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Lazard’s High-Priced Real Estate Bargain

Fri, 25 Mar 2011 12:15:27 -0400

BY THEO FRANCIS

Manhattan’s high-end rental market has remained remarkably resilient, rising even amid a nationwide real estate slump. But the investment bank Lazard is still getting a deal on a luxury apartment it rents for one of its directors,Vernon E. Jordan Jr.

Mr. Jordan, a Washington lawyer and well-known confidante of President Bill Clinton, has been with Lazard since 2000 — pulling down seven figures in cash, stock and perks for years. In 2010, Mr. Jordan collected $500,000 in salary, a cash bonus of $1.08 million, an estimated $1.08 million in restricted stock and $527,344 in perks and other benefits, Lazard disclosed in its annual proxy filing.

He also gets “priority” use of a corporate apartment. Last year, Lazard spent $288,000 to put Mr. Jordan up. His free housing has been noted in the past, but what is striking is that the cost has not become more expensive. The $288,000 is the same price that Lazard paid in 2006, according to regulatory filings.

This is a bargain by Manhattan real estate standards. Since then, luxury rental prices in the borough have increased 3.5 percent to $65.77 a square foot, from $63.53 a square foot in early 2007, according to data from Miller Samuels, a Manhattan real estate appraisal firm.

Chances are good that Lazard has locked in a long-term lease on the apartment, compensation experts say. Since companies must disclose their costs of executive benefits, rather than the value of a benefit to an executive, the number would not have changed even as the surrounding rents rose.

Of course, the apartment is still expensive when compared with the overall luxury housing market, since the rent is much more than the amount most New Yorkers pay. The $288,000 rental costs — assuming they are for the full year — amount to $24,000 a month. The median rent for all luxury rentals in Manhattan is roughly $6,750 a month, according to Miller Samuel.

But even as Lazard’s rental costs remained the same, the firm and Mr. Jordan managed to cut their tax bills on his luxury pad. The Internal Revenue Servicecounts the apartment as a type of compensation — for which Mr. Jordan is required to pay taxes. Lazard, in an unusually generous but not unheard-of move, footed his tax bill, which amounted to $217,356 in 2010, the same as in 2009. In 2006, the taxes came to $250,000.

It is not clear why the tax benefit would decline even as the cost of the apartment stayed level. Mr. Jordan’s tax rate is not likely to have gone down, one compensation consultant notes, given his high income, and the top tax brackets have not fallen substantially in the last five years. Another possibility is that an earlier error in the calculations was later corrected, the consultant said.

A Lazard spokeswoman declined to comment on the arrangement.

Theo Francis is a senior reporter for the Web site Footnoted, a division of the financial information company Morningstar that scrutinizes corporate disclosures.

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Lifting the veil on Goldman’s partnership

Tue, 18 Jan 2011 21:46:48 -0500

By SUSANNE CRAIG and ERIC DASH

Goldman Sachs executives have long been among the most richly paid on Wall Street in the best of times. They are now poised to reap a windfall that was sown in the dark days of the financial crisis in 2008.

Nearly 36 million stock options were granted to employees in December 2008 — 10 times the amount issued the previous year — when the stock was trading at $78.78. Since those uncertain days, Goldman’s business has roared back and its share price has more than doubled, closing on Tuesday at nearly $175.

The options grant is among the many details that emerge from a study of regulatory filings and internal partnership documents by The New York Times and Footnoted.com, a division of Morningstar that scrutinizes corporate disclosures. These filings provide a much fuller picture of both Goldman’s compensation and its elite partnership of 475 people who run the firm.

At the center of Goldman’s lucrative compensation program is the partnership. Unlike other Wall Street firms, Goldman retained a partnership system when it became a publicly traded company in 1999. Goldman’s partners are its highest executives and its biggest stars. Yet while Goldman is required to report compensation for its top officers, it releases very little information about this broader group, remaining tightlipped about even basic information like who is currently a partner.

