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Stan O'Neal's sweet exit package

Stan O'Neal

News comes today of the very likely departure of Stan O'Neal from the top slot at Merrill Lynch (MER). He's out in record time 1) due to the whole subprime situation and 2) because it looks like he approached Wachovia (WB) about a merger without properly informing those who thought they should be informed.

This brings two thoughts to mind:

  • Do any of you really understand the whole subprime thing? I mean, I kind of get it, because I've read a bunch about it, but perhaps one of you out there can explain it to the rest of us simply. Please do. And thanks.
  • Do any of you think that that name "Wachovia" is a subliminal message? If you prounouch the "ch" as a soft sound, you could say that it's a bank that will "watch over ya." I like a bank like that. You think it's a coincidence? If, on the other hand, you fail to bank there, it's just possible (if the "ch" is hard, like a K) that the world will "walk over ya." Who wants that? I want a bank that protects me from stuff like that!

Anyhow, back to business. The thought for today is Mr. O'Neal's exit package. If a merger with Wachovia had taken place, he would have been paid as much as $274 million, according to the LA Times. That's a lot of money, even by today's standards. Even one percent of that sounds nice.

As it is, upon leaving, he'll walk about with about $154 million in pension payments, stock options, and direct holdings in the company. That's in addition to the nearly $50 million he made last year. Of course, I know how newspapers factor in all kinds of future goodies into these numbers, but by any measure we've got another case of somebody who has made his fortune being canned.

God! Please send me one of those jobs!

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If you get a job like that, can I be your Executive Assistant? And can you give me a silver parachute, if not a golden one?


"Subprime" works like this. The problem is way bigger than subprime, but here's a brief word.

The guy you talk with at the bank when you buy a house is an "originator." He makes individual loans happen. He sells it to a "securitizer," who collects bunches of loans together and sells them in semi-uniform bunches. These are Mortgage Backed Securities, or MBS's, and your loan that came from an originator went into a pool that got securitized as an MBS. An MBS is usually a bucket of quite a few loans.

Still with me? Good.

From a risk perspective, mortgages are characterized by a lot of things, but they have really funny relationships in big groups. There's prepayment risk, default risk, etc. Usually, a big MBS security is sold in pieces to private investors based on risk profile. So the subprime loan to Joe Deadbeat gets collected with Jim Wontpay and Jeremy Penniless in a high-risk "tranche" (oh, the lingo) of the MBS and sold as a little bond to a private investor called a CMO. Or, and here's where it gets really complicated, a great big batch of MBS securities and other debt-structured securities get built into a SIV vehicle to generate tons of customized debt securities for investors.

Think of the SIV as a big, fat vending machine for debt. Ideally, an investor comes up to the SIV and wants a flavor - I want low-risk, long-term mortgage debt; I put in my cash and press the button and a slice of the mileu of debt forming the SIV spits out into my portfolio. These things are great for brokers, because their clients are picky. They're also great for broker-dealers, because these things were in crazy demand and produced lots of commissions.

Now, imagine subprime debt is Vanilla Pepsi in that SIV vending machine. Vanilla Pepsi was crazily in demand, so the price kept spiking up. Truck after truck of Vanilla Pepsi was consequently being delivered because people were buying it and business was great. But eventually, there was more Vanilla Pepsi coming in than plain old Pepsi, which doesn't make any sense. Why would there be so much more subprime lending than regular lending?

The thing is, everyone got sick of Vanilla Pepsi at once. The fad passed. As a result, everyone has a whole heck of a lot of Vanilla Pepsi laying around. Worse yet, since so many of the buttons on the vending machine were relabeled to meet the Vanilla Pepsi demand that it's taking a while to fix it.

The mortgage market has essentially shut down because things stopped making sense. Massive debt vending machines were beginning to trade on illogical pricing of risk and demand, and as a result the whole system is being decommissioned, restocked, and relabelled. Meanwhile, nobody wants to buy any of the massive pile of Vanilla Pepsi debt getting lukewarm in the corner.

At this point, you've probably concluded that I've taken the metaphor too far. Either that, or you have a baseline understanding of the current problem freezing the debt market.

