Worst Management Practices

One interesting point about the recession is that it has generated plenty of articles about bad management practices... right at a time where many managers are telling employees that they are lucky to have a job.

An article from Business Week placed "Forced Ranking" as number 1 on the list of "brainless and injurious" management practices. I have written about failures of forced ranking in the past, it is interesting to see that it is coming in regularly as one of the worst practices. Hopefully it is a practice whose time has come and is now disappearing from the corporate landscape.

10 Management Practices to Axe
http://finance.yahoo.com/career-work/article/108815/ten-management-practices-to-axe

WaMu CEO given the Boot

Past HingeFire articles have outlined in detail the issues at Washington Mutual and urged banking customers to pull out funds over the FDIC limit. News today shows that Washington Mutual has ousted CEO Kerry Killinger. WM stock is down over 15% in mid-day trading.

It is also interesting that Washington Mutual agreed to further oversight by the Office of Thrift Supervision concerning aspects of its operations. This demonstrates the high level of concern regarding the solvency of the institution from a regulatory perspective.

Wachovia: Turning the corner

The recent press headlines for Wachovia have been bleak recently; auction-rate security investigation raids, analyst downgrades, and sliding share prices. It seems that the bank can't catch a break from the negative media coverage. This is on top of all the earlier problems that led many to question the underlying integrity of the entire institution which in the past has joined telemarketers to scam it's own customers, and was fined $145 million from the Feds.

Despite all the difficult news there is a bright spot -- and his name is new CEO Robert Steel . Right from the initial conference call it appears that he is on the right track. He is going to first evaluate the "challenges" faced by the bank with particular focus on the residential mortgage portfolio and exposure to commercial real estate. Steel promises to outline his strategy on July 22, when the bank is slated to report its second quarter earnings. In a couple days we will be able to see how Wall Street reacts to the earnings and the vision of the new leadership.

Based on his reputation in both capital markets and government; Steel is likely to restore what is most important to Wachovia - a reputation for integrity.

Circuit City: So Toxic that Nobody Wants It

Is there such a thing as a bride so ugly that no one will marry her? Apparently there is such a thing as a business so toxic that everyone steps away from buying it.

One of the great fears of any party seeking to close a deal to purchase Circuit City (CC) is that the due diligence would reveal information so negative that potential acquirers would drop their bids. Apparently this scenario is playing out.

Blockbuster (BBI) dropping its bid may be due to other bidders pushing up the price; more likely it is that further disclosure revealed that Circuit City is already deeply entangled in its death throes. Blockbuster's Chief Executive Jim Keyes cited "market conditions" as a reason for withdrawing its offer, valued at up to $1.3 billion, and said the deal was not in the best interests of its shareholders.

Circuit City dropped over 16% on the open on Wednesday after this news. Blockbuster climbed over 12%, the shareholders gleeful that this proposed merger has been dropped. It is interesting to note that Blockbuster had offered at lest $6 per share for Circuit City. CC stock now sits at $2.19; effectively the proposed deal was at triple the price of Circuit City stock. The failure of Circuit City management to grease the skids on this deal will probably go down in financial history as one of the worst executive decisions ever; unless some other suitor actively closes on a transaction.

Philip J. Schoonover, the CEO of Circuit City, kept hope alive for a deal by commenting, "Our exploration of strategic alternatives is intended to serve the interests of our shareholders by considering every possible alternative to enhance shareholder value. The board's review was not dependent on Blockbuster's (BBI) participation. We are diligently working with the parties involved in the process, and intend to continue our thorough approach until such point as the board determines upon a particular strategic course of action. The board has not established a deadline for completing the review."

Loosely translated this means, “We are trying to find a deal that will leave the existing management team employed with large compensation packages despite our ruinous track record. The board is hoping some magical deal materializes shortly with a private equity fund. If something does not pop up soon; the company will be dead as we complete the review of the bankruptcy paperwork.”

The only constant is that the long suffering Circuit City stockholders will continue to be disappointed.

How come Mutual Fund Managers don’t invest in their own funds?

Once again, an article highlights that the majority of mutual fund managers avoid their own funds. Why would a customer want to buy fund when the manager won’t touch it?

