the board of directors of the Joint Venture entity will "have veto rights" with respect to "certain employees" for a period of three years.
Oh and by the way, there will be a majority of Morgan Stanley directors on this board.
If you ask me, this does not bode too well for Citi employees.

Maidenform's Unflattering Governance Style!

2009-01-19T14:27:00.009-05:00

A few posts back, I blogged about the mass exodus of Board level directors and other senior management at some companies..... almost akin to mice fleeing a sinking ship!

Look at Maidenform Brands...the Chairman of the Board resigned on January 5th 2009. Additionally, in an 8-K filed by Maidenform on Juanuary 12th, the company announced that Steven Masket resigned as EVP, General Counsel and Secretary w.e.f 3-6-09. In a subsequent 8-K filed by the company on January 16th, this seperation is termed as a 'resignation and retirement'...never heard of such a thing...you can either retire or resign...

Other than accrued salary and benefits upto his effective resignation date,Mr.Masket will also be entitled to receive payment for any unused vacation as well as executive outplacement services up to a maximum of $10,000, which will be provided for a period of not less than 3 months commencing on the Resignation Date, until Mr. Masket obtains subsequent employment or September 6, 2009 as well as payment of an amount equal to $372,395, paid in installments over a period of 12 months from the Resignation date.

In these times of mass mayoffs, zero retirement benefits is this justifiable in any way? Oh by the way, the company, like countless others, has revised is future earnings estimate.It's reported diluted EPS reduced from the earlier range of $1.17- $1.21 per share to $1.02- $1.04 per share. An additional fourth quarter restructuring costs of $0.03 per share has also been latched on to the revised estimate.This restructuring is "for a strategic workforce restructuring of 9% of corporate staff." With severance packages like the one handed out to Mr.Masket, is it any surprise that the company had to account for an extra "restructuring cost"?

Satyam's New Auditors.

2009-01-14T10:20:00.002-05:00

A quick update on the Satyam auditor front: Exactly as I had predicted in yesterday's blog post, Deloitte Touche Tohmatsu (which in India is represented by S.B.Billimoria & Co.) has been appointed as the new external auditors.

S.B.Billimoria & Co. have an untarnished reputation in India. They represent big multinationals and large Indian conglomerates such as the TATA group, HDFC, HDFC bank etc.

Full Disclosure: I worked with S.B.Billimoria in India for close to 4 years.

Basic Governance Controls Missing at Satyam.

2009-01-13T09:32:00.012-05:00

The ongoing Satyam saga has made me very curious about the level of disclosures as well as corporate governance practices that were being followed there. Unlike U.S. public companies, which are required to make certain disclosures of their governance practices, Indian companies have a relatively lower disclosure threshold. Ofcourse, the fact that Satyam has its ADR's listed on the NYSE makes it subject to a few of NYSE listing requirements. These requirements are considerably fewer in number as compared to a U.S. company whose shares are listed on the NYSE.

On a detailed reading of Satyam's latest 20F Annual Financial report (for the year ended March 31, 2008) filed with the SEC in August 2008, I found the following striking oddities:

None of Satyam's Board Members appear to have any financial experience -accounting or auditing or any other kind of financial expertise. It is no therefore no surprise to see how the CEO could have scammed the entire Board and gotten away with it for so long.
None of the members of the Board's Audit Committee are financial experts within the meaning of 'financial expert' as laid down by the NYSE. Their review and oversight procedures while acting as members of such a Audit Committee remains a mystery.
The company does NOT have a corporate governance or a nominating committee. This naturally leads us to question the basis on which Board members were appointed. There might have been a potential conflict of interest or board interlocks which went unsupervised.
Close to 14% of the external auditor's 2007 remuneration was from "Other Services". There has been no disclosure on the details behind these "Other Services". In order to prevent auditors from performing services that may constitute a conflict of interest, many country's corporate laws or listing standards discourage auditors from performing other services other than financial or tax audits. How does one trust financial statements that have been audited by auditors who could have potential conflicts of interest?
Only 5 of their 9 Board members were independent outside directors. The other 4 were employee directors. Satyam did not follow the practice of having its non management directors meet independently without the employee directors being present. Total lack of independence in their Board and its functioning indicates weak governance practices and a lack of oversight by independent directors of the Board.
Audit Fees paid to PricewaterhouseCoopers (PwC) increased from $800 K to over $1 million in 2008. No explanation for such an increase has been provided.
One of the outside independent directors has been paid a special remuneration of $0.2 million which is far higher than is the norm. This has been supposedly provided for his "professional services". If he is being paid for professional services, doesn't that make him a non independent director?
The entire non executive board (non-management Board) was paid through commissions. The amount of such commissions is not disclosed nor is the basis of such computation of commissions given. How does a shareholder ensure that these 'independent' directors don't inflate profits to allow them to receive fat commissions?

It will be interesting to see whether and how the new Board at Satyam addresses these issues. With Mr. Deepak Parekh (chairman of HDFC corp.) on its Board, Satyam shareholders and employees can be ensured of an honest and indepth review. The Board's first step of replacing PwC as the auditors has been in the right direction. Given the fact that HDFC has had the same auditors S.B.Billimoria & Co. (member firm Deloitte Touche Tohmatsu) for over 15 years, that maybe one of the shortlisted audit firms for Satyam. Lets wait and watch.

2009-01-02T07:00:00.002-05:00

I have been enjoying the scorching Mumbai heat for the past couple of weeks... after enduring multiple brutal snow and ice storms in the U.S., I have learned not to complain about the Indian heat.

Anyway, after a short sabbatical from the webosphere, (I must admit I had some distinct withdrawal symptoms at the beginning) I found something interesting on the Wall Street Journal.

This is a commentary of a Russian professor on the potential demise of the U.S. by 2010.
The professor goes so far as to predict a a bloody civil war in the fall of 2010 followed by a break up of the United States!At 500 reader comments, it has become one of the most read articles on the Journal.

Read it hereand decide for yourself whether this is pure Murdoch style sensationalism or has any true substance to it.

Satyam Computers and Corporate Governance-N'ere The Twain Shall Meet

2008-12-18T11:04:00.010-05:00

Update 9 p.m (EST): Few of Satyam's strategic clients are looking to re-evaluate their contracts with Satyam as "they are no longer satisfied with the intent and focus of the company."

India has been in the news a lot lately....unfortunately for all the wrong reasons...here is one more...

Satyam Computers, an Indian computer services firm with ADR's listed on the NYSE, is facing a a severe governance fiasco. Satyam recently announced its decision to buy controlling stakes in two infrastructure companies in which the chairman and promoter of Satyam had sizable stakes. Founders of the Indian company Satyam held as much as 30 to 35% in the infrastructure companies - Maytas Infra inc and Maytas properties. According to analysts, the deal was not only overpriced (at $1.6 billion) but was also questionable on the grounds that the businesses (computer services and infrastructure) were not complementary by any stretch of imagination.

Satyam faced its shareholders' ire and saw its ADR price drop 55 % to a 52 week low of $5.70.
You can see the price fluctuation in the last 5 days for Satyam especially a sharp dip to the $5 levels.

Of course, seeing the market reaction, Satyam has abandoned its acquisition plans...but not without some beating to its reputation. Ironically, the company had recently been awarded the coveted Golden Peacock Global Award for Excellence in Corporate Governance for 2008. If this is the kind of governance measures that a "top governance" company practices what about the others? I shudder to think......
Satyam now faces an inquiry from India's Ministry of Corporate Affairs into the board decisions behind this acquisiton plan. The Ministry of Corporate Affairs has become more stringent on Indian companies, with a recent proposal that would require all companies, whether public or private, to have atleast a third of their directors to be independent.

Satyam has had a bad year overall...in October of this year, Satyam was banned from carrying out an offshore work for the World Bank after news one or more Satyam contractors were accused of installing a spy software at the World Bank workstations. Satyam had been the vendor of choice at the World Bank for a long time.

The Satyam governance debacle could possible be a culture issue specific to India and maybe other South Asian countries. A sizable number of large multinational corporations in India have started as family owned businesses. Even after these companies are made public, they continue to be governed at the whims and fancies of the promoter family. Personal relationships drive many business agreements....

A case in point is the ongoing battle between the Ambani brothers who run the Reliance group of companies. According to Forbes Magazine, both the Ambani brothers figure in the top 10 richest men in the world. Rich they maybe, but unfortunately, as far as corporate governance goes, they lag far behind. Their ongoing personal feud scuttled Reliance Communications' potential merger with South African MTN Communications.

Lack of governance measures maybe the norm in India but there are some notable exceptions too...on top of the list would be Infosys Technologies or the ICICI Bank ....maybe a few others. There aren't too many of them but hopefully Satyam's governance fiasco will prove a lesson to family owned businesses.

Keep checking back for updates on the Satyam story...

Mad(off) Money !!

2008-12-15T23:40:00.006-05:00

It's almost as if the plague hit Wall Street...first the credit crisis ( which of course was preceded by the subprime mortgage mess and followed by the current recession)and along its heels comes a ponzi scheme the size of Godzilla!

Much has been and will be discussed about Bernard L.Madoff and his mad ponzi scheme.
By some accounts,the $50 billion ponzi scheme created by Madoff can be labeled as one of the costliest financial frauds ever created by an individual.

As details slowly trickle in on the operations behind Madoff's ponzi scheme, i thought it would be worthwhile to go over some 'Do's and Don'ts' for avoiding a Ponzi Scheme.

I found this general list on wsj.com

According to this one which is a little more specific, investors should be on red alert when an investment manager asks for checks to be made out to him or his company.

This is what the FBI has to say about ponzi schemes (scroll down on the FBI page till you reach 'ponzi schemes')- exercise due diligence and make sure you fully understand the investment before you invest the money.

Another nugget of advice from the Asset Protection Blog- Obtain independent advice and turn your back on "guaranteed" profits if they seem unrealistic. And of course, the common refrain that should be applied in everything: If it seems too good to be true—it probably isn't true.

Oh and by the way, in case you were wondering where the "Ponzi" in Ponzi scheme came from, here is the lowdown- (courtesy Wikipedia).

" The scheme is named after Charles Ponzi, who became notorious for using the technique after emigrating from Italy to the United States in 1903. Ponzi was not the first to invent such a scheme, but his operation took in so much money that it was the first to become known throughout the United States. His original scheme was in theory based on arbitraging international reply coupons for postage stamps, but soon diverted later investors' money to support payments to earlier investors and Ponzi's personal wealth."

Yahoo's 'Extreme Makeover'- Change in its Contentious Severance Plan

2008-12-10T23:24:00.008-05:00

One of the primary criticism leveled against Yahoo, that had many shareholders up in arms during the Microsoft debacle was the fact that the company had a rock solid severance package in place to deter any potential takeover.

According to Yahoo's old severance plan, if an eligible employee’s employment with the Company is terminated by the Company without “cause” or by the employee for “good reason” within two years after a change in control of the Company, the employee would be eligible to receive severance benefits.

The benefits under the old plan related to medical, dental coverage, accelerated vesting of stock options and RSU’s, continuation of base salary for a limited period of time (maximum period of 24 months) etc.

After getting sued by angry investors over the protective nature of its severance plan, Yahoo has finally been forced to make changes to its current severance plan. In an 8-K filing yesterday,
Yahoo has sought to make some fundamental changes to its severance plans.

At the basic level, it takes away the Board’s ability to declare that a change of control event has occurred. Secondly, a Yahoo employee needs to show a material diminution in his/her salary or duties to claim severance benefits. Thirdly, a change in the Board composition will not constitute a change of control event.

A detailed reading of Yahoo's amended severance plan, revealed a very key statement that is hidden deep in Appendix B. It directly addresses the potential takeover of the company’s search business. In defining a Change of Control, the document states that , “ a sale of the Company’s search business shall not constitute a Change in Control ……”. What this statement essentially means is that in in case of a takeover of Yahoo’s search business, severance benefits related to a change in control situation will not automatically kick in.
This is a brand new statement inserted into the severance plan, seemingly to smooth the way for Microsoft to takeover all of Yahoo’s search business.

In effect, there seems to be an almost inevitable quality to the likelihood of a possible takeover of Yahoo’s search business. What do you think?

Note to Mr.CEO- "Do Unto Others As You Would Have Them Do Unto You"

2008-12-06T17:13:00.012-05:00

The big economy news this past week was the total number of job losses in the economy- 1.9 million jobs lost year to date out of which 533,000 jobs were lost in November alone. (See graph below)

To make matters worse, there have been reports of accelerated layoffs at companies in preparation for a bleak 2009.

The most obvious objective for such aggressive job cuts is cost reduction and a quick return to
profitability. But why are companies not looking at senior management job cuts or paycuts as a show of solidarity? The Europeans seem to have beaten the US to it. (UBS, Deutsche Bank and Barclays PLC have either pulled bonuses for top executives, or executives there have voluntarily forfeited them.)

At invESGuard, we pulled up a list of companies that have announced layoffs and analyzed any CEO paycut or salary review at the same company. Here's what we found:

1. Out of the 24 companies on our list, CEO's of only 3 out 24 companies (12.5%) announced a paycut. This does not include Citigroup CEO who has yet to announce the full extent of his paycut, or the Detroit Three who have outlined a conditional $1 salary for 2009 (contingent on being granted a Government loan).

