Archive for the ‘Favorites’ Category

Bloomberg: Standard & Poor’s, facing charges that it defrauded investors, will defend itself by claiming that no one should have paid attention to its claims of independence. Why else would a ratings agency exist?

Per Bloomberg’s article, S&P will claim that “the government can’t base its fraud claims on S&P’s assertions that its ratings were independent, objective and free of conflicts of interest because U.S. courts have found that such vague and generalized statements are the kind of “puffery” that a reasonable investor wouldn’t rely on.”

This, of course, is resorting to the fine print of our legal system in an attempt to destroy the government’s case against the once well respected, and trusted, ratings agency. Far be it from us to complain about reliance on the decisions of prior cases. That reliance is the principle that supports consistency in the application of the law and is an essential component of “blind justice.”

However, if this is the best S&P has to offer in its defense, they may as well close the place down after the case is over. The whole point of ratings agencies such as S&P is precisely to provide an independent and objective opinion on the risk of an investment instrument. The very words “independence and objectivity,” which frequently appear in the codes of ethics of many professions, mean that there is no conflict of interest – that the competent opinion being rendered is untainted by any relationship the professional has with the organization on which an opinion is rendered.

If reasonable investors can’t rely upon that independence and objectivity, then there is no purpose served by a Standard & Poor’s. Close them down.


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The fertilizer plant explosion in West, Texas was tragic and unnecessary. It may also have been unethical.

Regulation of chemical plants in general has been hobbled. Nationally, congress has resisted more stringent regulation, a successful result of industry lobbying. Texas in particular has long resisted regulation, indeed prided itself on its hands-off business philosophy. It is very possible that no one, corporation or executive, will be charged with a violation of the law.

However, there is a profession, the engineering profession, whose members are bound by a professional code of ethics and are subject to state level regulation via boards of engineering that oversee the licensing process and activities of professional engineers.

Similar to CPAs, certain activities cannot be performed without an engineering license.  The supervision of the work of non-licensed personnel with an engineering degree is one such activity. Only a licensed engineer can certify the structural integrity of buildings and bridges. A firm that holds itself out to be an engineering firm must have a licensed engineer in order to make that assertion.

Licensed engineers in particular and professional engineers in general are called upon to uphold a code of ethics. In most states that code of ethics is closely based upon or actually is the code of ethics adopted by the National Society of Professional Engineers® (NSPE).

The Preamble to the NSPE Code of Ethics states in part:

“Engineering has a direct and vital impact on the quality of life for all people. Accordingly, the services provided by engineers require honesty, impartiality, fairness, and equity, and must be dedicated to the protection of the public health, safety, and welfare.”

The Code goes on to state its “Fundamental Canons.” The very first Fundamental Canon is “Hold paramount the safety, health and welfare of the public.”

We await further investigation to determine the last time an engineer signed off on plant maintenance, what was examined, what was observed and what records were kept.

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Last week the U.S Senate conducted hearings on JPMorgan’s $6.2 billion 2012 trading loss in its London office. This was the amount of a trading loss attributed to the “London Whale,” an individual trader in the bank’s Chief Investment Office (CIO), an office whose responsibility is risk management. That individual and the executive in charge of the CIO were let go and the damage now seems to be contained. So why should the Senate be investigating? Why should we care?

Critics might argue that this is the business loss of a defined corporate entity, JPMorgan Chase, and therefore a matter for the company and its shareholders, not the general public and the Congress. In most cases I would agree.

However, this is not just any company and the causes of the loss have significance beyond its corporate and national bounds. An important point to make here is that while the bank was successful in holding the loss at $ 6 billion, it could have been more extensive and had greater consequences.  More importantly, the nature of the loss is indicative of a systemic problem that continues to threaten the nation’s economy, which is the reason it is definitely the public’s business.

When the Banks Fall It Hurts Us All

JPMorgan Chase is a global financial entity, the largest global bank according to an editorial in Bloomberg. As the editorial points out, the bank’s equity is only between 3 and 4 percent of its total value. A sufficient drop in stock price could potentially wipe out that underlying equity and set events in motion that would cause the American taxpayer to bail them out.

How much would that bail out be? JPMorgan has a total value of around $4 trillion.   As someone argued soon after the first bail out, “too big to fail will one day be too big to save.”