The documents illustrate just how much wealth the partnership owns and has cashed out over the years. Goldman has almost 860 current and former partners, the documents show. In the last 12 years, they have cashed out more than $20 billion in Goldman shares and currently hold more than $10 billion in Goldman stock.

All Wall Street firms dole out stock to reward their employees. But the reporting of who gets what and who sells is typically limited to the firm’s top officers. The Goldman filings provide a window into how broad and how lucrative stock-based compensation can be.

The 2008 stock option grant came at a time when the firm’s financial performance took a hit and its top executives were not paid bonuses. The grant, much of it awarded to partners, gave options that could be exercised in one-third installments in January 2010, January 2011 and January 2012. The shares cannot be sold or transferred until January 2014. The award has already helped increase the partners’ stake in Goldman to 11.2 percent, from 8.7 percent. And as additional options vest, the partners’ control of the firm will most likely increase.

Goldman declined to comment.

In addition to the cumulative stock sales and stock ownership, the filings show an inner circle that is chiefly male — 87 percent of the current partners are men — and shed light on how much each partner has cashed out over the years. The analysis, which examined nearly 5,000 pages of regulatory filings, was a joint effort by The Times and Footnoted.com’s senior reporter Theo Francis.

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How Morgan Stanley's Mack Earned Another Payout

Thu, 29 Apr 2010 21:47:20 -0400

BY THEO FRANCIS

Here’s another consequence of recent Wall Street pay trends: Some company I.O.U.’s to their top executives are ballooning.

Consider Morgan Stanley, where the deferred-compensation accounts of its chairman, John J. Mack, jumped in value to $43.3 million from $27.2 million at the end of 2008 — and that’s during a year when neither he nor the company set aside any new pay for him under the company’s deferral programs.

The gains come from several current and grandfathered arrangements, some dating to the 1980s, and one still paying Mr. Mack guaranteed interest payments of 11 percent to 12 percent a year, which worked out to $2150,120 in 2009. But most of the increase in Mr. Mack’s accounts — about $15.7 million — comes from gains in the value of his restricted stock units, or R.S.U.’s, and dividendlike payments on them.

This is even though he hasn’t received new restricted stock units in years, and Morgan Stanley last year paid him no bonus at all.

Even though it came in 2009, none of that $15.7 million gain shows up in the proxy table laying out Mr. Mack’s annual compensation for last year. That’s because rules from the Securities and Exchange Commission direct companies to disclose only “above-market” returns on deferred compensation in the table. Market returns, such as from gains in Morgan Stanley’s stock price, are left out.

Still, Morgan Stanley is on the hook for the increase in Mr. Mack’s deferred-comp accounts.

Despite being called stock units, those R.S.U.’s aren’t actually shares of Morgan Stanley stock. They amount to a bookkeeping entry, tracking what the company owes the executive for past work: the account value rises or falls based on the fortunes of Morgan Stanley’s shares and dividends. But the company can ultimately decide to pay the R.S.U.’s out in cash instead of stock, and Morgan Stanley filings make abundantly clear that in the event of bankruptcy, those restricted stock units are simply unsecured I.O.U.’s.

The proxy notes that executives getting restricted shares from the company “will have only the rights of a general unsecured creditor of the Company. A Participant will not be a shareholder with respect to the shares underlying stock units unless and until the stock units convert to shares of common stock.”

Along with other big financial firms that received federal bailout funds over the last 18 months, Morgan Stanley is under pressure to pay executives less cash and more stocklike instruments and to put more of that pay “at risk” over time. Last year, the company reported to shareholders that about three-quarters of top executives’ pay was deferred, up from 42 percent in 2008.

Today’s pay-disclosure rules were drafted, for the most part, with stock options in mind, and the rules for deferred equity can be confusing, says Mark Borges, a principal at Compensia, a pay-consulting firm, and a former S.E.C. special counsel. (Until this year, Morgan Stanley didn’t disclose R.S.U.’s as deferred pay at all.) Regulators “may need to do a more thorough review of how these rules work,” he said.