2. The CEO of Hartford financial was given a $3.25 million bonus as part of a non equity incentive plan compensation.

3.Legg Mason CEO compensation includes a $1.9 million bonus.

4. Boeing CEO's base salary actually increased by $50,000.

Morgan Stanley CEO is one of the 3 out of 24 CEO's who has received a lower compensation during 2007 given the dismal company performance. However, a close look at the salaries of senior management at Morgan Stanley, reveals a different picture :
Mr.Scully (Co-President) made over $15 million
Former Chief Financial Officer, Mr. Sidwell was granted $14.61 million (including a cash bonus of $12.7 million owing to he retirement).
The new Chief Financial Officer, Mr.Kellheler made $21 million including a bonus of $6.9 million. Mr.Nides (Chief Admin Officer) made $6.33 million.
The total bonus paid to the 5 senior executives for 2007 totaled a whopping $35 million.
So much for the CEO pay cut!

One question that repeatedly comes to mind is- Do they even understand the true meaning of a bonus payout and the way that this is supposed to work?

The complete disregard with which CEO's refuse to even consider a paycut while the middle and lower management not just face paycuts but in most cases lose jobs, is completely ridiculous.

Even the Big Three Auto Industry Chiefs who have been before the Congress begging bowl in hand, have announced only conditional paycuts. That is, in return for the loans from the government, will they will accept a $1 salary for 2009.

Rep.Kanjorski rightly pointed out during the hearing, 'Instead of $1 salary for 2009, you should not be getting a greater salary that any of the successful Japanese auto executives as long as you are indebted to the United States. Until that time you should not be getting more than 20 times the salary of successful Japanese executives.'
Honestly, without the government's help, at least 2 of these auto companies would be broke and then the possibility of even earning that $1 would not exist. How ironical that no sweeping management concessions have been announced by GM when according to one news report, GM is not even replacing the batteries in its wall clocks!

Depressing as this news maybe, there have been a few bright spots:

1.In July of this year, the CEO of Midwest Air Group Inc. says he’s taking a 40% pay cut as part of the company’s restructuring, a plan that includes demands for even deeper pay cuts from union pilots and flight attendants.
2. The new AIG CEO accept ed a 1$ salary in return for government help.
3.Ky based Ashland's CEO has accepted a paycut for 2008.

If you know of any other companies that have made positive changes to Senior management compensation, drop me a line at tejus.trivedi@gmail.com

Auto Hearing Live Blogging- Detroit Three Hearing December 5.

2008-12-05T09:47:00.023-05:00

9.48 a.m.
Mr. Michael:

"Doubt that financial institutions would want to lend (to automotive industry)"
We have to worry about oversight and accountability"

Mr. Waters
Concerned about plan submitted, how will it affect jobs?
What impact will the reduction of dealerships will have on jobs in the regions where these dealers are present.

Mr. King
If we knew where the money is going, there would be reasonable assurance that the plan might just work.
What are the chances that this plan will work?

Mr. Watt
Talked to various dealers and feels there is a serious problem for example that one man did not sell a single car in October of this year.

Mr. Manzullo
The plan should address how will the Detroit Three will try to increase customer demand for cars. None of the plans address this critical issue.

Mr. Biggert
"We don't know whether granting your request, means you will not be back here in a few months time."

10.02 a.m.
Mr. Sherman
"We need to put tough standards in the bill." In order to minimize the number of executives from other industries to come to the Congress for money.
"...needs to provide the assurance that you cannot close plants without approval from the" (administration)

Mr. Scott
The Senator has raised an issue that was addressed many times yesterday which is the potential merger of GM and Chrysler.
According to Senator Scott, "Look carefully at merging your (GM+ Chrysler) operations."

10.11 a.m.
Mrs. Brown-Waite
Crisis comes from lack of foresight, governance....."GM and Chrysler ignored their liquidity problems..."

Mr. Green
Can we afford to put out of 2 million people out of work?"

Mr. McCotter (michigan)
" You have put up a very viable restructuring plan"

10.21 a.m.
Opening statements by UAW President (Mr. Gettelfinger)- Basically Mr. Gettelfinger's opening statement is no different from what he presented yesterday. Ditto for Mr.Ford Mulally and Mr. GM Wagoner.

10.42 a.m.
Ramifications in dollar terms on the failure of dealerships.
Nardelli- "240 dealer gone bankrupt since last Saturday"

Center for Automotive Research: 3 million people could lose their jobs and out of this 240000 relate to the Big Three.
Mr.Wagoner- "We have been dealing with a record number of dealer restructuring"

Senators asking more questions specifically related to the plan. Questions around what happens if the plan does not work, can failure of the suppliers bring down the whole industry including suppliers etc.

10.53 a.m.
Mr. Wilson
We should have wording that covers using funds (if given) to prop up suppliers in the auto bailout plan.

Mr.Gettelfinger- 'Men and women of the UAW should be given recognition for the sacrifices made'.

Wagoner- Short Term Financing and Oversight Board as a mechanism to force all the parties to negotiate.

11 a.m.
Mr. Klein

The Big Three should work as a Joint Enterprise,in the technology sector.They should take some money out of what they might receive from Congress and collaborate together on technology, best concepts for future development and commercialization.

Mr Nardelli agrees
Wagoner- Yes
lady nodding vigorously in the background of Mr.Wagoner.
Mr.Mulally- Yes doing it with suppliers.

Rep.Hodes
Rep Hodes to Detroit Three, "Two weeks back you were simply in another universe"
What amount of money do you put on the need of the credit companies?
Chrysler- 4 to 5 billion
Ford- $12 billion (accessed already $4 billion out $16 billion from short term asset backed federal reserve loan)
GM- no exact amount

What percentage of money lent to these auto credit companies should go towards auto loans versus other purposes?-Unadressed question.

GM- Overseas business have been profitable.
Mr.Wagoner reiterates, 'We have paid $103 billion in the last 15 years in pension and medical insurance payouts.'

Mr.Manzullo
Why would auto industry want to start commercial banks? "Your job is to make cars" .Mr Manzullo feels that financing cars should be left to community banks.
Manzullo to Ford- Are we going to lose more industries and jobs because Ford manufactures and will continue to manufacture tool and dye equipment in China?
Ford- No...you bet (after a great deal of evasiveness)

11.34 a.m.
Mr. Hensarling
"If we say yes to you then who do we say no to?"
'Should it be only the small businesses that supply to the Auto Industry that should be helped?'
According to a CBS resport, $50 million paid by the Detroit Three on lobbying efforts. How much of this money has gone into lobbying to receive money under this bailout hearing.

One of the representatives from California had a very relevant question, 'Can you meet fuel economy standards by 2015?'
Great question but none of the participants were allowed to answer because of an administrative issue with time alloted to the Representative who asked the question.
Honestly, if this is the way the Congress takes its decisions, then how can we expect any rational decision?

Rep Kanjorski
Representative to Detroit Three.

"Instead of $1 a year salary, you should not be getting a greater salary that any of the successful Japanese auto executives as long as you are indebted to the United States. Until that time you should not be getting more than 20 times the salary of successful Japanese executives."

This statement by Rep Kanjorski is quite ironical if you look at Japanese companies and their struggle with bringing their CEO pay at par with their global counterparts.(http://online.wsj.com/article/SB122782362228562381.html)

Rep Maloney (New York)
Will you cease all legal and lobbying efforts to block California greenhouse standards for cars that have been adopted in New York and many other states?

Why can't you meet standards of fuel efficiency of other countries? That may be the only way to export more cars?

Live Blogging- Automobile Industry Senate Hearing Panel 2.

2008-12-04T12:00:00.022-05:00

We are live blogging the Dec 5th auto hearing here .

Refer to the post below for Panel 1 that included questions posed by the Senate to the Comptroller General of Government Accoutability Office (GAO) on the potential bailout of the Auto Industry.

Senator Dodd introducing the second Panel.

Panel 2 consisting of :

1. President of the UAW
2. Chairman CEO of Chrysler
3. CEO-General Motors
4. CEO-Ford
5. President Automotive Retailers Association
6. President COO-Johnson Controls Inc
7 Chief Economist and founder of Moody'seconomics.com

Mr Wagoner Chairman & CEO General Motors:
Ironically, 2008 is GM's centennial year. According to Mr Wagoner, the restructuring plan almost creates a new blueprint for the revival of the company. Believes the plan is achievable. He requests $2 billion in short term loans and $6bil in line of credit. Repayment will begin as early as 2011 and complete by 2020. He wants a federal Oversight Board.

President UAW
opening statement

believes GM and Chrysler could run out of funds. Wants funds to be given to GM, Chrysler and Ford. With labor cost renegotiations, any differences in such costs as compared to international labor costs would be negligible.
Chapter 11 bankruptcy "simply not viable" neither is a pre-packaged bankruptcy.

Mr.Mulally
CEO Ford

Ford has a "laser focus" on the Blue Oval. Reduced investment in Mazda. Matching production to customer demand. Higher focus on smaller cars, fuel efficiency. "We are really focused."
Wants $9 billion in bridge financing may not use it, use this money for aggressive transformation.

Mr Nardelli
CEO Chairman Chrysler
requests $7 billion loan for continue restructuring, manufacturing fuel efficient trucks and cars, begin repayment in 2012. Wants immediate assistance from TARP.

Mr. Fleming
President Automotive Retailers Association
The Auto Industry failure will not just be a Ripple effect but a "Tsunami" (that word again!)
"Consider the human side"

Mr.Wandell
Johnson Controls-President and COO
Largest supplier of automotive batteries to the auto manufacturers.
Vast majority of minority and women owned suppliers can potentially fail .
Over 35% of their suppliers are financially distressed on the verge of bankruptcy.

Mr.Zandi
Chief Economist of Moody's economist.com

Loans requested by Auto Companies is insufficient. They will come back for more.

Q&A

Senator Dodd
1. Would you be willing to accept similar arrangement/model that had been used during Chrysler's 1979 financing.- Yes by all.
2. Cerebrus purchased Chrysler for $7 billion which is exactly the figure that Chrysler is asking the Congress for. What does that indicate?-Nardelli thinks there is no connection.
3. In view of the potential ramping up of mass transit, the big Three believe they can use their current brands to take advantage of this ramp up.
4. Mr Dodd wonders if management continuation at GM is the right way to go- Mr.Wagoner responds "I serve at the pleasure of the board"

Senator Shelby
1. Will the big Three provide full proforma financial statements for the next three years?-Yes from all.

Senator Menendez
1. Do the big Three refute the claim that they will be back for more money soon?
-GM, Ford believe their assumptions are conservative so indirectly they don't believe they will be back.

1.27 p.m.
Senator Crapo:
Congress might be able to provide the Oversight Board with the authority to impose restructuring conditions on all stakeholders.

Big Three
GM needs $4 billion immediately to tide matters over till end January 2009.
Ford just needs approval for funding if they should need it going forward.
Chrysler needs $4billion out of $7billion immediately.

Mr.Schumer
"We want to see the conditions before we give you the money"
Big Three has no leverage, not even threatening to go bankrupt will work. As Mr. Crapo put it, it is like saying "I will cut my nose to spite my face"

1.42p.m.

The President of the UAW is pushing for protecting the domestic industry versus promoting foreign competition.
Senator Schumer asks for an oral committment from all participants that they will abide by any arrangement covenants and make necessary sacrifices to make things work.

1.55 p.m.
Senator Corker to Chrysler "...you can date somebody and hopefully get married soon before you run out of money".
Chrysler Board member (representing the single major investor in Chrysler) to Senator Corker "there is no way that we are willing to make additional investments in the Auto Industry."

2.01 p.m.
Senator Corker, "Less public money (will be used) if the two of you (GM + Chrysler) consolidated"
Q to Mr.Wagoner "Why did you drop the plans to consolidate with Chrysler?"
Mr Wagoner blames liquidity issues for dropping the plan to merge with Chrysler.
Senator Corker- Would the UAW convert obligations into equity in GM?
UAW President- Cannot answer without "expert advice" (Lazard helping UAW.)

2.16 p.m
Senator Casey to Detroit Three- would you be willing to make monthly reporting and making government assistance as the most senior debt?
Yes to the first one
Maybe to the second one(after discussions with current secured creditors)
Senator Tester- Will you be back for more?
Detroit Three- Chrysler- we will get through 2009
Ford- We might be asking for the bridge loan.
GM- We might have to cut costs or require more funding

Big commotion!! Protest, Shouting

Senator Tester- Needs assurance that no dollars given would be used for mergers either domestic or international.

2.50p.m.
Senator Bennett, "everything i have seen...a merger between Chrysler and GM is a good thing"

Mr Wagoner, "We would be willing to look at it (GM+ Chrysler)" (after talking with UAW)

3.20 p.m.
Senator Corker- "We are really here because of GM."
- Senator Corker received an email from Senator Biden who runs the 136 financing plan, their applications have not been rejected but have been sent back for more information.
Senator Corker- "If we put money in GM,"....bondholders would be unwilling to take a haircut. This is a potential problem. They would want more now that GM has money.

Senator Corker to GM ,between a choice of accepting an arrangement from the Government with stipulations to be completed by Mar 31 or filing Chapter 11 bankruptcy, what would GM choose?
GM- Accept financing from government even if it has restrictive stipulations.

3.40 p.m.
Senator Dodd- "Inaction is unacceptable but we are not just going to write a check either". "We are looking at a death sentence."
Sit down over the next 24-48 hours and decide what to do next.

