Dividend policy

Let's put some links together on the broad subject -- one of great relevance to all the themes of this blog -- of corporate dividend policy. How do companies decide how much cash their stockholders get on a regular basis?

Here's a pdf from Deutsche Bank on the theory and practice.

And here are a few words from scholars at UPenn.

One piece of the puzzle is the fact that individuals in the US are generally taxed more for dividends than for the capital gain on the sale of stock. The dividends are "ordinary income." So, shouldn't a rational investor want the company to keep reinvesting its cash, building up that strike price, and earning him that capital gain? Why does anyone even want a dividend?

On the other hand, a stock that doesn't pay dividends has a Madoff-like air to it. I'm holding on to it so I can sell it at a higher price to someone else, you say? Well, why would he want it? Because he expects to sell it to a yet greater fool further down the road? Somewhere, somebody has to receive a stream of income/cash in order to anchor those capital gains. That, at any rate is one common sensical take on the issue.

At any rate, once a company has a history, a track record as to the quantity of dividends it pays, there is a good deal of pressure to keep it up. The dividend level is "sticky." Why? Because any departure can be taken as a signal. A cut in dividends can be considered proof the company is in trouble and desperately needs to hold onto its cash. An increase in dividends can also be taken as a signal that the company is in trouble, specifically that it is making a desperate move to perfume that fact!

Consider that Lehman Brothers, the broker-dealer that famously declared bankruptcy in September 2008 and set off that autumnal crisis, had increased its own dividends by 13% earlier in the year. You may as well give that some consideration -- if you are the member of a board of directors that institutes such a cut, signalling theorists will consider it for you!

Finally, if you are an investor, you might want to consider a dividend reinvestment plan. Especially because it goes by such a neat acronym. Such a plan is known as a DRIP.

The Last Days of Lehman Brothers

CNBC will air "The Last Days of Lehman Brothers" this coming Friday.

Indeed, they'll be running it all evening, in accord with the cable imperative that anything worth broadcasting at all is worth broadcasting a thousand times.

The movie was first aired on BBC last September, a year after the dramatic events portrayed. Here's a YouTube clip, portraying Hank Paulson in a philosophical mood.

I love the viewers' comments beneath that clip, too. What a combined reflection of the Zeitgeist they are.

Cast? Glad you asked.

Corey Johnson plays Dick Fuld, chairman and CEO of Lehman.

James Cromwell plays Hank Paulson, whom you saw in the YouTube clip, talking about the fall of Rome, or the European empires, and now of "us."

Michael Landes plays a fictional character, Zach, an aid to Fuld who also delivers the voiceover narration.

It isn't an A-list cast, but a respectable one. Landes is best known for having played Jimmy Olson in "Lois and Clark" in the early 1990s.

Anyway: Happy viewing.

Lehman's Problems, Continued

I'm still mining the Examiner's Report that I discussed yesterday, looking for the good nuggets.

I found this: On page 480 of the second pdf in the series, the Examiner is discussing Lehman's efforts to sell itself to Warren Buffett. Fuld and Buffett spoke on Friday, March 28, 2008.

"They discussed Buffett investing at least $2 billion in Lehman. Two items immediately concerned Buffett during his conversation with Fuld. First, Buffett wanted Lehman executives to buy under the same terms as Buffett. Fuld explained to the Examiner that he was reluctant to require a significant buy-in from Lehman executives, because they already received much of their compensation in stock. However, Buffett took it as a negative that Lehman executives were not willing to participate in a significant way. Second, Buffett did not like that Fuld complained about short sellers. Buffett thought that blaming short sellers was indicative of a failure to admit one's own problems."

Buffett was of course wise in this. And the short sellers were right to believe that Lehman was over-valued as Einhorn explained in May 2008.

The vulture doesn't kill. The vulture feeds on the flesh of the dead. And, in so doing, said vulture performs a service. Though he is led to perform that service by his regard for his own self-interest, it is a genuine service. Bring out your old Adam Smith neckties!

Lehman's Problem was ... Lehman???

You mean it wasn't a conspiracy of short sellers?

I see from Sorkin's book that back on April 2, 2008, Dick Fuld had a breakfast meeting with Jim Cramer and sold him on the theory that Lehman's real problem was "a cabal of shorts," and the abolition of the uptick rule in 2007, which had presumably empowered said cabal.

Many have echoed Fuld's views. Indeed, in September 2008 the SEC halted the short selling of stocks in the financial sector altogether. That didn't last long, and it didn't seem to have any impact while it lasted, but the geniuses in Washington thought they had to show that they could collectively be a tough sheriff coming into Dodge.

