According to Seeking Alpha which cites Bloomberg, here are Richard Fuld’s stock sales of his Lehman stock. The point being that even though he “lost” a billion dollars as the price fell, he did manage to capture some of the gains—over five hundred million dollars—during the good times. If anyone has any similar data on CEOs or other execs cashing out or their net worth, please send it to me.
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I don’t think he’s laughing all the way to the bank. He may be sulking all the way to the bank, but not laughing.
To me, the dollar-value of sales looks random over time. Showing the cumulative value gives the false impression of a buildup, which is inconsistent with the dollar-value of sales each year.
There was a buildup unless he was buying shares back with that money. Sure doubt it. The point is very simple. Richard Fuld’s downside had a very large cushion or safety net waiting for him. So even the worst case scenario left him a very very wealthy man.
http://www.nber.org/papers/w15212
We investigate whether bank performance during the credit crisis of 2008 is related to CEO incentives and share ownership before the crisis and whether CEOs reduced their equity stakes in their banks in anticipation of the crisis. There is no evidence that banks with CEOs whose incentives were better aligned with the interests of their shareholders performed better during the crisis and some evidence that these banks actually performed worse both in terms of stock returns and in terms of accounting return on equity. Further, option compensation did not have an adverse impact on bank performance during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis; further, there is no evidence that they hedged their equity exposure. Consequently, they suffered extremely large wealth losses as a result of the crisis.
I’ll check it out. But I’m particularly interested in a handful of investment banks.
Russ,
In almost every company I’m familiar with, it is perfectly normal for the highest executives to sell shares. It’s usually regarded as part of their compensation package, and the good Boards typically try to restrict the number of shares that can be sold (to keep skin in the game, if you will) over time and set an aggressive strike price (an incentive to the upper execs to maximize the stock price).
I’m not sure what you’re looking for here with Richard Fuld. The top graph tells the story, and it doesn’t seem to show anything out of whack at first glance.
I think the proverbial smoking gun would be if, say, he had regular sales of the same amount of shares at roughly the same time from 2003-2007….then he had a huge spike in the number of shares at the start of 2008, just before the company’s stock price declined.
To make the argument that I think you’re trying to make, I think you’ve got to show that Fuld’s marginal value of his 600,000,001st dollar was significantly lessened because he had 600,000,000 liquid dollars in the bank. I’m not sure how the above graphs help.
See my reply to Methinks below.
The point of the post is to chronicle the incentives Fuld and other executives faced. There was significant upside. There was much less downside.
depends on how long they were a CEO and how old they were when they took the big risk, doesn’t it?
Russ,
I don’t understand the point of this post. If a portfolio manager withdraws his compensation out of the portfolio periodically but blows up the rest of the portfolio at some point in the future, what does that say exactly? Are you implying something Fuld did was fraudulent? Are you saying all of his past earnings should be clawed back? If so, good luck finding a CEO. That’s a hell of a risk for an individual to take.
People like to say that Fuld (and others) paid a terrible price for their excessive risk-taking–they lost a billion dollars because they, like investors, held shares in Lehman stock. So there’s no moral hazard problem when we bail out creditors. The stockholders (and management) don’t want to lose their money and that restrains excessive risk-taking.
It doesn’t. Not when along the way, Fuld made $500 million dollars. That kind of cushions the downside, don’t you think?
Not if he had already taken out a $1 billion mortgage on a new house, anticipating the future earnings.
Happy to bet a large sum of money that Mr. Fuld was more prudent with his own money than he was with the money of others. That would be a rather large mortgage. Even for a Wall Street CEO.
Maybe he was planning on playing a lot of golf in retirement. Greens fees are crazy expensive these days. A man his age trudging around a 9-hole public course without a cart is not a pretty site.
I’ll take the other side of that bet.
What percentage of his net worth must have been tied up in a single company – the one he was running – for him to lose $1Billion and have only $500 million left and only because he happened to cash that amount out months before he knew the company faced bankruptcy?
His personal portfolio was so risky that he lost 2/3 of his net worth on a single bet. Did he take less risk with his own money? Clearly not.