Maybe the manager knows that the expense fees in most mutual funds eat you alive over time, and most knowledgeable investors are better off investing directly in stocks. John Bogle, the former chairman of Vanguard group, talks about this trend in his discussion about the “The Battle for the Soul of Capitalism”.

Morningstar reported that 47% of the managers of U.S. stock funds reported no ownership in their own funds. 61% of the managers of foreign stock funds and 66% of taxable bond funds do not own their funds. Similarly 71% of the managers of balanced funds will not include the funds in their holdings.

Do they know the funds are so toxic or poorly run that these managers will not even pick up a small number of fund shares – maybe this would be a good display of confidence.

Once again this is a dismal reflection of the mutual fund industry, and demonstrates that many managers do not believe their “gimmicky market-driven funds” are designed for the long haul. Investors should focus on low fees when investing in mutual funds and take a look if the manager actually holds shares.

Legal Nirvana

Nothing warms the hearts of corporate executives at public companies like the vision of class action lawyers being locked up in a cell. Especially when the visualization includes the lawyers responsible for 50% of the class action suits in the United States over a decade period.

Even more amusing is having one of the lawyers derided in the front page of a major newspaper for declaring that he is innocent, despite all the obvious evidence to the contrary. I expect that lawyer jokes will be at the top of the list in the executive happy-hour circuit during the month of June.

Serving Time, but Lacking Remorse

Q: What's wrong with lawyer jokes?
A: Lawyers don't think they're funny and other people don't think they're jokes.

Wachovia CEO given the Boot

The dirty laundry list appears to be almost endless, aiding telemarketers to steal money from account holders, money laundering investigations, selling customer lists, and a host of other activities that have Wachovia in trouble with regulators. Now all the problems have caught up with America’s most ethically challenged bank, CEO Ken Thompson of Wachovia has been shoved out the door.

Certainly the very poor acquisitions of mortgage companies such as Golden West also played into the decision. The resulting financial fallout has left Wachovia in state where it may need to further cut dividends and re-structuring.

"No single precipitating event caused the board to reach this decision, but a series of previously disclosed disappointments and setbacks cumulatively have negatively impacted the company and its performance," Smith said. It would be better to hear commentary on how Wachovia will in the future stay out of trouble with regulators and customers.

An earlier Hingefire article asked when the CEO would walk the plank (see Wachovia: Take Three Steps), now the board has taken steps to right the ship. The question remains if the directors can find a CEO candidate that has the moral backbone to place the bank back on course.

Countrywide Chairman tells Homeowners they are Disgusting

Countrywide Financial Corp. Chairman Angelo Mozilo reaped $132 million as the mortgage lender got hammered in 2007. It appears this wad of cash has not made him appreciative of his customers; he views homeowners as “disgusting”.

Apparently Mozilo does not know the difference between the reply and forward buttons, setting the stage to send an absurd email response to a homeowner. It does reveal the contempt that the executive holds for homeowners seeking help with unaffordable adjustable-rate mortgages, loans that were pressed on them due to Countrywide’s inappropriate business practices.

As outlined by the government and consumer groups, the mortgage giant has a history of focusing on loans that generate the maximum fees even if they were totally unsuitable for the homeowners, while not properly explaining the terms of the loan. Furthermore many loan agents, as shown in this case once again, made “promises” about refinancing and other loan attributes that would defined in most courts as fraud.

Despite these mortgage companies claiming in Washington that they are taking steps to alleviate the pain of homeowners; the email exchange underlines the stark reality that the mortgage giants actually could give less than two hoots about these mortgage-holders.

Mozilo on distressed borrower's appeal for help: "disgusting"

Countrywide Financial Chairman Angelo Mozilo's e-mail sets off a furor

Quote of the Week

"Capitalism without failure is like Christianity without hell" – Warren Buffett

Once again Warren and Charles provided some zingers at their annual meeting news conference. One theme this year focused on the irresponsibility of banks in the continuing credit crunch. From their perspective, “the pain many financial institutions are feeling because of the credit crunch is well deserved”.

The chairman and vice chairman of Berkshire Hathaway Inc. said Sunday that the financial companies that engineered sub-prime mortgages and the investment funds that bought securities backed by those mortgages didn't deserve much sympathy for their subsequent losses.