The area that should be our greatest concern is this: if Mr. Dimon is the best risk manager in the industry, then can the industry as a whole really be counted on to be a partner with the people (via regulation) in ensuring we do not have another global calamity? The Bloomberg editorial re-opens the discussion on capping the size of the largest banks.

It’s Not Their Money

There are people who believe the $6 billion loss is an issue for JPMorgan management and its shareholders and should be left there. But it is not just the bank’s direct shareholders that may be hurt in these situations. This bank’s stock prices impact many other investors and non-investors. Indirect investors in JPMorgan include those who buy ETFs including ETFs that track the S&P, the Dow and other metrics. People who do not directly invest but have pension and other retirement plans can be affected. A major bank failure, as we saw in 2008 and 2009 can impact the economy as a whole costing the jobs of people who have no investments of any kind.

We need to address bank size to protect us all. We need to understand that complex investments aimed at managing risk can introduce new risks. And we need to realize that the importance of fiduciary responsibility must be re-established in the industry.

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Each of these firms had achieved the highest reputation for integrity and quality by placing their responsibility to the investing public ahead of all else. Then their corporate cultures changed.

For those of us who were a part of Arthur Andersen in the 1960s and 1970s, there was no question that the firm considered its reputation to be its principal asset. An asset to be safeguarded at all cost. Reputation was everything and reputation brought in the revenue. The foundations of that reputation were competence, independence and objectivity, all found by no coincidence in the ethical standards for CPAs. The people we served were not our clients; they were the investing public who relied upon competent and independent audit opinions; opinions that were signed “Arthur Andersen & Company.”

The firm invested greatly in achieving and maintaining those qualities throughout its organization. We were masters at training our personnel, developing and enforcing firm wide standards of practice across the globe and maintaining discipline in the use of those standards through a mechanism of internal quality assurance reviews of every audit, tax and consulting engagement combined with frequent and specific personnel reviews at all levels.

But we overlooked one key and fundamental element of maintaining a corporate culture that applies to all organizations, one that Standard & Poor’s may also have missed. We altered the values that generated real rewards and recognition for upward movement in the organization. Over time we collectively allowed the importance of independence and objectivity to slip and the importance of revenue generation by individuals to rise. Serving the investing public remained in our literature, but generating more revenue for the partners became the most important value within the partnership.

Had the partners ever sat down at an annual meeting and openly proposed that this be done it most likely would have been booed down. It was not really a conscious decision, nor do I believe that we ever actually viewed rewarding individual revenue production as something likely to be in conflict with our reputation and our integrity. (A prior generation of partners most definitely did.) But slowly over time the focus on admission to and advancement within the partnership shifted. Reputation did not drive revenue; individuals did. Service to investors was not the primary overriding importance; renewing audit contracts and deriving consulting and tax opportunities was.

So when a Chicago Headquarters partner with a well established reputation for audit and accounting expertise came down to Houston to provide the quality assurance review for the Enron audit, his disagreements with the treatment of certain off balance sheet partnerships resulted in his quick dismissal by the firm’s client. The client had no say in the selection of quality assurance partners in the old days. The firm’s top management would not have acquiesced to a clean opinion after such client actions. The threat of loss of consulting revenue from the client would not have swayed the objections presented in the audit opinion. This time they did.

Floyd Norris’s story in The New York Times draws potential parallels between the corporate culture issues underlying Andersen’s demise and those that are appearing to surface as the government brings its civil case against Standard & Poor’s. In the case of Andersen, damage to our economy was contained. In the case of the CDO s of the type that S&P and others rated, the damage was global and a near worldwide meltdown.

Corporate culture is the key to ethical behavior in any organization. But can a company of such importance police itself? Enron led to the Sarbanes-Oxley Act, which among other things established a new oversight agency, the Public Company Accounting Oversight Board (PCAOB), for a profession that had previously been proudly self-regulating. It is time to do the same for the ratings industry.  They are there to serve the public and the public should have the oversight.

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As I read John Carney’s piece on CNBC.com (“In Defense of Morgan Stanley’s ‘Nuclear Holocaust'”) I decided a rebuttal of his opinion should be a post on this blog.

Among the news items this week was the release, in a civil trial, of the text of certain emails that were sent among staff at Morgan Stanley pertaining to the internally perceived quality of a mortgage backed CDO that they were preparing for the market. The emails speculated on an appropriate name for the CDO and included such labels as “Subprime Meltdown.” The emails were brought to light in a lawsuit by a Taiwanese bank that had invested in part of that CDO.

