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Archive for the ‘Chesapeake’ Category

The JPMorgan Chase CEO deserves every dollar of his recent pay raise.  That statement places us at odds with most commentators. Marketwatch’s David Weidner just published a piece whose headline uses the phrase “mocks accountability” to describe the raise. Forbes bashed not only the CEO but also an “ineffective board” in its article a few days prior to Weidner’s. Other negative opinions were expressed in such disparate places as The Wall Street Journal and The New York Times.

Few of these headlines point out that the board had previously, almost a year ago, halved Mr. Dimon’s compensation to $11.5 million from about $22 million in the “London Whale’s” wake. So while his recent raise looks enormous, he is still making less than he was before. But whether we call it a pay raise or a smaller pay cut from his highest compensation, I believe this current increase was deserved for the following reasons.

First, as noted in a post on this blog at the time the “Whale” surfaced, Mr. Dimon tackled the problem of his rogue London trader within days. He very quickly dismissed both the individual trader and the head of the London hedging operation, went public without excuses on the $6 Billion loss, and tightened the reins of that operation.

Other problems that faced JPMorgan Chase were problems that crossed multiple banks: Libor rate setting, foreign currency exchange rates and mortgage packages. You can be sure that the Libor and foreign exchange rate fixing, the collusion of personnel across multiple banks in multiple countries, was not out in the open for their respective CEOs to observe. As for the mortgage securities, we have all too easily forgotten that at the peak of the financial meltdown in September 2008, the federal government seized Washington Mutual and sold it to JPMorgan Chase. These were not securities that Dimon’s operation created.

Following the exposure of the “Whale,” Mr. Dimon acted swiftly on each of these problems, cooperated fully with all investigations, worked to settle with the government and initiated programs to develop and implement additional controls. The same was true when one of his department’s involvement in the Madoff scandal came to light.

As for the board, they acted quickly and publicly to slam Mr. Dimon’s compensation last year. They reportedly argued strongly over this most recent compensation adjustment. I find those to be healthy signs of an involved board.

Contrast this with Aubrey McClendon and the board of Chesapeake Energy, the company who gave us fracking. Mr. McClendon treated the company as his own fiefdom long after it went public. He leveraged his operation as much as he could and when gas prices came down he was caught short. The board did nothing until it was too late, primarily because the board had been filled with McClendon’s friends.

Over a ten month period Mr. Dimon has settled each of the issues for the bank, while still making healthy profits and delivering shareholders a strong improvement in share price. In every case Dimon has directed his team to examine internal processes and strengthen them. He has not hesitated to remove personnel, which is a key to strengthening internal corporate culture.

In short, Mr. Dimon is exactly what you want in a professional executive and he deserves every dollar. His board also deserves more credit than they have been getting.

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The Wrapper On 2012

What a year it was. I started this blog and its associated Twitter account, @ethicsbite, in March and since that time have covered and commented on an amazing number of stories. When I scroll down the list of tweets I realize first hand the extent of ethically questionable (and many times illegal) corporate behavior in our country. Ponzi schemes, insider trading, money laundering and (in the UK) phone hacking are among the illegal. Providing financial advice to clients while your own firm profits by the reverse position is unprofessional. Manipulating the rate determination for an international banking benchmark is likely a violation of regulations. I’ll stop there as the full list would no doubt cause my readers to move on. So we’ll switch to sex.

The Petraeus sex scandal seemed to dominate the corporate ethics news at the end of the year. The New York Times story regarding Walmart’s Mexico operations was more significant in scale.  But all of that was eclipsed by juicy, titillating tales from Washington, Tampa and Afghanistan.

2012 Awards

In addition to being amazed at the plethora of unethical activity, I have marveled at the crassness of the people involved. One has to wonder how they would explain their actions to Mom.

In terms of sheer and utter crassness, the 2012 award truly has to go to the News of the World, whose employees allegedly hacked into the cell phone of a young British girl who had disappeared, then proceeded to delete some of the messages on her cell phone so they could capture potential new incoming messages. Her parents detected that something was going on and informed the police. That case led to the demise of one Rebekah Brooks, a Rupert Murdoch “protégé” and the editor of News of the World. Ms. Brooks and her husband’s relationship with David Cameron, the British Prime Minister, tainted 10 Downing Street and created a political situation that could not be ignored. As the investigation continued, Rupert found himself testifying at Parliament and Ms. Brooks was formally charged in May, together with her husband and four others, with conspiring to interfere with the investigation. She allegedly attempted to carry off the evidence in boxes she took out of News of the World’s offices. Moreover it has turned out that phone hacking may have been a relatively common tool at News of the World as close to 200 individuals, many of them celebrities and political figures, have filed suit over the hacking of their personal cell phones. News of the World was shut down by Mr. Murdoch and he subsequently re-organized the News Corp. entity.

