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Post-9/11 Option Grants Under Scrutiny

The WSJ continues its recent habit of burying killer stories in the under read Saturday edition. This week's bombshell has to do with post 9/11 earnings grants:

"On Sept. 21, 2001, rescuers dug through the smoldering remains of the World Trade Center. Across town, families buried two firefighters found a week earlier. At Fort Drum, on the edge of New York's Adirondacks, soldiers readied for deployment halfway across the world.

Boards of directors of scores of American companies were also busy that day. They handed out millions of bargain-priced stock options to their top executives.

The terrorist attack shut the U.S. stock market for days. When it reopened Sept. 17, stocks skidded more than 14% over five days, in the worst full week for the Dow Jones Industrial Average since Germany invaded France in May 1940. But for recipients of options, the lower their company's stock price when options are awarded the better, since the options grant a right to buy shares at that price for years to come. The grants set recipients up for millions of dollars in profit if the shares recovered.

A Wall Street Journal analysis shows how some companies rushed, amid the post-9/11 stock-market decline, to give executives especially valuable options. A review of Standard & Poor's ExecuComp data for 1,800 leading companies indicates that from Sept. 17, 2001, through the end of the month, 511 top executives at 186 of these companies got stock-option grants. The number who received grants was 2.6 times as many as in the same stretch of September in 2000, and more than twice as many as in the like period in any other year between 1999 and 2003.

Ninety-one companies that didn't regularly grant stock options in September did so in the first two weeks of trading after the terror attack. Their grants were concentrated around Sept. 21, when the market reached its post-attack low. They were worth about $325 million when granted, based on a standard method of valuing stock options."

What makes this so pathetic is that corporate executives could have stepped up AND BOUGHT STOCKS IN THE OPEN MARKET if they believed they were so cheap. It would have been reassuring to a nation to see the leaders of industry voting with their own dollars. It might have made the subsequent economic slow down and period of tense aftermath less painful.>

Instead, these weasels decided to loot the treasury at the first opportunity. America was smouldering, the WTC lay in ruins, and this group of classless pigs decided it was time to pocket some cash.

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The Cream of American Corporate "Patriots"

Graphic courtesy of WSJ

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I'm going to take it a step further: These assclown executives are unAmerican. They are not Patriots, they are not model citizens -- they are merely a pathetic group of opportunistic whores who might as well hang outside the Holland Tunnel looking for a quick buck (although that would involve risk and work, something they have shown a distinct aversion to).

In 1929, when the stock market crashed, JP Morgan (and others) stepped in. They bought stock with their own dollars, they saved Wall Street. Oh, and they were rewarded for it -- both monetarily, and in the history books.

What the more recent group of execs did is probably legal. It certainly isn't ethical, and it reveals them to be "lacking in moral turpitude rectitude."  I wonder if there's a morals clause in any of their employment contracts.   

What a pathetic group of weasels. Brain cancer is too good for these shitheads. They -- and their lapdog Boards of Directors -- should all be fired.

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UPDATE: June 17, 2006 5:34am

A few emailers have asked why I feel so strongly about this; Perhaps this older 9/11 discussion -- and the early forerunner of this blog -- helps to explain why visceral reaction. 

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Source:
Executive Pay: The 9/11 Factor
As stocks sank after the attacks, scores of companies rushed to issue options to top officials. Some reaped millions.
CHARLES FORELLE, JAMES BANDLER and MARK MAREMONT
WSJ, July 15, 2006; Page A1
http://online.wsj.com/article/SB115292514221107632.html

Saturday, July 15, 2006 | 08:05 AM | Permalink | Comments (90) | TrackBack (11)
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Comments

Fired -- and then flayed alive.

Am I a little upset? yeah, I'm pissed.

At the time, my office was headquartered in 2 World Trade. I spent the week telling clients not to short into the mess -- not only was it a money loser, it was simply the wrong thing to do.

