Monday, November 5, 2007

The Next Phase of the Subprime Mess – Fired CEOs and Toughening Boards

The next phase of the subprime mess is the firing of CEOs and Boards of Directors that will go to confession and start doing their jobs. I have asked this question before and I will ask it again where was the Board of Directors, risk departments, finance departments, auditors and regulators before the subprime mess. The goal in a business is to maximize profit, but if it can't make it through the next tough time, it hasn't maximized it profits has it. Text in bold is my emphasis. From USA Today.

Amid growing losses from subprime mortgages at the giant financial services firm, Prince, 57, retired under pressure on Sunday. He said it was "the only honorable course for me to take." Former Treasury secretary Robert Rubin, a board member and chairman of the company's executive committee, will serve as chairman of the board. Sir Win Bischoff, chairman of Citi Europe, will serve as acting CEO, the company said.

Citigroup (C) also is lowering the value of some of its securities tied to subprime mortgages. It estimates the value of those securities, at fair market value today, would be $8 billion to $11 billion less than it expected just Sept. 30. That write-down would be in addition to a $6.5 billion write-down it has already taken. The company also said a special unit has been set up to handle the subprime mortgage problems. Citi said it has no plans to reduce its dividend.

Rubin, 69, may be a reluctant leader for Citi. A senior executive at Goldman Sachs before he joined President Clinton's Cabinet as Treasury secretary, he has resisted calls to head Citigroup since joining its board in 1999.

Prince's departure was not a complete surprise. It was the second major resignation at a Wall Street firm in a week, and is part of a tightening crunch for those at the top of financial services firms.

Companies have come under increasing pressure from shareholders for underestimating losses from complex securities tied to bundles of risky mortgage loans made during the run-up in housing values. But now home values are dropping, and an increasing number of borrowers are defaulting on their loans. Merrill Lynch CEO Stanley O'Neal was pushed into retirement last week following the worst quarterly loss in his firm's history.

The purge is not likely to stop there, some analysts say.

"There's a newfound sense of accountability at these boards, but where have they been before?" asks Jeffrey Sonnenfeld of the Yale School of Management. "Only now, with a sense of public pressure and a sense of liability that they haven't had before, are they acting."

Prince has come under fire as losses from so-called subprime mortgage lending have skyrocketed. Last month, the company announced that third-quarter net income fell 57% from a year ago, to $2.4 billion, amid more than $6 billion in charges and write-downs. At the time, Prince said the quarter's figures were "frankly, surprising."

Change at the top is becoming somewhat common in the financial services industry.

UBS, the Swiss banking giant, deposed its CEO Peter Wuffli last summer after it had to shut a hedge fund that invested in mortgage-backed securities.

Bear Stearns CEO James Cayne barely survived the implosion of two hedge funds this summer by firing a number of his firm's top executives, including the co-president.

Other executives who have been tarnished by the collapse of the subprime mortgage industry and the evaporation of value in derivative securities built on subprime mortgages or other risky investing strategies include Countrywide Financial's Angelo Mozilo and Bank of America's Kenneth Lewis.

The open season on bank and brokerage CEOs follows a period of unprecedented growth in the nation's financial sector. From 2004, Wall Street's financial giants posted record earnings and then topped those records in succeeding years.

It's now apparent that some of that record-setting growth, particularly in 2006, was fueled by outsized returns generated by bets on the frothy subprime mortgage industry. When the mortgage bubble popped early this year, the collapse in value of collateralized debt obligations based on those loans exposed the nation's biggest banks and brokerage firms to billions of dollars in potential losses. . . . .

. . . . The company's latest write-down of its subprime mortgage-backed securities is "an indication of how severe the subprime problem indeed is." But he added, the company is far from being out of the subprime mess. "There are still some more shoes to fall," he says.

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