The American Recovery and Reinvestment Act of 2009 (”ARRA”) and the associated guidance issued by the U. S. Department of the Treasury requires financial institutions that have sold preferred stock and issued a warrant to the U. S. Treasury ...
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2009 ‘Say on Pay’ at Financial Companies. and more...

2009 ‘Say on Pay’ at Financial Companies.

The American Recovery and Reinvestment Act of 2009 ("ARRA") and the associated guidance issued by the U.S. Department of the Treasury requires financial institutions that have sold preferred stock and issued a warrant to the U.S. Treasury Department under the Capital Purchase Program to permit a separate shareholder vote to approve the compensation of executive officers.


The Securities and Exchange Commission has also issued guidance that requires participants in the Capital Purchase Program to annually submit to their shareholders a proposal to approve the executive compensation arrangements as described in the Compensation Discussion and Analysis of an issuer's proxy statement.


Besides companies that are statutorily required to provide shareholders an opportunity to vote on executive compensation practices, there are a few other companies that have initiated this practice voluntarily. InvesGuard did a quick exercise on the number of banking companies from the S&P 500 that presented an advisory vote on executive compensation (‘Say on Pay’ ) to their shareholders between May 12th 2009 and May 12th 2010.


Only 16 banks presented some matter or the other to their shareholders for a vote during this period. Out of these 16 companies, 12 companies actually presented a proposal for shareholders to approve a non binding vote on executive compensation. Shareholders from all 12 banks easily approved this vote. The most overwhelming percentage of votes for executive compensation were at M&T Bancorp where 97% of the total votes were ‘For’ this proposal. The lowest percentage of ‘For’ votes was at Wells Fargo (WFC) where only 72% of the total votes, approved the ‘say on pay’ proposal. This is not surprising considering that earlier this year, soon after exiting the TARP program, WFC announced a revamped, higher compensation structure for its senior management.


Out of these 12 banks, 5 have already exited the Capital Purchase Program and have continued to provide the ‘Say on Pay’ vote to their shareholders.


A similar exercise for Investment Brokerage, Asset Management, credit services and other related companies for the largest 3500 companies (by market cap, excluding closed-end funds) was conducted. In this case there were only 41 companies that presented some matter or the other to their shareholders for a vote between May 12th 2009 and May 12th 2010. Out of these 41 companies, only 8 companies presented the ‘say on pay’ vote to shareholders. Shareholders at 7 of these 8 companies passed the ‘say on pay’ vote. 60% of shareholder votes at Wadell and Reed Financial Inc were against a stockholder proposal requiring the board to accept a proposal that would seek an advisory vote of shareholders to ratify and approve executive compensation.


Providing shareholders the right to an advisory vote on executive compensation was expected to boost shareholder rights. But, looking at the dismal number of companies that are providing shareholders with this right to vote on executive compensation it seems highly unlikely that it is going to have any far reaching consequences.



Goldman Sachs Senate Hearing April 2010

InvesGuard's Goldman Sachs Report on SALE ONLY TODAY!


10.25 Government putting forth their case.


10.40 3rd Senator on now....this is going to be painful....


10.46 Finally, Goldman employees and ex employees start their testimony. First off is 'Fab' Tourre's boss.


Mr.Sparks talks about how difficult it was sometimes to understand whether Goldman's position was long or short.


11.02 Tourre is on now....has worked at GS since 2001.....connected clients as part of his job profile...I feel like I am listening to Inspector Clouseau....Fab denies all allegations by SEC. Clients had comprehensive experience also rebuffs the claim that he represented to the clients that Paulson's fund would be an equity investor. Very strong and confident testimony. "ACA deal was not designed to fail".


11.10 Senator Question- Goldman is selling Anderson securitites but Goldman is itself short on these CDO's. Many clients reject this deal and yet GS pushes this deal. Clients asked GS- How did GS get comfortable with this collateral or this deal? GS response- no response from GS but instead pushes to sell this deal and unloads $20 billion of these assets. GS supervisors congratulates his team. Why did GS not disclose that they were short on the Anderson deal?