The original story was written by Jesse Eisinger in ProPublica on January 23rd and was also published by the New York Times’ DealBook that same day.

While there is a lot to ‘bite’ on, ethically speaking, in the story itself, I was particularly amazed by the defense of Morgan Stanley written by John Carney, Senior Editor at CNBC.com. Mr. Carney’s article attempts to defend Morgan Stanley from having done anything wrong. The core of his argument can be found in this statement: “There’s a big difference between selling a product to a retail investor and a bank, even a Taiwanese bank.”

Setting aside the obvious disrespectful phrase “even a Taiwanese bank” (implying that a Taiwanese bank is inherently not as competent as its Western counterparts), I find it incredible that anyone could hold out a distinction of this sort as a basis of a defense. At its foundation, this defense is the inevitable result of the caveat emptor (“buyer beware”) attitude that has permeated the financial industry for so long.

Carney goes on to say that it was no secret in the industry that Morgan Stanley was bearish on mortgage debt and that the bank had published articles on the approaching bubble as early as August of 2006. Evidently none of those articles reached the desk of then Federal Reserve chief Alan Greenspan. We all know that there were many contrary opinions within expert economic circles at that time.

Carney then points out that it is common practice, even today, for a bank to sell products to its customers that it does not itself believe to be good investments. In other words, everyone does this so therefore it is OK.

This defense of the bank’s actions is filled with flaws. I want to discuss those using my model for ethical standards, the Seven Layers of Integrity®. Quotations below are from his article, referenced above, and I encourage you to read his entire article.

The Law and Contracts and Agreements

We have laws and regulations governing the selling of securities to investors. A key focus of those rules is the attempt to ensure that the buyer is fully aware of the risks of the securities. That risk discussion is to be found in the prospectus or offering documents, not in “notes” from one of the company’s analysts appearing in an overall market assessment or industry hearsay that the bank was a bear on mortgages in general. The risks of the specific security being offered, not just the broad market or industry risks, should have been highlighted. The fact that fully $415 million of the $500 million package ended up being worthless and that this apparently came as a surprise to the buyer would raise the question of what was and was not revealed. The fact, via the emails in question, that the bank’s own staff who were putting the offering together believed it to be highly likely to default is tantamount to the bank itself knowing that the product being offered on the market was completely speculative and extremely risky. Is that how they categorized it?

The argument that these securities were not being sold to retail investors implies that for “sophisticated financial institutions” an investment bank can be less scrupulous, less transparent, in presenting the risks involved. I am not a registered financial broker or the like, and would invite the perspective of someone who is, but I am highly skeptical that an appropriate discussion of risk can be bypassed when the bank presenting the offering believes the securities to be highly risky. If that is actually acceptable, it should not be.

Professional Standards

I would like to think that people in the banking industry who hold certain securities licenses have professional ethical standards that they should adhere to just as CPA s and attorneys do. I would like to think that independence and objectivity would be part of those standards, along with placing your clients’ interests above your own. I don’t see any of that being observed in this case, nor does Mr. Carney’s defense even attempt to address those issues, other than pointing to an industry standard.

Industry Standards

The argument that “the investment banks have typically allowed clients to take the opposite sides of trades, even when they regard one side of the trade as misguided” states a current industry standard of expected behavior.  As I point out in our book, industry standards can and do violate the standards found in the Law, Contracts, Professional Standards and the other layers in my model. When they do, and this is one case where I believe strongly that they are in conflict, the industry standard will ultimately be changed.  I look forward to that day.

Community Standards – The Investing Public

Neither Mr. Carney nor anyone else can state without qualification that there were no retail investors involved. The odds are high that some were involved, albeit indirectly. For example, there could well have been retail investors holding shares of the purchasing bank that saw their investment in those shares hit when this CDO and others like it proved to be worth so much less on the bank’s books. And in general the losses on mortgage backed CDOs that were bought by municipalities, pension funds and other entities have affected retail investors and the non-investing public alike.

Interpersonal Standards and Spiritual Values

Not even raised by Mr. Carney as something to be defended, so the only flaw is that he doesn’t even mention them. Interpersonally, no one buys a second time from someone they had to sue. Spiritually, as I have said before, there is no spiritual value I am aware of that justifies what the banking industry has done to the global economy and millions of individuals in the name of greater profits for its own pockets.


Mr. Carney’s defense makes it clear that in his mind Morgan Stanley did little wrong, save for failing to teach their staff to not send emails of this sort. I don’t consider hiding bad actions to be a virtue.

