PEANUT CORP. OF AMERICA - A DEADLY FRAUD

The president of Peanut Corp. of America had allegedly committed a deadly fraud. Apparently, president Stewart Parnell, according to an AP report posted on Yahoo.com, knew that the peanut butter being sold was tainted. Allegedly this peanut butter has lead to numerous people falling ill and several deaths.

Parnell took the 5th in front of a House investigations committee. I read elsewhere that there was speculation that sales were low and Parnell could not risk scrapping the product and losing sales.
So, he sold a deadly product instead? This was the answer to lower sales???

Most of the frauds I have reviewed have one common item. How did the perpetrator of the fraud think it was going to end? How were they going to get out of the mess they were in?

In people contemplating fraud could stop to think of an exit strategy, they would not find one. And then, they might not commit the fraud in the first place. But hope springs eternal. They believe that something will happen that will make it all right.

Remember, during times of financial crisis, the frauds are exposed and more frauds occur. Some are out of greed and some are out of fear.

Cheers, Mike

EXCUSE ME, AREN'T YOU IN CHARGE?

Consulting Magazine has posted a review of our book in their February issue. For those of you who haven't bought multiple copies yet, and you know who you are, there are still copies left.

There is also a good article on the consulting industry. Remember that in these times, it is the people who ADD VALUE that are in demand. Those who sell LEADERSHIP services not commodity services will survive and thrive even in a distressed market.

Cheers, Mike

IF YOU DON'T UNDERSTAND IT, MAYBE IT DOESN'T MAKE SENSE

In Mike's post entitled Greenspan Doesn't Understand the Subprime Market, he referred to a show that aired last night House of Cards. I watched the show. There were many lessons to be learned but one really jumped out at me.

If you don't understand it, maybe it doesn't make sense!

There was a town mayor interviewed who invested all the town's funds in Collateralized Debt Obligations (CDO's). Needless to say, they lost most of it. She learned that if it sounds too good to be true, it probably is not true.

Throughout the show, they interviewed people who said it did not make sense to them but it seemed to make sense to everyone else. Why do we think we are the only one in the room that doesn't understand? Then we hesitate to ask questions.

Why do we assume it makes sense? Then if it doesn't make sense to us, we hesitate to ask questions.

Boom markets last until they bust. Remember the S&L's, LBO's, Internet bubble, and on and on. Things make sense until they don't.

The key for each of us is to make up our own minds. The only way to do that is to ask questions. Ask questions until it makes sense to you. But most importantly, if you don't ever understand it, it probably isn't you. Maybe it doesn't make sense.

Until Next Time,
Gail

AUTOMAKER NEGOTIATIONS - THE GOOD, BAD & UGLY

GM and Chrysler have to report next week on the progress of their negotiations. The Detroit Press has a good piece on the status of the negotiations between GM and the bondholders. The government requires a 67% reduction in the bondholders claims in order to continue to support the GM. The bondholders are demanding only a 50% reduction in their debt according to the article.


Here is the problem. In any such negotiations it is key for the company, GM in this case to demonstrate to the bondholders that if they don't go along with the deal, the company will file for protection under Chapter 11 and the bondholders will get much less since the company itself will be worth less.

In this case, the bondholders are saying, 'hey GM, we don't believe it. We think the Government will do whatever is necessary to keep you out of Chapter 11. Therefore, you can threaten all you want. We don't believe you will do it.'

In addition, the bondholders don't like that the UAW is getting a better deal. Even if the Government steps in, what credible threat do they have?

Look for the bondholders to get a better deal than the Government wanted them to get. Maybe the cat in the picture above (courtesey of Hypno_Bedhead) is right in this case.

Cheers, Mike

GREENSPAN DIDN'T UNDERSTAND THE SUBPRIME MARKET?

Is this for real? Check out CNBC tonight. David Faber hosts a two hour piece tonight airing at 8pm and 12am EST called 'House of Cards'. Apparently Greenspan admits that he didn't have a full understanding of the subprime mortgage market or of its derivatives.

In response to his critics, according to the DealBook blog, Greenspan said, "We could have basically clamped down on the American economy and generated a 10% unemployment rate. And I guarantee we would not have had a housing boom, a stock boom or indeed a particularly good economy either."

I have to watch this to see if this was out of context somehow. If not, Alan, we are well on the way to 10% unemployment and we will be lucky if it stops there. Also, no housing boom would mean not as big a problem now, right? No stock boom? Oh darn. And finally, indeed we don't have a particularly good economy now!

Perhaps if rates weren't artificially low from 2002-2007 we wouldn't be in the trouble we are now. Maybe institutions like Bear Stearns and Lehman Brothers which made it through the Depression would still be around today. Maybe the global economy wouldn't have fallen off the tracks. Maybe.......

I once sat next to Greenspan at a baseball game in the owner's box in Baltimore. He said he had been a baseball fan when he was younger, but didn't follow it much now. I figured, 'oh well, at least he is an expert on the economy'.

Cheers, Mike

MADOFF AND RUTH

Ruth Madoff, Bernie's wife, allegedly according to the WSJ, Bloomberg and other sources withdrew $10 million from a Madoff account on December 10, the day before Bernie confessed to his sons.

Hello!!!! I spent 25 years working on troubled companies and many financial frauds. This was all orchestrated. The question is how much, if at all, was Ruth involved?
Did Bernie just say,"Ruth, why don't you transfer $10 million today to a new account"? Or was Ruth involved and moved the money out of desperation knowing that the jig was up.

