Banker CEOs Lied to Congress

This article is about how the CEOs of the largest Banks in the world lied to the U.S. Congress about the extent of their equity compensation bonuses. Their deliberate lies were pre-meditated and were intended to deceive the Congress and the viewing public.

Specifically at the 1 hour and 24 minutes into the afternoon session of the Congressional hearing on February 11, 2009, Representative Bill Posey from Florida asked the bankers to declare the value of all the equity compensation that they were granted during 2007. They answered with flat out lies or artificially low values.

The links below illustrate the size of their grants of equity compensation during the years 2006, 2007, 2008. This article will indicate the true value of the compensation grants on the day of grant by analyzing the components of the grants and using standard theoretical pricing models. This underestimating is done by the companies to hide the actual value of the grants in order to have it appear that the accounting costs are far less than their real costs. They minimize the value of the grants by making unrealistic low assumptions about the volatility of the stock and the expected time to expiration. They also make false assumptions about the probability of early terminations.

The pages of the links from SecForm4.com have to be expanded by adjusting the time period to three years instead of two years near the left top. Otherwise you will receive just two years of data.

1. Morgan Stanley's (MS) John J.Mack (SecForm4.com).

John Mack is the infamous inside trader who was subpoenaed by Gary Aguirre of the SEC to take a deposition about his alleged inside trading activities in connection with the hedge fund Pequot Capital. Aguirre was fired by the SEC for trying to subpoena a banker too big to be prosecuted. See the link from Wikipedia.

Mack received the following equity compensation:

2. J. P. Morgan's (JPM) James Dimon (SecForm4.com).

Total Value of grants on the grant day for 3yrs.= $86,000,000 Dimon stated he received $29,000,000 in equity and cash bonuses in 2007 which really equaled $54,000,000 plus an unknown amount of cash.

3. Goldman Sachs' (GS) Lloyd C. Blankfein (SecForm4.com).

4. Bank of America's (BAC) Kenneth D. Lewis (SecForm4.com).

5. Citigroup's (C) Vikram S Pandit (SecForm4.com).

Total Equity Compensation granted in 2008 as a bonus for 2007.........$62,700,000.

At the hearing Pandit said he was granted as a bonus for 2007 of just $2,500,000. But the true figure was $62,700,000.

6. Wells Fargo's (WFC) John Stumpt (SecForm4.com).

Mr. Stumpt said he received just $3.2 million in options in 2007 which he claimed are now worthless. In fact, the options he was granted in 2007 were worth $22,300,000 at the time of grant and are far from worthless now. The options granted to him in 2007 are presently worth about.............. $8,000,000 to $9,000,000.

Total Value of the options on the day of the grant for 3 years equal..........67,000,000.

Comments

[ifuwish2:]

why keep digging in the past,let sleeping dogs lie and lets try to get the banks anf financials back to recovery,i think you guys try to make is bad or worse,,what good does this do i like to know..time to move on and look to the future even if it is bleak but you giys keep making it worse,,,,cant belive the shiit journalism..

Apr 05 07:04 PM

[dcb:]

The idea is to make the public aware and fix the system for everyone. Not to move on and let things happen again. Ceo pay, derivatives, leverage, going behind congress back, etc. These things should bother you. If you don't want to be informed, don't read and just invest on blind faith alone. That isn't for me, and I think executive compensation is an issue, and I think lies in front of congress are an issue. While non exercised options really aren't part of compensation (not being exercised), it would appear the testimony was perhaps a bit slanted.

I take everything I have written above back. Lets let sleeping dogs lie and do no investigations as to why the financial crisis happened.
Lets not look at failure at the SEC, etc and attempt to reform them. Lets lets sleeping dog lie like chuch prince who walked away with over 100 millions dollars of shareholder money for ruining his company. that isn't capitalism, that is crony capitalism.




On Apr 05 07:04 PM ifuwish2 wrote:

> why keep digging in the past,let sleeping dogs lie and lets try to
> get the banks anf financials back to recovery,i think you guys try
> to make is bad or worse,,what good does this do i like to know..time
> to move on and look to the future even if it is bleak but you giys
> keep making it worse,,,,cant belive the shiit journalism..