These other fuckers can all go to hell as far as I'm concerned.

Posted by: Barry Ritholtz | Jul 15, 2006 8:08:12 AM

I had the exact same reaction when I read the story. What really pisses me off is the bs excuses they are using for what is pure and simple greed and piggishness. The country is in a state of shock, families are mourning, firefighters and cops are busy inhaling all kinds of crap that will lead to cancer while digging out their fallen brethren, and all these assholes can think about is how to line their own pockets even more.

My personal favorite is the company whose excuse is that the CEO just calls up the board whenever he wants more options and they are always approved. Sounds like it is in line with shareholder interests to me.

Posted by: John | Jul 15, 2006 8:20:01 AM

I didn't short, all I had was a 401k with no short fund. But I did have a decent cash/bond hoard, I exchanged for stock funds at the end of the month, despite my distrust of the equity markets.

Partly because it was right, and partly because I figured on a nice bounce. You can do right, and do well at the same time.

Although I have occasionally wondered, did my "Go USA!" feeling make me decide that there would be a bounce? Or did my feeling that there would be a bounce cause me to feel that buying shares is patriotic, so I wouldn't feel that I was making money off of the death of thousands?

Posted by: Jason | Jul 15, 2006 8:36:40 AM

This is what our capitalist system has evolved into: all reward and no risk for the guys at the top and their hand-picked compensation commitees. All men are created equal but some are a bit more equal than others. Yuck.

Posted by: Ned | Jul 15, 2006 8:38:48 AM

It's not just the stock options, but the entire CEO compensation issue. You know that something is wrong when a company sends a broadcast voice mail about why the CEO's pay package is not exorbitant...and sends a PR letter to executives/top managers with "talking points". This is in the midst of culling back the benefits to the balance of employees. It made me sick. I was paid well, enjoyed stock options (but they were very specific on the date on which they were granted and their basis--though if I am to find that the very top had something differently worded, I would be spitting bullets. ) Nevertheless, I was not going to defend what I considered indefensible.

My own personal belief is that compensation should be tied to performance on a balanced score card that balances goals in operational and financial performance, service improvement to/satisfaction of clientes/customers, workforce development and others as necessary. Singular models that focus on financial peformance (bottom line/share price), typically produce singular action at the detriment of longer term goals that build value over time.

Posted by: Leisa | Jul 15, 2006 8:45:05 AM

The problem is that the fox is managing the henhouse.
If I could set my own pay (or pick a select group of my buddies to help me) how could it not get totally warped in my favor. The boards are not protecting the company owners, but this should surprice no one.
Ever notice how the proxy works? Shareholders don't pick the boards, they "vote" for the names picked by management. Or they can withohold their votes! Wow. That is power. Not. Leisa is right but we are a very long way from there now. Just look how CEOs are rewarded when they screw up so badly that the board has to get rid of them! They retire shamefully rich anyway. Bad business and for business.

Posted by: Ned | Jul 15, 2006 9:32:55 AM

The more I read about these corporate scandals (such as Mario Gabelli paying a "fine" of $125 million and admitting NO WRONG DOING) the more I am convinced that it will continue to get worse until people actually are sent to jail.
In fact, prosecutors and even certain attornies general (Eliot Spitzer) are part of the problem. They have become as money greedy as the executives. What do I mean? They only want large $ settlements and not actually convictions & jail terms for what is clearly illegal and criminal activity. All the money that was paid in fines in NY state went right into the treasury of the state of NY and not to defrauded shareholders. It was a resume builder for Spitzer to run for higher office.

WHY DO THEY BOTHER WITH ALL THAT OPTION PAPERWORK? JUST ISSUE STOCK AND WRITE THEMSELVES CHECKS FROM THE TREASURY ACCOUNT? (which is the same thing)

Posted by: Larry Nusbaum, Scottsdale | Jul 15, 2006 9:35:31 AM

First, let me say for the record I agree with what everybody's saying. That said can I introduce a question beyond the immediate and obvious ? What are the implications and consequences for the performance of these companies ? And for the general tenor of corporate ethics and performance or any organization ?