For my part, and likely a large percentage of the retail investor market, the revelations coming from this lawsuit are of little surprise and may simply confirm our worst suspicions. There are so many instances of ethical failures and deception in this real world example that a reasonable person can only conclude that what the bank did in this case was simply wrong.  It is one more reason why so many of us are reluctant to return to the market even now as it is clearing the decks for new highs.

Wall Street has tarnished itself mightily, doesn’t even realize it and most likely doesn’t even care.

Other Assessments

Two other interesting opinions on the ethics of the investment banking industry are

“Wall Street Ethics Codes Make Me Want to Inhale” by Susan Antilla of Bloomberg News

“The Market Has Spoken, and It Is Rigged” by Simon Johnson, Professor of Entrepreneurship, M.I.T. Sloan School

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Just in case we had all forgotten about it, Sex once again reminded us that Greed and Power are not the only players in town. Our corporate ethics related news this year has been so focused on financial Greed (Libor manipulation, Iran money laundering, insider trading) and ego driven Power (London Whale, anything Murdock) that we totally and completely forgot about the oldest corruptor of the human race: Sex.

But here is Sex right back in the news immediately on the heels of election night. The CIA Director, generals, a possible FBI agent, a famous biographer living in the same neighborhood as John Edwards’ former mistress, a Tampa socialite…. it doesn’t get any juicier than this folks. I mean really, this could have been a new episode of the Dallas TV soap. All of that overshadowed the relatively tame announcement from Lockheed Martin  that its named future CEO and then current COO resigned because of a “close personal relationship” with a subordinate.

How could military discipline break down at the the highest levels?  Lest we forget, the military is a vast organization run by executives called generals and subject to the same fundamental forces of organizational and human behavior that face Goldman Sachs, JPMorgan Chase and your own employer.

The forces of individual behavior are more or less clear: the temptation to commit adultery, no matter how dumb an idea it is. As of today, November 13, 2012, there are at least two generals and possibly one FBI investigator whose behavior has or may have strayed over the line due to sex.

The organizational culture forces involved are not nearly as clear, unless you frame the issue in the context of organizational culture in general together with a long history of prejudice against women. The problems women have faced in our 21st century military are well known: harassment on and off post, sexual assaults, rape, reported rapes being ignored or downplayed and few women in the highest levels of authority. An organization that can so easily overlook charges of rape will surely knowingly wink its eye at a mere affair.

Yet at the same time, organizational culture can be a force for good. The CIA hides its internal operations for obvious reasons, but one thing it has always been clear about is this: no member of the agency, regardless of rank, can conduct their personal life in a way that invites blackmail from a foreign entity. That’s why the General submitted his resignation so quickly when he was found out.

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I started this series back in May with my first post on this topic. Given the whole summer has already gone by, let me repeat my introduction:

“The time for a national discussion of our right to privacy and what that really means is long overdue. I will try to contribute to that discussion in a series of posts on digital privacy. Particular points I will discuss include the following:

  • That the right to privacy has already been established as a constitutional right;
  • That technology assisted statistics has already made protecting and hiding your personal identity and personal identification information impossible;
  • That the data that is collected on you in database warehouses around the globe is and ought to be yours and yours alone to surrender, no matter how it was collected;
  • That the economic size and scale of companies such as Google renders “opting out” impractical and our laws ought to recognize that reality;
  • That therefore the burden of maintaining privacy and security of identification should be on the organizations and corporations that provide services, not the individual; and
  • That these principles must be established not just on the federal level but on the international level.”

That post continued by addressing the first bullet in the above list as I outlined how our constitutional right to privacy came to be recognized in the Constitution and through two key Supreme Court decisions.

This second article will explore the idea that “technology assisted statistics has already made protecting and hiding your personal identity and personal identification information impossible.”

To understand why that is true requires an understanding of two things. First, personal identifying information does not have to be the pieces of data normally associated with that phrase – social security number, name and address. Any combination of data that can collectively determine who you are will do. Second, statistical analysis and technology capable of making that connection exists today.