GS Response to question- Cannot make out from the evidence presented whether GS was short or long on the assets.


Senator- If you were short, should you have disclosed to your client or not that you were short on the same transaction that it was selling to clients.


GS- Would have got the sales team with the deal team and made sure that the client's doubts were answered.


Did GS make money on the Anderson deal? Those assets were downgraded from AAA status to junk status within 7 months.


More questions on other deals that GS did not disclose to the clients that they were short or that the assets behind the deals were "shitty" as the Chairman of this sub committee puts it. The chairman has already used the word "shitty" atleast 12 times.


11.34 Senator Collins starting now.


Q- Do you believe you have a duty to act in the best interests of your client?


Answers- All GS representatives (except Mr. Birnbaum) are hedging their answers. If I were a GS client, I would run away at this point.


General frustration among the committee members that GS representatives are following a strategy to delay the hearing but as the Chairman put it, the committee would take as long as it was needed to get everything out.


After a series of email reference page number mix ups, the committee is now getting its act together.


Question- How could GS use 'stated income' method for 50% of sub prime loans which were subsequently securitized by GS.


(stated income method is somebody's income is what individuals claim their income is stated to be and is generally used for mortgage purposes for high net worth individuals only)


12.36 Q to Fab Tourre- Are you personally represented by lawyers paid for by GS? Tourre- Yes


Q to Tourre: How did you feel when your personal emails (about the transactions) were released to the press? Tourre- "I regret what I did "


1.11 Should GS have disclosed that Paulson was on the deal? Sparks- Not necessarily....there is no obligation to disclose who is behind the transaction.


Sparks- We made mistakes like any business makes....


Question: Did GS actions contribute to the market's downfall?


Sparks: Need to think....later says "I take responsibility for my actions"


Swenson: We did nothing wrong


Tourre: I am sad and humbled by what happened in the market. I believe my conduct was proper. I take responsibility for my actions.


A brief discussion on how Wall Street is similar to Las Vegas, although as a senator put it "Vegas would be insulted to be compared to Wall Street".


Question: How would you justify BBB related products, package them and have rating agencies rate the same products as AAA?


Tourre: Rating agencies have their own rating assumptions. Rating agencies rely on historical data for rating.


Sparks: Certain deals would perform differently from others.


Question: Did you feel obligated to inform your clients that these were BBB rated products and rating agencies in their wisdom rated them as AAA?


2.51 Hearing getting repetitive....same questions being asked. Bankers are seasoned professionals and frankly, the questioners don't have enough meat to thoroughly question them.


3.16 Chairman's closing comments- Should your customers know that you are betting against the whole market? When you sell to your customers should they know that you betting against those assets? A huge conflict of interest.


End of First Panel.


CEO Lloyd Blankfein in response to a question- I have heard of transactions (during panel 1 and 2 inquiry) that I have not heard of before. I will look deeply into those.


Looking back at today, would you rather be an investment bank? Blankfein response- We will see how the legislation unfolds.


"Generally supportive" of the pending Dodd bill that covers financial legislation but it sounded like he is sitting on the fence for that one....said that he would have to see details.


Blankfein is asked his opinion (what was that all about?! Blankfein's opinion in a hearing....) on what will happen to smaller community banks who are asked to keep 5% of mortgage loans advanced (part of Dodd's bill). This is really not relevant from a hearing perspective, not sure I understand why this was asked.


Question: Have you in the last 6 to 8 months talked with treasury about financial legislation? Blankfein: Yes in a general way.


Everything seems to be 'general' with Lloyd Blankfein.


Again, his opinion on what are the ways to limit systemic risks. (Same interviewer)


Blankfein- "For sure we need apparatus"....observe different people and processes.


Hmmm, all this opinion is making me wonder if Blankfein is in line to take over from where former treasury secretary Paulson left off......