Now there is a bounty of new evidence for what those of us who were skeptical of the anti-shorting cause have suspected all along. The problem with Lehman according to a report by the bankruptcy court's examiner just released was Lehman's own management, compounded by overly creative accounting and its enablers at Ernst & Young.

The report is available in full here. It's more than 2,000 pages long, and accordingly each of the links on the Jenner & Block page to which I've just linked you represents a separate volume. (The examiner is J&B's chairman, Anton Valukas.) But let's just stick to the Executive Summary, which appears at pp. 58-70 of the first volume/PDF.

Lehman failed because it was unable to retain the confidence of its lenders and counterparties. Why was it unable to retain their confidence? Because "a series of business decisions had left it with heavy concentrations of illiquid assets with deteriorating value...." Those decisions, misguided though they were, were within the business judgment rule -- i.e. they were legal. What may not have been legal, though, was the use of accounting trickier to obscure them.

The short sellers, then, were right. They accurately perceived the rottenness that Lehman's accounting trickier was designed to hide. Short sellers are the heroes of this examination, not the villains. Of course, they are well-compensated heroes, so there is no need to cry over their underappreciated character., Still, the short sellers were doing a valuable job, doing it well, and were made the scapegoats by the real malfeasors.

Who'd a thought?

Dubai World

It is an ill wind that blows no good. I see in a story in the FT yesterday that Aidan Birkett, of Deloitte, has been chosen as the chief restructuring officer at Dubai World.

Dubai World (DW) is an investment company that is essentialy a private contractor for the government of that Emirate, handling a portfolio of businesses for it. DW could cause quite a splash by defaulting on its debts, something that the relevant chunks of the world have worried about since November. Indeed, you might think that no good could come out of the failure of Dubai World with all it would imply.

But, then, Accountancy Age says this is a great opportunity for Birkett and Deloitte. Indeed, it "should provide Deloitte and Birkett with the kind of boost that Lehmans has given PwC – the latest count shows the administration has wracked up £150m in fees." For my fellow Americans, GBP£150m is about USD$232 million. That's how much PricewaterhouseCoopers has gotten on the Lehman deal?

It beats keeping the votes on Oscar nominees safe until some celebrity can get on stage to tear open the envelope.

As for the blow-by-blow on the restructuring, there is this.

A timeline for the fall of WaMu

Feel free to correct me about any of the particulars below. It does seem that the forced sale of the assets of the operating company, Washington Mutual, and the bankruptcy filing of the Holding Company, were both key events in the financial chaos of the autumn of 2008, and here is a simple effort to set forth some pertinent facts in chronological order.

We begin our timeline while WaMu is still engaged in a buying spree.

2002, purchases HomeSide Lending Inc., a major mortgage lender.

2003, Chief Executive Officer Kerry Killinger says, "We hope to do to this industry what Wal-Mart did in theirs."

2005, purchases Providian Financial Corp., thereby becoming a large player in the credit card business.

2006, purchases Commercial Capital Bancorp, the third largest player in the multi-family residence lending market in California.

2006, WaMu bans referral fees from banks to agents, fearing they could be construed as illegal payments. But the ban is only unevenly applied within the organization.

October 2007, WaMu enters a period of consistent heavy losses as its easy-money "power of yes" policies meet the great "no" of a collapsing housing market.

February 2008, WaMu introduces the "Whoo Hoo" advertising campaign, applies to register a trademark in the phrase. But by this time, the view from the executive suites would have been better expressed by another Simpson expression, "D'oh!"

March 2008, Killinger calls Jamie Dimon, CEO of JPMorganChase, to talk about a merger -- in effect, putting his company up for sale. On March 16, a JPM team went to Seattle for talks with WaMu.

April 2008, JPM makes an offer of $7 billion. It is rejected.

July 22, 2008, WaMu posts a loss of $3.3 billion for the second quarter.

September 8, Ratings agencies downgrade WaMu, and its stock price plummets. The board fires Killinger, replaces him with Alan Fishman

From Sept. 9 to September 18, depositors withdraw a total of $16.7 billion.

September 14, [Sunday] Lehman Brothers files for bankruptcy, guaranteeing market chaos through the following week.

September 15 - 19, Hell week on Wall Street. WaMu stock price falls to $2.01.

September 19, Sheila Bair, of the FDIC, calls Dimon of JPM and tells him to think about taking over WaMu.

September 24, JPM's head of retail, Charlie Scharf, submits a bid of $1.888 billion for WaMu's assets to the FDIC. This is the winning bid. It is regarded by some as on the high side under the circumstances, though significant lower than the $7 billion they had offered for the company in April.

