Smart Arse on this planet

`Dr. Doom,' Montag Profit as Greenberg, Fuld Lose $7 Billion

By Peter Robison
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Sept. 18 (Bloomberg) -- ``Dr. Doom'' had it right.

Henry Kaufman, a Lehman Brothers Holdings Inc. director who earned that nickname for his 1970s forecasts as an economist, made almost $2 million when he exercised Lehman stock options in December and January, after the firm reported record fiscal 2007 net income.

Kaufman's profit-saving sale shows there are some winners among the losing firms in this week's Wall Street meltdown. Another is Thomas Montag, a Merrill Lynch & Co. executive hired only a month before the firm negotiated its sale, who stands to get $76 million. The list may also include ousted managers like ex-Bear Stearns Cos. President Warren Spector, who sold $382 million in stock before resigning in 2007. He was spotted dancing in the rain during a New York staging of ``Hair'' last month.

``When stocks depreciate like this, your best bet was getting fired or getting value out of the stock ahead of time,'' said Ben Silverman, director of research for InsiderScore.com, a Princeton, New Jersey-based firm that tracks insider transactions for institutional investors.

By contrast, top executives and workers who hung on until the end took a beating, including Lehman Chief Executive Officer Richard Fuld.

His stock and options once worth $1.2 billion became almost worthless in the firm's Sept. 15 bankruptcy. This week, Fuld sold 2.88 million shares for 16 cents to 30 cents apiece, or less than $500,000, according to a regulatory filing. Fuld, 62, took home at least $168.5 million when Lehman had record profit from 2005 to 2007, according to proxy filings and pay consultants.

Lehman's filing wiped out as much as $13.7 billion in company stock held by employees, who owned 30 percent of the shares when the stock peaked at $85.80 last year. Lehman encouraged stock ownership and has said about 20,000 of its 26,000 workers got at least some equity in 2007.

`Destroyed Us'

``Dick Fuld destroyed us,'' said Mohammed ``Mo'' Grimeh, Lehman's global head of emerging-market debt, in a Sept. 14 interview. ``He had the board in his pocket and the board never challenged him.''

Lehman spokesman Mark Lane didn't return two calls seeking comment from Fuld.

The firm's plan to sell its North American business to Barclays Plc may cushion the blow for employees. The U.K. bank is buying divisions that have a total of 10,000 workers and disclosed in a court filing it will pay employees it retains 2008 bonuses equal to those in 2007.

Offering Shares

After Bear Stearns collapsed in March, its acquirer, JPMorgan Chase & Co., offered employees it kept shares in the combined bank equal to their 2007 pay. Workers owned a third of Bear Stearns, and they saw the value of the stake drop to $393 million at the sale price of $10 a share. That compared with $6.7 billion at the $171.51 peak last year. Former Bear Stearns CEO James ``Jimmy'' Cayne sold a holding once worth $1 billion for $61 million in March.

Another loser is Maurice ``Hank'' Greenberg, who ran American International Group Inc. for 38 years and saw the AIG stake he controls decline by $5.9 billion this month, to $622.9 million yesterday from $6.53 billion at the end of August. Greenberg and his investment entities diversified their holdings somewhat last year by selling $3.4 billion in AIG stock through 83 transactions tracked by InsiderScore. The Federal Reserve is taking over the insurer.

`Wipe Out Shareholders'

``Why would you want to wipe out shareholders when you just need a bridge loan?'' Greenberg, 83, said in an interview yesterday. ``It doesn't make any sense.''

Fuld didn't have a contract that would have provided him with severance if he lost his job or stepped down following a change in control, according to Lehman's annual proxy statement.

He owned 10.9 million shares and restricted stock units as of Jan. 31, valued at $931 million at their peak price. Fuld also had in-the-money options and other stock worth almost $300 million more, according to Graef Crystal, a pay consultant in Santa Rosa, California, who reviewed the firm's proxy filings.

``The top people are certainly not as rich as they used to be, but they're still going to be able to dine at New York's finest restaurants,'' said Crystal, a consultant for Bloomberg News.

The sale by Kaufman, 80, stands out because he called for more regulation of financial institutions as early as November. Kaufman wrote a commentary for the Wall Street Journal calling the issues ``vast and deep.'' As a managing director at Salomon Brothers, he correctly forecast rising interest rates that led to U.S. stagnation in the late 1970s and early 1980s.

Securities filings show Kaufman exercised options on 56,788 Lehman shares in December and January, more than half the 100,188 options he held as of Nov. 30. A Dec. 19 sale generated a $1.6 million profit and a Jan. 9 sale netted $346,000.

Kaufman didn't return two calls seeking comment.

Steepest Decline

Lehman's collapse led to the steepest decline in the Standard & Poor's 500 Index since the September 2001 terrorist attacks and triggered concern about the solvency of other firms.

Outsized pay packages contributed to the turmoil by encouraging risk-taking, said Peter Morici, a business professor at the University of Maryland in College Park, Maryland. Lehman said in its latest proxy filing that it paid 49.3 percent of net revenue to employees in compensation and benefits.

``It would be like if someone sent you out to the track and paid 20 percent for any wins, but they kept all the losses,'' he said. ``You're going to bet nothing but long shots.''

Spector, who oversaw bond trading at Bear Stearns as the New York firm became one of the largest underwriters of mortgage- backed securities, sold most of his stake between 2004 and 2007, according to filings. As of March 2007, he owned just 0.06 percent of the company, worth $8 million when the firm's board asked him to resign in August.

`No Comments'

``I make no comments whatsoever of what I did with my own stock, but thanks anyway,'' Spector said in a brief telephone interview. He is now chairman of the board of the Public Theater, which staged the Central Park production of ``Hair.''

Merrill Chief Executive Officer John Thain and two former Goldman Sachs Group Inc. colleagues he recruited may reap almost $200 million for their year running the New York brokerage if they leave or are given lesser roles after the firm is sold to Bank of America Corp., according to regulatory filings and people familiar with the situation.

Thain, who got a $15 million bonus when hired in December, stands to get another $11 million in accelerated stock payouts if he leaves, according to Crystal. Trading chief Montag may get $76 million including bonus and accelerated awards. Strategy head Peter Kraus was given $95 million including bonus and stock awards to replace a Goldman package he had to forfeit, people familiar with the matter said.

Merrill spokesman William Halldin declined to comment. Calls to each of the three weren't returned.

The arrangements reminded Lawrence Schulman, who runs Chicago futures trader Cheiron Trading LLC, of a scene in the Marx Brothers film ``Animal Crackers.'' A musician explains that he's paid more for not playing than playing.

``Where's the board of directors?'' Schulman asked. ``Why should it cost so much to get someone to do a decent job?''

To contact the reporter on this story: Peter Robison in Seattle at robison@bloomberg.net.
Last Updated: September 18, 2008 00:01 EDT