Business Blog: Hoover’s Business Insight Zone

A couple of weeks ago The New Yorker ran one of its patented character profiles* on Sam Zell, the real estate tycoon who is in the process of buying Tribune Company.

Rough Rider
Where will Sam Zell take the struggling Tribune Company?
by Connie Bruck

Having read the piece, I’m having second thoughts about my own reflexive dismissal of the deal. Yes, the newspaper business is heading further into the toilet by the week. But dang, Zell sure knows how to make money.

He also makes many a meal out of his flamboyant personality, to the point that you could think of him as a Richard Branson of real estate. But this penchant for iconoclasm has also helped Zell to excel in the business world.

Annotated excerpts follow. Read more

Is Countrywide Financial fundamentally dishonest? That was the flavor of many of the news stories that came out earlier this week when Countrywide announced that it would not inflict devastating mortgage-rate resets on financially strapped borrowers. The basic message: Countrywide is selling this as a good turn they’re doing for borrowers, but in fact . . . it’s secretly designed to keep the company from financial disaster. As though this would be news about a profit-seeking enterprise that’s facing hard times.

[Sound effect: curmudgeonly writer mutters something about the state of the media.]

But. We have enough facts in hand at this point to surmise that Countrywide is not exactly the Red Cross when it comes to helping people out. Read more

A disclaimer: I am not claiming that Countrywide CEO Angelo Mozilo has done anything illegal with his programmed stock sales.  I have no idea whether he’s broken the law or not.

He has, pretty clearly, done something that will win him no new friends among the worried ranks of Countrywide employees who fear that he and his lieutenants are engaged in nothing more than a cynical deck-chair-arranging exercise.

Relevant items:

1. Gretchen Morgenson of the New York Times details the allegations slung in Mozilo’s direction — in this case, from the state treasurer of North Carolina:

Stock Sales by Chief of Lender Questioned

The Securities and Exchange Commission has been asked to investigate stock sales made by Angelo R. Mozilo, chief executive of the mortgage lender Countrywide Financial, in the months before its shares plummeted amid the deepening mortgage crisis.

2. Seth Jayson of The Motley Fool offers a nicely tongue-in-cheek summary of Mozilo’s stock sales.

Mozilo Forced to Dump More Countrywide

[…] On Friday, after market close, Mozilo lived up to the oiliest of Wall Street standards of conduct by trying to drop the hard truth into the news wire while everyone’s ordering drinks. In this little after-hours press release, the Countrywide CEO warns the investing world that, once again, he’ll be dumping shares of his company — just as he’s asking employees to take loyalty oaths.

Not to worry, folks. Poor Angelo has to sell. It’s part of his 10b-5 plan. The fact that he entered into this second stock-exit plan less than a year ago, after he’d already dumped enormous piles of Countrywide, and just as sub-prime was beginning to really crack, well, all that means nothing regarding his opinion for the long-term health of the company he built. […]

3. This Motley Fool piece that Jayson wrote last week gives more detail or the company’s rightly derided p.r. / damage control / loyalty oath project. The piece ends on the great high note of indignity quoted below:

Countrywide’s Misguided Pride

[..] The problem at Countrywide isn’t a lack of pride; it’s an excess, especially in the boardroom. It seems that Mozilo’s ego won’t let him admit that the party is over. And as the guy who shouted the loudest, and stood on the coffee table with a lampshade on his head the longest, he richly deserves the hangover. The tragedy is that homeowners, employees, and shareholders are suffering the worst of his headache.

I think that if Mozilo had any real pride, he’d plow his hundreds of millions back into the company and promise not to sell a single share until the market was right, and employees and borrowers had security. I won’t hold my breath.

Mozilo has earned the privilege of being derided this way. At least he has his money to keep him warm.

In response to last night’s post about Countrywide and CEO Mozilo, I got this response from “anonymous.” On the Internet, no one knows you’re a dog, so I’ll have to the commenter’s word that s/he is who s/he says s/he is. Here it is:

I am a senior VP at Countrywide. The good people at our company are struggling with this, among other things. Many of us wish the leadership would have chosen to use this crisis as a time for reflection, self-examination, and betterment rather than retrenchment and PR bullshit, but leadership at our company has ceased to listen. They merely dictate. Very few people in Drew Gissinger’s circle have the temerity to question his mandates, which are often formulated in haste, and often very emotional and reactionary in nature. I don’t sign loyalty pledges for anybody, and my inquiries into what the potential consequences to my career might be for failing to do so have gone unanswered.

It is truly a sad time. Though I’m sure the company will survive, and someday thrive again, I now have serious doubts as to the sincerity of our mission at the very top of our ranks. Those of us at my level believe it in our bones.