The lawyers call it fiduciary responsibility but I like the military's take on it. When you have accepted a position of command you have obligations extraordinarily far beyond the mundane and normal for the good of the whole organization. And on the other an officer who violates his obgliations to his troops for his own benefit is worse than the worst scum.

Nobody thinks business is war but it's not entirely everyone for themselves because any organization has to have a certain level of trust that everyone in it will focus on the general welfare not the particular gain of the individual. Organizations are institutions for social cooperation. Sorry if this sounds too abstract but it's an important point.

When it gets to the point where everyone is spending all their time watching their backs and working on their own interests the operating performance of the organizations drops by 50-90%.

These guys aren't just robbing the treasury they are destroying a fundamental asset, the level of trust and cooperation required for the surivial of their organizations. They are in effect saying that my compensation is more important than anything else that we're doing no matter what happens to you or the company.

These are people who belong in Dante's 10th Circle of Hell because they've violated a public trust, not just a private one. And they've done it for mere short-term financial gain.

American enterprise performance will not recover until, among other things, the role of values and ethics, the critical importance of public virtue becomes a central part of the operating philosophies of these organizations.

For anyone interested I owe these insights in a way to Jim Stockdale and his discussions of 'Public Virtue' in Reflections of a Philsophical Fighter Pilot.

Posted by: DBLWYO | Jul 15, 2006 9:51:49 AM

This quote from Werner pretty much sums it all: "no one knew what direction the market was going to move in the future." What a stand.

Posted by: rajesh | Jul 15, 2006 10:09:05 AM

One of the great problems in corporate america (IMV) is the notion that management serves the shareholders interests. (Don't pelt me yet). I will continue to believe (I'm idealist) that if management focuses on the customers (service, products, value perception) and equipping its employees with requisite skills, processes and technology to provide distinctive service at a perceived value, then the shareholders always win (so long as you have enough customers!). ONe of my most disappointing corporate events in my professional life was when our parent company elected to spin off an internet division--a division absolutely critical to providing seamless service to our clients. This was in 1999/2000. By spinning it off and putting .com behind the name, the greedy bastards put their own interests over service to the client. The president of my division and I were vocal opponents recognizing the detriment to client service. OUr clients were scratching their heads and we could not give them any credible answer as to why that didn't involve saying greedy bastard (but I'm warming up to Barry's assclown label). The employees that were moving over to the .com portion were shameless in their gloating of the stock options that they were getting. I said, wait and see. Their gloating was amply rewarded with poetic justice that brings a tear to one's eye (dab, dab, sniff). Crash and burn.

What is interesting about the turmoil regarding back dating of optons, is that these options dating didn't get any real air time until share prices began to fall--witness UNH's fall from performance grace. Funny how that works.

Posted by: Leisa | Jul 15, 2006 10:20:16 AM

Actually these executives are "guilty of moral turpitude" and lack moral fiber, conscience, shame, patriotism, ...a whole panoply of higher human values; if it's worthy, they seem to lack it. Leisa is right, it is time, nay well past time, when boards and stockholders should demand real performance metrics to regulate executive compensation; there is simply no way to gauge what value executives add (if any) in the absence of such tools. Not that I see that happening given the control executives currently exercise over their boards but then that's what morals is all about: Not what necessarily is but what ought to be.

Posted by: RW | Jul 15, 2006 10:27:57 AM

and just to add fuel to the fire....
I have been under the impression for a long time that even calling these "option" grants to senior mgt is a misnomer designed to assuage their political incorrectness. Don't these grants function more like "warrants", because when they are exercised NEW stock is issued making them more detrimental to shareholders? I mean, take a look at CSCO almost doubling out shares between 1993 and 2001, from
4.4 BILLION to nearly 7.4 BILLION.