Apr 05 09:12 PM

[dcb:]

If you don't report things, if they don't get out on the web there will never be any pressure on congress to fix things, and the voting public won't really know what is going on. The web is the best vehicle for democracy since the newspaper. Is it any wonder why the elites tried to prevent people from learning how to read back in the day. Ignorance just allows people to take advantage of you.

Apr 05 09:15 PM

[eieinli:]

It is a fact of life: bank CEOs won't go hungry or homeless in good or bad times. They are holding the pot (of gold). The real question is how much time do they have to really enjoy their loot!!!

The real culprit are the Board Members who approved these astronomical pay and perks and bonuses. The Board is suppose to protect the interests of the shareholders. When are the shareholders going to wake up and get rid of these incompetents. How many shareholders have the real opportunity to attend annual shareholder meetings and get to vote for the board. Besides, who nominate these rubber stampers?

The whole set up is ONE BIG FARCE, worst than the Madoff scam!

WAKE UP INVESTING PUBLIC!!! DO YOU REALLY BELIEVE
OBAMA, GEITHNER, BERNANKE, DODD AND FRANK CAN PROTECT YOU?????

Apr 05 09:36 PM

[User 388979:]

VVVVViking: Feel free to call me ignorant if you like. You do me no harm. The point of my comment was that at the point in time when the CEOs were asked about their compensation for 2007 most of their stock options were, as you say, under water. There is no way the CEOs could place a value on the stock options unless you think they are able to see into the future. Asking them to place a value on those stock options was another case of our elected officials putting on a show for the public at large. Anyone with a ounce of brains would have been able to pick up on the nonsensical questions that the bankers were being asked to answer.

Apr 05 10:39 PM

[Clint007:]

I don't have to say a lot, but this interview, says a lot:
(Note: + 30 minute) "Corruption In America's Banks? mefeedia.com/entry/cor...

Apr 05 11:31 PM

[horrid:]

Let's not forget also that congress and the regulators are not doing their jobs or lie to get re-elected or to please their appointers.
The whole system is corrupt- the way things work now, the executives at all corps incl banks, their board and all the members of the government are not held accountable for their actions.
The boards are appointed by the execs and the shareholders have not say. The boards are supposed to be watchdogs- impossible.
The lobbyists represent special interests who support the politicoes and pay for their elections.
Where will it stop?
It is not a question of capitalism, free markets, socialism, regulationism...
Right now our system is NONE of these.
We need a system that motivates (where are you game theory economists?) and holds those in power accountable to the shareholders and the voters.

Apr 06 02:33 AM

[PapaWhisky:]

User,

It's very easy* to put a value on options ... even if they are under water. It's called Black-Scholes. It's the exact formula the banks used when they awarded the options so they could account for the expense in the year it was incurred.

*By easy I mean mathematically easy. Some of the inputs to B-S are little more than educated guesswork


On Apr 05 10:39 PM User 388979 wrote:

> VVVVViking: Feel free to call me ignorant if you like. You do me
> no harm. The point of my comment was that at the point in time when
> the CEOs were asked about their compensation for 2007 most of their
> stock options were, as you say, under water. There is no way the
> CEOs could place a value on the stock options unless you think they
> are able to see into the future. Asking them to place a value
> on those stock options was another case of our elected officials
> putting on a show for the public at large. Anyone with a ounce
> of brains would have been able to pick up on the nonsensical questions
> that the bankers were being asked to answer.

Apr 06 02:46 AM

[rajivk2005:]

WOW.. people really know nothing about options here. As very rightly pointed out.. even underwater options *have* value. Thats the reason they are bought/sold for a price. In 2007, when the stock prices hadn't started falling, these ESOs were worth a lot of money. Its unfortunate that companies do not fully non-cash components of key employees, as most guys make a multiple of their stated salaries from stocks and stock-options.