Committee adjourned at 3.42 p.m.

Live Blogging- Automobile Industry Senate Hearing Panel 1.

2008-12-04T10:06:00.015-05:00

We are live blogging the Dec 5th auto hearing here .

We are live blogging panel 2 (Detroit 3 on the witness stand) right now!!

Invesguard will bring you live updates from the Senate Hearing as it happens...
Keep checking back for frequent updates..

The hearing has just started... Senator Dodd thanking outgoing senators....

Senator Dodd's opening statements:
According to the Senator, he asked Mr Bernancke if there was anything preventing the Fed from providing financing to the automobile industry. The treasury and Fed representatives were invited to the hearing but declined. He believes that failure of the Auto Industry would have ramifications far beyond manufacturing and pensions" and would "worsen the crisis".
Most of his opening statement was spent on explaining the ramifications of the failure of th auto industry.
Bottomline, he supports bankrolling the auto industry. He believes that conditions levied on Auto Industry companies for getting financing should also be levied on companies from the Financial Industry who have participated in TARP.

Senator Shelby opening statements:
He intends to oppose the bailout of the Auto Industry...
The "price tag" for the bailout increased from $25 billion to $34 billion 2 weeks. What changed?

First Witness:
Gene Dodaro
Acting Comptroller General of Government Accountability Office (GAO)

Before financing is provided, there is a need to understand if auto industry crisis is national economic crisis, if there is an exit strategy, companies are willing to make concessions , the federal government must be put in a first lien holder position, there should be controls over management, clear and consistent federal controls and monitoring over disbursement and use of funds.
There should be a rigorous board to oversee the administration of monies. This board has to be established if the decision is made to go forward with financing.
Financing could be provided through short term and long term loans in view of the urgency of the crisis.
He believes that TARP legislation is broad enough to provide such financing. But Board oversight should be included because current TARP legislation does not include critical management oversight.
UPDATE: Mr. Dodaro insists that the Congress should receive collateral for the loan indicating that he may not be trusting the assumptions on which the Auto Industry has based its potential repayment schedule.

Senator Bennett

Suggests providing financing to financial companies to provide funds to Auto companies. Such financing could be through equity participation by financial institutions in such auto companies. In such a way, financial companies will ensure the success of the auto companies and provide oversight of the disbursement of the funds as well.

Senator Schumer

Does not trust the Auto Industry enough to give them the money. Needs greater oversight and cooperation from various stakeholders for the Auto Industry bailout work.

Gary Kepplinger
General Counsel to the GAO

He is providing inputs from the Chrysler government financing (from a few years back) to provide similar controlling tools here.

Senator Brown

Points out that most of these questions surrounding accountability and transparency were never posed to banks that participated in TARP. I guess the Congress is a quick learner :-) Better late than never!!

List of Banks Participating in TARP- Refer to the sidebar of this blog for the latest list.

2008-12-03T21:41:00.005-05:00

as of November 25th 2008.
Source: The Wall Street Journal
You will find the latest list under the second to last item of "My Blog List" on the sidebar of this blog.

Nordstrom's skewed incentive plan.

2008-11-25T11:03:00.011-05:00

What kind of long term incentive plan involves accelerated vesting of stock units?

This is precisely the kind of incentive that is outlined in Nordstrom's revised 2004 Equity Incentive Plan (EIP) that I found in its recent 8-K filing (11/24/08). It outlines a plan to accelerate vesting of restricted stock units from 3 years to 6 months. This has some really strong implications considering that the stock is trading at its lowest levels in the past year! Ironically, the company states the purpose of the EIP is "to promote the long-term success of the Company and its subsidiaries and the creation of shareholder value by (a) encouraging Employees and Non-Employee Directors to focus on critical long-range objectives,......"

With restricted stock units vesting as fast as 6 months, there is almost, a myopic focus on the short term rather than long term. The awards of such restricted stock units is completely at the discretion of the 4 directors on the Compensation Committee as stated by the 8-K filing, "The (Compensation) committee shall select employees and non employee directors who will receive benefits under this plan."

What will be interesting to see is who will be awarded such restricted stock units in the months to come. As per Nordstrom's latest proxy filed in April of 2008, none of the named executive officers had any outstanding restricted stock awards. It almost appears as if the company is laying the groundwork to start issuing some lucrative restricted stock units to certain executive officers and directors.

Juggling Citigroup Directors drop the ball?

2008-11-21T15:26:00.011-05:00

The idea behind having independent outside directors on a company's Board is primarily the expert third party advice that they can potentially provide. Ofcourse, 'potentially' is a key word here. Just nominating a few senior executives from other companies to your board is not enough. The 'potential' needs to evolve into an active and interested director. This transformation from 'potential' to 'actual' happens when these directors are regulars at Board meetings and devote time that is needed to provide advisory services to these public companies.

Unfortunately, another by-product of the financial crisis has been the spate of director resignations at financially troubled companies.

The WSJ recently reported on the growing number of such Board resignations at public companies. This should come as no surprise when you consider the number of boards that each of these "outside experts" are sitting on.

As an example consider the number of public company boards that some Citigroup directors are sitting on: As per the company's proxy statement issued in 2008, the final tally of directors who sat on more than 2 public company boards looked like this:
(The numbers in brackets show the total number of public company boards that these directors sit on.)

Sir Winfried Bischoff (4),Kenneth T. Derr(3),John M. Deutch(4), Anne M. Mulcahy (3),Dr. Judith Rodin (3), Robert L. Ryan(5- He retired from one in June'08)

Goldman Sachs looks like this:

William W.George (3), James A Johnson (3), Lois Juliber (3), Rajat Gupta (4) Laxmi Mittal (4)

Besides this, 3 out 13 board members at CITI are CEO's of other public companies. At Bank of America 2 board members are CEO's of public companies.

With directors sitting on multiple Boards, how can shareholders expect a focused and attentive Board? For those that sit on 3 or more Boards, they could even be getting mixed up in the issues and concerns at different companies. It wouldn't be a stretch to imagine getting mixed up while juggling meeting dates, agendas and decisions when you are managing compensation, audit, risk review etc at multiple public companies, not to mention the non profits that also vie for your attention.

image: mcglinch.com

Basel Committee Strategy to Combat Financial Crisis.

2008-11-21T11:48:00.003-05:00

Yesterday, the Basel Committee announced a "comprehensive strategy" to combat the banking crisis. Chief among the recommendations were:

Ensuring the risk capture process under the Basel II framework included both book and off-balance sheet exposures.

Increasing capital buffers that will aid in times of stress.

Increasing vigilance over liquidity levels at cross border banks through stronger supervisory frameworks.

Using Basel II to build up governance practices at banks.

For a full report click here.

While on the subject of Basel and its supervising body, Bank For International Settlements (BIS), back in September, Már Gudmundsson, the Deputy Head of the Monetary and Economic Department of the BIS, addressed the Financial Technology Congress at Boston.

A few of his observations presented at this forum on the current financial crisis:

-Financial institutions are in the process of reducing their leverage and size, by both selling assets and reducing staff. The result will be a smaller financial sector, at least for a while.
-The banking system will probably have to operate with higher capital buffers than prior to the crisis.
-There might be additional capital charges under Pillar 2 (supervisory review process). In addition, there is an active discussion taking place on the merits of introducing a limit on the leverage ratio of financial institutions, which, depending on where it is set, might call for more capital than otherwise at the peak of the next boom.
-Banking supervisors will demand high quality data and analysis.

During his speech, he painted a picture of the future of the financial sector in the years to come. Here are a few of his predictions:

"1. Higher capital and liquidity buffers and higher risk premia will entail a higher cost of capital and credit than before the crisis. That is not necessarily bad, as risk was underpriced.

2. Financial firms basing their business models on cheap access to funding in wholesale markets will either have to adapt or disappear. In the United States, the trend is currently towards universal banking. Competition for deposit financing will also be intense for a while.

3. On the product side, a premium will be put on simpler products because regulators and investors will remain sceptical of complex structured products and because management of financial firms will insist on understanding the products they offer, at least for a while!

4. The originate-to-distribute model remains to be fixed, and the interests of all the various players in the securitisation chain have to be better aligned. However, that does not mean that the model will disappear. At the fundamental level, the idea of distributing risk away from the institutions at the core of the financial system to investors that are willing and able to share in the risks is basically sound.

5. Finally, the financial sector will become smaller and less leveraged. That is the only way the sector can be returned to soundness and profitability in the environment that is likely to prevail in the post-crisis period. However, such retrenchment has to be seen against the earlier growth of the sector"

For a full report on his speech refer here.

Unrest at Citi India.

2008-11-20T14:42:00.004-05:00

Citigroup lost its CEO of India and South Asia, Mr.Sanjay Nayar. He will be succeeded by Mark Robinson, a longtime Citi employee.

Mr.Nayar is slated to join Kohlberg Kravis Roberts & Co. early next year as CEO (India).

Citi is also planning to slash 1000 jobs in India, primarily in its lending arm- Citifinancial India. These changes come close on the heels of Citi's recent sale of its 12000 employee back office operations in India.

more to come....

Terrence Lani resigns from KB Homes.

2008-11-20T09:55:00.005-05:00

After reports questioning the credibility of Mr. Terrence Lani's past education arose, he resigned from his CEO position at MGM Mirage. In an 8-K Sec filing yesterday, KB Homes also announced the departure of Mr.Terrence Lani from his director post at the company. As per the 8-K filed by KB Homes , Mr. Lani informed KB Homes of his decision on November 13th. Although, Mr.Lani would have us believe that the decision to resign from MGM and now KB Homes, is driven by the need to have some personal time, his decision came too close on the heels of the WSJ report about the authenticity of his MBA.

Mr. Terrence Lani was chair of the Compensation Committee at KB Home. If you remember, there were compensation governance issues at KB Homes when the CEO was accused of choosing favorable stock option dates for himself and others in his company. (Incidentally, he settled charges with SEC in September of this year.)
Mr.Terrence Lani had been director at KB Homes since 2003.

Pepsi's "Strategy to Succeed"

2008-11-19T11:25:00.007-05:00

Yesterday, in an 8-K filing, the Pepsi Bottling Group, unveiled its new multi year initiative called "Strategy to Succeed".

This plan takes aim at the company's customer service, streamlines processes, takes a stab at reducing costs and at the same time "rationalize(s)" the company's supply chain.

Behind this grand statement lies a plan, which like many other companies today, scales back operations, (Pepsi will close 4 facilities in the U.S., as well as 3 plants and about 30 distribution centers in Mexico, Pepsi will also eliminate about 700 routes over time in Mexico), lays off global employees (approximately 3,150 positions will be eliminated, including 750 positions in the U.S. and Canada, 200 in Europe and 2,200 in Mexico) and makes changes to retirement/pension plans.

The company hopes to make a pre-tax saving of around $140 to $170 million with this initiative. This does not include charges associated with changes in the pension plan.

The company is projecting a less than positive outlook for the coming period."Deteriorating macroeconomic conditions" in Mexico has also resulted in the Audit Committee of the Board of Directors approving a $412 million non-cash impairment charge. This primarily relates to certain intangible assets for their Electropura water business in Mexico.

In the 10-K filed by the company during the last quarter, there were several indicators of the company fighting a slump in the Mexico market including the physical case volume in Mexico decreasing by 9% for the quarter and 4% for the year-to-date period. These declines were partially offset by the growth in the the net price per case in this market.

Image courtesy: shopshorthills.com

Bernanke, Paulson, Sheila Bair at Financial Services Hearing.

2008-11-18T12:16:00.007-05:00

The House Financial Services Hearing concluded at noon today, leaving Secretary Paulson on the defensive about the execution of the rescue plan as well as on the other side of the table from Chairman Bernanke and Chairwoman Sheila Bair with respect to allocating TARP funds to directly helping homeowners.

Secretary Paulson (to no great suprise) was grilled and probably deep fried by almost all the Representatives on the Financial Services Hearing committee. His responses, which were pretty standard irrespective of the questions, centered around:

1. TARP not being a vehicle for helping the auto industry.
2. TARP not being a vehicle for direct intervention to help homeowners.
3. TARP will not be used to purchase illiquid assets.

As you will probably notice, all these are just a collection of his past interviews/press releases over the last few days.

Chairman Bernanke on the other hand expressed support for Chairwoman Sheila Bair's plan to help affected homeowners directly, although he also expressed reservations on some aspects of her plan.

Chairwoman Sheila Bair of FDIC really did not have to answer almost any questions, barring a few to clarify her plan to help homeowners directly.A few points about FDIC Chairwoman Sheila Bair's homeowner rescue plan:

1. The plan will be available only to self occupied property owners.
2. The plan will renegotiate the mortgage payment down to 31% of the homeowner's income.
3. In case the homeowner redefaults, the government will be responsible for 50% of the money due. (this is the part that Fed Reserve chairman Bernanke hates)
4. The entire process will be executed by mortgage servicers, not by the government.

It was no surprise then, that at the end of the hearing, Chairwoman Sheila Bair and Secretary Paulson barely acknowledged each other as they walked to leave the hearing room.

If you are interested in watching Secretary Paulson's uniform responses or watching Secretary Paulson interrupted while trying to answer every question he was asked, here is where you'll find it.

Jerry Yang to Step down as CEO of Yahoo.

