The Great American Boardroom Bailout Sweepstakes

Main Street always pays for the wild parties Wall Street throws and the cleanup required afterwards.

Do you have your ticket for the Great American Boardroom Bailout Sweepstakes? Probably not. You need a special pass to get to the front of the line. Angelo Mozilo, CEO of Countrywide Financial, once the largest mortgage lender in the United States and now the poster child for financial ruin for itself and millions of homeowners, has one. And it’s a beaut. While steering his company into a Titanic-like credit collision and foisting loans on the most vulnerable and least able to handle them, the king of subprime mortgages has pulled in hundreds of millions in salary, bonuses and stock options since 2000 alone.In 2006, when he was still sowing the seeds of the subprime disaster, he was one of the 10 highest paid CEOs in America, coming in at $142 million. In the past several months, in what we have called before a miraculously well timed event, he has been selling off tens of millions in stock from the exercise of generous options provided by a hand-picked, all-male board whose propensity to prevent any suffering on Mr. Mozilo’s part knows no bounds. All the time during his flurry of recent sales, he, like Ken Lay before him, claimed the company’s fortunes were looking good. We know how it ended for Enron. Now, Mr. Mozilo stands to gain another $100 million or so in severance as a result of the proposed takeover by Bank of America.

Countrywide’s shareholders, who up to now have preferred to see only a rosy future and never turned their eye to other signs that suggested a downside for the company, like, for example, rather irrational levels of CEO pay and poor corporate governance, will also enjoy a bailout. Bank of America is offering to buy the stock, but only at its current near-52-week low. Not exactly what investors were hoping for, since most –except Mr. Mozilo– will be losing a bundle on the deal. But it’s still more than they would get if the company went under, and a better deal than most homeowners are getting.

Bank of America likely thinks it doesn’t have to worry because much of the purchase can be financed one way or another through the Fed’s bailout program of making lots of cheap money available to banks. Low interest funds in the hands of financial institutions helped to create these toxic credit concoctions in the first place. Wall Street and the banks, like recovering drunks on a cold Monday morning, have notoriously short memories when it comes to fee-producing extravaganzas, so it is unclear how long today’s more sober mood will prevail. During Bank of America’s webcasted conference call today, the sound of a train could be heard faintly in the distance. Some might be wondering if it was really an omen of the larger train wreck waiting to happen.

This is only the beginning of the bailout process that is unfolding. In this deal, the perpetrators of the current disaster who made their great fortunes through financial machinations held up by little more than hot air and fast talk will walk off with even more. The banks that made it all possible will wind up becoming bigger thanks to a panicky Fed which seems prepared to throw money out the window just to keep up the appearance of doing something. Let it not be forgotten that when the banks and investment icons were beginning to pull off their heist of flimsy loans and loopy investment vehicles a few years ago, it was the Fed that drove the getaway car, having turned a blind eye to the high risks that were being incurred.

Management will always be compensated handsomely whatever happens, no matter what its role in engineering the calamity. There is no groundswell of demand that Stanley O’Neal give back any of the hundreds of millions he made off with while he presided over decisions at Merrill Lynch which will result in a staggering $15 billion loss, according to the latest reports.

Investors will do less well, of course, but much better than the ordinary individuals on whose behalf the Fed is supposed to be acting but thus far has shown little inclination or ability in that regard. And let there be no doubt: A large chunk of the costs incurred by these mounting losses, the takeovers and overall decline in investor- and consumer confidence will be in the form of lost jobs and layoffs in the financial sector and in the wider economy. Main Street always pays for the wild parties Wall Street throws and the cleanup required afterwards.

The final costs of this financial nightmare will probably never be tallied. Nor will there be any discussion or accounting of the consequences of more and more sovereign funds controlled by despotic regimes or sultans whose oil wealth insulates them from the intrusion of the slightest molecule of reality here (or criticism in their own lands) gaining control of the financial heart of North America as a result of the greed and folly of its present stewards.

Welcome to the bailout of American capitalism, 21st century-style. Some will see it as their ticket to bigger pay and a way of holding on to the fortunes they were making while masterminding this calamity. Others will call it the market working its magic. At the very least, we call it the Outrage of the Week.

from Finlay ON Governance, January 2008

 

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