I don't know anything about subprime but I do know that knowledge is of two kinds, the seconf being that you know where to find out what you want. If you really have to know try your professional colleague at Fortune. He knows all about stuff like that and related matters. Everything financial is related. And, yes, I am glad to have my bank watching over me. But you have exploded that little balloon with the "walked over" phonetics. I had never thought of that. The bank's lit says it is an old German name...but I have never seen it. Phil in Birmingham.

Why do shareholders and boards allow this type of severance package to exist? Was O'Neal such a fantastic leader that he was worth a quarter of a billion dollars? Arguably, no one is worth that money. It is difficult to convince a rationale person that any one individual can provide that kind of value to an organization of this magnitude. Maybe you cannot vote with the board, but you can sell your meager stock holdings in the company, drop your adviser and let them give away someone else's money the next time they run out the CEO.

Sub-prime Made Simple, my Take Anyway:

A number of financial institutions made complex loans to a lot of people they should not have.

They packaged those loans together into what essentially became a bond (an interest paying instrument), and sold them to banks.

The financial institutions then lent the proceeds of those sales to more people they should not have, packaged the loans, and then resold them to hedge funds.

The "bonds" received high quality ratings from the usual suspects because they were mortgage backed, they also had a significant yield and were in high demand.

What most banks and hedgies did not know was that the original lender was not doing their homework. They were not confirming sources of income or payment ability, and people began to default on their payments.

Suddenly, these highly rated "bonds" were downgraded, nobody wanted to buy them because of the risk rating, and anybody left standing when the music stopped go burned badly.

Thing is, the music has just begun to stop.

Wikipedia does a decent job explaining things
Subprime_mortgage_financial_crisis ), but even that's pretty dense. So I'm going to attempt a subtlety-free, super-basic version here:

Back when the economy was rockin' and rollin' and interest rates were low, lots of people took out variable-rate mortgages based on the awesome rates of the day, assuming the rates would never rise or that they'd be manageable when they did rise. Some people also took out loans that promised fixed low rates for a time, followed by fixed very high rates for the rest of the loan's term. Both of these groups of people were heavily pressed by mortgage companies, who of course make their money by getting people to pay lots of interest for a long time. And (I didn't even know this happened until "subprime crisis" started hitting the papers) large financial institutions trade in loans and debts just like they trade in stocks and bonds.

The mistake the people taking the loans made was in overestimating how long the good rates would last and their ability to pay. Whether this is the people's fault for being ignorant of how things work or the mortgage companies' fault for being deceptive... well, that gets uglier the longer you look at it. (Some people did get genuinely unlucky -- as anyone out there who's been laid off can witness, sometimes you do everything right and get screwed over anyway -- and some did knowingly take out loans that were impossible for them to pay off. There are always some of both of those people.)

The mistake the mortgage companies made was in thinking that these people would all (or mostly) be able to pay back their loans. Normally, threats of foreclosure and such are pretty good at getting people to do whatever it takes to pay their loans. But in these cases, the burden of the loans was such that many people had no chance of paying them off short of a Powerball jackpot. So the loan companies aren't getting their money back at all -- and thanks to the nationwide dive in housing values and demand, they're now holding onto a bunch of houses that are worth less than when the mortgages were originally issued.

The mistake the big institutions made was trading in these debts and mortgages without doing their homework. They blindly assumed that it all had a certain value now and that it would all have a certain value in the future, not paying any attention to the way the mortgage market was actually going.

The result? Everyone loses. The people who took these loans can't pay them, so they're out of money and they don't have a house anymore. The loan companies have the house -- which is worth less than they originally paid for it -- and only some of the money that was supposed to be paid back. This basically creates a vacuum in the trading the big financial institutions were doing -- they've been buying and selling things that are now worth a heck of a lot less than anyone assumed they were or would be. Or, in one sentence, a whole lot of assumptions about how money was going to move fell through, leaving lots of people with no money.

I'm sure there are at least a couple gaping holes in here that fellow readers can fill in, but like I said, I'm trying to write the kindergarten version here. :)

Oh, and "Wachovia" has always struck me as one of those sneaky corporate made-up words that's supposed to trick you into feeling good about yourself while actually meaning nothing.

I forgot to add the "Why should you care" part.