2008-11-17T21:43:00.003-05:00

In a sentimental memo to his employees, Jerry Yang announced his departure from Yahoo. He will continue to be 'Chief Yahoo' and will be present as a member of the Board of Directors.

Mr.Yang took the mantle of CEO in June 2007. His tenure as CEO was marked by a spate of failed attempts to lift Yahoo out of the doldrums including the botched up deal with Microsoft,the abandoned search deal with Google followed by possible merger talks with AOL that went nowhere.

Chairman Roy Bostock, working with the independent directors and in consultation with Jerry Yang, is leading the process of assessing potential candidates to take over the position of CEO after Mr Jerry Yang steps down. The search will encompass both internal and external candidates, and the Board has retained Heidrick & Struggles, a leading international executive search firm, to assist in the process.

According to the statement issued by the company, Mr. Jerry Yang will step down as CEO as soon as a successor is appointed. He will continue to focus on "global strategy and to do everything I can to help Yahoo! realize its full potential and enhance its leading culture of technology and product excellence and innovation."

Whether this rekindles hopes of any deal with Microsoft or anybody else for that matter is up in the air....for now.

High tension, Great performances, an almost Emmy award winning saga......Hedge Fund Hearings on C-Span.

2008-11-14T12:56:00.011-05:00

Honestly, the Cspan channel on T.V. has become the most engaging channel in recent times. I mean it has 'shows' that have drama, emotion, high stakes as well as glamour, not to mention the interesting lineup of financial industry 'celebrities'. Fox and gang can learn a thing or two from these hearings. No wonder there are blogs devoted to C-Span events (check out cspanjunkie)

In yesterday's episode of the star studded House Oversight Committee ‘show’, the hearing focused on the role of the hedge fund industry in the current financial crisis. The House Oversight Committee invited several advisors including a past SEC chairman along with a handful of hedge fund managers to investigate the role of the hedge fund industry in the current financial crisis.

This has been their general pattern of 'questioning'. They go with the advisory panel first, trying to get a sense of what can be done to correct the problems and then they hone in on the (supposed) 'perpetrators'. Of course there are those from both these sets of panels who will refuse to answer or provide any information feigning either ignorance (case in point, Mr Willumstad ex-AIG) or the Law professor (Joseph Bankman, Stanford University) from yesterday's panel who claimed most of the questions posed to him were outside his scope of expertise. Hmm...note to myself...blog about the 'dead wood' at these hearings...might make for some hilarious s(n)ide notes...more on s(n)ide notes later…

Anyway, expect changes in the regulatory landscape for hedge funds soon. Some of the often repeated advice from the advisory panel that came out (except of course, good ol' Prof Bankman):

1.There is a need for Federal oversight over hedge funds. The logic behind this is that hedge fund operations directly impact liquidity and the Federal Reserve Board is directly responsible for the state of liquidity in the markets.

2. The SEC should be able to able to inspect the information systems particularly the risk management systems of hedge funds and report the information coming out of this function directly to the Federal Reserve.

3. The Federal Reserve Board should impose 'Capital Adequacy Norms requirements' or 'Maximum leverage constraints' for all those 'too big to fail' type financial institutions.

4. To address large scale short selling activities by hedge funds, there was common consensus, that "under certain conditions", hedge funds should report their short positions to the regulators. Not to the public mind you, but to the regulators. This information would be kept confidential to the public at large.

S(n)idenotes **(refer footnote for meaning)

During the 5 minute presentation by the hedge fund managers, what came out was their desperate need to communicate to the House Oversight Committee and ultimately to the public watching this program, how their or their fund's incomes were not unreasonable or how they were completely in synch with the needs of the'common man'.

We had Mr.Philip Falcone (Senior Managing Partner of Harbinger Capital and ranked 707 on the world’s Billionaires List for 2008 by Forbes) depicting his deprived childhood- being one of nine children in a small remote town in Minnesota. Of course, the fact that, today, he calls some swanky dig in New York City his home is somehow not relevant..

Another hedge fund manager, Mr.John Paulson of Paulson & Co. Inc went to great lengths to explain his fund's squeaky clean and upfront policies with clients.

As expected, most of them were defensive, blaming the banking sector for most of the credit and financial markets' woes.
(According to one of these managers, the hedge fund industry is not as leveraged as the banking industry and Mr.Paulson most definitely supports additional regulation for these troubled industries which would not include regulating hedge funds.)

When questioned on potential regulation for the hedge fund industry, most hedge fund managers were quick to respond that the "financial tsunami" had occurred in the industries that were already regulated and not the hedge fund industry! I would challenge these hedge fund managers to say that with a straight face to all those displaced hedge fund employees who had to be laid off, precisely because of this financial crisis . That is ‘far removed from reality’ for you.

Anyway, if you want more of this drama, grab some popcorn and see the whole recorded shebang here.

**(s(n)idenotes (noun) : snide sidenotes)

Auditor's to blame for unreliable financial statements?

2008-11-11T12:58:00.003-05:00

It can be safe to conclude that the recent financial crisis can be largely attributed to loose or missing internal controls coupled with a lack of adequate regualtion at large public companies. To guard against the lack of controls and regulation affecting the reliability of financial statements, these financial statements are certified as being 'true & fair' by 'independent', qualified and trusted public accounting firms.

Auditor processes and procedures at various public companies undergo an indepth scrutiny by the PCAOB (Public Company Accounting Oversight Board). This is a private body that was established by the Sarbanes Oxley Act, 2002 with a mission to keep an eye on public company auditors.

Unfortunately, the number of cases where the auditors have been reported to have failed in their responsibilities is growing at an alarming rate. 2 recent cases related to the incompetence of senior executives of Deloitte were recently brought to light. Both these executives were partners at the Chicago office of Deloitte.

In one case, the Deloitte partner Christopher E. Anderson, showed gross negligence by ignoring 'apparent errors' in financial statements resulting in an overstatement of earnings, assets and revenues.

In the other case, the Deloitte partner, Thomas Flanagan used his information about the financial and non financial aspects of his client company to profit from trading in that company's securities, sort of like 'insider trading. This breaks the SEC's rule regarding 'independence' requirements for auditors. This was not a one time or one client incident. He did this over a period of 3 years and for all the clients where he was the engagement partner (including Walgreens, AllState and USG Corp). Consequently, the reliability of all those financial statements where he signed off comes into question. Walgreens, Allstate and USG subsequently conducted a legal investigation and concluded that their annual and quarterly financial reports were unhindered by the Deloitte Partner's activities. (How is that possible?!!)

This is just the tip of the iceberg. The PCAOB publishes the results of the inspections of such accounting firms here. I have to warn you that this is by no means a small list....My suggestion would be to find out who is the auditor of the company that you are invested in, ( you will get this from the company's annual report, if you cannot find it, send me a message and i will get you the name) and find out if this auditor is on the PCAOB inspection list. (the probability that they are on this list is very high.) You can read the inspection report to find out which company and what matters were raised during the inspection. Granted that these inspection reports cite historical cases, but knowing who is certifying the financial statements of the companies that you are invested in, is a key piece of information. This is definitely some useful reference reading that every investor should use.

Obama And You- 2

2008-11-05T14:45:00.006-05:00

In case you are wondering how you can use President Elect Obama's resounding victory (there, I used the word again!) to benefit your current investment portfolio, I suggest looking back at the sectors/industries that he discussed during his time on the campaign :

1. Infrastructure: Barack Obama believes that it is critically important for the United States to rebuild its national transportation infrastructure – its highways, bridges, roads, ports, air, and train systems. Companies doing business in these areas should certainly benefit in a big way. Obama has promised to address the infrastructure challenge by creating a National Infrastructure Reinvestment Bank to expand and enhance, not supplant, existing federal transportation investments. The Bank will receive an infusion of federal money, $60 billion over 10 years, to provide financing to transportation infrastructure projects across the nation.

2. HealthCare: Obama has stressed on revamping the health sector...presumably a lot of money would be invested in this sector. Health Care companies should stand to benefit in the next 4 years.

3. Energy: President Elect Obama has a lot of goodies for this sector....increased job generation, committment to put a million hybrid plug in cars on the road by 2015, reduce green house gas emissions, increased importance to renewable sources of energy etc.

Based on President Elect Obama's industry proposals, here are a few companies that will face better prospects in the near future:
(Standard Disclaimer: This is not a recommendation to buy or sell or trade. Just for informational (and recreational) purposes only. Please make investment decisions at your own risk.)

You get the general idea....With the markets as depressed as they are, lots of good deals out there in these industries and others.

Obama And You.

2008-11-05T09:36:00.008-05:00

With Obama's resounding victory, this is the time to really try and understand his stand on issues that affect us personally...let us start with his stand on the Government sponsored bailout plan going forward: (Click on the image to see a bigger image)

Another thing,try playing on the Obama Tax Calculator to find out how much you are looking to potentially save under Obama's Tax policies.

And here is what we should expect from him on the mortgage industry revamp:

2008-10-27T21:49:00.005-04:00

In case you were wondering which banks have asked for and received a share in the $700 billion pie, here is the list.....the word on the street is that at least some of these banks will use the money to make acquisitions.
If you click on the image, it should open larger on a new page.

Lessons from previous state-owned 'Private Enterprises'.

2008-10-27T12:10:00.004-04:00

With large scale Governments investments into private entities on the rise, I think this would be a good time to look back at similar situations to see how such private entities fared post government intervention. The best case in point would be France. France has had an extended policy of nationalization under their late president Francois Mitterand.

One example is Credit Lyonnais, the French bank that was nationalized twice...once in 1945 after the world war and the other time when the bank's assets and liabilities were moved to a state owned corporation.Credit Lyonnais collapsed completely after it had squandered away vast resources while financing Giancarlo Parretti's takeover of MGM in 1990. In addition, the former president of the bank, Jean-Yves Haberer, was under investigation over allegations of inaccurate financial reporting and misuse of business assets. The case revealed the strong links that existed between the bank's state-appointed heads and the government during the administration of the late president Francois Mitterrand. Credit Lyonnais was ultimately fully privatized in 1999. It was acquired by another bank Credit Agricole and reorganized.

Recently, there was strong public reaction to Congressman Waxman's revelation that AIG spent $440,000 on entertainment at a resort in California. But the fact that those were never AIG employees but self employed agents (Agents being critical to an insurance company) was never much publicised. If a private company is run by politicians who don't have the requisite experience to run private organizations, shareholders would be better off with a newer management board than an inexperienced one from the government.

Companies that were nationalized but subsequently allowed to go private such as Renault are healthy (is that even possible in today's market?) and profitable, thus furthering the cause for privatization rather than nationalization.

Revealing Testimony at the Hearing of Credit Rating Agencies.

2008-10-23T10:26:00.014-04:00

Regular readers of this blog would remember my post back in July of this year about declining standards including computer programming errors at Credit Rating Agencies.(these would be moody’s, S&P, Fitch etc).
You can see that earlier post here

Yesterday, top executives from Fitch Ratings, Moody’s and S&P were grilled by the House Committee on Oversight and Government Reform. SEC findings from an examination of records at credit rating agencies, that was conducted earlier this year was brought to light once again.

A few highlights and memorable quotes:
1. An email written by an employee of one credit rating agency wrote that the ratings don’t capture half the risk of the deal and even the deal “was structured by cows, we would rate it.”

2. Another report indicated that executives were quoted as saying that “….hopefully we will be retired when this house of cards collapses.”

3. In a presentation made to the his board of directors a year ago, CEO Raymond McDaniel warned that his employees sometimes "drink the Kool Aid" and gave in to pressure for high ratings, even as the weaknesses of the mortgage-backed securities were becoming apparent.

4. One of the participants at the hearing also felt that issuers of investment instruments awarded credit rating contracts to agencies that were willing to give them favorable ratings.

In case you missed this very informative, revealing and not to mention entertaining (!) exchange see it here

BTW, in the testimony of Mr.Alan Greenspan (he is testifying before the same committee this morning) "....unrealistically positive designation (of financial products backed by sub prime mortgages) by credit rating agencies was the core" of the current international economic problem.

Leadership missing in Action at Financial Companies- Part II

2008-10-22T23:07:00.006-04:00

Looking at Senior Management Turnover at companies can reveal a lot about that company’s health.

Beside the CEO, positions that are critical to a company’s core would include, in case of the financial industry, the Chief Risk Officer (CRO). Departure or a shuffle involving this executive should definitely put you on high alert. There could be several reasons behind the turnover of senior management.

1. Could it be that the CRO warned the management about high leverage risks or perhaps non compliance risks and management did not appreciate that?

2. Maybe the new CRO who is replacing the old one is a buddy of the CEO…this could lead to a conflict of interest…

Anyway, In September 2007, Lehman reshuffled its Risk Head Madelyn Antoncic out of her role into a relatively sedate role dealing with global public policy. The reason: She had warned senior management that it was taking on riskier bets than was good for its health.

At AIG, (specifically AIG Financial Products) the Vice President of Accounting Policies, Mr.Joseph St.Dennis resigned from his position after his warnings that the accounting behind the risky financial products that AIGFP was peddling would subject the company to extensive losses, went unheeded. Mr. St. Denis subsequently came forward and gave his evidence before the House Committee on Oversight and Government Reform. Mr. St.Denis resigned in October 2007. Soon after had discussions with AIG’s auditors. They in turn, declared that the company had material weaknesses in its Internal Control System for the financial year ended December 2007. Makes you wonder, what were they doing until then?