A close second place in crassness would be Chesapeake Energy’s founder, Aubrey McClendon. Mr. McClendon showed little bounds in his use of the company’s money and making a name for himself with it. From such relatively small amounts as corporate payment of his personal staff (to be reimbursed at year end without interest on the amounts advanced) to the millions of dollars he authorized be invested in a local NBA team and the construction of a shopping mall that just happened to have eateries owned by Mr. McClendon, the CEO continually used corporate funds to “match” expenditures from his personal wealth to foster his interests. Chesapeake by this time was a publicly held company traded on the NASDAQ and the CEO’s use of money in this manner should have been overseen by the Board. But as is often the case, the Board was beholding to the CEO.  Chesapeake’s stock fell on bad times (from around $34 on 8/1/2011 to around $17 on 12/14/2012), four new independent board members were elected and McClendon was stripped of his Chairman title. But those who paid the cost were the shareholders, of course.

What Will We See In 2013?

Here are our predictions: Rebekah Brooks will go to trial. JPMorgan will further increase its reserve for bad trades by “The Whale.” No one in the investment banking industry will go to jail for anything other than insider trading. Goldman Sachs will continue to be bad. The global economy will continue to improve. Slowly. More dirt will come out regarding Walmart’s non-US operations. Somewhere in the US a bank will go under.

And there will be at least one big sex scandal.

As the French say, “the more things change, the more they stay the same.”

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Libor

JPMorgan Chase may be facing inquiries from up to eleven different government agencies regarding its role in the Libor rate setting scandal.

The managing director of the U.K.’s Financial Services Authority stated last week that the Libor “is no longer fit for purpose.” He is pushing for it to be replaced with alternative indices. The Reuters article implies that other indices used in commodities and stocks may also be “under scrutiny.” This will surely be grist for the mill in the courthouse where lawsuits are already being filed from plaintiffs who believe their Libor based interest rates were calculated incorrectly. It also raises the question of legitimacy on any existing contract that is Libor based. This one is going to go on for a long time with many interesting and significant repercussions.

Standard Chartered

Standard Chartered is a great name for a UK bank, isn’t it? The name just feels old, stable, conservative…. all the things you would want in a bank. Now the New York State Department of Financial Services has a hotshot young regulator who is threatening to revoke Standard Chartered’s “charter” to operate in New York on the basis that the bank allegedly laundered $250 BILLION-with-a-B for Iran through its New York branch.

Goldman

Goldman Sachs has escaped prosecution by the Justice Department for its actions related to packaging mortgages and reselling them as collateralized debt. The feds felt they didn’t have enough evidence to win the case. Sigh.

NewsCorp

News Corporation announced a $1.6 Billion-with-a-B LOSS for the most recent fiscal quarter, primarily a result of write-downs related to the restructuring of its businesses around the world. That restructuring was announced following the phone hacking scandal at News of the World in London which has resulted in Murdoch’s protege Rebekah Brooks being formally charged in criminal court. However there have also been significant charges related to restructuring initiatives underway in the company’s Australian businesses.

Chesapeake Energy

Chesapeake, the scandal that keeps on giving future case studies, was in the news first for being served subpoenas in a US anti-trust probe and then for facing financial challenges in selling its Michigan properties, which are the subject of said investigation.

Facebook

The Facebook saga continues as a lower price for its stock is causing the company to face significant challenges. Key personnel have been leaving for new opportunities, a possible sign of loss of faith in the company’s further upside potential. The company faces a $3 BILLION tax bill springing from its extensive employee stock plan. At the same time, shares that had been acquired on the private market pre-IPO will soon be able to be traded on the public market. Welcome to the real world. They obviously didn’t learn any lessons from GE which makes billions in profit without paying a dime in federal taxes. Facebook got it backwards – are they making any profits at all and yet have a billion dollar tax bill? No wonder I need a CPA to put my return together.

Knight Trading

Knight Capital Group Inc. announced that its after-tax losses on its trading glitch could amount to $270 million. Good Night.

