Saturday, March 18, 2006

Hey small investor, $#@! you

That was the message from most of the events over the last 2 weeks. Depressing as they are, I would still like to list some of them here.
  • A recent report indicated that top executives will walk away with around $280 million from the Capital One / North Fork merger. Capital One definitely has performed well, but $280 million ? Not unless they have fixed world hunger. Distributed to current Capital One shareholders, that would amount to almost a dollar per share (current shares outstanding - around 300 million). As an investor can you do something about it ? Sure. Write to Capital One Investor Relations at Don't think you can make a difference ? Try telling a few more people. Ask them to write to IR to let them know that they are unhappy with the handout. Are all the fund managers and directors sleeping at the wheel? Shouldn't someone be questioning the compensation ?
  • Bear Stearns settled with the SEC over the market timing allegations. The settlement of $250 million won't make it to the account of small investors who lost out in this process. I would have liked to see a few people sent to the gallows for these crimes. But instead a settlement ? What about holding a few people responsible ? A third-time pizza stealer gets what amounts to life, and stealing from people's retirement accounts gets nothing ? The worst possible punishment so far in such cases seems to be house arrest - home sweet home. I am sure they are working on a yacht arrest too!
  • A Wall Street Journal report today describes how options backdating is widespread. If all the people involved in backdating are put behind bars, Silicon Valley will turn into a Con Valley. Who knows, that may finally bring down valley real-estate prices and unclog the freeways.
  • Financial Times reports that insider trading is rife on the London Stock Exchange, with around 30% of takeovers preceded by stock movements that look suspicious.
  • By now Spitzer's allegations about H&R Block's IRA accounts have been reported a few times. Just another bad day for small investors' retirement plans and not one too different from other days.

    At this rate, combined with the other malpractices, small investors are likely to be dead before they can retire. Mainstream media cannot be trusted to take these up more aggressively. After all, they are owned by corporations whose boards intersect with other non-media companies' boards.


At 7:41 AM, Blogger Shayne said...

Your post implied that COF's management was, in some way, guilty in the $280mn payment. Actually, the payment was triggered by, and paid to, Kanas and his senior team at NFB. Even if the payment stuck in the craw of COF's management, they don't have the legal standing to refuse to pay the change-of-control payment; after all, that provision is in NFB's bye-laws, not COF's.

The brickbats should be aimed at Kanas and NFB, and it is the NFB shareholders that got shafted in this transaction. In essence, Kanas pocketed a huge kickback for selling NFB. Actually, COF shareholders have done pretty well in picking up a dominant deposit franchise in one of the wealthiest parts of the country, and lowering their cost of funds.

At 8:02 PM, Blogger Guru said...

I agree. I should have directed my ire at North Fork. This is definitely a good deal for Capital One, as I note in my latest post.
North Fork definitely has been built into an attractive franchise and a juicy target, but not one that makes the execs worthy of receiving 280 million. 5 million - ok, 10 million - take it if you must, 20 million - I will be generous, but 280 million. I am speechless.

At 8:52 PM, Blogger Guru said...

Whoa! I spoke too soon. Looks like Capital One also has a few thieves in its top ranks, who are going to get away with a few hundred millions. Where are the DOJ, Spitzer and SEC when you need them ? This is obscene!

At 5:04 PM, Blogger Shayne said...

What did you mean by saying that you found a few thieves in COF's ranks?

At 11:13 PM, Blogger Guru said...

I came across another report (I think it was in WSJ) that Capital One execs were getting richer by some $180 million, mostly via options. The first para was enough to make me switch to saner stuff, like the classifieds pages!

At 5:10 PM, Blogger Shayne said...

Rich Fairbanks has not taken cash salary or comp for last 10 years, taking all his comp in stock options. Pt 1, Rich has never repriced his options (unlike many CEP's), even when the stock cratered in '02 when the Comptroller began to monitor liquidity - he stood and took his pain like a man along with the shareholders when the stock busted $25. Pt 2. We've owned the stock for 10 years - Rich is many things but he is no crook. He is one of the duo that took COF out from Signet and made shareholders a fortune along the way. I know the $180 surprises you, but look at what he has delivered to shareholders over the last 10-12 years. Rich Fairbanks shares in every uptick and downtick of the stock - how many CEO's can say that?