Subsequent to Mr.Dennis’s departure, AIG also had changes in its Board of Directors Audit Committee in 2007.

Citi has had a new CEO as well as a new Risk Officer, all in 2007. They also changed their Risk Officer once again in early 2008. The earlier Chief Risk Officer had apparently chosen to retire. (after being in office for less than 6 months!)

Goldman Sachs and Bank of America (BOA) have not had any significant or critical positions that were reshuffled or fired during the entire 2007. Ofcourse this does not take into account the shuffle at BOA post Merrill purchase, but that was in 2008.

What do all these executive changes mean in terms of the share value? Can these be indicators or rather foretellers of the future?

Maybe…way back in September 2007, if a Lehman investor would have considered the implications of a Chief Risk Officer being taken out of her position and shuffled somewhere else, it should have raised red flags or a ‘watch’ on that stock.

Anytime a crititcal position in a company is changed, due to reasons other than retirements, it’s time to step back and think behind the reasons. Most large institutional investors would use information like this to take the right investment decision. Even if you are not invested directly in stock market but in mutual funds or 401K’s or other investment vehicles, it is always appropriate to be aware of the companies that belong to the industry in which the mutual fund has invested your money.

2008-10-22T10:32:00.002-04:00

Before I post'Missing Leadership.... Part II', I have to comment on the interesting response that I received (well, indirectly) about the earlier post. To summarize, this individual felt that governance is over rated and it is almost impossible to attribute economic failures to the quality of leadership at any given company.

It is interesting that you should say that, because here are some instances in the current economic scenario that reflect this very thing:
1. Lehman top boss Mr.Dick Fuld has been questioned on the 'misleading' information that he presented during analyst calls. Many regulators believe the picture that was painted of Lehman during this call was misrepresented. There are several instances of people holding on to their investments in Lehman purely based on Mr.Fuld’s confident outlook on that and other calls.

2. At the ongoing hearings of Wall Street honchos, Congressmen want to hear evidence of poor leadership on the Lehman Board. (Similar points that I brought to light on Bank of America but only worse). I have attached a part of the transcript of the statement that was made before the Congressional Committee by a respected finance professional about Board failures at Lehman.

"While some of the individual director backgrounds at Lehman reflect more experience in banking and financial services than some of the other recent failed firms, overall it did not have the depth of experience it needed. Notes Dennis K. Berman of the Wall Street Journal:
Nine of them are retired. Four of them are over 75 years old. One is a theater producer, another a former Navy admiral. Only two have direct experience in the financial-services industry…. Until the 2008 arrival of former US Bancorp chief Jerry Grundhofer, the group was lacking in current financial-knowledge firepower. A number of the members did have past financial-markets expertise, but most of their working lives were tied to a different era: The one before massive securitization, credit-default swaps, derivatives trading, and all the risks those products created.
Until recently, one director was actress Dina Merrill, daughter of E.F. Hutton. She retired in 2006 at age 83 after 18 years of service. At the time of her retirement Ms. Merrill was a member of Lehman’s Nominating & Corporate Governance and Compensation & Benefits Committees.
Currently serving on the board is Broadway producer Roger Berlind, 76, the longest tenured member of the Lehman board, his only public company directorship. While we do not recommend over-boarding, it is usually not a good idea to have people on boards who have no other board or sector experience. Mr. Berlind is a member of Lehman’s Audit and Finance & Risk Management Committees. Also on the board is Marsha Johnson Evans, 60, a former Rear Admiral with the US Navy and head of the American Red Cross and Girl Scouts of the USA. Ms. Evans is a member of Lehman’s Nominating and Corporate Governance, Compensation & Benefits, and Finance & Risk Management Committees. She is also an active director of three other large US corporations: Weight Watchers International, Office Depot, and Huntsman Corporation; she is a former director of AutoZone. Michael Ainslie, who has been on the board for 12 years, is the former Chief Executive Officer Sotheby's and former President and CEO of the National Trust for Historic Preservation......"

3. Yahoo’s decision by top ranking executives to spurn the Microsoft offer at 33$. Yahoo shares hover around $12 today. That is a 60% reduction in less than 6 months.

These are just a few instances of top leadership failures that contributed to drastically reducing shareholder value. Let’s not fool ourselves into thinking that an investment strategy devoid of non financial research is an optimum one.

I hope I have not misconstrued the comment that was made. My only intention is to raise awareness of the average investor on non financial issues before making an investment decision.

Write back with your thoughts on this. I will be back with Part II later today.

Leadership missing in Action at Financial Companies- Part I

2008-10-20T14:20:00.016-04:00

Every public company has different Board committees to provide oversight and expertise over a critical area of business. Board Committees should ideally consist of members who are subject matter experts. Ideally, they should also be members from outside the company so that there is that element of independent advice.

In order to define their scope of work and responsibility, every committee should have a charter, which is like a mission statement of the committee- the ‘laundry list’ of things to do.

Look at the table (above) carefully. It depicts a few major financial institutions and the status of key non financial factors that could be considered critical to the long term success of the company.

In this part, I have taken the first factor and analyzed these companies for the presence of the Asset Quality Committee.

For a financial company, in the current scenario, Assets would include those assets backed by sub prime mortgages. This should give you an idea of the critical nature of this committee and we also know now, that oversight over such assets is a key factor to the on going viability of a financial company.

The thing that strikes me the most peculiar is that only 1 out these 5 companies even has an Asset Quality Committee.

As per Bank of America’s Asset Quality Committee charter, the purpose of such an Asset Quality Committee has been, among other duties, to provide oversight of credit risks to the Company’s assets and related earnings.

Even having such a committee is not enough…it needs to be ‘manned’ by members with relevant experience. Look at the details of the committee members at Bank of America:

There are 4 members of this committee. Out of these 4 members:

1. One is a Publisher and Chief Executive Officer, La Opinion, Los Angeles, California, the largest Spanish-language newspaper in the United States. From the bio of this member, she appears to have more media related experience.

2. The second member is a former chairman and CEO emeritus of Lowes (home improvement retailer.)

3. Third member is retired chairman/CEO Computer Generation Inc. This is the chairman of the committee. He gets $20,000 p.a. in addition to other Director remuneration for serving as the chairman of the Asset Quality committee.

The charter for the Asset Quality Committee needs members, among other things, to “approve credit risk policies and management disciplines as required by the Basel II accord”.

From the members listed above, how many of these members do you think would have any experience related to Basel II? Basel II is an extremely financial industry specific requirement for companies. 3 out of 4 members of this committee do not belong to a financial company or appear to have a financial background. .. Worth thinking over? You bet. Even when a company hires salaried employees, they would look for candidates with ‘relevant work experience’.

Here is the charter.

(http://media.corporate-ir.net/media_files/irol/71/71595/corpgov/Asset_Quality_Committee_1_07.pdf)

If you see the kind of oversight that it requires from its members, you will see a clear disparity in the requirements of this charter and the qualifications of the members on this committee. It kind of makes you wonder what was the Corporate Governance Board committee of Bank of America thinking when it nominated these members?

And don’t forget the other observation from this table….the Asset Quality Committee does not even exist for 4 out of these 5 companies.

Paulson on Lehman, TARP : The CNBC Interview

2008-10-16T14:00:00.004-04:00

For those that missed yesterday's CNBC interview with Treasury Secretary Mr.Paulson, here it is ....

http://www.msnbc.msn.com/id/22541546/

During the CNBC Paulson interview, there were some very pointed and specific questions put to Mr Paulson. He was asked if in hindsight, leaving Lehman to fend for itself turned out to be a wrong decision given the strong negative market reaction thereafter. Mr. Paulson's answer was pretty long winded (you have to see the video to believe me ) but basically he did not agree with this. He was also very candid about his decision to inject Government capital directly into American banks which was a complete 'Volte Face' from his earlier stance when he had declared that injecting capital into banks would be considered a sign of failure.

British Prime Minister takes the lead on world credit crisis.

2008-10-16T09:19:00.009-04:00

The unanimous verdict is that beleagured British Prime Minister Mr. Gordon Brown has taken the lead in solving the world credit crisis.

By deciding to be the first to directly inject capital into banks and provide unlimited guarantees to British Banks, he forced the hand of Mr. Paulson to do the same in the U.S. Not following in Mr. Gordon Brown's footsteps would surely have made American Banks uncompetitive on a global basis.

http://www.ft.com/cms/s/0/a95f17b6-9988-11dd-9d48-000077b07658.html

North Korean Mata Hari!

2008-10-15T10:06:00.000-04:00

47 year old Ms Linda Kim of Los Angeles and Seoul is at the center of an investigation for her role four years ago in securing a multi-million dollar contract from the Korean defence ministry for a Texas-based company, E-Systems.

The scandal first surfaced when one South Korean newspaper - JoongAng Ilbo - published love letters that former defence minister, Lee Yang-Ho, had sent to her.

http://news.bbc.co.uk/2/hi/asia-pacific/755752.stm

Financial Companies missing Board Level Asset Oversight?

2008-10-13T00:31:00.007-04:00

So, more on the Congressional hearings of last week....especially Willumstad and company from AIG, Dick Fuld and company from Lehman.

A common thread that came out at each of these hearings was a lot of "I don't knows" and "I am not aware of that" and not to mention,"I don't remember that".

But each of the people interviewed were or used to be members of their company's Board of Directors and its committees. So how do these things work? Do directors get paid good money to conveniently 'forget' when asked for justifications of their decisions? As per consultancy Steven Hall & Partners,(as quoted on CFO.com ) median total pay for independent directors at the 500 largest U.S. companies increased 14 percent compared with last year, rising from $162,363 to $185,000.How's that for inflation?

There are different committees of a Board of a publicly listed company that directors can serve on. There are generally 'required by law' committees like Audit Committees (we will discuss them in later posts) plus Compensation Committees, Nomination and Governance Committee and a few others. Sometimes, the type of industry also determines specific types of committee for high level oversight. One might naturally think, in the light of the current happenings ('Financial Tsunami' as Mr.Sullivan liked to keep referring to it during the hearing), in case of the financial industry this would include having an 'Asset Management' (read Asset = mortgage backed assets) or 'Asset Valuation' type committee. Envision a responsible, attentive, Board reviewing the financial arrangements that gave rise to those poisonous (and risky) mortgage based securities. And steadily warning senior company managment about the impending doom...

Now, lets review how many large companies from the financial industry have such 'Asset Management'or 'Asset Valuation' type committees:

1. Citi- None
2. Goldman- None
3. JPM- None
4. Bank of America- Yes. (Asset Quality Committee with 4 members.) More on the committee members for later...
5. AIG- Sort of (a Finance Committee which is supposed to review asset management policies and quarterly asset reports and nothing else.)

So, is it any surprise that most senior Board members either pleaded ignorance or lapses of memory when questioned? It appears that there was never any Board level oversight over Assets.

Keep checking back for more financial industry companies being added that are missing Board level 'Asset oversight'.

Mr.Willumstad and the Art of Ignorance.

2008-10-10T10:22:00.004-04:00

Top AIG officials were questioned early this week by the House Oversight Committee members (read Congressional members) for their role in the financial crisis. What was striking in this hearing was the fact that Mr.Willumstad (ex chairman and ex CEO of AIG) must have answered 10% of all the questions posed to him on top of the fact that less than 10% of the questions were even addressed to him.
At the hearing he pleaded ignorance on most of the questions put to him. According to him, he was the CEO of the company for a brief period of 2 months or so and was therefore unable to anwser any questions accurately. How preposterous is that!! As per public reports filed by the company, he has been an 'ex-officio' member of ALL the board committees at AIG.(audit committee, finance committee, regulatory and legal compliance committee, public policy committee, nominating and governance, compensation committee etc.).On top of that he had been chairman of the AIG board since November 2006.
Oh and by the way, he made an extra $200,000 each year that he was the chairman of the Board of AIG. This is of course on top of the $75,000 per anum that he made just for being on the Board. His total compensation for 2007 was $434,443.For that amount, he should have at least made an effort to know what was going on at AIG. It was a little strange to see one Congresswoman praise Mr. Willumstad for giving up his severance package while completely ignoring all his prior years' earnings or the role that he might have or should have played in this financial crisis.

The severance package that he voluntarily decided to forego was valued at $22 million. What kind of compensation metrics do these public companies use to compensate somebody who has been a CEO for a couple of months and that too an ignorant one at that (by his own admission).
As chairman of the Board at AIG he had a fiduciary responsibility which it seems he completely managed to wash his hands off of. Will somebody let the general public know what is the official responsibility for members of the Board for public companies? Are they allowed to plead ignorance or does their membership to the Board mean something?

Here's a recorded video of the hearing...4 hours long if you have not seen it before.
AIG Congressional Hearings

More to follow....

Fuel up your day with these funnies!

2008-07-11T06:43:00.010-04:00

SEC finds deficiencies in credit rating processes of Fitch, Moody's and S&P.

2008-07-08T22:28:00.003-04:00

A few weeks back, this blog had talked about a proposal by the SEC to regulate the credit rating industry. In addition to this proposal, the SEC today released the findings of an investigation into the rating procedures followed by by 3 major credit rating agencies (Fitch, S&P and Moody's). Some very disturbing facts have come to light at the conclusion of this investigation:

1.The SEC staff's examinations found that rating agencies struggled significantly with the increase in the number and complexity of subprime residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO) deals since 2002.