Posted by: tjofpa | Jul 15, 2006 10:52:12 AM

Barry - I assume comments such as these don't exactly ingratiate you with this particular flock of CEOs (which probably encapsulates more of them than most of us would like to think). I admire the hell outta you for speaking your mind SO directly on this topic.

One of the benefits of not answering to the Man, I reckon.

At the age of 30, I'm pretty jaded to find that this is not the world that good ol' Dad prepared me for.

To best prepare me for the world, and certainly corporate America (I'm recently displaced from an S&P 500 regional bank where the "good ol' boy" CEO is lining his pockets at the expense of, well, most everyone else), Dad should have taught me the importance of CYA, sandbox politics, and certainly the time-treasured act of kissing ass for the sake of self-denegration perceived as humility.

Maybe that's why I'm trying to get my ducks in a row to start a fund.

In short, you're my hero, Barry. The meek may inherit the Earth, but the bozos get to run the show in the meantime. Kudos to you for doing anything but helping them clear the path.

Posted by: CDizzle | Jul 15, 2006 11:13:35 AM

Yup tjofpa. One of my pet peeves is the false inference, fostered by pundits and executives alike (and accepted as valid by far too many shareholders), that many of these companies are doing something positive by buying back their own stock when all they are doing is offsetting the dilution caused by their options program: net effect is really less than zero IMO; less cash but no concomitant capital investment.

Posted by: RW | Jul 15, 2006 11:17:38 AM

It is amazing to me how there has essentially been no pushback from institutional holders against all of these scoundrels.

tjofpa and RW, agree with you both. The stock buyback is a charade.

tjofpa, one additional reason the # of shares outstanding at CSCO went up so dramatically is that they issued stock to acquire a bunch of companies in those days.

Posted by: Whammer | Jul 15, 2006 11:41:04 AM

How about some names. "from Sept. 17, 2001, through the end of the month, 511 top executives at 186 of these companies got stock-option grants." It would be good to see a DisHonor Roll published somewhere. Maybe as an AD in the NYTimes or WSJ?

Posted by: frankr | Jul 15, 2006 11:41:25 AM

I would argue more likely than not good CEOs are not good people. If nobody is watching, they will steal shareholders' money anytime they can. That is why agency problem is a big topic in ecomomics.

I laugh everytime Larry Kudlow says that free market and capitalism can solve this kind of problem. Without oversight, rules and regulations, free market will become wild, wild west. Unfortunately, regulators and board memebers are too often ex-CEOs who have no incentives to look out for shareholders. Even mutual fund managers, they get more fees from corporate 401ks and pensions than from individual investors, so they will not criticize CEOs.

Posted by: yc32 | Jul 15, 2006 11:49:43 AM

In the amoral world of Wall Street and corporate boards, right and wrong have no meaning, and the phrase business ethics has been a quaint anachronism for some time. In their religion, it would have been immoral, even criminal to NOT take advantage of the opportunity that 9/11 presented to Make. More. Money. Just like the WSJ editorial board urged Bush to use 9/11 to further the right-wing agenda of tax cuts and deregulation, there is nothing they won't appropriate to their financial benefit; in their philosophy money is an end that justifies any means necessary to get it. The only shame is in not making as much as possible.

Plus, the Bush tax cuts worked out great for them, too. A lovely little rigged game, eh?

Posted by: R. Porrofatto | Jul 15, 2006 11:51:55 AM

Barry
Thanks for taking such a strong stand. It is great to see that someone with a voice that will be heard standing up for something that is clearly so wrong.

I hope for a day when "integrity" comes back into voque.

Posted by: advsys | Jul 15, 2006 11:56:04 AM

Erm, the one thing that they are not lacking is "turpitude". Y'all might want to correct that. ;-)

Posted by: Kerosene | Jul 15, 2006 11:57:57 AM

Many of these proud, wealthy BlackSTOX businessmen don't compete; they buy the refs in D.C. with campaign contributions. The refs then allow all manner of marketplace gouging of customers, employees and shareholders.