Pep Talk by Blankfein of how it is not good for the country if Goldman Sachs was perceived as 'too big too fail'.


Ethical question : Why did GS decide to release the personal emails of 'Fab' Tourre and why not of anybody else at GS.


CEO Blankfein stumbling badly, says, "elements here (in these emails) that spoke badly about the firm and we wanted to come abreast of this......"


Statement by a senator "Somebody is being made a whipping boy (Tourre)"


Once again Blankfein stumbles and basically says that fears that the emails would be leaked to the press made GS decide to come clean on their own.


Goldman Sachs CEO has no clue whether the company has any off balance sheet vehicles. When asked, Blankfein is totally unable to say whether his company has such vehicles.



Bar B’Que time for the House Financial Services Committee.

‘Grill baby grill’ is the mantra over at the House Financial Services Committee today. Dick Fuld (no introduction needed) and Thomas Cruickshank (ex chair of Lehman’s Board Audit Committee) are busy getting ‘marinated’ for their broiling session later today. Their testimony was made public yesterday, and I thought it may be worthwhile to examine Mr.Cruikshank's testimony considering that Dick Fuld’s testimony had already saturated the blogosphere enough without adding to the swarm.


Lets cut to the chase……Mr.Cruickshank’s testimony makes the entire (ex)Board of Lehman look like puppets…either in the hands of management or the auditors. On at least 4 different occasions Mr.Cruikshank claims the Board was “told” about things that they depended on. Now management is the primary source of information for the Board, but is that all the Board did ? Accepted whatever was “told” to them? Is this what the Board is for? To be “told” things? What is the true meaning of oversight?


Here are some more incongruous statements from his testimony-


"Since the beginning of 2007 through Lehman’s bankruptcy filing in September 2008, our Board and its committees convened on more than 80 occasions in that less than 21 month span. I still remember one week in July 2008, when we were examining and analyzing the company’s strategic options, meeting every day for six days in a row." – Great work, pat yourself on the back, but what about before 2007? Did they not meet as often before 2007?


"One issue that management spent a great deal of time discussing with the Board was risk." - And yet, it appears from his own testimony, that Risk Management was not on the Board agenda at all in 2007. It was discussed only in April 2008.


"Board members probed management, asked numerous questions and demanded and received detailed, cogent answers." – This I find hard to believe. Hopefully, the committee will ask for minutes of the meetings to support this assertion of Mr. Cruikshank.


“We also retained Ernst & Young (“E&Y”), one of the most highly-regarded accounting firms in the world, as the company’s auditors. E&Y performed reviews on a quarterly basis by applying analytical review procedures and making inquiries of persons responsible for financial and accounting matters.”- A big part of Analytical review procedures generally includes month to month or period to period comparison in which case Repo 105 transactions are not going to show up.


If the Board depended on E&Y’s ‘Analytical review procedures’ it is no wonder they were in the dark all this time.


“The Board was told how Lehman’s liquidity had, between the second quarter of 2007 and the second quarter of 2008, nearly doubled to a record high.”- Once again that troubling word “told” . Total absence of any apparent oversight.


“As the Examiner has concluded, this Repo 105 issue was never brought to the attention of the Board by anyone.” – Like someone is going to present a big time bomb to the Board and say here is a huge gaping governance hole. What do you think we should do about it?


A couple of times, Mr. Cruikshank quite skillfully passes the buck to the public accounting firm, Ernst & Young. “…I believe that E&Y would have promptly raised the issue with the Audit Committee and I would have expected them to do so. They did not.”


Mr.Cruikshank also laid bare his feelings on mark to market accounting - “…the firm’s real estate exposure (which was exacerbated by the rules for applying mark-to-market accounting)…”.