1.) Lots of large international financial institutions, through whose hands billions of dollars pass, have now panicked. I myself don't really understand the precise effects of this, but I think we can all intuit that "billions of dollars" and "panic" are not ever good words to have in the same sentence.

2.) Mortgage companies (and a lot of loan-issuers allsorts), to try to make up for their losses, are now being INCREDIBLY cautious. Many are trying not to take on any real risks at all. That makes it a lot harder for many people to get a mortgage, which makes buying or selling a house extremely difficult right now, and no one knows how long these difficulties will last. This probably affects other markets as well, but I think I have to go actually do some work now because that's the second time my boss has glared at me. Someone else feel free to pick up the ball.

How about upon leaving, that money get's distributed evenly to the rest of the employees. I'm sure they could use it/need it more than a fired CEO with a tens of million salary.
Why do CEO's get these great packages for being fired anway? Who thought that one up.....

The sub-prime debacle was the perfect credit storm. Record low interest rates,appreciating real estate and speculators looking to turn a quick buck.

The sub-primes were sold to people who should never have been given a mortgage in the first place but as long as the asset was appreciating there was always the hope that when the payments reset refinacing would alwyas be available.

The kicker here was that the credit rating agencies didn't downgrade these loans until it was too late. Thus most companies & individuals who bought them really belived they were safe. Can you say bait & switch.

The Merrill Comp committee must be living on another planet. How do you explain this severence package to Joe Six Pack? This type of irresponsible behavior will certainly help in the downfall of capitalism.

I think I understand the subprime thing pretty well, but I'm not going to get into it because: (a) I don't want to show how little I really do know in public, and (b) it would take longer than I have time for right now.

As to the pronounciation of Wachovia, I always pronounced the "ch" hard, which gives it a distinctly teutonic ring, and there are all kinds of nationalistic stereotypes that go along with that and square it with the "walk over ya" interpretation. The softer "ch" sound would tend to give it a little more eastern European sound to me (although I'm aware that "cz", as in Czechoslovakia, would be a better combo than "ch"), which lends a little different slant to "watch over ya" (as in KGB, maybe).

As for O'Neal's exit package, I don't know if I would want to sell my soul for the privilege of getting paid millions when I'm canned. Nice hog picture. Time for slaughter. Hmmm . . . canned ham.

Subprime thing: A bunch wealthy individuals loaned money to a lot of not so well off (poorer) people to buy homes that they could not afford. The poorer people borrowed this money because they were told that real estate would always go up. It looked like a sure way of becoming richer.

Lots of speculation later. Many homes at inflated prices have been built and interest rates are going up after the first year or two of a teaser rate. People now realize that they can't afford homes. They end up defaulting.

Richer people are now scared because they're going to loose their money on risky investments. A rate cut won't help and it's their own fault for taking the risk.

what is up with merl - he has been plagued with problem for years.
straighten out and fly right, or else

You guys are terrific. Thanks for the incredibly great comments!

"As for O’Neal’s exit package, I don’t know if I would want to sell my soul for the privilege of getting paid millions when I’m canned." - Posted By Steve, Charleston, WV

You obviously do not have a clear concept of the reality of money.

There is nothing wrong with Mr. O’Neal’s exit package. He got paid a large sum of money for being terminated because that is what the company decided to pay him. Why be mad at him for taking the money? If you were laid off of your job and you were offered a large compensation package, wouldn't you take it? Of course you would. A CEO position pays a lot of money. Instead of complaining about the large pay, how about trying to become a CEO? It makes no difference whether he got $154 milion or $1540,000. No rank-and-flie employee will ever get any of the difference. If it didn't go to O'Neal, it would be used to fund some other project. People need to stop complaining and crying about what others are doing and start to make wiser educational, financial, and career choices.

When it comes to money, there is no such thing as "selling your soul". Either you have a lot of money or you don't.