And just to bolster Methinks’ pointNobody would ever sign up to manage anyone else’s investment ever again if one misstep could mean financial ruin. That is the definition of undiversified.The sale of restricted stock is so tightly governed that you couldn’t just “cut & run” like so many people think. Affiliation status carries automatic 90 day restrictions, and filing requirements (Form 144) open 90-day windows pending legal counsel approval.Here are Fuld’s Form 144s:http://biz.yahoo.com/t/76/6046.html You can’t just sell the stock whenever you want (Barney Fwank’s “long-term ownership interest”). Ask Martha Stewart.Plus, Russ, thanks to new regulations, you couldn’t “bet a large sum of money” now anyway.;)
Hi Russ.A couple of things to keep in mind here re: sales of control or restricted positions are 1) there are very specific rules governing restricted stock sales (and options for that matter), and 2) the timing of these is usually very limited.One very common way to do this is via a [SEC Rule]10b5-1 plan, which stipulates that plan participants must liquidate at certain times following specified parameters, which are largely inflexible. So it is equally possible he couldn’t sell shares, or that he had to sell shares as part of an estate 10b5-1 plan. Most of these guys have some sort of estate/trust (often several) that cover this kind of activity. So the construction of the estate sales of securities is just as important as the outright number of shares and vesting period.I do not know if Dick Fuld participated in such a plan, but it could have significantly limited his ability to liquidate fully at the time he wanted and may have resulted in the sporadic activity you see.
It cushions his financial downside – there are other downsides that money can’t compensate for. I still fail to see what you’re getting at.
I don’t know what solution you’re looking for. Nobody on the Street believed they were taking excessive risks – at the time. Very smart quants – smarter than Dick Fuld – didn’t think they were taking excessive risks.
In hindsight, the risks were excessive. However, everyone thought we were in a new paradigm where credit spreads could be tighter and everyone could handle more leverage because we could hedge and diversify so much better than before. That was true, but nobody knew where the limit was at the time. We found it.
I don’t agree that there’s no moral hazard problem in bailing out creditors, but it seems to me that you’re implying that it would be even better to impoverish Fuld to punish him. Please correct me if I’m reading into your post. If that’s what you’re suggesting, the cost of being a CEO is way too high for anyone to do the job. Nobody would ever sign up to manage anyone else’s investment ever again if one misstep could mean financial ruin. That is the definition of undiversified.
Companies concentrate on their core competencies. Fixed income was Lehman’s core competency. When everyone is fighting for fractions of basis points in your industry, you either fight with them or you lose market share. If Fuld didn’t get into the game, Lehman would have fallen to the back of the pack and Fuld would have been bashed for that – capital would flee in search of higher returns. If the pack was headed for a cliff, he would crash and burn with them. Pick your method. When the herd lurches toward the abyss, you die either way.
Investors always have the option to reduce the size of their investment in these companies. It’s not as if zero-down mortgages, liar loans and the tightest credit spreads in history were a huge secret. Investors had enough information to judge how risky the sector had become. Creditors certainly did. But they too were locked in a heated battle. But, at least they have the option to reduce their exposure. The CEO doesn’t
If we claw back everything the CEO made (much of which he probably already spent), then we’re asking him to be more exposed not only to his sector but to one single company than the investors in his company. No thanks.
I worked with compensation consultants many many moons ago at the beginning of my career. It is insanely difficult to align the interests of CEOs and investors. You may want to contact Marc Hodak at Hodak Value Advisers (http://www.hodakvalue.com/). He comments on your blog sometimes and he’s very knowledgeable about compensation as he’s spent an entire career trying to perfect compensation. One reason it’s insanely difficult is that everyone has a different risk tolerance. If you get a risk loving whose willing to fight to the death for market share, then he’ll do it with your money and his.
If you get a risk loving whose = if you get a risk loving CEO whose…
And, by the way, Wall Street loves a risk taker. So, it’s not uncommon to find more of them at the top of firms in this industry.
I think moral hazard and Fuld’s net worth are separate issues. At any time investors could have punished Fuld’s risky bets by dumping the stock and creditors could have refused to lend to Lehman. They didn’t.
“investors could have punished Fuld’s risky bets by dumping the stock and creditors could have refused to lend to Lehman”
That’s because the good professor is getting distracted from the real issue: it was a bubble–nearly everyone was fooled. That’s what bubbles are. No reasonable changes to the incentive structure are going to insulate large numbers of businessmen from mistakes consequent to a system-wide misdirection of signals.
When the ground moves, those dependent upon the ground move with it. Fuld didn’t move the ground, he just rode it.
I don’t know if the professor is getting distracted or playing devil’s advocate.
Just to add to your post – the reality is that if Fuld didn’t participate in the madness, Lehman’s returns would have lagged behind its competitors and Fuld would have been replaced with a CEO willing to do the return-at-any-price bidding of investors. Then, we wouldn’t be talking about Fuld but some other guy. Make no mistake – there would have been a guy.
This is a reason I think I-banks made a mistake going public. Julian Robertson decided to simply shut down Tiger Management when value investing fell out of favour and capital fled his funds to join in the tech bubble. Growth investing was not what Tiger knew how to do well and the partners decided to shutter the fund instead of jumping into the bubble – and they could do that because Tiger was a private partnership. A CEO of a public company doesn’t have that luxury.