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Fourth of July:  I took a break the week of July 4th and enjoyed family, friends and the traditions of America.

Then we all got back to work and it appears that some of that work was once again of an unethical nature.

GlaxoSmithKline paid a record $3 Billion-with-a-B in civil and criminal penalties for marketing several drugs for unapproved purposes, which is sometimes referred to as “off prescription.” The conduct was characterized in the media as “fraudulent.”

In the on-going Chesapeake Energy saga, news sources revealed that Chesapeake and Encana may have colluded on setting prices for land deals in Michigan. In other words, the people who owned the land did not receive competitive bids from the two companies.

JPMorgan Chase restated a prior quarter’s results, due to the losses in its London hedging unit. When this story first broke, CEO Jamie Dimon said the losses were $2 Billion. That number has progressively been increased ever since. Now they are restating Q1 results to cover a $4.4 Billion loss and are recognizing that the total may exceed $7 Billion. My bet is we aren’t done yet.

Penn State dealt with the Freeh report which portrayed legendary coach Joe Paterno as part of the cover-up of Sandusky’s actions.

But all of those, significant as each may be, were totally eclipsed by one single word: Libor.

More on that in the next post.

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Chesapeake Energy:

Chesapeake’s Board of Directors named Archie Dunham, former CEO of Conoco, as their new Chairman, removing co-founder Aubrey McClendon from that role. Soon after, Dunham made it clear that Chesapeake needs to continue to sell off assets thereby raising cash. In the meantime, news surfaced that CEO McClendon may have violated anti-trust laws by allegedly sending emails related to bid prices on land for future drilling.

JPMorgan Chase:

Remember a previous post titled “Black Holes?” As predicted then, the hedge unit’s loss at JPMorgan continues to grow. Now reportedly at $ 9 BILLION-with-a-B dollars. Slightly more than the original $ 2 Billion.

News Corp:

Rupert Murdoch is apparently considering splitting News Corp. in two. The split would separate the entertainment business from the publishing business thereby cushioning shareholders who are primarily investing in the entertainment businesses from suffering the effects of the scandal going on in the publishing business. That scandal involves cell phone hacking allegations against the News of the World organization in London.  The company’s board quickly approved of Rupert’s wish. Hmmm.

Goldman Sachs:

No action against them, but the SEC is reportedly filing a civil law suit against a hedge fund manager for allegedly giving favorable treatment to some investors. Goldman was one of the names that allegedly received special treatment. The hedge fund is Harbinger Capital Partners LLC of Wall Street.

Facebook’s IPO:

The SEC opened an investigation into the NASDAQ stock exchange which was unable to effectively process the large number of trades on the stock’s opening day.

And Finally…..Madoff:

Remember Bernie? His brother Peter was planning to plead guilty while at the same time insisting that he did not know about his brother’s massive fraud. ….. sure.

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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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A four day week and relatively quiet.

Chesapeake Energy – Where the money has gone:

A comprehensive analysis from Bloomberg claims that the company will run out of cash sometime next year unless it disposes of more assets. The company has been investing for some time in new wells faster than the cash from existing operations was coming in the door. CEO McClendon has a 2.5% interest in these wells and had to put up his share of well development costs in advance of revenues also. Thus it appears that the company and its CEO are financially over leveraged and the driver is not the share price of CHK but the low price of natural gas on the market. Chesapeake may have lead the way to its own demise as it pioneered the use of the controversial fracturing technology for drilling. Others adopted that technology and natural gas is at a low as supplies have risen.

Other news on Chesapeake: Carl Icahn accumulated over 7% of the company and is demanding representation on the board, which he usually does in these situations. A major New York pension fund has declared itself opposed to two current board members that are up for re-election in June.

Facebook has lost over 20% of its share price since going public last Friday.

News of the World – Former editor and recent PM confidant Andy Coulson was arrested on perjury charges in the phone hacking scandal.

Recent Quotes – Last week Goldman Sach’s Director of Asset Management Jim O’Neill said: “Is it really that entirely desirable to have financial stability at the expense of everything else?” This statement demonstrates three things: (1) Mr. O’Neill sees financial stability as a roadblock to “everything else” – a false choice; (2) he sees financial stability as undesirable; and (3) he doesn’t understand how important financial stability is to the other 7 BILLION-with-a-B people on this planet. I suggest he try making it on a minimum wage for a year so he can experience first hand the importance of financial stability.

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