I think the right pronounciation of " Wachovia" in this context is "Wack-over-ya"

Everyone knows the parts about adjusting rates and people not being able to make their payments, but the real issue is on the other side of this turmoil. The real issue is that Banks and Lenders were willing to buy these loans and thus created a market for them. When mortgage companies originate and bundle these loans to be sold to the largest financial institutions, they have companies who analyze and price these packages. These companies are called credit rating agencies. These companies did not do their homework and put the highest ratings on loan packages that did not deserve them. In other words, they told these banks that these investments were solid and the best around, when in fact they were not.
Now, all of these banks and other financial institutions are having to go through the investments they hold and figure out what they bought. Most thought they bought prime cut filets, when in actuality they bought ground chuck. This is why they are now reporting huge profit losses and not taking on other risks. It’s no that they can’t afford the losses, but more that they don’t know what their losses could be. As the reports and numbers come out over the next 6 months, we will find out who has the quality risk management departments and who was lazy. For individual investors, now is the time to buy financial sector ETF’s and/or individual stocks. buy low, SELL HIGH!!

If you don't mind a little hassle of registration, the following article gives a big-picture overview of subprime and complicated financial devices:

Now that O'Neal is gone (with his huge severance package) everyone is wondering who will replace him ( )? Do you think it should be someone from outside or inside the company? Or someone with strong corporate ties to Merrill Lynch? Oh, and Wachovia comes from the name of Moravian settlements in Forsyth County, NC (where I proudly grew up). The Moravians were German, and named the land in North Carolina "die Wachau"

Stan, don't tell me you are surprised O'neal is getting a sweet go away package.
It's the same old story; as long as you make us money, and don't embarrass us you can stay. By the way, you can only screw up one time and you're gone. However, some ceo's get more than one chance.
Chuck Prince has been fumbling around at Citigroup since he was handed the title of CEO, but I guess his screwups haven't been big enough yet.

As for the going away money, I guess he is just supposed to leave it on the table. Would you leave it on the table? How come no one understands that this going away money is agreed to prior to taking the job, and by law he is entitled to it? This is no different from any of all the other ceo's who have been shown the door in the past couple of years. They didn't rob the company on their way out, and neither will Stan O'neal.

Yes, I too would like a job like that.

I think some of the comments below do a good job describing sub-prime... but I think what the real question is, is why are we still worried about it? and the answer that isn't talked about is counter-party risk.

because of how obscure and byzantine the CDO structures are, its very difficult to find the correct price for securities (other than, as buffet says, "sell some") no one really trusts banks to mark them correctly(lower), and banks have no incentive to do so. so no one knows who's good for how much. combine this with over-the-counter derivative markets that allow institutions to relatively anonymously make large bets, and hedgefunds that have a penchant for making big long-short bets and you have a possibly volatile situation to unwind. its quite possible that a hedgefund that went long-short on some of these CDO's went way past bankrupt, and they'll fail to pay some small bank, which will inturn fail, and then default on its obligations to a larger institution ( little domino's knocking over bigger dominoes).

an institution may be in a position with 10 billion in assets and 9 billion in liabilities, but if just some of the (sometimes semi-anonymous) counter-parties that the bank bet with to build its 10 billion pile of assets welch on the bet, the banks 1 billion in equity can get wiped out. with all this turmoil its difficult for a bank to asses the probability of a counter-party welching.

basically everyone could have made a bunch of big offsetting bets in the dark, and now don't know what they're worth because they don't know who will pay and who won't.

Yes all this CEO's like O'Neal get big and fat all at the expense of Stockholdrs even when they litterlly screw up..So what else is new..They just go somewhere else and do the same act and get paid again..Some even resort to starting a hedge fund to line their pockets more..They should all br sent to prison and give back all that easy cash they got..That is the only way to address a huge problem that needs to be cured...Nick

How do you explain so many people do not do they home work. This is similar to what happend to Holland tulips

I agree with the comments posted by Charles, Levittown PA. What magnifies the problem and the reason we have not seen the end of bank writedowns and losses is the difficulty an institution has valuing these securities.

The challenge is both practical and human. If you see a comparable security sold under "forced" circumstances (e.g., margin call) into a market without any liquidity, is it correct to use that price to value your portfolio? Management believes it is being conservative and takes a partial writedown to reflect what it believes to be a permanent loss in value but does not write the asset down to the price to reflect the lack of liquidity in the market. This is where the human factor comes in. Managment rationalizes that their bank is not being forced to sell these assets and as such does not need to writedown values to that artificially depressed" price. So they wait and hope that time will bring rationality back to the market and bolster prices.
Unfortunately, most markets do not recover quickly enough and the bank will end up taking its writeoffs on the installment plan.
The bottom line is to expect that we willl not see the end of these massive writedowns for quite a few calendar quarters. As an investor, I have learned that it is near impossible to know whether a financial firm has taken sufficient writedowns to reflect the issues in its porttfolio because managment and the board have no idea either.