1. Personal Identification Does Not Require Your Tax ID

The very concept of privacy is that others should not know what you have done and what you are doing, who you associate with, what your plans are for the future, your personal letters, or what you said in a private conversation on the phone without your willing permission of the force of a subpoena or duly executed warrant. The “you” in that concept means YOU, the person you are at your address. The combination of your name and Tax ID/Social Security Number as “personal identifying information” is applicable to privacy in a narrower sense – your financial and medical data and identity. However, if someone circulates in a social network system that “Mary Smith and her husband had an argument at home last night” that would be a violation of the Smiths’ personal privacy in that the recipients of this information can be reasonably certain which of the thousands of Mary Smiths in the world was involved. That is what I mean when I say that “You” can be uniquely identified without a Tax ID being compromised.

2. Statistical Analysis and Technology are Capable of Identifying Unique Information About You Without Your Tax ID

Let us assume that you are a woman and you have just found out that you are pregnant. You are excited and happy by the possibility, but haven’t had a chance to tell your family yet. You stop at a store on the way home. A few days later you receive a mailer from that store offering special deals on baby products. A coincidence? A mass mailing? No, it isn’t. The store that is capable of doing that is named Target and their ability to pinpoint the unique “You” who is pregnant was reviewed in an article in the New York Times earlier this year.

Target does this using a combination of statistical analysis of buying patterns captured by modern computers that have the speed and storage capacity necessary to identify, store and track every purchase in every store. They have a variety of means of identifying the specific customers. There is also a company in Arkansas that helps retailers with the specific person identification problem. It’s name is Acxiom and it too was featured in the New York Times.

Personal identifying information in the traditional sense (Name, Address and Tax ID) can be readily derived from there via the store’s name brand card, for example. However, smart companies have taken huge strides to protect that data from their own employees and the outside world, and the store systems that link your swiped credit card to the Visa/Mastercard computers are now specifically designed to prevent retaining the full card information for the retailer. There are also data security standards covering the transmission of that information back and forth. But as the Target story illustrates, one can still ascertain that you are the Mary Smith who lives at a specific residence.

Isn’t that enough?

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John C. Bogle, the 83 year old founder of the Vanguard mutual fund company, was the featured story in the Sunday New York Times Business Section. Anyone who is interested in making our financial markets a more ethical sphere of life, who is interested in a fair and level playing field for all investors and who wants to see a new cultural / behavioral standard in that industry should read this article. It cheered my heart to know that there is someone out there who built a company in that industry which has been a stellar performer while maintaining a customer focused and ethical culture. Thanks so much, Mr. Bogle.

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Libor is the London Interbank Offering Rate. It is an interest rate that is used between banks as they lend each other funds. It is a “free market” rate that has been used as a starting point for variable rate mortgages (based on Libor plus some number), rates for borrowings by municipalities and over $360 TRILLION-with-a-T in financial and derivative contracts. (Hmmm, isn’t that more than the combined GDP of all the world’s countries? Would that bring us down?)

Libor is calculated using estimates from the banks and it is those estimates that were, how shall we say this, allegedly fudged.

Last week a growing global gasp could be heard as we have learned that London’s Barclays has settled an accusation of having manipulated that rate, paying a fine of $450 Million. We then learned that potentially a dozen other large banks in North America and Europe may be under investigation. Banks may include Citigroup, Inc., Royal Bank of Scotland and Deutsche Bank. The manipulation of this rate apparently was going on before and just prior to the near global financial melt-down of 2008.

The story continued with word that Secretary of the Treasury Tim Geitner, who was head of the NY Fed during that timeframe, was potentially aware of issues with the setting of Libor and advised the British on what to do to get the situation under control. In the UK, the scandal has included allegations that the Bank of England’s deputy governor may have known but not taken action.

Ethical Analysis

The Law was broken. That’s not my personal opinion, it’s obviously the conclusion of more three-letter government enforcement agencies in the US, UK and elsewhere than can be listed here. They undoubtedly set Barclays up with a plea deal so that they can go on from there to the other banks that may have been involved. Congressional representatives are already calling for anyone involved to be prosecuted. Over the weekend the New York Times reported that the US is considering criminal charges against some banks and their employees.

Contracts and agreements were not honored. That IS my opinion and the supporting evidence is only just starting to come forth. Several municipalities are considering suing because the interest payments on their loans may have been higher than justified. They argue that they have been forced to cut their budgets to support those rates.

The community expectation of fair play was violated. When the investing public, would be mortgage holders, municipalities in need of lines of credit and other financing all have an expectation that the Libor rate is a free market rate, then manipulation of that rate by the investment banking industry which is often on the other side of the loans is clearly a violation of the standard of fair play.