The two billionaires emphasized that investment banks should not be rescued by the government. Failure and its associated lessons are an important part of capitalism. Continuing to rescue institutions that are “too large to fail” sends the wrong message about risky business behavior in the financial sector.

Buffett did state that “the Federal Reserve's bailout of Bear Stearns Cos. probably prevented a crisis among investment banks”.

Another section of the commentary focused on the “R” word. Buffett outlined that the country is obviously in a recession even if the conditions do not meet the classical definition of two quarters of negative growth.

Wachovia: Take Three Steps

In a week in which North Carolina is celebrating the tradition of pirates like Blackbeard; articles are appearing asking if the Wachovia CEO will walk the plank? Ken Thompson the CEO of the Charlotte, North Carolina based bank appears to be stuck between a rock and a hard place.

Despite earlier statements that the bank would not cut dividends and was not facing a wave of mortgage trouble; this illusion was shattered in the recent first quarter report. Wachovia cut the dividend from 64 to 41 cents, while adding write-downs of $2 billion. The highly-touted acquisition of mortgage broker Golden West in 2006; has turned out to be a fiasco.

"Everyone points to the acquisition of Golden West, and I do, too," Townsend said. "Certainly that has to be viewed, in retrospect, as one of the most boneheaded decisions of recent times."

Will Wachovia’s CEO weather the storm or be forced to take three steps down the plank? If thrown overboard, he can join the cast of executives from large banks recently cast adrift.

Quick Takes: Credit Churn, Bear Stearns

The failure of auction rate securities is still causing angst for the closed end bond funds. The leveraged funds that issue auction rate preferred shares are in serious trouble.

BlackRock and others in this business are searching for strategic alternatives. Over $300 billion in securities are at risk, and BlackRock has 66 impacted bond funds with a value of $9.8 billion.

Despite proposals for re-financing and put features for these instruments, the probability of a resolution appears bleak. By the end of the auction rate failure crunch, there is an expectation that one or more of these fund families will flounder. Most likely the backing company will be sold for pennies on the dollar.

The news is not any better in the subprime sector, the delinquencies on the mortgages issued between 2005 and 2007 continue to rise according to Standard & Poors. The delinquency rate is rapidly approaching 40% for many of the notes issued in these years; the rate of delinquency is jumping 4 to 10% per month. Wall Street expected a delinquency rate of 15% worse case when it packaged the notes in CDOs; so much for financial modeling.

In other news, you don’t have to feel bad for all those executives at Bear Stearns; many of the top insiders sold large chunks of stock in December in advance of the implosion. It appears that these folks will not have to move out of their multi-million dollar mansions.

In related news that will cheer up Bear Stearns employees, JP Morgan raised its bid to purchase the bank to $10 from $2. The question being if Bear’s chairman James Cayne who is probably off-site at either a bridge tournament or the golf course has heard this news yet.

Things you can buy for two bucks

Now for less than the price of coffee at Starbucks you can get a piece of Bear Stearns. Not that I can think of any reason why anyone would want to buy shares of this effectively bankrupt investment bank. In an astounding remedy for a liquidity crisis, Bear is being purchased by JP Morgan for a mere $2 in stock per share; a deal that values BSC at a minuscule $230 million.

Note that this deal will not be an immediate bargain for JP Morgan; they will need to immediately take $6 Billion in write-downs upon acquisition and probably lose the $30B in loan guarantees made to Bear Stearns by the Fed. It does allow them to acquire a competitor for a measly 1/20th of the price where the BSC stock was a mere ten days ago. The deal also allows JP Morgan to take a slap at other investment banks who own a significant piece of Bear Stearns; the list includes Morgan Stanley (5.37%), Legg Mason (4.84%), and Barclays (3.60%). The deal effectively makes these holdings valueless.

So why is Bear Stearns willing to be purchased for a fraction of their value instead of declaring bankruptcy? The obvious reason is because if BSC declared bankruptcy then the executives would likely have to pay back millions in dollars in 2007 year-end bonuses that they received within the last 120 days. The decision to sell Bear Stearns for pennies on the dollar may not make sense for the stock holders, but it sure makes financial sense for the management. While the banks and government can dress-up the deal in an appealing dress and make bold statements about maintaining confidence in the markets; anyone with an inside track has a better perspective on the realities.

