WaMu: Executive Privilege Trumps Shareholder Interests

Whatever happened to women and children first? The Directors and Executives of Washington Mutual (WM) recently exhibited a level of self-interest and insensitivity to the interests of their shareholders that reflects quite badly on them.

WaMu is in the worst shape of the large banks. Their capital adequacy ratios (Tier 1 and Total) are both below average. Their Tier 1 ratio is at the bottom of the 24 large banks in the Keefe Bruyette Woods large bank index.

Their stock is down about 55% for the year. Their dividend (currently yielding over 12%) is in question due the possibility of having to raise money to restore capital adequacy.

The fourth quarter is likely to bring more unpleasant mortgage write-off news for them and other banks due to pending variable rate mortgage resets and the desire of management to get as much of the bad news out before beginning the new year of 2008.

Why then don’t the Directors and Executives of WaMu put their compensation at risk as they have risked shareholder wealth? Instead of standing up to take their medicine for the lending decisions they made with our investor money, they have changed the deferred compensation plan to allow executives to withdraw lump sum assets in July of 2008.

Oh, sure they have some risk for the next 7 months, but the full consequences of the mortgage crisis may not mature that rapidly. Instead of the captain and crew helping the passengers to their life boats, the captain and crew are pushing to the front of the line to get to the life boats first. Shame on them.

Here is the text of their November 15 SEC 8-K filing. Judge for yourself if there is any reason to continue to have faith in management at WaMu. If we were you, we’d fight our way past the captain and crew and get off this boat now.

Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

As provided for in transition rules under Section 409A of the Internal Revenue Code, the Human Resources Committee of the Board of Directors of Washington Mutual, Inc. (the “Company”) approved the amendment of the Company’s Deferred Compensation Plan (the “Plan”) to allow Plan participants, including the Company’s executive officers, to make a one-time election before December 31, 2007 to receive distributions of their Plan balances commencing in July 2008. Under the amendment, a participant may elect that all or a portion of his or her account be distributed in a lump sum in July 2008, or in annual installment payments for a payment period of up to ten years.

What an incredibly bold, audacious and anti-stakeholder act on the part of the WaMu Directors and Executives. WaMu is in need of capital and should not be increasing outflows to management.

It is quite alarming that management feels the need to protect their deferred compensation by taking it now instead of later as was the original plan design. Why do you think management is in such a hurry to take out their cash in the midst of a credit crisis and a plummeting company stock price?

What’s next, stay bonuses and stock option strike price resets?

Of course don’t forget the bonuses paid for the production in the past that is the cause of the problem today, to be followed most likely by future bonuses for curing the problem caused by the production.

There is something terribly wrong with the misalignment of shareholder (owner) interests and management (employee) interests these days. This example at WaMu is just that: an example – one of far too many examples. We hope institutional investors (or class action attorneys) who have the muscle would figure out a way to force realignment of the interests of those who own and those who manage public companies.

WaMu could be a real home run for investors who go in now with the possibility of price recovery and a handsome dividend, even if it is cut in half. But the risk is quite high.

Even for a high risk betting person, it would be better to wait until after the fourth quarter to see how much worse mortgage losses may become for WaMu (and other banks as well) before committing funds.

We consider the stock a sell.

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Comments

[Kim]

Huh? Deferred comp plans aren't company funds--they are investment accounts for the employees that have already been funded. And because mortgages are collateralized borrowings, banks with a ton of mortgages will ALWAYS have lower capital ratios than those that lend on an uncollateralized basis. So I'm missing the story here.

[WaMu]

Remember that this is deferred compensation. I see know problem with the Execs being able to access what is rightfully their compensation. Just another writer trying to make a name for himself.

[WaMu]

Sorry should have written no instead of know. Article just makes me mad.

[wamuemployee]

I must be missing something. I'm a WAMU employee who elected to accelerate the payout of the deferred comp, but it's just money that was previously taken out of my paycheck pre tax. When it comes out, it's taxed at close to 50%. This money couldn't be used to clean up the balance sheet (as the article implies), or to help out shareholders in any way. I agree that management at WAMU is severely lacking in leadership, but to focus on this is a red herring at best.

[Richard Shaw]

Deferred comp asset are general company assets. They are attributabel to specific employees and they are contractual obligations, but they are not guaranteed and are at risk in extreme situations.

[Richard Shaw]

An important point is that of the 24 banks in the KBW large bank index, only WaMu took an action for a special release of deferred comp assets. To do so in the midst of an historic cash crisis is not something to inspire confidence in the company, and does not seem to be a balanced approach to stakeholders when owners are losing the majority of their capital and have most the majority of their dividend income taken away while open the cash window to executives who could protect their deferred comp from potential creditors by the action. The board was conflicted in their action in our view and the management showed poor leadership in moving sponsoring or supporting the action.