Professional standards were ignored. We had expected that everyone in the investment banking industry upheld a minimum of professional ethical conduct standards. Financial advisors should be giving their clients objective analytical based recommendations. Institutions whom we entrust with our money should safeguard it from recklessness and be prudent in its management. Investment banks we might invest in as shareholders should be transparent about their business and its risks. The Libor scandal is just one of a series of continued ethical breaches by this entire industry. It is long past time to call them out.

Moral and spiritual values have been disregarded.

The true ethical issue is this: the banks believe the money is theirs, the traders think the money is theirs, and the individuals making trades think that the level of risk they successfully take with the money that is not theirs to begin with is a game to play that enables them to personally be rewarded, satisfy their ego and prove they are the biggest Whale in the sea.

The money is NOT theirs. It belongs to shareholders, depositors, pension funds and retirees. As the source of accumulated capital that drives the world economy it is a tool that can be used to the benefit of all and a hammer that can be used to dash the lives of many.

The banking industry still does not get this, as I pointed out when I tweeted this quote from one Lloyd Blankfein of Goldman Sachs: “If you put too much penalty on risk judgment, what kind of world are you going to have?”  We already know the kind of world we do have – one in which too much risk judgment takes place without, up till now, much in penalties. Perhaps we need to take fewer risks while in the process of “risk management.”

Yet to be determined is the potential impact this alleged rate fixing among the banks may have had on the overall global economy. If the rates were lower than market reality leading up to the crash, which is where the facts seem to be pointed, then a bank could lend more money than it otherwise would have been able, thereby contributing to the bubble.

Bottom Line:

The banking industry’s imprudence with the money entrusted to it, the resultant hardship and harm that has been inflicted on so many around the world and the inability of industry personnel to recognize the culpability of their firms and themselves in the global recession, coupled with their lack of regard for those who have been hurt is at odds with any true spiritual principle I am aware of.

Other Assessments: Two other interesting opinions on the ethics of the investment banking industry are

“Wall Street Ethics Codes Make Me Want to Inhale” by Susan Antilla of Bloomberg News

“The Market Has Spoken, and It Is Rigged” by Simon Johnson, Professor of Entrepreneurship, M.I.T. Sloan School

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When the Chesapeake story first hit the news I asked why their CEO, who was reportedly lining up over $ 1 BILLION-with-a-B in personal loans, could need so much money? This week a detailed special report from Reuters tracked not only what CEO McClendon has been doing with all that money but how intertwined his personal business and aspirations are with the company’s business. To finance his own personal spending and investments, including a house in Bermuda and investments in company wells, McClendon borrowed heavily and mortgaged everything so that he could own more. Hence the constant need for more personal cash.

He ran the company the same way (noted in one of my prior posts), borrowing against existing drilling sites to finance the acquisition of more leases and properties that could be drilled. In essence the company was always using more cash per year than it was producing from ongoing operations. In spite of that, CEO McClendon made decisions and received personal benefits that required significant amounts of corporate cash according to the Reuters report.

For example, McClendon made continual use of company funds to provide himself with a group of assistants who worked on everything from his personal accounting needs to arranging for repairs to his personal residence. These individuals were on the Chesapeake payroll and McClendon was to repay the company for that expense at the end of each year. In essence he had a zero interest working capital loan from the company for the salaries of a staff that managed his personal, non-Chesapeake related business.

He also, as do many CEOs, had access to corporate jets. But McClendon and his family used these jets extensively, thereby receiving a significant amount of additional executive compensation totally at his own discretion.

McClendon also decided to invest Chesapeake profits in revitalization projects for Oklahoma City, including a shopping center across the street from the company’s campus. Two restaurants in that center just happened to be part owned by McClendon. According to Reuters, the shopping center, Classen Curve, did not even appear as a footnote in the company’s financial statements.

As CEO he decided that Chesapeake should invest in the Oklahoma City pro basketball team, the same team that he personally owned part of. He then used his personal ownership interest in the team as collateral for loans that provided cash to maintain his personal quest for more. By deciding as CEO that the company should have its name on the team’s stadium and purchase a large block of tickets every year, he essentially paid himself, an owner of the team, with company funds.

In short, Aubrey McClendon appears to have had a big ego and desire to be a city father, and he used the company’s funds to support that ambition. He has been unable to distinguish between himself and the company, thereby placing his co-owners, the shareholders, at a much greater level of risk than most of them probably assumed they were exposed to.

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