Bear Stearns shareholders can hold-out hope that a white knight competing bid of greater value will be put together by a consortium of other banks. This explains why BSC is trading in the open market near $4 rather than $2 today.

Bear Stearns CEO Expected to Step Down

The Wall Street Journal states that Bear Stearns CEO James Cayne is expected to resign, but remain as chairman. To many pundits watching the situation at Bear Stearns, it was just a matter of time until this step was taken. Cayne has been under intense scrutiny since a series of articles appeared showing that he was playing golf and bridge while a major crisis sunk two hedge funds at his firm. The subprime credit crisis caused Bear Stearns to write off billions of dollars of bad debt while its stock price dived nearly 50 percent. An earlier summary (Is Your Investment Bank Executive a Doper) provides some more details.

WSJ: Bear CEO Expected to Step Down

Circuit City: A continuing sad saga

Very rarely do you witness analysts asking the CEO to throw in the towel, sell the company, and step down in the quarterly conference call. At Circuit City this is becoming a regular routine.

While sales at nearest competitor Best Buy rose, Circuit City’s sales slipped 3 percent to $2.96 billion from $3.06 billion a year earlier, with sales at stores open at least a year (a closely watched retail metric) falling 5.6 percent. The financial performance did not fare well either despite cutting all those “highly-paid” associates in stores, “losses ballooned to $207.3 million, or $1.26 per share, from $20.4 million, or 12 cents per share, a year ago”.

The management team lead by CEO Philip Schoonover maintains the company is on the right track and said, "We're staying the course on our longer-term strategic initiatives." It appears the master strategy is to turn on the jets and dive towards bankruptcy.

In a further absurdity, Circuit City announced the approval of millions in cash incentives to retain its executives. These are the same executives that canned all the top performers in stores earlier in 2007 and then watched the stock drop 70% since.

“The bonuses didn't sit well with Merrill Lynch analyst Danielle Fox, who questioned whether Circuit City should be focusing on incentives for the people who sell its products in stores.”

It appears to be time to officially place Circuit City on the “death watch” list. Shortly they can join CompUSA in shuttering all the stores and auctioning the remaining inventory.

Circuit City Posts Huge 3Q Loss
Circuit City Posts Wider-Than-Expected 3rd-Quarter Loss, Shares Tumble
http://biz.yahoo.com/ap/071221/earns_circuit_city.html

Some Humor: Project Head Honcho

Project Head Honcho: The Citigroup CEO Search
A video on YouTube provides Citi some help with their CEO search:

Off with their heads!

The financial press mob has formed and appears to be rolling out the virtual guillotine while howling for the heads of nearly every top investment bank over the past few weeks. The crescendo has risen as further deep losses have been revealed by many of these institutions.

The recent decapitation of O'Neal from Merrill leaves Citigroup Inc's Charles Prince, Bear Stearns Cos Inc's James Cayne and Countrywide Financial Corp's Angelo Mozilo at the top of the list of prominent U.S. chief executives hunkered down in the their corner offices trying to deflect blame. Recent news indicates that the Citigroup saga will end today with the resignation of Prince; although this will not likely appease the media rabble but rather serve to further feed the frenzy. The press horde was not apparently pacified by the recent changes at ABN AMRO where Rijkman Groenink has recently left, or at UBS where Peter Wuffli was forced to walk the plank a few weeks back. Each day new articles are shouting for more heads to roll.

Will this spill over into an increasing list of investment banks; even Goldman’s where Mr Blankfein has been recently upheld as an example of active and able management. Will Ken Lewis over at Bank of America survive as risk management practices and investment banking services have come under scrutiny? The list created by the press continues to get larger as well as the increasing angry buzz of the articles. Has someone started a pool on which corner offices will be vacant by the end of the year?


Other CEOs under microscope as Merrill chief exits
http://uk.news.yahoo.com/rtrs/20071030/tbs-uk-merrill-ceo-fallout-7318940.html

Report: Citigroup CEO May Resign
Citigroup CEO Will Offer to Resign Sunday; Board Expected to Hold Emergency Meeting
http://biz.yahoo.com/ap/071103/citigroup_board_meeting.html