That certainly rings true to me — don’t you agree? I responded with this:

In any business, inept senior management can lead to all sorts of trouble, for themselves and for everyone down the ladder. But if they’re sincere and truly giving their level best, it at least takes some of the sting out of operational pitfalls.

But cynical leadership is the worst, because everyone down the ladder can smell the cynicism from a thousand yards away.

My worry is that Mozilo & his lieutanants might be the worst of all — inept AND cynical. And the really crummy part, if this is true, is that he’s got his vigorish regardless, while thousands of workers on down the line have been given the sack.

Here’s a broader appeal to current and recent Countrywide insiders: please use the comments here to let us know your own thoughts about what the company’s going through, and about the response of Countrywide’s senior management to the company’s plight.

Though I do have my own populist streak, in general I can live with large salaries for CEOs. The best executives take on extraordinarily hard jobs that balance the skills of the politician, the market strategist, the operations troubleshooter, the psychologist, and the financier. But there are plenty of CEOs who don’t live up to their billing, and don’t display any kind of special prudence or insight that justifies their extra-jumbo payouts.

I’m thinking of this because I stumbled across Countrywide Financial CEO Angelo Mozilo’s entry in Fortune’s list of the 25 highest-paid male executives in the US. Mozilo made $43 million last year.

You may have heard something about Countrywide’s, er, recent troubles in the marketplace. Just in the past day we’ve gotten details on the company’s rah-rah P.R. push that tries to cast recent critiques of the company as “personal” attacks prompted by bad actors in the mortgage industry. (See “Countrywide puts lipstick on the pig” and “Countrywide Rearranges the Deck Chairs.”) You may have heard that Mozilo stepped up the pace of his stock sales as things headed south. The point is clear: Countrywide’s hurting right now, and it’s not clear that it’s going to recover.

Maybe it will. I hope it will, because in general I don’t want more disruption in the markets (mortgage, credit, equity — take your pick) than we’ve already had. But in any event it’s not clear that the company will recover from its recent run of bad news.

Now, back to Mozilo’s pay. My heretical notion is that CEOs should take the-buck-stops-here responsibility for how their companies do. I know, I know — this is crazy talk. But CEOs are always saying how hard their jobs are, how tough it is to guide a company successfully, and so on. They’re perfectly happy to take the upside (read: massive paychecks) when things go well. By rights, they should be just as happy to face the downside when things go poorly.

Imagine this: the Mozilos of the world get paid some generous base salary, and then bonuses are put into escrow for a certain number of years until the performance of the company becomes clear. If Countrywide does gangbuster business in Year 1, great — put a truckload of money in Mozilo’s escrow account. When Countrywide does great in Year 2, release some of that money into Mozilo’s hands. When Countrywide takes a dive in Year 3, take some of that bonus money off the table and put in back onto the corporate balance sheet where it can actually help the business to prosper.

The thing is, if CEO performance really is meritocratic, CEOs who espouse the virtues of meritocracy — or, at least, the unhypocritical among them — should embrace this system. CEOs make long-term decisions all the time, so they should be paid for long-term results.

That would mean, of course, that Mozilo’s vigorish would suffer in 2007. But it should suffer. Countrywide’s stock price has plummeted, the company has laid off many thousands of workers, and one wonders whether all of the accusations about the company’s business practices can be dismissed as “personal” jabs. We need not take the approach of “guilty until proven innocent,” but it would be prudent to take the approach of “let’s wait and see how this plays out.”

Champions of mega-payouts to CEOs will say that a system like this would prevent a company from being able to hire the best executives. Baloney. The very best executives will relish the chance to prove their worth over and over, year after year, without any smoke and mirrors. Lloyd Blankfein at Goldman Sachs need not worry — because the quality of his leadership is proven. Jamie Dimon at JPMorgan Chase likewise can rest easy at night. Angelo Mozilo? Well, he should worry, because his company has gone (at least partway) to pot on his watch.

Oh, and why wouldn’t some up-and-coming executive with the chops of, say, Amy Brinkley jump at the chance to run Countrywide — even with the escrow provisions in place? Someone of that caliber would have enough guts to stake her long-term pay to the long-term consequences of her leadership.

All it takes is a slight change in the playing field — one that would benefit shareholders in the long run. It would be like going from Major League Baseball’s system of guaranteed contracts to the NFL’s practice of non-guaranteed contracts. It would be smart, and I say it would work.

What do you think?

First, check out this detailed Aleph Blog post by David Merkel:

Eight Notes on Residential Real Estate

The post offers many links to other stories addressing specific aspects of the mortgage crisis, so you can pick which parts of the story most interest (or scare) you and go from there.