Mr. Mack isn’t the only Morgan Stanley executive to see gains on R.S.U.’s last year. Together, he and the company’s four highest-paid executives are owed about $96.3 million by Morgan Stanley for back pay as of Dec. 31, up from about $48.8 million at the end of 2008.

– Theo Francis

Theo Francis, who writes for the Web site Footnoted.org, is keeping an eye on corporate perks disclosed in regulatory filings this proxy season for DealBook’s Perks Watch.

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A subtle shift toward sales at Macy’s ...

Fri, 26 Mar 2010 09:34:44 -0400

by Theo Francis

When it comes to executive comp, it’s worth keeping in mind a fundamental assumption behind the whole process: Incentives are intended to drive behavior. That means that when you see the board changing the chief executive’s incentive structure, however subtly, pay attention: It may just tell you something about their hopes and fears.

Consider Macy’s (M), which filed an 8-K on Thursday with an amendment to the compensation agreement of the company’s 58-year-old chairman and CEO, Terry J. Lundgren.

At first glance, the amendment doesn’t seem to change a lot: Lundgren’s base salary remains at $1.5 million a year, where it was when this particular agreement was originally signed in 2007. The contract continues to run through Feb. 28, 2011, which is the same date as in the 2007 agreement.

And then there’s the amended Schedule 1, which looks like pretty much the same hairy table that closed the original agreement. Indeed, quick arithmetic suggests that, if Lundgren hits his targets — for earnings before interest and taxes, for sales and for cash-flow — he is still eligible for a bonus of 150% of his salary, or $2.25 million. Moreover, a little additional calculation shows that hitting the uppermost thresholds in each of those categories will continue to earn him 390% of his salary, or $5.85 million. (One minor change at the upper end: The old formula kept increasing from there, while the new one doesn’t; there’s also an absolute ceiling of $7 million.)

So what changed? Simple — the emphasis the board is putting on each of those three key elements. ...

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Juggling jobs with Corzine at MF Global ...

Wed, 24 Mar 2010 10:47:51 -0400

by Theo Francis

Congratulations, MF Global (MF) shareholders! You have snared a smart, high-profile and accomplished (if pricey) chief executive. Or part of one, anyway.

As has been widely reported, MF Global on Wednesday named as its new chairman and CEO Jon S. Corzine — the onetime Goldman Sachs co-head who went on to represent New Jersey in the U.S. Senate and then governor, losing his bid last year for re-election as chief executive of the Garden State.

At the same time, Corzine will be a visiting professor at Princeton University’s Woodrow Wilson School. And he’ll also be an operating partner at private-equity firm J.C. Flowers & Co. (Flowers owns about 10% of MF Global, but both firms are very clear that Corzine isn’t at MF Global to represent Flowers.)

And that may turn out to be the rub for MF Global’s shareholders. On the one hand, Corzine “is expected to spend substantially all of his business time and attention” on his day job at MF Global, according to his agreement with the company; he can only spend time on Flowers “so long as the activities … do not significantly interfere with your performance of your responsibilities under this Agreement” to serve as CEO. (Emphasis is in the original.)

And yet, when it comes to “corporate opportunities” — read, potential investments for MF Global — Corzine must split his attention: He’s under no obligation to tell MF Global about even the best opportunities if he finds out about them through JC Flowers. ...

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The perks that ate infoGROUP...

Tue, 16 Mar 2010 09:30:01 -0400

by Theo Francis

One key principle here at footnoted is that the small stuff does matter. Look no further than Vinod Gupta, who, yesterday evening, became the Securities and Exchange Commission’s poster child for perks run amok.