2. None of the rating agencies examined had specific written comprehensive procedures for rating RMBS and CDOs.

3. Significant aspects of the rating process were not always disclosed or even documented by the firms, and conflicts of interest were not always managed appropriately.

4. The internal audit processes followed at these firms varied substantially.Out of the 3 credit rating agencies, only one had adequate internal audit processes and management follow up. Out of the other 2, one had an inadequate one page check list kind of an audit that appeared inadequate and the other agency's internal audit resulted in plenty of critical findings but were never acted upon by the management.

5. Significant aspects of the ratings process were not always disclosed

6.The rating agencies did not always document significant steps in the ratings process - including the rationale for deviations from their models and for rating committee actions and decisions - and they did not always document significant participants in the ratings process.

The investigation also had access to emails and other communication between analysts at these firms. In one exchange, dated April 5, 2007, an analyst said the ratings model didn't capture "half" of the deal's risk but that "it could be structured by cows and we would rate it," according to the report.

With a virtual collapse of its internal control system(computer 'glitches', weak internal audits, conflicts of interest, inadequate documentation of the rating process coupled with zero public disclosure), it's a wonder there is even a shred of confidence left in the ratings produced by these three credit rating agencies. The SEC plans to take up a similar investigation for another seven agencies in the next few months.

SEC regulatory proposal for Credit Rating Agencies.

2008-06-29T12:20:00.007-04:00

After a tumultous year or two in the financial markets, finally some regulatory action. In mid June, the SEC invited comments to a planned proposal to reduce the influence of credit rating agencies (CRA) in the financial markets. The central theme of such a proposal is 'to address concerns about the integrity of their credit rating procedures and methodologies in the light of the role they played in determining credit ratings for securities collateralized by or linked to subprime residential mortgages' No surprises there... Following the recent market turmoil (everybody's favorite phrase),the Senate Banking Committee held a hearing on the role of the credit rating agencies in the mortgage mess. They directed that the Securities and Exchange Commission (SEC) impose tough regulations on the rating industry.

The SEC plans to propose new rules that would be aimed at enhancing disclosure, comparability as well as provide more detailed information on the processes and methodologies behind the credit ratings. These rules would also add reporting requirements and address conflicts of interest that may arise in the structured products rating process.

According to the Wall Street Journal, the SEC will propose new rules that may 'diminish the importance of credit ratings in determining the amount of capital that investment banks are required to hold'. Floyd Norris of the New York Times, says that credit rating agencies are being made the scapegoats in a crisis that seems to have no end to it. Besides rating agencies, weak regulations that let borrowers with poor credit history borrow money are also to blame.

While that may be true, lets not forget Moody's credit rating 'computer glitches' reported by the Financial Times a few weeks back followed by a 'confession' by S&P reporting its own rating 'glitch'.

XBRL tagged financial reporting to be made mandatory.

2008-06-06T14:04:00.004-04:00

The SEC has announced a proposal that would require all U.S. public companies that follow the U.S. Generally Accepted Accounting Principles, to provide financial information using the 'interactive data' format.Specifically, for companies whose market capitalization is more than $5 billion this requirement would become effective from fiscal years ending in late 2008 and the remaining companies would be expected to comply over the next two years. The first set of financial statements in the new format would be available to the public starting 2009.

The interactive financial data would be in the e(X)tensible Business Reporting Language (XBRL). XBRL is from the family of 'XML' languages. It is a language that is used for transmitting information.

Imagine if you were to download a company's annual report. The way things stand today, this data would be a block of text. However, using XBRL, computer tags would be attached to this data such that each individual financial information would have its own tag that is computer readable. For eg: inventories would have its own tag. A tag would serve the purpose of not only an identifier but also provide information on the tagged item such as whether it is a percentage, fraction or a monetary item. As a result, it would be possible to efficiently collect data from different business units (they may even have different accounting systems) and generate internal management reports as well regulatory filing reports such as financial statements. Instead of wasting effort and money over time consuming data entry, companies can simply validate the received XBRL data through available software and speed up their research and analysis of this data. XBRL tagged data would have particular use not only for companies looking to simplify their financial reporting process but also for analysts, researchers and lenders.

XBRL is a standard that is being adopted worldwide. The most important information- XBRL is free of cost and there are no license fees.Obviously, different XBRL taxonomies would be required for different financial reporting purposes as well as for different national jurisdictions.

The fact that SEC is making XBRL filings mandatory for U.S. public companies is a very important development for vendors of accounting software as well as for outsourced data processing companies. With XBRL tagged information easily available, the need to outsource data entry of financial information or the need to outsource the preparation of financial filings could potentially drop.

Sensitive Information Breach at Walter Reed Army Medical Center.

2008-06-03T13:47:00.006-04:00

Sensitive information related to approximately 1000 patients has been breached at Walter Reed Army Medical Center and other military hospitals. Although the compromised information did not include health related information such as diagnosis, prognosis or medical records, information related to names, addresses, social security information and other data has been compromised. Walter Reed officials were informed of this breach on May 21st by an outside company. The details on how this breach occurred has not yet been disclosed.
Data security has been a critical issue for government organizations. In 2006, the Committee on Government Reform had issued a detailed report on the government agencies that had faced some kind of data breach between 2003 and 2006. According to that report, all 19 Departments and agencies reported at least one loss of personally identifiable information since January 2003.

Agency/Department- Number of data breach incidents between 2003 and 2006
Social Security Administration- 3
Office of Personnel Management- 3
Veteran Affairs- hundreds of security and privacy incidents
Treasury- 340 incidents involving loss or compromise of sensitive personal information
Transportation- 1
State- 1
Labor- 3
Justice- 2
Interior- 8
Housing and Urban Development- 1
Homeland Security- 6
Health and Human Services- 24
Energy- 7
Education- 41
Defense- 43
Commerce- 297
Agriculture- 8

The letters received by the Committee from these departments showed that, in many cases, agencies did not know what information had been lost or how many individuals could be impacted by a particular data loss. The report also pointed out that in many cases the private contractors that many federal government agencies had come to depend on especially for information management services were responsible for the data breaches.

Delisting: A solution to SOX woes...or not.

2008-05-20T23:52:00.005-04:00

The current mortgage and overall credit market crisis can be partly attributed to the lack of adequate regulation. Even when regulation is put in place it is not always effective. The increasing number of disclosures related to write offs and losses that once seemingly invincible companies are making today ultimately point towards weak internal controls . The Sarbanes Oxley Act was put into place in order to prevent lapses in the internal control environment of a company that could potentially have an adverse impact on a company’s financial statements. There have been cases of companies exiting the U.S. stock exchanges only to rid themselves of the ‘high SOX compliance cost’. Recently, I talked to a senior employee of a foreign company who happened to mention that his company (of U.K. origin) was contemplating delisting from the stock exchange in the U.S., solely attributing this decision to the high cost of SOX compliance. Christian Leuz, an accounting professor at the University of Chicago’s Graduate School of Business found 484 firms that had delisted from a major U.S. exchange between 1998 and 2004. Out of the total companies that delisted, 370 delisted between 2002 and 2004. According to Leuz, not every delisting can be attributed to SOX, yet most companies have citied high SEC reporting costs as the primary motivator behind the delisting.

Basically, there are two ways in which a foreign company can get listed on any U.S. exchange.
1. They can issue shares by registering with the SEC thereby listing their shares either exclusively or primarily on U.S. exchanges.
2. A foreign company can issue an American Depository Receipt (ADR) backed by shares issued in their home country.

According to Steven Siesser, chairman of the Lowenstein Sandler’s specialty finance group, overseas companies are staying out of the U.S. stock market because of SOX related concerns citing high compliance costs, officer liabilities and burdensome internal control requirements.

However, a deeply contrary view has been presented in a paper by a group of researchers from Northwestern University, The Chinese University of Hong Kong, USC and the University of Massachusetts. Their research indicated that foreign companies that ultimately delisted from the U.S. stock exchanges had weak governance characteristics to begin with. Good governance is measured by the number of independent directors on the board, nature of their shareholding, segregation of voting and ownership rights. They have also concluded through their analysis that foreign companies that delisted from the U.S. stock exchanges ultimately suffered a sharper decline in their share price. Shareholders perceived compliance with SOX as a form of an enhanced investor protection tool. A direct result of delisting was a sharper decline in their share price given the negative perception that the delisting had in the minds of their shareholders. This ultimately lends credence to the theory that if the delisting from U.S. stock exchanges was motivated by cost considerations (i.e. increased SOX compliance) there would have been an expected price increase as a result of the delisting and not the opposite effect.

The authors of this paper were also driven to conclude that the delisting decision was driven to a larger extent by the controlling manager’s or controlling shareholders desire to protect their interests that would not have been possible due to the internal control requirements that SOX stipulated. Their research indicates that U.S. capital markets have not lost their competitiveness due to large SOX compliance costs but possibly due to SOX requirements that take away sole control from ‘corporate insiders’.

Please feel free to send in your comments on this post and thoughts on delisting as a way to get away from SOX.

Basel Committee unveils plans to strengthen global financial markets.

2008-04-18T10:27:00.006-04:00

On the close heels of the report presented last week by the Financial Stability Forum (FSF) , comes an additional report from the Basel Committee on Banking Supervision(BCBS).

In its report to the G-7 ministers, the FSF provided a brief outline of the steps that are planned to improve market resiliency. The BCBS in its report presented on April 16th, provides additional details with a general timeline for the implementation of these measures.

The measures are addressed towards five main areas: Capital, Risk Management, Liquidity Management, Disclosures and Valuation.

1. Capital: Economists, central bank governors and others have attributed the weakening of financial markets to inadequate capital maintenance by banks and other financial institutions that did not commensurate with the level of risk that these banks took on over the years. Towards this end, the BCBS will introduce measures to ensure adequate capital, to better capture off balance sheet exposures and to 'improve regulatory capital incentives'.
Specifically, the committee will revise the BASEL framework to establish higher capital requirements for certain complex structured credit products. Besides this, the capital requirements associated with the liquidity extended to support off balance sheet vehicles will also be strengthened.Details of this proposal are expected to be provided later this year. The Committee, in cooperation with the International Organization of Securities Commissions (IOSCO), is extending the scope of its existing proposed guidelines for "incremental default risk" to include other potential event risks in the trading book.This is planned for 2010. Until this is put in place, an interim treatment will be used for complex securitisations that are held in the trading book. The Committee expects to issue its proposal for public consultation later this year, and it also will conduct a quantitative impact assessment.
The committee also plans to monitor Basel II minimum capital requirements and capital buffers over the credit cycle. If these are found to be inadequate, then such requirements laid out in Basel II will be enhanced in order to provide a sound capital framework commensurate with the banks' risk profiles.

2. Risk Management: The committee plans to revise Pillar 2 associated with the Supervisory review process by providing additional tools and guidance.

3. Liquidity Management:The committee plans to publish global sound practice standards for the management and supervision of liquidity risks. This is planned to be published in July and will be open for consultation.

4. Disclosures: Pillar 3 (market discipline) of the framework ensures adequate disclosures in the area of complex securitization. There will be additional guidance in the area of market discipline by 2009.

5. Valuation: The bank plans to develop guidance that supervisors can use to determine the strength of the banks valuation processes. The committee believes that weak valuation practices contributed to the recent market turbulence. This measure will hopefully reduce a recurrence of such an event.

One step closer to an enhanced Basel II.

2008-04-11T21:28:00.008-04:00

The Financial Stability Forum (FSF) today presented a report to the G 7 finance ministers, recommending actions for achieving strong and resilient financial markets. The FSF is a body that consists of Central Bank Governors, international financial institutions, regulatory bodies and others with a specific purpose to promote financial stability across the world. The FSF was formed in 1999 at the behest of the Finance Ministers and Central Bank Governors of the G 7 countries.

The G-7 includes the U.S., the United Kingdom, France, Germany, Italy, Canada and Japan.

The reportpresented to the G 7 ministers recommends specific actions relating to capital and liquidity requirements, risk management, strengthening disclosure requirements under Basel II as well as standards for off balance sheet vehicles and valuations. The report also addresses the role and use of credit rating agencies. Rating agencies should distinguish between ratings on structured products versus those on bonds. Enhanced information disclosure will also be required from institutions about securitised products and their underlying assets.

Addressing the need for a swift response by authorites to changes in the environment, the report also recommended that a supervisory body will be put in place by end 2008 'for each of the largest global financial institutions.'

The FSF member firms also include the Bank for International Settlements(BIS). The standing committees at the BIS supports central banks by providing guidance and recommendations on monetary and financial matters. One of these committees includes the Basel Committee on Banking Supervision. With the FSF having recommended changes to capital and liquidity requirements in its report to the G 7 ministers, enhancements in Basel II should be expected before the end of the year.

Weak Internal Controls at Verifone Prompt Large Financial Restatement.

2008-04-10T11:07:00.004-04:00

In December 2007, weak internal controls on Inventory processes, forced the management of Verifone Holdings Inc.,(the maker of electronic payment equipment) to restate their financial statements for the Quarters ended January 2007, April 30, 2007 and July 31, 2007. Verifone's fiscal year ends October of each year.