On Apr 05 09:52 AM User 388979 wrote:

> Mr. Olagues apprently have never been granted a option to purchase
> stock. The idea behind a ESO is that the employee is granted the
> opportunity to purchase stock in the company he works for at a guaranteed
> price, generally determined by the stock price at the time of the
> grant. The employee then can (within a specifed time period) either
> purchase the stock and retain it or can buy and sell the stock on
> the same day netting a profit. If you look at the stock options
> that were granted for example to Mr Stumpt of Wells Fargo in 2007
> you will see that the price of the stock options ranged from 13 to
> 26 dollars a share. The price of Wells Fargo Stock at the time the
> CEOs testified was well below 13.00 a share therefore if Mr Stumpt
> had not yet exercised his option to purchase these shares he would
> be a fool to buy them for 13 dollars a share when he could purchase
> the same number of shares on the open market for less. Therefore
> these stock options are worthless to him.

Apr 06 04:47 AM

[User 332744:]

i disagree with how this article is calculating total bonus compensation. the value of the stock options and restricted stock units can not be taken at the time of the grant besides the standard vesting periods there are usually a number of clauses attached to the options.

i'm more inclined to count bonuses on what i have in the bank if i get fired tomorrow.

Apr 06 07:28 AM

[klh:]

I see so many people bashing this article and deriding the author, yet none of them have given any numeric facts to prove the statements are false - they have ony provided intuitive arguments by which less sophisticated readers might infer they are right, e.g. an underwater option is worthless. my conclusion is that these bashers must have some kind of vested interest in making the bailout of these firms and executives seem kosher - and therefore they must either be: in a similar situation, a friend of the banks or a friend of Geithner and Pauson.

Apr 06 07:31 AM

[jamesa40:]

You're joking right? Sure, the options may have some intrinsic value, but the reality of the matter is that the author is exaggerating the value, based on current market conditions, to make a point. Just as he exaggerated the title of his article to draw viewers, which he seemed to have done. Why not have an article that says "Congress lied to bank CEO's, by imposing retroactive salary caps and bonus restrictions. Fails to understand how markets work."? This article in my mind is a shill piece that is not constructive in any to fixing the current financial system problem. If you like to read junk like this, by all means continue to do so. I for one will be moving on.


On Apr 06 07:31 AM klh wrote:

> I see so many people bashing this article and deriding the author,
> yet none of them have given any numeric facts to prove the statements
> are false - they have ony provided intuitive arguments by which less
> sophisticated readers might infer they are right, e.g. an underwater
> option is worthless. my conclusion is that these bashers must have
> some kind of vested interest in making the bailout of these firms
> and executives seem kosher - and therefore they must either be: in
> a similar situation, a friend of the banks or a friend of Geithner
> and Pauson.

Apr 06 08:07 AM

[MDR:]

According to Black-Scholes, these options were indeed worthless and the CEOs didn't lie. Let's stop perpetuating this populist, anti-capitalist bs that is undermining an economic recovery. Big companies are not the enemy guys, let's all keep that in mind.

Apr 06 11:17 AM

[levin70:]

If the question that was asked was "what was your stock based compensation granted in 2007"

Why is the OP posting grants from 2006 and 2008? That doesn't make sense to me. As long as they listed the grants from 2007 that's all that they need to respond with, not in addition to that i was granted a bunch in 2006. IF the congressman wanted to know about 2006 and 2008 he should have also asked about 2006 and 2008.

What am I missing?

Apr 06 11:43 AM

[Carousel:]

The San Francisco Chronicle had an article on Sunday about the lack of prosecutions and an assertion that this credit crisis is not real. The writer said that it's a deep recession from too much debt and too much debt-financed consumption but that the idea that it's because consumers and businesses can't borrow more is a lie devised by the banks to justify handing them a lot of money that they aren't going to lend to consumers and businesses anyway.

Check it out: www.sfgate.com/cgi-bin...

Apr 06 02:40 PM

[hmmm.really:]

User 388979: we are saying the same thing... I was questioning the original author in my reply; you were actually much more articulate and hit 'send' before I finished writing my response...