Of course, in Gupta’s case, the little stuff turned out not to be so little, as the SEC tells it. We’ll spoil the ending: Gupta, infoGroup Inc.’s (IUSA) former chairman and CEO, was formally accused yesterday of fraudulently using nearly $9.5 million in corporate funds “to support his lavish lifestyle,” while hiding another $9.3 million of transactions with companies that he owned at least in part. Two other former executives and a former director of the Omaha-based database and mailing-list vendor were also charged in the case.

Without admitting or denying wrongdoing, Gupta agreed to pay $7.4 million in penalties, interest and disgorgement, and will be banned from serving as a corporate director or officer for life. An attorney for Gupta didn’t return a call seeking comment.

If you’re feeling a little déjà vu, loyal readers, there’s a reason: Gupta’s a frequent flyer here at footnoted ...

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Retiree Annuities May Be Promoted by Obama Aides

Fri, 8 Jan 2010 17:03:44 -0500

By Theo Francis

(Bloomberg) — The Obama administration is weighing how the government can encourage workers to turn their savings into guaranteed income streams following a collapse in retiree accounts when the stock market plunged.

The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.

Annuities generally guarantee income until the retiree's death, and often that of a surviving spouse as well. They are designed to protect against the risk that retirees outlive their savings, a danger made clear by market losses suffered by older Americans over the last year, David Certner, legislative counsel for AARP, said in an interview.

"There's a real desire on a lot of people's parts to try to encourage something other than just rolling over a lump sum, to make sure this money will actually last a lifetime," said Certner, legislative counsel for Washington-based AARP, the biggest U.S. advocacy group for retirees.

Promoting annuities may benefit companies that provide them through employers, including ING Groep NV (INGA:NA) and Prudential Financial Inc. (PRU), or sell them directly to individuals, such as American International Group Inc. (AIG), the insurer that has received $182.3 billion in government aid.

Balances Fall

The average 401(k) fund balance dropped 31 percent to $47,500 at the end of March 2009 from $69,200 at the end of 2007, according to a Fidelity Investments review of 11 million accounts it manages. The Standard & Poor's 500 Index tumbled 46 percent in that period. The average balance of the Fidelity accounts recovered to $60,700 as of last Sept. 30 as the stock market rebounded.

There is "a tremendous amount of interest in the White House" in retirement-security initiatives, Borzi, who heads the Labor Department's Employee Benefits Security Administration, said in an interview.

In addition to annuities, the inquiry will cover other approaches to guaranteeing income, including longevity insurance that would provide an income stream for retirees living beyond a certain age, she said.

"There's been a fair amount of discussion in the literature taking the view that perhaps there ought to be more lifetime income," Iwry, a senior adviser to Treasury Secretary Timothy Geithner, said in an interview.

Lump Sums

"The question is how to encourage it, and whether the government can and should be helpful in that regard," Iwry said.

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What Lurks on the Books of Banks

Thu, 3 Dec 2009 17:00:08 -0500

By Theo Francis and Jessica Silver-Greenberg

At first glance, banks seem to be recovering nicely from the financial crisis. But investors cheered by optimistic earnings reports could soon face a painful surprise.

Many banks appear to be postponing inevitable losses on home-equity loans and commercial mortgages. Others face new trouble in consumer banking, especially credit cards. "Banks know they've got big holes on their balance sheets," says Paul Miller, an analyst for FBR Capital Markets.

The hopeful news is that overall bank industry earnings tripled, to $2.8 billion in the third quarter, compared with the disastrous three-month period a year earlier. But plenty of pitfalls remain, and more grief is certain if the economy takes a turn for the worse.

Consider home-equity lines of credit. During the real estate boom, many homeowners borrowed against the value of their dwellings to pay down credit-card balances, buy new cars, or even cover down payments on the very houses that anchored the loans. With property values down sharply in most markets, a lot of those loans now look shaky. Already, payments on $21 billion in credit lines are past due.