Second, this post from Knowledge@Wharton

How We Got into the Subprime Lending Mess

offers a thoughtful and thorough overview of how we got to where we are today, when the credit crunch from the mortgage industry threatens the broader economy. This one comes complete with historical perspective and comparisons between the US mortgage market and housing markets abroad.  With all the daily hyperventilation and speculation about what’s coming next in the mortgage / real-estate / credit meltdown, this sort of perspective is quite tonic.

Quick hits on a hectic Tuesday morning . . .

Oil futures have been holding steady above $80. That’s not quite the highest inflation-adjusted price ever, but it’s not too far off, either, and it doesn’t look like the price is headed down much in the near future.

We may be living in a world where $80 oil becomes normal. Recalibrate your expectations accordingly — everyone in the business world is having to.

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In the past few years, we’ve heard a lot less about Microsoft the monopolist. The EU is changing that now:

Microsoft must ‘change its illegal behavior’

Microsoft is trying to spin the EU ruling as potentially threatening to the business practices (and interests) of many large companies, but Europe’s competition commissioner, Neelie Kroes, isn’t buying it: “Let me be clear, ladies and gentlemen, there is one company that will have to change its illegal behavior as a result of this ruling, and that is Microsoft.”

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The US home mortgage foreclosure rate is getting worse, not better, and the damage is spreading across the country. We have not seen the end of this mortgage mess, and while I think it won’t lead to a general recession (or not a long one, anyway), I do think we’re apt to see much more misery among homeowners, and more failures of big businesses involved in the real estate, home building, and mortgage markets.

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Well, this isn’t exactly a new development, since German banks have already been affected, but now the Bank of England is stepping in to save the big UK mortgage outfit Northern Rock. The Times Online offers a useful timeline of Northern Rock’s decline:

Northern Rock: a fall from grace

Depositors have been queueing outside Northern Rock branches to withdraw their funds.

Marc Andreessen has some appropriately snarky minimalist commentary (about the bank, not the depositors) here.

Addendum: My colleague Patrice Sarath, who has wit coming out her ears, broadens the analysis of the mortgage meltdown even beyond this planet.

Some of the more interesting things to transpire today:

–What? Countrywide needs even more money to bail it out? That’s un-possible!

–SCO’s CEO: resolute in the face of a dire court ruling against his company.

[Wired News]: So how’s business been since this ruling?

McBride: This has zero to do with our open-server business. That has nothing to do with these fights. That’s 70 percent of our revenue. And finally, it has nothing to do with our new mobility products we are working on. All of our product business is really unaffected by this ruling, other than the noises in our market places.

–Oil gets expensiver and expensiver, despite OPEC’s quota hike.

–The award for Best Blog Title of the Day goes to Dana Cimilluca of the Wall Street Journal’s Deal Journal blog: “The Arc of the Covenant.” Even better, the post explains the rising prevalence of covenant-laden debt deals in the buyout industry, which we touch on in the next Company of the Day installment on First Data.

–Over at the Bizmology blog, my colleague James Bryant ably supplies context on Chrysler’s hiring of Jim Press, which we touched on last week.

–Henry Blodget of Silicon Alley Insider offers hot and cold running commentary on Google (hot) and Yahoo! (coooollld — brr!).

–Joel Makower offers extensive thoughts on Coca-Cola and plastic bottles, which we discussed here the other day.

–Ryan Paul of Ars Technica reports on the decision that SCO will face a judge rather than a jury in its Novell trial. We talked about SCO’s legal issues last month.  SCO’s troubles look to be getting worse.

–Ville Heiskanen of Bloomberg reports that “Motorola May Fail to Lift Profits With New Razr Phone.” This reminds me — in the vein of this post from a couple of months back — of how poor an indicator business-magazine stories are for long-term success. When the Razr was at its peak, the stories came thick and fast about how Motorola had gotten its groove back. Now the prevailing line — which seems apt, given the company’s struggles to sustain financial and branding performance — is that Motorola had a one-hit wonder with the Razr, and that so far it’s not built to produce a string of hits a la Apple.

–The New York Times offers this extended business/exec profile on Dell the man and Dell the company: “Can Michael Dell Refocus His Namesake?” Writer Steve Lohr’s answer to that runs to several thousand well-informed words. My own take: Dell the company is nowhere near folding its tents, but Dell the man faces an uphill battle. Just because his company has been successful doesn’t mean it has the long-term answers. It’s hard to think of it this way, but in fact the PC market is still quite young in historical terms. I wouldn’t bet against Michael Dell, but what got them to where they are is not likely to get them where they want to go.

–Like the rest of the business world, we’ve talked plenty about Countrywide Financial as the huge mortgage company has navigated the troubles in the real estate and credit markets. Now they’re going to be navigating with fewer hands on deck: the company is laying off 12,000 employees. I’ll say again what I’ve said before: we’re a long way from working out all the hidden problems that built up during the real estate bubble of the early 2000s.