On Apr 05 11:49 AM User 388979 wrote:

> Hmmmm.really: I didnt quote a strike price for my example since I
> dont know what the strike price would be for Mr Stumpf's stock options.
> My position was that in todays market the value of options granted
> in 2007 are more than likely worthless. Therefore I dont feel that
> the CEOs necessarily lied. Truth be told I thought the congressional
> hearings were nothing more than a dog and pony show for their constituants.

Apr 06 07:13 PM

[Jonathan Rose:]

Why am i not surprised. I don't understand how employees feel they can justify such incredibly large bonuses and returns. Are they simply saving i have waited my turn and beaten out everyone else to this job and it is now my chance to rape the company that has paid my bills and given me job security.

If these guys set up the company and built it from scratch as entrepreneurs and took risks went without food to make it happen, more power to them that is the American way.

This however is pretty intolerable as most have never done anything special or of great worth in their lives and have never really built anything

Apr 06 09:09 PM

[John Olagues:]

I am not a journalist. I was an options market maker on the CBOE and on what was once the Pacific Stock Exchange in San Francisco for 5 years each.

I personally traded and maintained some of the largest positions of anyone who worked on those exchanges.

Employee stock options and other forms of equity compensation are not too different from exchange traded stock and options, although there are certainly some differences.

In 2006 The SEC and FASB required that companies account for their options and other hybrid forms of equity compensation in a manner that they felt appropriate. My calculations are consistent with their suggested methods.

The values that I outlined are certainly higher than their values now because the stocks are much lower.

However, those executives surely understood the true financial status of their companies far better than you or I and probably made short sales, sold calls and bought puts on a basket of stocks highly correlated with their own companies. Perhaps they even "parked" short sales in their own companies in the accounts of colleges and still maintain those short sales.

Knowing what I know, I would say its highly probable that they did make such short sales to hedge their grants. But they did it in a manner disguised from the public.

So the father those options are out of the money the better, from the view of those who hedged their grants.

Good luck

John Olagues

Apr 07 12:00 PM

[PapaWhisky:]

JackRuby,

You've got 6 comments and you use the word 'moron' in each one.

BlackScholes on Mr. Prandts (C) $24 options awarded on 22-Jan-08, expiring in 2018, is (assuming V=50 and Int=5%) $0.70.

His grant of 1,000,000 options, then, according to Black-Scholes, is worth $700,000.


On Apr 06 09:07 AM JackRuby wrote:

> What a moron!!!! Obviously this idiot has never received a stock
> option. The value of all of those options are ZERO !!! Absolutely
> worthless! When options are granted they are valued by what is called
> a "Black-Scholes" model. It is a mathematical calculation based
> on past history. On the day the options are granted....they have
> absolutely no value. If the company performs well, and the company's
> stock rises in price, only then due the the options have value.
> In this market....those options have NO VALUE. This article has
> been written by a totally ignorant MORON!!!! This is the problem
> with articles written in financial journals and publications....misinf...
> This idiot is trying to make a headline out of nothing. We need
> business majors writing articles....and not uninformed stupid journalists!!!
> Most people learn to write by the second grade....and then go on
> to productive lives....unlike journalists

Apr 10 03:09 PM

[indubio:]

I think you have made an important point that some people fail to understand. The fact that options ended up being worthless isn't the point. That wasn't the expectations when they were granted. Now admittedly, this is the risk executives take when they accept options in lieu of actual pay but please...anyone...give me one instance between 2000 and Mid-2008 when executive compensation didn't end up being much greater then the estimated value at the time the grants were made? I haven't done the research but my guess is that few instances exist.


On Apr 05 11:49 AM HBWOW wrote:

> The point of Mr. Olagues's very good article is that it was the intent
> at the time the options were granted that these "insiders" be grossly
> overpaid for their respective performances. The fact that the derivatives
> problem caught up with them and the general economy, does not alter
> the greedy intentions of these individuals. Options have long become
> an accepted practice to via "indirect" cloaked in house transactions
> of net cash distributions to these "deserving" over achievers at
> the expense of the stockholders. Look at comparative annual balance
> sheets on most companies and one can see the massive cash taken out
> of the corporations and bank debt or other liability forms having
> to be used to replace this working capital.

Apr 13 01:11 AM