"'As for O'Neal's exit package, I don't know if I would want to sell my soul fo the privilege of getting paid millions when I'm canned.' - Posted by Steve, Charleston, WV

You obviously do not have a clear concept of the reality of money."

Perhaps, Yadgyu, you have an immature or unevolved concept of soul. And your concept of money seems rather shallow and superficial, for that matter. All of which reminds me of a lawyer joke about replacing lab rats with lawyers because there are some things that a rat just won't do.

Yeah let's not forget the billions of dollars O’Neal made for investors over the years. He has a right to the compensation package… because…. It’s what the board agreed to contractually. He takes a big risk… to make big money… and he lost. Now he is losing his job… ok. No one complained went the good times were rolling. We (investors) are so spoiled. What have you done for me today?

"No one complained went the good times were rolling. We (investors) are so spoiled. What have you done for me today?" - Posted By Eric Davis Atlanta, GA


Investors want to make a ton of money when things are good, but do not want to lose money when things go wrong. Many investors are not very smart when it comes to money and will throw their money into the pot as long as things look sweet.

Why villify Mr. O'Neal because things got bad? He deserves every penny that is owed to him. He did a good job. It is not his fault that things went bad. When things were going good, no one had any complaints.

Money is the key to happiness. If you have a ton of money, you have access to happiness. But you have to use the key to get to the promised land. Those who are rich and unhappy are just not going through the correct doors. I have seen unhappy rich people, but I have never seen a happy poor person. Poor people are locked out of the good life. Get the money, use it correctly and all troubles and concerns disappear.

Blame the NINJAS (No Income, No Job Applicants) for the subprime mess.

A McSalary cannot support a McMansion.

Found this in a recession article on Wikipedia:
Prior to the Great Depression, speculative investing in the US stock market occurred, which created artificially high stock prices. Shares were also used as a partial collateral for loans to buy more stocks (ie. buying stocks on margins as little as 10%). When share prices plummeted, people who had bought on margin were forced to pay their 90% loans used to buy their stocks; to pay their loans, they sold stocks, driving prices down still further in a vicious domino effect. Financial institutions -- banks, etc. -- collapsed, triggering a monetary crisis.

Sounds a little like the sub-prime mess. History repeating itself ?

If the mortgage business is so bad, why am I still getting solicitations daily to mortgage my house and why is Ditech still advertising every 10 minutes on CNBC?

The parable of the sub-prime:

Once upon a time there lived a happy people in the Village of Overlyoptimistic. A few good citizens (and a lot of them non-citizens, but we'll save that for another parable) of Overlyoptimistic starting building a widget called, oh I don't know, we'll call them IDKs. Those who could afford them paid cash and they were the envy of the neighborhood. Soon, more and more people wanted them.

After a short while, more people wanted IDKs and the demand went up while supply was still quite moderate so banks stepped in to help the people who couldn't pay cash finance it over a large amount of time. The bank would be careful who they would loan to because IDKs were pricey so they had a few requirements... like a good credit history and a sizable down payment. This worked well for decades.

But the banks of Overlyoptomistic started to notice that even if the borrowers defaulted on their loans they still came out ahead because the value of the IDKs continued to rise. So banks got sloppy and loaned money to people they shouldn't have made loans to without verifying income or requiring some cash up front.

But also the citizens were told that IDKs would always continue to go up in value so buying an IDK should be considered not only a convenience but also an investment. Seeing the safe investment and being able to afford more IDKs on leverage (borrowing the perceived increase in value of an original IDK to buy more IDKs on even more credit) the citizens (and again, non-citizens) bought as much as they could.

And the few who made IDKs attracted more IDK manufacturers because of the high profit margin of making an IDK. The market was soon flooded with IDKs. To make things worst, banks started loaning money so that people could make even more IDKs. In time, a large chunk of the population was involved in either making, selling, or loaning for IDKs.

One citizen of Overlyoptimistic Village sold his IDK and realized, "Woa, wait a minute. I just lost money. I better warn the neighbors." And that is when Overlyoptimistic started going to hell in a hand basket because perceived value suddenly shrank.

