Doofuses smart with their own money (Bank CEO's knew when to sell)

Chron.com ^ | 12 March 2011 | Loren Steffy

[Notary Sojac]

The Doofus Defense is under attack. As longtime readers know, I coined that term leading up to the trial of Enron executives Ken Lay and Jeff Skilling, who, facing criminal charges, suddenly claimed to be woefully ignorant of their company's actions.

In the recent financial crisis, bank executives were among the biggest doofuses (doofi?). Most insisted they couldn't have seen the crisis coming. No one could. It was — cue the Wall Street cliché machine - "the perfect storm."

Consider, for example, Lehman Brothers, whose bankruptcy precipitated the Great Recession in September 2008. Lehman's CEO, Dick Fuld, had one reported stock buy and 304 sales during the preceding eight years.

Looking at it another way, he spent about $19,000 investing in his own company and sold stock worth almost $579 million.

Factoring in the cost of exercising options, Fuld still sold about $428 million more than he bought.

As a group, bank CEOs reaped about $2.6 billion from stock sales during the eight years.

Even if you account for their paper losses from the collapse in 2008, they still came out ahead by about $650 million.

Of course, executives can argue that options and restricted stock were part of their compensation, and by selling, they were simply collecting part of their pay.

Read the rationale of bank compensation committees in their 2009 proxy statements and you have to laugh at the absurdity.

Executives are showered with perks and pay because, investors are told, their expertise is vital to the company's growth.

Yet when they fail, they invoke the Doofus Defense as justification for keeping the cash they've already taken out of their companies.

Look at how they voted with their wallets leading into the financial crisis, and it's clear they had a pretty good idea what was coming.

[bolobaby]

Ridiculous analysis in the end.

Of course CEOs sold. Stock options are a form of compensation. When you vest, it is wise to exercise some (or all) and diversify. Not doing so would be like *not cashing a paycheck*.

I saw a significant number of friends lose a substantial sum of money because they didn’t exercise their stock options during the internet bubble. Always exercise, *especially* if you have a large amount of non-vested options.

[psjones]

Options tend to come with an expiration date, writer does not make it clear how many of those options sold were about to expire.

[RockinRight]

The implication of this article is that they knew they were destroying their companies and economies and trying to exempt themselves.

Even if true, your analysis is correct - why would you NOT exercise those options? Or - if you see the writing on the wall (even if NOT at fault for it) aren’t you going to do what you can to protect yourself?

There are plenty of things to crucify these guys on, but this really isn’t one of them.

[Free Vulcan]

Pretty superficial analysis, not enough to prove culpability.

[ozdragon]

Those who call for bankers to have “skin in the game” should remember that at the time of their collapse both Lehman and Bear Stearn were 30% employee owned. Historically, most Wall Street firms (investment banking and brokerage, not commercial banks) paid a large portion of their compensation in the form of stock options which vested over 2 to 5 years. This created golden handcuff requiring employees (and partners) to focus on firm profitability year after year and forstered loyalty.

[padre35]

Of course, did anyone really expect anything else to have happened?

They make money with OPM, they are not going to lose their own money at any time no matter what it looks like.

[runninglips]

Why not just make it illegal to receive stocks as payment for services? Pay them up front, make their pay eligible for taxation, and make sure you also make it illegal to pay people boats, yachts, cars, trips, vacations, healthcare, dental, heck everything but money. We all know it is a way to get around paying taxes for the rich, and it is part of the IRS that truly isn’t fair. If people had to pay for their own health and dental, you would see lower costs for those not within a corporate structure. There were finally be a level playing field in that area. For those that make a minimum amount, like $100,000 plus options, they would have to pay tax on ALL of their compensation.