Bailout Report

RECESSIONWIRE May 14, 2009: “So… how big is your package?”

It’s a question that used to be taboo, something only discussed between intimates. But these days, virtually no one is too shy to ask about the dimensions of someone else’s severance deal. In fact many people can’t help but compare what they received against the packages of their friends, enemies and former coworkers.

It’s natural to want to know how you measure up. And information sharing in this regard can be valuable because as you’ve no doubt realized by now, severance packages come in all shapes and sizes—some generous, many decent, some completely non-existent. So what’s fair and what’s your legal due… and technically what is severance anyway?

Severance, as defined by the American Heritage Dictionary is: “The state or condition of being severed or separated, as in the ending of a relationship.” But you already suspected it was a parting gift for being dumped, didn’t you? Legally speaking, severance pay is what an employer gives an employee at the time of termination. It is sometimes given in lieu of notice (as in, “So sorry to let you go. But here’s two weeks of pay. Don’t let the door kick you in the ass on the way out.”) Sometimes a company provides severance based on how long you’ve been in your job; for example, one week of severance for every year of service. But depending on how poor the financials of the company at the time, sometimes the employer will offer a flat two weeks of pay regardless of your length of service. And sometimes, you’ll get bupkes—Yiddish for diddley squat.

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In August 2007, Bear Stearns CEO Jimmy Cayne wrote to Bear investors.  Cayne’s mission that August was critically important, and he knew it.  In the wake of the shocking failure of two huge Bear Stearns hedge funds with heavy ties to the subprime mortgage market, the CEO needed to convey his confidence in the future of his company. Cayne cooly reassured investors that Bear’s conservative tradition, strong risk management culture, and plan to pare its mortgage backed securities portfolio would assure Bear Stearns a speedy and full recovery from the summer’s disastrous fund collapses.

In Cayne’s words, “You can count on us.”  Less than seven months later, Bear was purchased by JP Morgan for $10 per share.

A year later, Cayne sang a completely different tune in an interview with Fortune Magazine titled “The Rise and Fall of Jimmy Cayne.” The ex-Bear Stearns CEO revealed that the strength he projected in the summer of 2007 was in fact false strength. Fortune reported that Cayne “did not know how to deal with the devaluation of the firm’s mortgage-backed securities and other illiquid assets.  Nor did he know what to do… when two hedge funds that contained those same toxic assets collapsed and further poisoned the company’s balance sheet.”

The truth according to Jimmy Cayne himself is that Bear’s all-powerful dictator was paralyzed by indecision in the wake of Bear’s hedge fund troubles. Cayne had absolutely no idea how to cope with the company’s financial troubles.

In the CEO’s own words: “It was not knowing what to do. It’s not being able to make a definitive decision one way or the other, because I just couldn’t tell you what was going to happen.”

“I didn’t stop it. I didn’t reign in the leverage,” Cayne also admitted to Fortune.  Clearly, Mr. Cayne understood that Bear was overleveraged and blames himself for  doing  nothing about it.

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The Washington Post reported on campaign letters President-elect Obama sent to federal workers prior to the election in a story by Carol D. Leonnig (”Obama Wrote Federal Staffers About His Goals“, November 17, 2008).

The story represents the following are quotes from such letters sent to Housing and Urban Development workers signed by Barack Obama:

“Because of the fiscal mess left behind by the current Administration, we will need to look carefully at all departments and programs.”

“I am committed to appointing a Secretary, Deputy and Assistant Secretaries who are committed to HUD’s mission and capable of executing it.”

Are these quotes/letters genuine?  Do we really think these are direct quotations from the letters?  Anyone with a copy of the these letters, please send a copy to us.

The Federal Home Loan Agency– regulators of Fannie Mae, Freddie Mac, and federal home loan banks– announced a streamlined loan modification program designed to prevent “preventable foreclosures”.  Details of the program which will start December 15th:

Goal is to reduce monthly housing payments, including homeowner association fees and taxes, to no more than 38% of gross household income.

Eligibility requirements:

• Loans must be 90 days or more pats due and can be in foreclosure.
• Loan to value  ratio must be 90% or higher.
• Owner-occupied homes only.
• Servicers will receive a $800 payment for each loan modified.
• Loans will be modified by Reduce interest rate, extending term to 40 years, defer principal payment, reducing principal with difference added to back end of loan.

The most noteworthy elements is the lack of a write-off component when loan principal’s are reduced.

While FHLA only regulates 58% of single family mortgages (approximately 31 million ) representing 20% of delinquent mortgages, the elements of this program are likely to be copied by banks and investors owning non-conforming loans.  JPMorgan Chase, Bank of America, and Citi beat FHLA to the punch by announcing the initiation of mortgage forebearance programs in the last two weeks.  Mortgages that have been sold into mortgage-backed security pools– so called private label mortgages representing 20% of loans outstanding and 60% of delinquencies–  may be modified by loan servicers.

The standardized terms on which Treasury will invest up to $250 Billion as senior preferred equity in U.S. controlled banks, savings associations, and “certain bank and savings and loan holding companies engaged only in financial activities”:

• Minimum subscription amount available to a participating institution is 1 percent of risk-weighted assets. The amount is the lesser of $25 billion or 3 percent of risk-weighted assets.
• Will qualify as Tier 1 capital and will rank senior to common stock and pari passu with existing preferred shares, other than preferred shares which by their terms rank junior to any other existing preferred shares.
• Will pay a cumulative dividend of 5 percent for the first five years and will reset to 9 percent after year five.
• Raising dividend on common stock requires consent of Treasury.
• Non-voting, other than class voting rights on matters that could adversely affect the shares including any increase in common stock dividends.
• Callable at par after three years. Prior to the end of three years, the senior preferred may be redeemed with the proceeds from a qualifying equity offering of any Tier 1 perpetual preferred or common stock.
• Are transferable.
• Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15 percent of the senior preferred investment with an exercise price calculated on a 20-trading day trailing average at the time of issuance.
• Participating companies must adopt the Treasury Department’s standards for executive compensation and corporate governance for the holding period (in other words, the salaries of the CEO, CFO, and next three most highly compensated executive officers will be taxable to the company).
• Participating financial institutions must 1) ensure that incentive compensation for senior executives does not encourage unnecessary and excessive risks, 2) clawback any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate, 3) not make any golden parachute payments to senior s, and 4) not deduct for tax purposes executive compensation in excess of $500,000 for each senior executive.
• Must elect to participate before 5:00 pm on November 14, 2008.
• Treasury will fund by year-end

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