He ended his testimony by thanking all the other Lehman board members…including the “the first woman to command a U.S. naval station, and the head of the American Red Cross”. Great as their achievements maybe, it is hard to understand how a naval officer could possibly have understood and provided oversight over complicated financial transactions at Lehman. Many of the other directors had similar stellar personal backgrounds but almost zero financial industry experience.


And concluding his testimony was this blanket CYA, (Cover your a--) “While I may not have the knowledge and expertise of my fellow panelists appearing before this Committee…”- Short for, I don’t know anything, my eyes were shut, my ears were closed and my hands of course were stretched out to receive the easiest money I made in my life, so don’t ask me anythin’ about nothin’.



2009 Banking Industry Non Financial Scores - Citigroup, Wells, Bank of America

Lately, Citigroup appears to be putting its best foot forward. Its CEO provided a very confident (albeit doubtful) front during the recent congressional hearings held by the Oversight Panel for TARP. President and CEO of Citi Mortgage Mr. Sanjiv Das also appeared reasonably confident in Citi’s ability to ‘assist’ underwater homeowners in the recent House Financial Services Committee hearing.


It appears that these Citigroup executives are not too far from the mark…and not just based on their behavior or how confident they were at congressional hearings. Based on recent SEC filings and published information, Citigroup appears to have taken a lead over both Bank of America and Wells Fargo so far as InvesGuard's non financial scores are concerned.


Look at InvesGuard scores for Citigroup, Bank of America and Wells Fargo below:


InvesGuard scores comparison


A legend of the scores and what they mean has been included at the end of this post.


InvesGuard scores and grades companies based on non-financial information. Different parameters are considered including:


1. Number of transactions between the company and its directors (other than director fees) that may give rise to conflict of interest situations.


2. Directors who also perform consulting services for the company resulting into reduced Director Independence.


3. Level of transparency in Board Audit Committee reports.


4. Relevance of experience of Board members especially those who hold Board level finance, credit and risk committee positions in the financial industry.


5. A look at the quality of a company’s guidelines, charters, principles etc under which it operates.


6. Social and environmental factors such as lending practices, emissions, waste management, recycling etc.


For 2009, Citigroup’s chief area of improvement has been its Board of Directors. Although concerns continue over some aspects, the Citigroup Board is stronger than it used to be. Out of 9 parameters or ‘Core’ comparison events between Bank of America, Citigroup and Wells Fargo, Citigroup has scored the highest or shared the highest score for 7 of these ‘core’ events. These core events include such parameters like CEO and senior management effectiveness, aligned director shareholder interests etc.


Of the three companies, Wells Fargo has by far performed the worst on the Board of Directors and Senior Management front. Its poor scores will get even worse for 2010 with the jump in CEO and senior executive pay without any apparent long term strengthening of shareholder value. Hitting it the hardest, is Wells’ absence of a Board level Asset Quality committee. Even its Board level Finance and Credit committees appear to have some directors with less than relevant experience.


InvesGuard’s Internal Control Environment primarily includes a comprehensive review of a company’s Board Audit Committee including quality of this committee’s reports, its members, their compensation, as well as its charter. Conflict of Interest is also considered within the Internal Control Environment category.


For 2009, all three companies did not explicitly prevent their directors from providing consulting services to each of these companies. Providing consulting services has the potential to take away the independent perspective that directors are expected to provide. It could potentially cloud their judgement. In fact, Citigroup paid consulting fees of $100,000 to Director Joss during 2009 in addition to regular director compensation.


For more detailed information on these scores please visit our store at or send me an email at


Check back later this week when we will be adding final 2009 JP Morgan Chase and Goldman Sachs scores.


Legend for the scores used in the graphs


Legend for InvesGuard scores



Auditors In The Hot Seat.

With Lehman’s ‘Repo 105’ accounting maneuvers going unnoticed for an extended period of time, the most logical next thought is the role that public accounting firms play in a company’s financial statements. Lehman’s examiner put Dick Fuld and Co. (namely Messrs O’Meara, Callan, Lowitt) including Lehman’s public accounting firm, Ernst & Young in the hot seat.