September 25, FDIC seizes WaMu, makes the deal official.

September 26, The holding company, WMI, enters bankruptcy in Delaware.

A Tale of Two Dick Fulds

Gasparino or Sorkin. Who are you reading this Fall? about last Fall's ... um, fall. Gasparino is the author of The Sellout, a new book outlining what Gasparino sees as the 30 year long history behind the financial meltdown of 2008, finding fault in both Wall Street greed and government mismanagement. Sorkin is the author of Too Big to Fail, a bigger book that offers more of an "inside story" on the crisis and the bailout efforts it inspired. Or, like me, you may be obsessively reading both.

Dick Fuld, I'm guessing, is reading both. He's the former CEO of the now defunct broker-dealer Lehman Brothers, and Time magazine gave him a spot on its list of "25 People to Blame for the Financial Crisis," here.

Both Sorkin and Gasparino give an account of a certain dramatic incident in Fuld's rise up the corporate hierarchy at Lehman, from his days as an impatient young trader. Here is Sorkin:

One day he approached the desk of the floor's supervisor, Allan S. Kaplan (who would later become Lehman's vice chairman), to have him sign a trade, which was then a responsibility of supervisors. A round-faced man, cigar always in hand, Kaplan was on the phone when Fuld appeared and deliberately ignored him. Fuld hovered, furrowing his remarkable brow and waving his trade in the air, signalling loudly that he was ready for Kaplan to do his bidding.

Kaplan, cupping the receiver with his hand, turned to the young trader exasperated: "You always think you're the most important," he exploded. "That mothing else matters but your trades. I'm not going to sign your fucking trades until every paper is off my desk!"

"You promise?" Fuld said, tauntingly.

"Yes," Kaplan said, "Then I'll get to it."

Leaning over, Fuld swept his arm across Kaplan's desk with a violent twist, sending dozens of papers flying across the office. Before some of them even landed, Fuld said, firmly but not loudly, "Will you sign it now?"

-----

A version of that story has been published before, but Sorkin in his notes assures us that his own reporting is responsible for the level of detail with which he tells it. Curiously: Sorkin lets the story expire and moves on to later incidents in Fuld's career -- he doesn't close out that anecdote by telling us whether Kaplan actually signed off on the deal or not. Here it is Gasparino, who gives the matter only four sentences, who is more informative.

Fuld, as most people knew, even early in his career, was among the most aggressive traders at the firm, something he cultivated to bully his way through the management ranks. When the loan officer said he 'needed to clear' his desk before approving the trade, Fuld took matters into his own hands and cleared the man's desk for him -- literally by shoving the papers to the floor.

The officer was stunned, but he approved the trade. And Lehman made money on it.

So never make the mistake of using the expression "I have to clear my desk" while in the presence of a Type A personality.

The compare-and-contrast exercise here is worthwhile, I think. Sorkin gives to Kaplan a bad-guy characterization, so that we understand and even sympathize with Fuld's rudeness. Sorkin for example has Kaplan "deliberately ignore" Fuld when Fuld first approaches his desk. And then he has Kaplan telling Fuld off before he gets to the "clear my desk" remark. For Sorkin, I think, the men (and a few women -- such as Erin Callan, Lehman CFO) at the center of the crisis were facing grave challenges and doing the best they knew how to save their companies in the face of those challenges. Heck, if Kaplan had been more central to Sorkin's story he might not have been fitted for the Snidely Whiplash moustache in the telling of that Fuld-as-young-man anecdote.

For Gasparino ... well, did I mention that his book is named "The Sellout"? He is looking to assign blame. They weren't facing challenges in 2008, they were working through a disaster of their own creation. Since Fuld is a prominent recipient of blame, there is no need even to give Kaplan's name. The story is only meant to show that the Gorilla routine was a deliberately adopted tactic whereby Fuld bullied his way through management ranks.

I prefer Gasparino as a writer, for both precision and concision; I think they both are sadly deficient as analysts, though if I were to write such a book I think I'd adopt something more akin to Sorkin's tone.

The next Treasury Secretary?

There's a good deal of speculation these days about the composition of the incoming Obama cabinet. It gets almost as much attention in the broadcast networks' news shows as the choice of a new White House puppy.

One intriuing bit of guesswork is that Timothy Geithner may be the next Treasury Secretary.

Geithner, who since November 2003 has been president of the New York Fed, would be a non-partisan choice, certain of Senate approval sans fireworks. He has held important posts under both the Clinton and the Bush (II) administrations, and is himself an avowed independent.