The full extent of the problem hasn't shown up yet on the books of some banks. Lenders generally don't write down questionable home-equity loans until after a borrower has stopped making payments. So far, just 2.94% of home-equity loans have defaulted, vs. 5.96% of traditional mortgages, according to real estate data company First American CoreLogic. Industry analysts predict the percentage of home-equity defaults will rise significantly.

When home-equity loans sour, the damage to banks tends to be greater than losses on traditional first mortgages. That's because home-equity lenders stand in line behind first-mortgage lenders when a foreclosure occurs. The bank holding the first mortgage has claim to the underlying property and often sells it to recoup some money. Home-equity lenders must fight for any remaining scraps. Recovery rates on home-equity lines that have gone bad averaged about 40% during the boom; mortgage-servicer Clayton Holdings says the figure now hovers near zero.

Many banks are reluctant to write down the value of their home-equity loans because that could force them to raise more capital, further denting profits. Problems with home-equity lines and other residential loans in Florida alone could shrink financial reserves at Atlanta-based SunTrust Bank by $745 million to nearly $1 billion over the next several quarters, ultimately hurting profits, according to Gradient Analytics, a research firm that serves hedge funds and other investors. SunTrust declined to comment.

Home-equity loans aren't the only weak spot in consumer lending. ...

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These Men Could Kill SarbOx

Thu, 19 Nov 2009 17:00:36 -0500

By Theo Francis

From the marbled corridors of Congress to the tony salons of Georgetown, liberal lawmakers are abuzz with ideas on how to rein in U.S. corporations. Yet over in the courts, two conservative lawyers are mounting a serious challenge to a law, enacted earlier in the decade, that imposed tough restrictions on American businesses. A ruling in their favor could deal a serious blow to the pro-regulatory movement in Washington.

Michael A. Carvin and Noel J. Francisco, partners at the giant law firm Jones Day, are taking on the Sarbanes-Oxley Act of 2002, the controversial anti-fraud legislation passed after the last big wave of corporate scandals. The two are representing Brad Beckstead, the head of a small auditing firm in Henderson, Nev., who is suing the Public Company Accounting Oversight Board, the panel created by SarbOx to make sure auditors are doing their jobs. Beckstead says the PCAOB picked apart his business in a grueling 2004 audit. "I became the poster boy for what not to do when auditing small companies," he says. The cost of complying with the rules was so great, he claims, that he had to abandon his auditing practice.

On Dec. 7 the U.S. Supreme Court will hear oral arguments in the case, known as Free Enterprise Fund and Beckstead and Watts v. PCAOB and United States of America. A finding for Beckstead could reopen the entire Sarbanes-Oxley Act. Some board defenders fear a victory for Beckstead could even shake the foundations of established bodies such as the Federal Reserve. "The implications are potentially far-reaching," says Gillian Metzger, a Columbia law professor who is supporting the PCAOB board in filings with the high court.

For Carvin, 53, and Francisco, 40, this is no ordinary case. While the two have staked out a nice business for Jones Day cutting through regulatory tangles on behalf of blue-chip companies such as Electronic Data Systems (HPQ) (EDS) and R.J. Reynolds Tobacco (RAI), they're litigating Beckstead for free. They were attracted to the case not only for its potential to bring in new corporate clients but also because it fits their political agenda. "If you believe [in] limiting government, you're much more zealous," says Francisco.

Yet that passion hasn't alienated them from Democrats among Jones Day's 2,400 lawyers worldwide. One partner who voted for Obama says he enjoys jousting with the pair over politics. "Francisco has a beautiful mind," he says. "So does Mike."

CONSERVATIVE CONSORTIUM

Carvin and Francisco are important players in what Hillary Clinton might call the vast right-wing conspiracy. They belong to an informal yet powerful web of conservative judges, lawyers, and veterans of the Ronald Reagan and George W. Bush Administrations that has been decades in the making. Even liberals admire the group's reach. "Although I disagree with these people to the core, I have a lot of respect for the way they went about cementing not just their beliefs, but the network of people who shared their beliefs," says Stephen Vladeck, an American University professor of constitutional law.

