The Buck Doesn’t Stop Anywhere with the Paulson Plan

The latest U.S. government plan to take preferred equity stakes in financial institutions is a great step in the right direction. But it lacks one key element - the government should give shareholders enhanced rights if they wish to replace the boards and managements of companies that accept government aid.

In a speech to the Economic Club of New York yesterday, Fed Chairman Bernanke stressed the importance of attracting large private investors and institutional money into the banking system.

But how can we expect private money to take big stakes in banks if they are put at the mercy of the same managements which got us into this mess to begin with? This is totally unrealistic.

As discussed in the Oct. 13 Lehman commentary on this blog, many boards at financial institutions abjectly failed in their oversight responsibility. Too often these boards gave managements virtually unchecked freedom to pursue risky, leveraged strategies that board members, and in many cases managements, obviously didn't understand.

How can we be sure that these same boards and managements won’t make the same mistakes again now that the government is backing them up? Shouldn't taxpayers and investors be better protected?

It's like a town with a chemical factory run by a bunch of mad scientists that blow up the plant and cover the town with toxic fumes! Should the town be forced to fix the plant but still keep the same mad scientists?

As in other countries, shareholders should have the immediate right to call special meetings to elect new boards at companies. These new boards should demand more answers and accountability from management - as boards are designed to do.

I strongly agree that private investment is an essential component in recapitalizing the banking system. There are trillions of dollars in capital allocated to private funds in this country and there is no reason some of this money can't be funneled into many of the 8,000 or so banks in this country.

But laws need changing to attract private money.

The U.S. Federal Reserve recently relaxed bank ownership rules to allow an investor to buy up to a 15 percent voting stake in a financial institution without becoming subject to an array of regulations.

The rules need to be changed to allow private investors to take control of these companies. Many such firms specialize in restructuring faltering companies and this kind of expertise is sorely needed.

In Japan, U.S. money managers including Ripplewood Holdings and W.L. Ross & Co. have turned around major banks by taking controlling stakes and restructuring the firms. The same should be encouraged here.

This month, I launched United Shareholders of America, a new initiative that aims to increase shareholder rights by working to change the many laws that favor managements in this country.

Managements and boards are employees of companies, which are owned by shareholders. Too often company executives forget this salient point.

Importantly, shareholders should have the right to move a company's legal domicile to other states that give shareholders more rights. Too often, companies incorporate in states which have pro-management laws with blatantly inadequate corporate governance rules.

In my view, it was egregious corporate governance failings that allowed the managements of financial institutions to drive their institutions off cliffs while raking in huge salaries and perks. It is only fair that investors and taxpayers should have a much stronger voice in corporate governance, especially in a bailout situation where executives nearly wrecked our financial system.

The latest plan has merits, including a government backstop for all new senior debt issued by banks for up to three years, which is essential to bring confidence and liquidity back into the stalled inter-bank lending market.

And importantly, the plan restricts executive compensation, bonuses and golden parachutes, but doesn’t go far enough in my opinion. It is too vaguely worded to have much real impact. As I said, why should the mad scientists be allowed to be rewarded for blowing up the plant?

It is only with strong boards and management accountability that we can avoid the kinds of messes that imperiled the global economy in recent months and put all of our economic futures at risk.

Join United Shareholders of America by signing up on my blog, The Icahn Report, www.IcahnReport.com. It costs nothing and I need your support. It is only by having a large number of voices in Washington that we will be able to make changes and it will advance the cause of shareholder rights and democracy.

Comments

[Tim]

Carl,

I agree with everything you say on this subject. As a portfolio manager I've thought for a long time that poison pills are a joke and only a way for a board to have no accountability. I like what you are doing here.

[gff]

Carl,

If you really want to expose the unfair system that is in place today, take advantage of these times and gather your team of wealthy allies, pool your money together, and then plan your attack on an unprecedented level of companies - a full force, non-stop, effort until reform and/or value is achieved. Make it like a tsunami, where the first wave may be overlooked, but the second, third may really get their attention.

And, yes, this has been a good portion of your career in what you've been doing, but again this would be on a much larger scale, efforts by people who can have a greater influence than the average investor (but will hopefully support it), and with one purpose in mind, shareholder value.