At 11:37 PM, Blogger Guru said...

Rich ? Sure. Rich as a bank ? Sure. Fair ? Not so sure. I will concede - COF is no Enron, and has been good for long-term shareholders. But 180 million ? I don't understand. Your points are all well taken. And from parts of your comments ("we", "10 years", and the level of detail), it looks like you have owned/followed this stock as part of a fund. I guess given the outright robbery elsewhere, we have a saint in COF's CEO!

Please don't take my response as an attempt to prevent future differing opinion. Your comments so far have made for a fruitful discussion. Would definitely love to see more. But I must admit, it will take a miracle for my skepticism to fade even a little bit.

At 9:25 PM, Blogger Guru said...

I was a bit more careful with my words - not this author. Check out this piece at Daily Reckoning.

At 10:01 AM, Blogger Shayne said...

The authors at Daily Reckoning are free to call for anything, including the advent of Armageddon and a return to public hangings - it's still a free country, wiretappings and all.

Returning to COF, Rich Fairbanks and his team took COF from a mkt cap of $1.06b at the start of '95 to $25b today. This was during a period when he did not take a salary or cash comp, rather taking option grants every year. The entire accumulation of option grants granted over the last 10 years had to be exercised last year, or expire worthless. As a holder, Rich and his mgmt team stood there with us, took their lumps in '01-03 along with us and finally, delivered for us. After a 25 bagger in 10 years, we consider that as pay for perfomance.

Bottomline, this has been one of the biggest success stories for investors in the financial sector over the last 10 years - COF can easily stand tall with LM, TROW, EV, and SLM.

Other the other hand, Ivan Seidenberg should be shot - what has he (or countless other CEOs?) delivered for their owners during their last 5-10 years? All their poor shareholders can recount is an endless litany of 8 figure cash comps, insane perks, and constantly re-priced option packages.

At 11:20 PM, Blogger Guru said...

While I agree that Verizon has done nothing for investors, I cannot understand the way few top executives take credit and more importantly, take everything in the till, when it is really due to a huge contribution from lower level footsoldiers that a company ultimately runs and succeeds. There is just no excuse for it. You have your reasons to say that is ok. But then again, a million is a small change for the top 5% of the population and they don't even realize that they are siphoning it off from other workers and shareholders. Heck, you could just use it help the poor creditcard holders that routinely get duped into taking unacceptable rates. As far as I am concerned, the banking and credit-card industry has thrived due to lax regulation and borderline unethical behavior - nothing less. There is hardly any productivity-enhancing innovations to speak of here.

At 2:30 PM, Blogger Shayne said...

Let's look at the math - the shareholders paid Fairbanks $180m for staying at the helm for $24bn in incremental mcap over 10 years - this works out to a little over 70bps - that too, in heavily depreciated dollars in a single-shot payment at the end of 10 years Many of us have paid well over 100bps EVERY year to mediocre money managers over 10 years - and got very little in return. As an investor, that is a fairly easy proposition for me to evaluate.

Simply put, if a analyst or trader came me and asked for a 1% or 0.70% carry on his book, I would happily reach for my checkbook if he made me the money.

If we're going to make value judgements, the alternative is not to own COF and let someone else enjoy the gains. The markets are full of investors that don't buy MO or HET for their own reasons, and we still all get along.

Finally, the "no innovation" argument? Taken to its logical conclusion, only CEOs in the pharma, biotech, and enterprise software sectors deserved to be paid. Every other CEO in every other industry, therefore, should turn up to the office and work only for the perk of having his pic in the Annual Report.

My point is simple - Rich delivered for his co-owners (he is the largest individual holder of COF, even before the option exercise), and no owner cavilled at what he was paid. Skin in the game and pay for performance - that what it was about. The problem is not CEO comp - it is obscene pay for incomptent and non-producing CEOs.


Post a Comment

<< Home