The first thing that happened was that people didn't want to hold on to their IDKs for a long period of time anymore and put their IDKs up for sale. Some were even desperate and put them up for less than the perceived value in order to make a quick sale. The sudden increase in supply with many more IDKs being produced worried many and even more IDKs were put up for sale. Almost overnight, IDKs lost half their demand while tripling the supply and the perceived value dropped tremendously.

In poor timing, inflation started to rear is ugly head at this time because monetary supply was quite high and the dollar was losing value so the Feds raised interest rates. Loan prices suddenly jumped and what was once affordable home loans became unbearable for some people who shouldn't have had the loans in the first place.

Most people, recognizing this for a cycle, decided to hold on to their IDKs and wait it out. But some are not in a position to do so.

For instance, those who received loans to build IDKs now had an IDK or two or twelve they couldn't sell for the price of the original loan. Having thought the IDKs would sell themselves overnight they had not budgeted for a longer window to sell the IDKs. The banks wanted their money, the manufacturers said, "We can't give you money but you can have my IDK since that was what I used as collateral. If you have any questions, here is the card to my bankruptcy lawyer."

Some citizens who bought more IDKs than they could afford, even if it was just one, in hopes that they could sell an IDK when things got rough made the same decision. These included those who bought several on leverage as explained above.

And all at once people are shouting in near unison, "This is not fair. We were mislead. I shouldn't have to suffer this mess because somebody else made a poor decision," so everybody is trying to find somebody else to bail them out of their whoas and misery. But banks are losing money, people are losing their houses, and a few are even losing their jobs. Who can they turn to?

People suppose that Bush should have seen this coming so it is his fault (as well as everything else that makes people unhappy) and they expect the government to pay for it. Therefore they are looking at the government for an IDK loan bailout which will costs the loving tax-paying citizens (but not the non-citizens grrrrrrrr) a trillion dollars to get out of this mess. That will lead to higher taxes, more government involvement, a lower value of the dollar, a higher deficit, and even more troubles.

Clear as mud?

Oh Mr. Yadgyu – I think you are a very confused individual. So I will take a few moments to pick on your comments. Just a few.

Many CEO’s and corporate executives are way over compensated. No corporate executive is worth $50 million a year regardless of how much money they make for a company. When they are fired for making mistakes – no one deserves to walk away with $150 million – regardless of the money they made or lost for a company.

These inflated pay packages are approved by the board of directors. Positions held by good old boys that are or were in similar positions. One hand washes the other.

( Example in 1995 when Michael Eisner hired long time friend Michael Ovitz for the position of President at Disney Co. – Ovitz was fired for poor performance after 14 months – taking with him a $140 million severance package. ) I mean honestly Yadgyu – you think Ovitz deserved this level of compensation? Did he deserve every penny that was owed to him?

Legally yes – that is what was in the contract. But was he worth that level of compensation. Is any executive worth that level of compensation received by Mr. O’Neal? I find this highly unlikely. But corporate boards filled with CEO and past executives would like you to believe this. Successfully corporate executives in other countries, which have made large profits for their companies, make far less in compensation than American counterparts. But they still get the job done.

And yes Yadgyu is correct – nobody complains when times are great – but that doesn’t make it right. It just shows how greedy we all are. Mr. Yadgyu states that it was not Mr. O’Neal fault things got bad. Well yes Mr. O’Neal was part of the reason things got bad – he was way too greedy like many of his counter parts in the industry fuelled by us greedy investors. There were some CEO’s in other Banks that did not make the same mistakes. For the level of compensation Mr. O’Neal receiving – he should not make that magnitude of a mistake.

One other statement by Mr. Yadgyu – “I have seen unhappy rich people, but I have never seen a happy poor person. “

I’ve met and known many poor people and some of these people are very happy and live full and rich lives. Not rich as in $$$$’s but rich in life. I’ve known many very wealthy individuals who have everything and are not very happy. People who equate happiness with material possessions are seldom ever happy for long – enough is never enough – you will always need and want more.

So O’Neal – does he deserve that level of compensation – In my modest opinion - not in a million or should I say 140 million years.

Just another pig at the public / private trough.