Here is how I envision the plan....
1. Establish your own G-20 meeting, including professional, independent analysts ("bird-dogs") with companies in mind, several "money investors" as well as a few major "shorts" and/or "hedge funds" (those remaining after this year's redemptions), a few corporate recruiters for BofD and officers, and a few supporting members who all share the same vision for change.

2. Establish a "Fund" for shareholders of these companies and any investors willing to invest for the cause.

3. Once a company is chosen, based upon the criteria set, establish a small position in the company and begin the "exposé" on those companies, including full articles in magazine periodicals, interviews on major business channels, and on a blog similar to what you have right now explaining your facts, reasoning behind your efforts, etc. Again, this would be several companies simultaneously, not just one or two, an eye-opening number. As for the current shareholders of a company targeted, suggestion will be made in the media blitz that the company is worth more than today's value, however, because of the lack of direction of its current management and policies, you are suggesting them to sell a small portion of their investment in protest of the company, "pitch" an alternative investment vehicle supporting the "Icahn Fund", United Shareholders of America, and ask that they also pass on these facts to other shareholders and/or investors.

4. Send a letter to the company Bof D, officers, asking them to issue a public statement on their immediate efforts on how they will be returning value to the shareholders and/or enforcing reform of its policies.

5. If the company refuses to acknowledge your request, you begin to short the stock, continuing your media blitz on "facts", not speculation, on how the company should change corporate policy, asking other crusaders to follow your path, while at the same time slowly accumulate additional shares using the Icahn Fund as long as the share price remains under par.

6. Continue your blog for Icahn Fund Investors on the status of efforts.

7. If the company sees the efforts being put forth, not to mention their share price continue downward pressure with the support of the investment community, observation will be maintained and possible full disclosure of changes will be made to the public.

8. If all efforts go in vain, it will then be determined a full-force effort to accumulate enough
shares using the Icahn Fund will be made to help influence a new Bof D at the annual meeting.

At the same time, hopefully other shareholders will catch wind of these efforts and will support it through their vote at the annual meeting.

9. If all efforts are successful, establishment of new board members are made who are ethical in what they do, experts in the company field, and will ensure they are working for their pay through shareholder value initiatives, whether increasing dividends using idle cash, selling itself because more value can be achieved since they have no chance of survival, etc. Moreover, if the exposure is quite successful, the former executives will then possibly become blacklisted from future job offers for fear the "Icahn Fund" will target their company because lack of response to a group of influential financiers who are doing a righteous effort on the shareholder's behalf and corporate reform.

10. REPEAT THIS PROCESS FOR EACH COMPANY.

A short version of this act would be making a newly established position, having to put effort into a media blitz, and the BofD then taking notice of the efforts and make the necessary changes. The Icahn Fund will make money (hopefully) on any initial short position, and then will gain on the upside of pps once the positive changes are made.

I also do not believe these actions would be illegal by any means, since the efforts would be transparent to the public using leverage including legal shorting, media disclosure, with the main principal of making changes that the current management is ignoring which is detrimental to shareholder value.

In the end, with enough coverage throughout the markets, hopefully regulators will also act to initiate the changes needed which would benefit the markets and public shareholders, including not allowing a CEO to also hold Chairman of the Board status, for example, a flawed market principle which allows unfair business practices to ensue.

Mr. Icahn, if you actually read these comments on your blog and agree with a few of these ideas, I look forward to reading about it in future blogs of yours, and I'll then fine tune my comments and continue being a supporter of your reform endeavors. Because I do not believe the average shareholder can influence the changes needed, I, again, believe you, yourself, need to push these efforts forward along with your allies within the business community.

I wish you many years of health, wealth, and many more corporate takeovers.

Sincerely,

Glen F.

[laisseraller]

Great Article & Comments! A new deeper view of the $700 billion bailout or rescue plan. http://got700billion.blogspot.com/

[Wendy Fried]

Hi Carl,

I share your outrage and frustration about "mad scientist" managers who blow companies up with impunity. You mentioned corporate governance practices in other countries. Norway has shaken up entrenched boards and managers by setting a 40% quota for female directors at Oslo Stock Exchange companies. Yeah, I know such a thing is unthinkable in this country, but you have to admit it's a creative way of profoundly altering the game. In addition to changing the gender balance, it's injected vast amounts of new blood into the pool of outside directors.

Coincidentally or not, Norway has been weathering the financial crisis pretty well.

Wendy

[Robert Green]

USA for the U.S.A.!