Posted by: tsq | Jul 15, 2006 12:05:30 PM

Suggestion: It will cost a few bucks per month.

ASSCLOWN.COM A listing of the Greediest Corporate Enemies of American Free Enterprise and accountability.

All listed stocks are to be shorted or sold. A permanent sell recommendation on all listed companies until the Board of Directors grows some NUTS and does their job.

I was a VP of a non-profit corp.....honestly, it doesn't really matter the size or capitalization, almost all boards are ASSCLOWNS too.

Posted by: Craig | Jul 15, 2006 12:23:14 PM

Hey Bill. Look at those people jumping jumping off the WTC. Hey! I think I know that guy, played golf with him at Sahalee. What, the Pentagon has been attacked? There is an anthrax attack!

Hey Bill, how can we make some quick, easy money off this thing?

Posted by: busdrivermike | Jul 15, 2006 12:25:38 PM

I find this whole conversation kind of funny. lots of smart people discussing something that makes them so mad and is it moral? is it legal?

such interesting questions.

but of course, no one must ask the most obvious one (and here it comes, cliche alert--it's the 800 pound gorilla in the room!):

is this an inherent problem of capitalism, and of capital accumulation as the ultimate arbiter of success?

OF COURSE IT IS! we're capitalists, guys, get over it. if we can make a buck screwing out own children over in the name of short term profitability over...fill in the blank here--long term environmental stability, long term social health etc. ad infinitum...we make that buck. to do anything less is to be anti-capitalistic. that's not speculation, or marxist raving, that's the fucking law as defined in our late model of the system. shareholder value uber-alles. i'm sorry, but i don't get the hand-wringing, and i don't believe a single person who posts here hasn't done something on a daily basis to make our world a little bit worse for our/their children in the name of capital accumulation (better defined for the middle and lower classes as "putting food on the table for my family" and for the upper as "having a second table in a second home for my family).

stop whingeing, look at your own life. are these guys scumbags? sure. are they doing something illegal? no. are they even doing something wrong? no. they are following the same rules we all follow, they are just better at it than the rest of us.

of course, let me be clear--i'm indicting myself in all of this. i traded my youthful socialist ideals in for a fancy life a long time ago, but at least i don't lie to myself about it. and in not lying to myself i try to make things a bit better, but believe you me, it's all picking around the margins.

Posted by: Robert Green | Jul 15, 2006 12:34:21 PM

Amazing how so many "professional" market players seem to think there's not a free market for CEO's. Good CEO's are hard to find. Even people who would be mediocre CEO's are pretty scarce. Why do people get so upset when a company spends what it costs to hire or retain somebody good?

Now, I am not and will never be part of executive management, and none of my family is either. But I do have a friend who used to be a highly in-demand CEO (of real companies, not bogus ones), but after about ten years he moved to less stressful and more satisfying work. The money was just no longer a lure to him.

Think about it, a person who's capable of being a good CEO has probably amassed a substantial fortune already. The only incentives that will entice him are job satisfaction or HUGE amounts of money. It's NOT an easy job, even at the smallest companies. That's why it's so expensive to keep proven talent. Companies thrive not because we're sitting here trading shares off a PC, but because actual people do insanely hard work to make it happen. With exceptions, to be sure.

I've never heard of a company that went under because they paid the CEO too much, but I've known plenty that failed under bad ones.

And frankly, post-9/11 was a time when it was especially important to retain good leadership, and it was also a time when the lure of retiring with one's family was the strongest. So there was a price spike in CEO's. That's just the market. Why do we get upset when CEO's get a price spike, but when when some small-cap triples and we bail before it crashes, we act like we've earned it?

Posted by: krrk | Jul 15, 2006 12:49:09 PM

December 2008

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