The Sarbanes-Oxley Act (2002) was enacted not only to ensure that the CEO and CFO certified as to the state of internal controls within their organization but it also established audit procedures on the public accounting firms themselves. The Public Company Accounting Oversight Board (or PCAOB, sometimes jokingly pronounced "Peek-a-boo") is a private-sector, non-profit corporation created by the Sarbanes-Oxley Act, a 2002 United States federal law, to among other things, oversee the auditors of public companies.


The PCAOB carries out inspections on the audit procedures of public accounting firms. The results of these inspections are then published for the consumption of the general public. I thought it would be interesting to highlight some of the ‘issues’ raised by the PCAOB against the big public accounting firms. Unfortunately, companies where such audit inspections have been conducted are not named, but you get a sense of the type of violations committed by these accounting firms.


For 2009


Deloitte- There were multiple adverse observations but there was one particular observation that related to allowances for loan losses. For one company, Deloitte failed to perform sufficient procedures to test the issuer's allowance for loan losses ("ALL"). This allowance was determined using a quantitative model that was designed to be adjusted for recent conditions and information. During the year, the company gathered evidence of deteriorating conditions relevant to the value of its loan portfolio that were in excess of the ALL. According to the published report, Deloitte “failed to perform a sufficient analysis of whether the deteriorating conditions should have prompted further increases in the qualitative adjustments included in the ALL.” In short what this indicates is that the company might not have adequately provided for potential losses in asset values.


Ernst & Young LLP- There were at least two cases where the firm did not perform sufficient procedures to assess the valuation of certain securities. In one of these two cases, PCAOB suggested that insufficient evidence was present to suggest that the firm had sufficiently evaluated the assumptions underlying the company’s valuation of securities. In the other case, Ernst & Young used prices for recent transactions to assess the valuation of the company’s loans. But they did not evaluate whether the loans being valued were of “comparable quality to the loans in the transactions”. And for other other loans, Ernst & Young developed an independent estimate of the value. But such an estimate was based on an incorrect assumption that transactions whose inputs were used were in fact comparable to loan transactions that were being valued. In a third case, the firm failed to perform adequate audit procedures beyond “management inquiries” in estimating the fair value of certain assets that collateralized loans.


What is most alarming is the fact that many of these findings relate to loan allowances or valuations of collateralized assets. Material mistakes here could potentially spell disaster.


Each of the other large public accounting firms were also inspected by the PCAOB. If you are interested in the whole list, click here.


Unfortunately, certain parts of the report are kept private and are not published. These include the results of an inspection of the audit firms’ quality control system which in fact would be critical to understanding the quality of their audits at large companies. It could also indicate the extent to which reliance could be placed on their audit conclusions.


As an offshoot of this research, I thought it would be interesting to take a quick look at how audit fees at the 6 largest banks’ have fared over the past 3 years, starting with 2007.


Audit fees average in the $20-$60 million category. At the highest end is $128 million paid by Bank of America to PricewaterhouseCoopers (PwC) for 2009. In 2007, they were paid $61 million. At the lowest end of the spectrum is Goldman Sachs with $38 million paid to PwC for 2008. 2009 figures are not yet available. Most notable is the absence of Ernst & Young (E&Y). It appears that none of the large 6 banks have E&Y as their public accounting firm of choice. Ernst & Young was Lehman’s public accounting firm until its demise in September 2008.


It is interesting to note that public accounting seems to be one profession that, recession or not, appears to be doing very well. Where else would you find such a quick and steep jump in revenues despite the fact that your customers are not doing well financially?


What is most concerning is whether the inspection reports published by the PCAOB are even read by shareholders or presented to the Board of Directors. As per most Board Audit Committee charters, public accounting firms are expected to present results of the review of their quality control systems to members of their client company’s Audit Committee. But whether this is actually done or not, is difficult to determine given the opacity of reports published by the companies themselves.



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