[SI]

Boards need to have some real accountability. The fear of God needs to be put into these "you rub my back, I'll rub your back" plutocrats that sit (literally) on lame duck boards, whose only purpose is to reward incompetent management.

Q: "Where was the Lehman board as the company was failing?"

A: Two days before filing for bankruptcy, the board of LEH was busy approving a $100 million bonus / severance package for five executives. That's where it was. See -
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4926278.ece

Wow! Words fail to capture the extent of this disconnect between the fiduciary responsibility of a board and the idiocy that actually goes on behind those closed doors.

[Trent]

I am really enjoying the comments from the oracle and the direction of the movement. I totally agree with Mr. Icahn.

How do we address the bankruptcies of these companies and hardworking American's (Individual Investors) investments left out of the exit process? The American dream is being destroyed because of a lack of Integrity, Transparency, Greed, Trust, Confidence, etc.

Thanks for your Leadership Mr. Icahn!

[eric sabety]

Well said.....where were you a decade ago? If you can change corporate governance you will do more for our country than anyone in politics ever.

[walter voelker]

Carl,

I have read Glen F.'s comments. Is this a viable method to enact shareholder and company reform? Will this work? And if so, are you willing to do this?

[Mark Montgomery]

I've been following your movement with interest and support. A long-term business consultant, entrepreneur, and manager who served primarily family offices and private companies, I've been shocked many times in attempts to work with major public corporations as a VC and manager of my own small hedge fund.

I just posted an article on my blog that may be of interest:

Restoring Trust to Capital Markets
http://markmontgomery.wordpress.com/

And an enterprise software suite I invented that brings meritocracy to large organizations while vastly improving productivity. Of course since that also requires accountability- and performance metrics, Carl will probably not be surprised that we've had a devil of a time with adoption- even in some of the better managed corporations and gov agencies.

http://www.kyield.com

Keep up the good work Carl- accountability is one fight that no one can afford to lose.

Mark Montgomery

[Ken]

You write:

"Importantly, shareholders should have the right to move a company's legal domicile to other states that give shareholders more rights. Too often, companies incorporate in states which have pro-management laws with blatantly inadequate corporate governance rules."

I would be curious to know to what degree the shareholder-unfriendly laws are state laws (versus federal laws)? What are some of the states that have the most shareholder-friendly laws?

Ken

[Nick Choukair]

Dear Carl,

How can we expect private money to take big stakes in banks if they are put at the mercy of the same managements which got us into this mess to begin with? This can only happen when politics take over the economy and its reasoning.

Regards, Nick - The Hedge Funds Exchange

[Glen]

Carl,

I would like to thank Walter Voelker for taking notice of my comments. I would also like to say that I am not trying to take any credit for what you are doing, however, I still believe starting with gathering your allies in the business arena is the only way to make this "idea" work.

Worst case scenario, if you layout the groundwork, are sincere to investors in this movement and possibly involve them using my idea of creating a "Fund", this Fund just could give Fidelity a run for its money in terms of size and scope. Would that be a bad thing? Could this Fund still make investors, including yourself and other founders, money in the long-run and accomplish what you are trying to accomplish??

I look forward to your next blog.

Sincerely,

Glen F.

[Larry Caldwell]

I agree with what you're trying to do but, with all due respect,we have legislators that are effectively allowed to take bribes. How can we overcome that fact? Even when overwhelming numbers of voters/shareholders/whomever, other than large contributors/lobbyist, insist that our legislators do something what they do is purposely filled with holes and rendered meaningless as far as I can tell. How will this noble challenge to the status-quo be any different?

[Mike B]

Carl,

Are you as outraged as I am at the TARP funds being used for one Bank to buy another? This PNC/NCC deal is gov't interference in the market.

If PNC wants to buy NCC with its own bucks I don't care. But when the Treasury uses the 'with holding' of TARP funds from NCC to force the sale and then gives PNC NCC's portion of the TARP funds to help finance the deal this is the gov't determining the winners and losers. Plus doing this with tax payers dollars. TARP was meant to stabalize the mortgage market. Not used by banks to buy other banks, pay dividends and soon other purposes not intended by congress. OR AS AIG DID TO HAVE LAVISH PARTIES.

All TARP fundings should be frozen until the ground rules are established. The Treasury dept currently acts as if it has the power to do what it wished with these TARP funds!