At the time of the initial December 2007 announcement, management estimated reductions to previously reported inventories of approximately $7 million, $16 million and $30 million as of January 31, 2007, April 30, 2007 and July 31, 2007, respectively, and reductions to previously reported pre tax income of approximately $8 million, $7 million and $13 million for the three month periods ended January 31, 2007, April 30, 2007 and July 31, 2007, respectively.

Almost three months later and with the help of 70 staffers from an independent general counsel as well as a forensic accounting firm, Verifone's management is ready with their 'final' estimate.

A few days back, Verifone managment reported that the audit committee had completed their investigation. Their final tally on reduction in the value of inventories was pegged at approximately $13 million, $23 million and $40 million at January 31, 2007, April 30, 2007, and July 31, 2007 These are considerably higher as compared to the originally reported estimates of reductions. These are also unaudited and subject to the review of their public accounting firm.

The cause of such a large restatement has been attributed to weak internal controls surrounding the inventory financial reporting and accounting process.

Specific remedial measures have been recommended in the audit committee's final report:
-- Implementation of a more stringent voucher approval process for manual journal entries;
-- Implementation of enhanced information technology/enterprise resource planning systems commensurate with the increased size and complexity of VeriFone's businesses;
-- Adding appropriate accounting and finance resources through additional centralized staffing with individuals having sufficient knowledge and experience in cost accounting and other GAAP principles;
-- Enhanced segregation of duties between the financial planning and the accounting and control functions;
-- Improvements in governance and compliance functions to improve control consciousness and appropriate adherence to generally accepted accounting principles, as well as improved tone, communication, documentation, education and training for employees involved in the financial reporting process, including the appointment of a chief legal and compliance officer; and
-- Personnel actions, including the termination of the Company's supply chain controller, enhanced supervision and other actions.

Besides the obvious accounting gaps, the recommendations also indicate a weak Human Resource function. Inadequately trained and incompetent personnel combined with weak oversight will almost certainly lead to disastrous results.

Manual Journal entries are one of the few items that receive maximum scrutiny from auditors.

Inadequate seggregation of duties is an issue that receives a high severity rating in an audit report. How could such issues have escaped audit attention?

The company's external auditors, Messrs Ernst & Young LLP issued an unqualified, clean audit report for the year ended October 2006. The Management assertion that is required under the Sarbanes Oxley Act, 2002 also held no indication of any weak internal controls. The managment stated "our management (including our chief executive officer and chief financial officer) concluded that our internal control over financial reporting was effective as of October 31, 2006.Management’s assessment of the effectiveness of our internal control over financial reporting as of October 31, 2006 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report included at Item 8 in this Annual Report on Form 10-K." There has been nothing in any statement from Verifone's management that can assure investors and authorities that the same inventory issues from 2007 were not creep into the prior years financial statments.

The SEC has sent an informal letter to Verifone managment asking to interview a few present and previous employees. Does the SEC or the PCAOB plan to involve the public accounting firm as well? I have written to the PCAOB to comment on this issue. Their response is awaited and once received will be posted on this blog.

SEC support to Basel Committee.

2008-04-04T10:29:00.007-04:00

In the light of the recent financial market turmoil, the Basel Committee's Working Group on Liquidity has planned some key updates to their liquidity management guidelines for banks.

Mr. Christopher Cox, chairman of the SEC recently wrote to Dr. Wellink, chairman of the Basel Committee on Banking Supervision. Although the objective of the letter was to express support for upcoming updates in the guidance for liquidity management, yet the bulk of the letter addressed the Bear Stearns collapse. It attributed the collapse to rumours and a 'self fulfilling prophecy' than inadequate liquidity management.

Mr. Cox provided the capital and liquidity position of Bear Stearns prior to and up to the days leading to the take over by J P Morgan Chase. It showed the liquidity pool on Jan 31 up until March 13th. Mr.Cox remarks how the liquidity pool of Bear Stearns diminished from $18 billion on Mar 10th to $2 billion on March 13th which resulted in Bear's collapse.
Interestingly, towards the beginning of the year (Jan 31st) the liquidity pool stood at only $8 billion.

According to Mr.Cox, although Bear Stearns' holding company and the bank's 2 SEC registered brokerage dealers had adequate capital to fulfill the Basel II standards, yet "evaporation of market confidence" led to liquidity being impaired.

An obvious question that comes to mind is: how did the current regulatory structure at SEC miss this impending debacle? By reassuring the Basel Committee about the adequacy of Bear's capital structure, the SEC has failed to answer a very important question which is how did the bank crumble in spite of such an apparently strong capital position? Does the SEC truly believe that rumor mongers and market whispers were the sole reason for Bear's downfall?
Innovative financial products fared very well in an unregulated market. But their failure also meant the crumbling failure of the biggest financial markets and consequently a weakening in the economy.

It will be interesting to see how Treasury Secretary Mr.Paulson's plans to overhaul the financial regulatory environment actually plays out in the coming months.

New Governance, Compliance Standards for the financial industry in the making.

2008-03-31T14:03:00.004-04:00

The Financial Stability Forum (FSF), which is a consortium of 26 National Authorities (including international financial institutions, Central Banks, regulatory and supervisory groups etc) met in Rome this past week, to contemplate on the current challenges facing the financial industry and the possible remedial measures that need to be in place in order to avoid a repeat of the current financial crises.

The FSF was put in place with a broad agenda for regulating, streamlining and stabilizing the international financial markets.

A few of the topics covered at the most recent meeting of the FSF held on March 29th include:

1.A report detailing the market weaknesses as well as ways to increase market resilience will be delivered to the Central Bank Governors of the G-7 countries. This report will indicate improvements in the current regulatory approach that may give rise to newer compliance requirements.The report outlines specific policy recommendations in the following areas: prudential oversight of capital, liquidity and risk management; transparency, disclosure and
valuation practices; the role and uses of credit ratings; the authorities’ responsiveness to risks and their arrangements to deal with stress in the financial system.

2. On the urging of the FSF, the hedge fund industry in both the U.K. and the U.S. are in the process of developing best practice standards. The level of adherence to these standards will be closely regulated and reported to the FSF.

3. The International Monetary Fund, (IMF) in close partnership with the Sovereign Wealth Funds (SWF) is coordinating work to identify a set of voluntary best practice guidelines, focusing on the governance, institutional arrangements and transparency of SWFs.A Sovereign Wealth Fund (SWF) is a state-owned fund composed of financial assets such as stocks, bonds, property or other financial instruments.SWFs are typically created when governments
have budgetary surpluses and have little or no international debt for eg. The Kuwait Investment Authority. The Organisation for Economic Co-operation and Development (OECD) is developing guidance for recipient countries’ policies toward investments from SWFs.

All these strategies clearly indicate that there will be an increase in the number and type of regulations geared toward the financial industry.Compliance laws will definitely go beyond Basel II and even the loosely regulated hedge fund industry will soon undergo a more comprehensive overhaul.

To add to this is the announcement by U.S. Treasury Secretary, Henry Paulson outlining the measures that he has in store for the ailing U.S. economy from a regulatory perspective:
1. Merge SEC and Commodity Futures Trading Commission bringing oversight of U.S. securities and futures markets under a single regulatory umbrella.

2. Eliminate the federal thrift charter, folding the Office of Thrift Supervision into the national bank regulator, the Comptroller of the Currency.

3. The blueprint also calls for a new Mortgage Origination Commission (MOC) with a director appointed by the president. "The MOC would evaluate, rate and report on each state's adequacy for licensing and regulation of participants in the mortgage origination process.

4. There would also be federal regulation of the insurance industry by establishing an Office of Insurance Oversight inside the Treasury Department.

Almost all of these recommendations will require legislation to put them into effect, and although according to Henry Paulson, increasing the number of regulations was not his intention in this overhaul, it seems obvious that this is going to be the case.

Keep checking back for updates.

SocGen's Accounting: Innovative or Inventive?

2008-03-20T14:40:00.006-04:00

Everybody has read, discussed and digested the multi billion euro trading loss that Societe Generale suffered a few months back. What has escaped public attention to a large extent is the subsequent accounting treatment of this loss.

The bank follows the IFRS (International Financial Reporting Standards) for the preparation of their financial statements and these have been audited by the company’s auditors (Messrs Ernst & Young and Deloitte).Investors and observers would have expected the huge trading loss that Societe suffered in January ’08 to be reflected in the first quarter financial results of this year.
According to Societe Generale’s special board committee that led its investigation into the trading incident, the trader had closed out most of his positions by the end of 2007. On that basis, such a trading loss should have been accounted for in the year that it occurred i.e. 2008. However, according to the bank’s Annual Report, it has been accounted for in the financial year 2007. This has been done by creating a provision equal to the amount of the trading loss in the consolidated 2007 income . Accounting for a loss that has not occurred in that relevant financial period is a very unconventional accounting treatment appearing to defy common accounting principles.

The Annual Report states,
“….. the Group considered that the application of IAS 10 “Events After the Balance Sheet Date” and IAS 39 “Financial Instruments: Recognition and Measurement” for the accounting of transactions relating to the unauthorized activities and their unwinding was inconsistent with the objective of the financial statements described in the F ramework of IFRS standards. For the purpose of a fair presentation of its financial situation , it was more appropriate to record all the financial consequences of the unwinding of these unauthorized activities under a separate caption in consolidated income for the 2007 financial year. To this end and in accordance with the provisions of paragraphs 17 and 18 of IAS 1 “Presentation of Financial Statements” the Group decided to depart from the provisions of IAS10 “Events After the Balance Sheet Date” and IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”, by booking in the consolidated income for the 2007 financial year a provision for the total cost of the unauthorized activities.”

The International Accounting Standards include a rarely used provision related to ‘true & fair’ financial statements. This provision provides that “in the extremely rare circumstances in which management concludes that compliance” with the rules “would be so misleading that it would conflict with the objective of financial statements,” a company can depart from the rules. This is the loophole under which Societe Generale has decided to depart from the provisions of IAS 10 “Events occurring after Balance Sheet Date” and IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”.

This departure in conventional accounting has been submitted to to the banking supervisorybody (Secrétariat général de la Commission bancaire) and to the market authority (Autorité des Marchés Financiers) to confirm its acceptability regarding the regulatory framework.

Keep checking The CG Factor for updates on this issue.

Credit Card Breach at Hannaford.

2008-03-18T22:19:00.003-04:00

Corporate Governance (CG) is a term usually associated with CEO compensation, Board Composition, Director Independence etc. These are some of the factors that governance rating companies most commonly consider.

CG is the accountability or responsibility that a company has towards all its stakeholders. Now the word stakeholders conjures up images of shareholders, employees and other internal constituents of a company. An important often overlooked stakeholder is the customer and in the case of the retail industry, one of the most critical. Imagine a concentric circle within which you have the shareholders in the innermost circle followed by the management or employees, then the Board followed by vendors, customers, banks, regulators, and the circle gets bigger and the list gets broader. CG expectations mandate that the company presents itself as a responsible corporate citizen to not just its inner circle stakeholders but to the surrounding circles as well.

The credit card fraud at TJX and the most recent one (reported today)at Hannaford Bros Co., a grocery chain in the U.S. (a group company of Delhaize SA) are prime examples of instances where a company fails in fulfilling its responsibility towards its external stakeholders. The computer intrusion at TJX went on for 18 months before being discovered. The worst part was the audacity with which it was executed. There were 3 different ways in which the attack was carried out including one where the credit card processing terminal was replaced.

The Hannaford breach has reportedly affected close to 4.2 million credit and debit card numbers. The breach occurred at over 200 stores in the U.S. The modus operandi in this case as with TJX was breach during credit card transmission. Close to 2000 fraud cases related to this breach have already been reported. On the Hannaford company website, you will find the CEO’s apology to customers and a brief mention that they promise to cooperate fully with the authorities handling this probe. Now on the other hand if you visit the corporate website of Hannaford’s parent company (Delhaize SA), there is no mention of this credit card breach, no apology or update on steps being taken to combat this problem that was discovered on February 29th and this despite the fact that out of Delhaize’s 2545 stores, 1570 are based in the U.S. It would be interesting to find out whether the same procedures for credit card transmission were in effect in all its U.S. stores (beside Hannaford and Sweetbay, there is Food Lion). Another point to note, the company’s credit rating has been recently (Mar 11th) elevated by S&P to BBB- (investor grade positive outlook)from a BB+ (investor grade stable outlook).

Ironically, Hannaford was certified as PCI compliant last spring and once again in February

http://www.digitaltransactions.net/newsstory.cfm?newsid=1712

Spitzer and Bouton

2008-03-12T21:28:00.006-04:00

Spitzer Vs Bouton.

This may seem like an odd comparison, one is in public service and the other obviously as private sector as you can get. But it just came to me last night as i sat there reading about Gov. Spitzer's resignation. They are not that different...there are some obvious similarities in their position, responsibilities, role model like expectations that arise from being at the helm of large entities.

The biggest difference in spite of all these similarities is that Spitzer, (atleast from whatever is currently known ) did not put the state's economy at peril nor did he erode 'shareholder'(in this case taxpayer) value and yet we are looking at his upcoming resignation. Which is not too say he should not resign. On the contrary, this was expected and in fact surprising that it did not come any sooner.