The New York Fed, institutionally, is the Wall Street annex of the federal reserve system itself. Though the brains of our central bank has to stay in Washington, it has to have both its eyes and its hands in southern Manhattan.

Geithner was profiled in the June issue of Portfolio, by Gary Weiss. In those innocent days, before the Lehman collapse, before the stock market panic of September and October that killed the McCain campaign and led to the nationalization of key financial firms -- before all of that, Weiss focused on Geithner's "informal brains trust," a group of Wall Street luminaries with whom he has been consulting.

These may also be figures of moment in Washington for all or some of the next four years: John Thain; Gerald Corrigan; Paul Volcker. No spring chickens in the group. John Thain is the reative youngster, at a spry 55 years. Volcker was the head of the Federal Reserve in the late Carter and early Reagan years, for goodness sake. Corrigan was Volcker's special assistant in those days.

If the Obama administration recruits its economic team from such a crowd, it will have made the decsion that the country needs some old wise white-haired heads around, for when those emergency calls come in at 3 AM from Greenwich, CT or the Isle of Man.

Three brief items

1. Wow. Wall Street has had an exciting weekend.

Personally, I'm glad Lehman has bit the dust. Somebody had to. These firms and their proprietary traders are in the business of taking risks, and it is in the nature of risk that there be losers.

The "moral hazard" was becoming enormous, even in just the relatively short period since the government avoided a Bear Stearns bankruptcy with a fire sale of that storied brokerage firm to JP Morgan in the spring.

Neither well, nor poorly. JPM stock has lost about 7% of its value since that time. But this is in line with the general market trends in the intervening period, so the acquisition of Bear can't be blamed for that.

Anyway, there had been a lot of talk, the usual talk, about how Lehman again was somebody "too big to fail" and the Federal Reserve or the Treasury or somebody would have to step in and prevent its failure. But nobody has.

As I say, I'm glad. So everybody will be just a little more careful with risky financial instruments in the near future perhaps? So that might not be a terrible thing?

It is sometimes called "creative destruction." Something has to be destroyed as something else is created. What is now being created in the US is a depositor-centered financial world, in which commercial and investment banks are one and the commercial side is the one.

2. CSX opinion.

The second circuit has issued an opinion in the much-watched matter of TCI/CSX.

You can refresh your recollection of the issues here.

I'm disappointed. The 2d circuit didn't even get to what I see as the key issue in the case, the unbundling of votes from economic interest. Instead, it tersely upheld the vote that has been taken and the district court's decisison ONLY INSOFAR as the district court had refused to interfere with that vote.

"We decide that issue alone at this time," the appellate court said. Drats.

3. Crude oil likely to stabilize

Here's some guessing (note that word!).

The fall in the price of crude oil in recent weeks, from its peak of nearly $150 a barrel in mid-July to a current price below $100, has likely gone as far as it is going to go.

The crude oil price run-up this summer seems to have been a South Sea-like speculative mania, and the run-down seems to have been the bursting of that bubble, so now the stuff is back in the grip of the fundamentals.

Given the continuing credit/liquidity crunch, there will be a great deal of temptation to inflate the currency, at least until $110 doesn't mean as much as $90 does now.

Another Soros Buy

I'll follow up a bit on the subject of yesterday's entry ... what is George Soros investing in these days?

Soros Fund Management has of late increased the size of its position in the investment bank Lehman Brothers. At the end of the first quarter of the year, SFM owned only 10,000 shares of Lehman. But by the end of the second quarter, June 30, it owned 9.47 million.

He is fishing in troubled waters. Lehman's shares have fallen by 75% so far this year as the credit crunch has played itself out. When Bear Stearns tanked in March and had to sell itself for the proverbial song, rumor had it that Lehman was 'next.'

Indeed, the SEC has reportedly investigated those rumors, on the theory that they may have been spread by stock munipulators.

Soros' confidence may itself prove an important shot in the arm for Lehman.

Meanwhile, today's Wall Street Journal, specifically the "Deals & Deal Makers" column, paints a doom-and-gloom portrait of Lehman's present situation, saying that it is likely the bank will report third quarter losses, "instead of the modest profit they previously expected."

The 3d quarter isn't over yet. I suspect Lehman itself is encouraging such reports, in order to lower the bar so that if it DOES have to report 3d quarter losses when the time comes, the street will regard the report as "old news."

Have I mentioned lately that nothing I say in this blog should be regarded by any rational person as investment counsel? If not: consider it mentioned!