Both Carvin and Francisco boast impeccable conservative credentials, including big roles in Bush's successful challenge to Florida's Presidential vote in 2000. ...

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Wall Street Plays Hardball

Wed, 18 Nov 2009 20:10:45 -0500

By Theo Francis, Ben Levisohn, Christopher Palmeri and Jessica Silver-Greenberg

Detroit Mayor Dave Bing is struggling to save his city from fiscal calamity. Unemployment is at a record 28% and rising, while home prices have plunged 39% since 2007. The 66-year-old Bing, a former NBA all-star with the Detroit Pistons who took office 10 months ago, faces a $300 million budget deficit—and few ways to make up the difference.

Against that bleak backdrop, Wall Street is squeezing one of America's weakest cities for every penny it can. A few years ago, Detroit struck a derivatives deal with UBS (UBS) and other banks that allowed it to save more than $2 million a year in interest on $800 million worth of bonds. But the fine print carried a potentially devastating condition. If the city's credit rating dropped, the banks could opt out of the deal and demand a sizable breakup fee. That's precisely what happened in January: After years of fiscal trouble, Detroit saw its credit rating slashed to junk. Suddenly the sputtering Motor City was on the hook for a $400 million tab.

During late-night strategy sessions, Joseph L. Harris, Detroit's then-chief financial officer, scoured the budget for spare dollars, going so far as to cut expenditures on water and electricity. "I figured the [utility] wouldn't turn out our lights," says Harris. But there wasn't enough cash, and in June the city set up a payment plan with the banks.

Now Detroit must use the revenues from its three casinos—MGM Grand Detroit (MGM), Greektown Casino, and MotorCity Casino—to cover a $4.2 million monthly payment to the banks before a single cent can go to schools, transportation, and other critical services. "The economic crisis has forced us to move quickly and redefine what services a city can and should provide," says Bing. "While we face a tough road ahead, I believe we're on the right path." UBS declined to comment.

Detroit isn't suffering alone. Across the nation, local governments and related public entities, already reeling from the recession, face another fiscal crisis: billions of dollars in fees owed to UBS, Goldman Sachs (GS), and other financial giants on investment deals gone wrong.

Charm Offensive

The seeds of this looming disaster were sown during the credit boom, when Wall Street targeted cities big and small with risky financial products that promised to save them money or boost returns. Investment bankers sold exotic derivatives designed to help municipalities cut borrowing costs. Banks and insurance companies constructed complicated tax deals that allowed public utilities, transit authorities, and other nonprofit organizations to extract cash immediately from their long-term assets. Private equity firms, pointing to stellar historical gains, persuaded big public pension funds to plow billions of dollars into high-cost investments at the peak of the market. Many of the transactions shared a striking similarity: provisions that protected the banks from big losses and left the customers on the hook for huge payouts.

Now, as many of those deals sour, Wall Street is ramping up its efforts to collect from Main Street. "The banks stuffed customers with [questionable investments] and then extorted money from the customers to get rid of them," says Christopher Whalen, managing director at research firm Institutional Risk Analytics. The New Jersey Transportation Trust Fund Authority, for instance, must pay nearly $1 million a month at least until December 2011 to Goldman Sachs on derivatives deals tied to municipal debt—even though the state retired the debt last year. The Chicago Transit Authority (CTA), having entered into complex arrangements to lease its equipment to outside investors and then lease it back, could face termination fees of $30 million. The investors could collect penalties because American International Group (AIG), which backed the arrangement, has seen its credit rating tumble. "These [sorts of deals] are potentially huge liabilities," says Stanford Law School's Joseph Bankman. "Investors aren't going to be settling for chump change." Goldman Sachs declined to comment.

The financial struggles of America's cities and towns stand in stark contrast to Wall Street ...

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