Bouton, on the other hand is the chairman of SocGen and it was on his watch that SocGen suffered massive losses. The circumstances of such losses point towards inadequate human resource management, loose internal controls and inadequate reviews and supervision and maybe even collusion. Nevertheless, Bouton continues as the bank's chairman. Under his leadership, SocGen raised capital to make up for the losses, took cover under one of the most obscure and rarely used accounting rule thereby booking their losses in financial year 2007 and are now looking ahead.

Why are we not yet looking at his resignation? What makes him so different? Don't SocGen shareholders care that this can happen again or don't the French believe that Bouton has failed in his moral obligation as a corporate leader. I guess they just threw Corporate Governance out of the (french) window!

Tax Dilemma over Vodafone-Hutchinson transaction-Part I

2008-03-11T23:24:00.007-04:00

The facts:

Netherlands based Vodafone purchased a controlling stake in Hutchinson Essar,an Indian company. The sale price of $11billion was paid to Hutchinson, a Hongkong conglomerate.
The acquiring company paid the full amount to the selling company without witholding any capital gains tax that according to the Income Tax authorities in India should have been witheld and paid to the Government.

Amount Involved:

The capital gains tax would be around $2billion on the $11 billion sale.

Government's viewpoint:

The acquiring company, in this case Vodafone, should have witheld capital gains tax on the transaction. The logic? Because the 'capital asset' is on Indian land i.e Hutchinson Essar, has operating assets in India.
The 2008 budget proposed an amendment in Indian Tax laws that would strengthen its case in such situations. This amendment has yet to be enacted and will be debated when the Indian Parliament starts its next session on April 15th. The likelihood that this proposed change in the Indian Tax Law will be passed without opposition is extremely high.

Vodafone's viewpoint:

The transfer of shares took place outside India and therefore the taxability of such a transaction is outside Indian jurisdiction.

Implications:

This has big implications for the future of M&A's to thrive in India. India is just emerging as a big player in the M&A world. This is evidenced by the possible, maybe even imminent Tata Motors take over of Jaguar for an estimated $2bill, Tata Steel's 6.7 billion pounds takover of dutch rival Corus etc. Taxing capital gains on such transactions would not be regarded as very positive and encouraging signal.

Big Dates:

April 15th- Parliamet resumes its session and will consider enacting the proposed changes to the Indian Tax laws relevant to this case.
June 23rd- Date on which Bombay High Court will resume hearing on this case.

Helping hand or playing musical chairs?

2008-03-11T15:00:00.004-04:00

The Fed alongwith other central banks (ECB, Bank of England etc) announced plans to make available through loans, an additional $200mil to the ailing financial industry. This is being hailed as a great 'innovative' and timely assistance to the 'poor' and credit beaten banks.....but hold on a minute, let's back up a bit...what did they say they would accept as collateral? ...Unbelievably, the collateral for these loans is going to be the very same subprime assets that that have been the cause to begin with.

Now i don't claim to be an economist but how does this move truly help the current situation? It just means transferring these subprime assets to yet another lender which in this case means ultimately transferring it to the taxpayers.

Doesn't anyone feel that the banks really need to take responsibility for this? What kind of a message is this sending? That if they do this the next time they will be bailed out again?

(Un)Independent testing- A real shocker.

2008-03-07T15:14:00.003-05:00

The Senate, yesterday, passed a bill aimed at cleaning up the U.S. Consumer Product Safety Commission. The purpose of this bill is to better control quality of children's toys that enter the market by providing guidelines on the testing that goes into getting the product ready to be launched into the market and ultimately reducing the number of defective and unsafe toys. An effort in the right direction, but very weird to say the least. To explain it very simply, they plan to hand over the testing to "independent" labs who in most cases have had very close relationships with the very same manufacturers whose products they are expected to test independently. Convoluted or wot?

After reading about the Senate Bill's efforts to clean up the , i wrote back to the author whose article i read on WSJ.com on some of my views....here is the email...

Gary,

Your commentary on the recent Bill on consumer safety made for very interesting reading. It is truly shocking to see the utter ignorance of the authorities on the simple concept of independence. How are these laboratories supposed to provide an independent assessment despite their proximity to toy manufacturers? The ‘independent in house testing’ quoted by CTL’s President is more of an oxymoron. Corporate America, it appears is always struggling to understand the true meaning of ‘Independence’ whether it is auditor independence or ‘Independence of outside experts’. It is always testing ways to stretch the limits a little more.

There are different elements of Corporate Governance, the most popular being CEO compensation, director independence and takeover defenses. But key corporate behavior at the grassroot operation level may reveal greater inconsistencies than those revealed by years of research into other more arcane and obviously well controlled areas such as board composition or proxy voting.

I would just like to conclude by saying that analysts need to look beyond the usual and into more chronic, repeated and often overlooked offenses to understand the true value of a company.

Thanks,

Tejus

Corporate (mis)Governance: The saga continues....

2008-03-06T13:56:00.003-05:00

The ritzy and often glamorized world of deal making on Wall Street gets another slap on its face. With Fidelity's managers fined for accepting gifts and favors in exchange for placing their trades through the 'donors' trading desks, corporate governance in America Inc. takes yet another blow. Measuring Corporate Governance is more than weighing the composition of the Board or succession planning or takeover defences. Corporate Governance includes ethics from the grassroot level upto the highest level of a company.

The main accused in question, the prominent and well known Mr.Lynch (ex manager of FIdelity's highly popular Magellan Fund) was asked to pay $15,948 in disgorgement and $4,183 in interest to settle allegations. Please!! WIll somebody please tell me how this will prevent Mr.Lynch and company from repeating this? This is not even a rap on the knuckles....Kudos to the SEC for following up with these practices and pursuing the accused and ultimately penalizing...but $15948? Fidelity was also asked to pay $8 million to settle claims. But where is this money going to come from anyway? From Mr.Lynch and company? No way...Ultimately the shareholders.....

Hmmmm........I wonder how these situations are taken into account by Corporate Governance rating agencies....GMI, Corporate Library, ISS are you listening guys?

Look out for the Corporate Governance (CG) dashboard with updates of this and other CG blunders.

Compliance in Product Design.

2007-08-22T13:56:00.000-04:00

For companies looking to strengthen internal controls or stay compliant with applicable statutes, the best approach would be ensure that all new software that is being purchased by your company’s IT deparment is already ‘Statute (SOX, HIPAA,etc) compliant’. Products don’t have to come with a certificate that says ‘Our product is SOX compliant’. Even if none of these laws are applicable (lucky you!) it is in your best interests to ensure that basic principles such as Confidentiality, Integrity and Availability are the key cornerstones of every product that you seek to install in your IT or business environment.

Any product that
• truly enforces segregation of duties thereby avoiding conflicting responsibilities,
• has proper authorizations/workflow management in place
• Adequate management reporting capabilities
• Audit log capabilities
can be considered a compliant product.

Obviously, there are other internal control considerations. In addition, the many principles set down in COBIT or any other industry standard can be studied and applied to these products in greater detail. Besides this, the company’s control environment and risk appetite will also determine how many compliance features the product should ideally be ‘loaded’ with.

Look for my next post on compliance and “must-have” internal control features for product companies.

Mobile entertainment goes another step forward in India.

2007-07-23T22:29:00.001-04:00

Stuck in the traffic? Facing a longish train journey? Bored of hearing the same old songs? Wouldn’t it be nice to be able to see a short movie on your ride home?
This is exactly the kind of service that will soon be available to mobile phone users in India. A tie up between BPL ( a leading Indian mobile phone service provider) and Shemaroo ( an online store of Bollywood movies) was recently announced to provide streaming 15 minute movies on your mobile phone. Key scenes of a movie will be picked and condensed into an abridged 15 minute version. The real challenge, of course, will be to ensure that the essence of the movie is not lost through the abridged version.
The cost to the viewer is Rs 5 per minute taking the total cost of watching the 15 minute movie to Rs 75 (around $2). The movie can be stopped at anytime and the viewer will be charged only for the portion of the movie watched.

New Self Regulatory Body for IT Companies in India.

2007-06-14T10:56:00.000-04:00

NASSCOM, which is India's trade body and chamber of Commerce for the IT industry, announced plans to form an independent self regulatory body to monitor information security among member IT companies in India. Called the Data Security Council of India (DSCI), it is formed especially to combat security lapses within companies offering outsourcing services.This body aims to offer security policies, bring about increased governance to the hiring process and offer accreditation/certification services.

According to Shymal Ghosh, chairman of DSCI, 'it will be an independent organization, at arms length from NASSCOM.'

What is important in order to combat inadequate controls surrounding information security, is to ensure that there is a body of information security standards that companies are expected to follow. This ensures process standardization, industry comparisons as well as enables accreditations/certifications. These standards would encompass

encryption standards,
physical controls,
logical controls (especially user access controls, interface controls, restriction over the use of Instant Messaging etc.)
other infrastructure related standards.

Best practices dictate establishing an information security policy and a data classification policy. Data that has been classified as critical, sensitive or public data, automatically becomes much more organized and it is easy to see which data should be given priority for security.

Although we have seen incidents of internal control violations (data theft, cheating, passing on confidential information) in recent years, the core of the outsourcing business in India stays strong. Today’s Wall Street Journal reports another U.S. investment bank outsourcing work to an Indian research firm.

Maybe, an initiative like DSCI will be the first successful step towards achieving formal governance in corporate India.

New PCAOB standard aimed to increase efficiency in Internal Control audits.

2007-06-04T16:21:00.001-04:00

The board adopted AS 5 to supersede AS 2. This will apply to all companies required to conduct internal control audits as required by the SEC.

Key reasons for the change:

1. The Board’s inspection of the internal control audits conducted as well as public roundtable discussions revealed that the audits took greater than necessary effort.
2. The Board also felt that adoption of AS 5 would make it easier for smaller companies to comply with the Act’s internal control requirements.

Key Features of the new Standard:

1. Emphasizes fraud-risk and fraud related controls in the process of risk assessment.
2. The effectiveness of the company’s entity level controls may reduce the amount of testing in the underlying process controls.
3. The new standard permits the auditors to restrict their own testing by letting them use the control testing of others.
4. The Audit committee should pre-approve any internal controls related non-audit services provided by the company’s auditor. In fact, Rule 3525 requires a registered public accounting firm that seeks to provide such service to provide details such as scope of the internal control related non-audit service, the potential effects of the proposed service on the firm’s independence and also document the discussions that are held with the audit committee.

This may reduce some of the economic and operational burden currently being experienced by many companies. This is true because increased auditor reliance on the work of others and stronger entity level controls may translate into a reduction in the auditor’s testing time and effort.

PCAOB Approves New Audit Standard for Internal Control over Financial Reporting.

2007-06-02T11:06:00.000-04:00

On May 24th, the Public Company Accounting Oversight Board approved a new audit standard for Internal Control over Financial Reporting.

Details:As per the PCAOB, 'the auditing standard adopted by the Board today is principles-based. It is designed to increase the likelihood that material weaknesses in internal control will be found before they result in material misstatement of a company's financial statements, and, at the same time, eliminate procedures that are unnecessary.' The final standard also focuses on the procedures necessary to perform a high quality audit that is tailored to the company’s facts and circumstances. The Board worked closely with the Securities and Exchange Commission to coordinate Auditing Standard No. 5 .

Applicability: 'The final standard may be used by auditors immediately following SEC approval, and it, along with Rule 3525, and the conforming amendments, would be required for all audits of internal control for fiscal years ending on or after November 15, 2007.

Coming soon~ Auditopia's analysis on the new audit standard.

Increased reliance on Internal Audit- the means to increased compliance and reduced cost burden.

2007-04-20T12:02:00.000-04:00

In an interview with CFO.com, retired Senator Oxley is reported to have said that he is unhappy with the implementation of the Sarbanes-Oxley Act especially Section 404, by the PCAOB through Accounting Standard 2 (An Audit of Internal Control Over Financial Reporting Performed in Conjunction with An Audit of Financial Statements). He felt it was far too prescriptive and much more expensive than anyone anticipated.

With Senator Oxley as the new non executive vice chairman of NASDAQ, one can only hope that this will translate into substantial changes to reduce the financial burden and at the same time maintain the level of compliance required by the Act.

This is definitely achievable and can happen through increased reliance on the work performed by Internal Audit groups for the purposes of complying with the Sarbanes Oxley Act particularly section 404. Internal audit departments whether in-house or outsourced are staffed by competent and experienced professionals with as much subject matter expertise as an external auditor. Additionally, they possess a certain level of independence through a direct reporting line to the Corporate Audit Committee.

Sarbanes-Oxley ripples felt on the Indian sub-continent.

2007-04-11T12:47:00.000-04:00

Good news for those with business ties in the Indian sub continent. Last week, the DNA (http://www.dnaindia.com/report.asp?NewsID=1088529)provided details on the Ernst and Young India CFO survey.

It appears that out of the 125 CFO’s who were interviewed, 43% wanted the country to follow a SOX like model for internal controls. In fact, 56% felt that the benefit from corporate governance requirement outweighs the compliance cost.

Note that of these 125 CFO’s, 78% represented listed companies.

There was also an overwhelming support (81%) for the existing regime of corporate governance certification by CFO/CEO, despite its perceived high level of risk. About 60% of the CFOs believed that regulatory compliance is not a burden.

There maybe growing opposition to the rigorous demands of Sarbanes-Oxley in the U.S but it is surely gaining positive momentum elsewhere. With a large number of financial and other operations being offshored to India, increased corporate governance in the sub continent is a welcome phenomenon.