I have found that there is no such thing as a coincidence concerning a fraud and a related party. Bernie may have said, 'Ruthie, it is time to take the money out and put it somewhere safe.' She may said, 'What about the boys?' And he may have replied, 'I will tell them to call their attorney tomorrow to turn me in.' And so on. They may all need to go away. The brother Peter also.

But, this is just my conjecture.

Cheers, Mike

LEADERSHIP - A PERSONAL ADVISORY BOARD

Gail and I have, from time to time, recommended that people consider forming a Personal Advisory Board. The Board is meant to be a few people that can support, advise and challenge you.

At first this might sound corny. However, you probably have the loose form of one already. There are probably a couple of people you speak with for counsel as issues arise. It may be a mentor where you are currently working. It may be a mentor from a prior job, or a college classmate, or a friend from some other walk in life.

Read this article on how to build and use a personal advisory board. Linda Gravett wrote this article answering some questions you might have on setting up your board.

Everyone I know who has done this, really enjoys speaking with their personal board members. And, this may surprise you, the members of the personal advisory boards consider it an honor to be asked and really enjoy helping out.

Try it and let us know how it works.

Cheers, Mike

Stimulus Plan- Let's Slow Down!

Yes, I know that just last night President Obama warned of the lost decade. I also agree with him that the situation is dire and time is of the essence.

However, it is precisely because we are in a crisis that I want to make sure we are disciplined in our approach.

We are now hearing all the things that were done wrong regarding the first half of the TARP funds. Clearly, everyone is blaming the old administration.

Don't worry, this is not going to be political. I blame the democrats and republicans.

Wasn't President Obama in the senate when TARP was passed? Didn't he vote for it? Didn't John McCain vote for it? Didn't Nancy Pelosi vote for it? Both republicans and democrats let $350 billion go out the door with little to no controls- let's not do it again.

The other night there was an interview of some of the house and senate members. When they were asked how they came to the numbers for certain items in their respective bills (the analysis that arrived at these numbers) no one could answer the question.

They said this was not scientific!! These were rough estimates.

Ladies and gentlemen, this is $800 plus BILLION dollars. Let's at least be a little scientific and disciplined.

There is a good Opinion piece in the WSJ today entitled- How Government Created the Financial Crisis. It is a good read. http://online.wsj.com/article/SB123414310280561945.html

What I am most impressed with about the article, is not John Taylor's conclusions but rather his analysis.

If I were on the board of a company and management was asking to spend over $800 billion due to a crisis, I would ask for the following at a minimum:
1- Diagnosis summary- what happened and why
2- Needs/opportunities analysis- given the diagnosis, what are the immediate and long term needs/opportunities
3- Return on investment- what measurements are we using and over what time frame
4- Risk analysis and mitigation plans- what are the likely things that could go wrong and what will we do then

Now, I realize we are in uncharted waters so many of the items above could change or prove wrong. But at least we would have a plan.

This is complex and not easy to summarize. However, we have a key asset- President Obama's communication skills. He is an excellent communicator.

If he told the American people a little bit more about why we need to spend this amount of money and how he would make sure it did not get wasted, people would feel more comfortable.

Am I the only one that feels like they just spun a wheel and picked a number? Am I alone in believing that we need to do this but that I want more discipline?

What do you think?

Until next time,
Gail

THE DISCLOSURE OF THE MADOFF INVESTORS

So, what do you think? Did the names and addresses of each Madoff investor have to be disclosed? What purpose did it serve? Some of these people have sinced suffered humiliation on top of the loss.

Are these people now going to be targets of other financial scams, contacts from other financial advisors or worse? Would you like to have you name and address out there for the world to see as someone who potentially had a lot to invest?

I think there was a better way to deal with this. The list could have been filed under seal with access subject to bankruptcy court approval. This may have been a better first step.

What do you say?

Cheers, Mike

OBAMA HIRES RESTRUCTURING ADVISORS

Back in December when I was test blogging, I wrote a piece that the US government should hire restructuring advisors and bankruptcy lawyers to advise it on how to deal with the automotive industry. I said this should have been done in conjunction with and as part of the extension of the loans.

Apparently according to this Bloomberg article, Obama has hired restructuring advisors and bankruptcy lawyers. Excellent!!!

Unfortunately, the Bush team didn't hire professionals apparently. The Obama advisors and lawyers are now going over the loan documents to see just where loans already extended to GM and Chrysler sit relative to both companies other debt.

So, why wasn't this debt put in senior to existing debt?

Why doesn't the loan provide that the auto companies that receive the loans, pay for the Governments advisors? This is how it works in the real world.

Back to the advisors, this is a great move by the Obama team and great for the taxpayers.

Cheers, Mike

OBAMA EXECUTIVE PAY LIMITS

I am posting two links to articles on President Obama's proposed executive pay limits. One article from the WSJ and one from the Washington Wire.

I am sure there will be a firestorm of opinions one way or the other over the pay limits. Another government intrusion? The first step to more sweeping executive pay limits? Bigger government? Will the good executives and employees leave?

One way to look at this is like a lender to a financially troubled company. What the US Government is a lender in these cases? The recipients of the "exceptional assistance" are troubled companies?

Yes, the recipients ARE financially troubled companies and the Government IS the last chance lender! Guess what, in the old days, the lenders of last resort called the shots. Those shots typically included:

a. Limitations on the amount and timing of executive compensation

b. Prohibitions against certain non-essential expenditures

c. Limits on capital expenditures

d. Limits or prohibitions on related-party transactions

e. Spending in accordance with a budget approved by the lenders

f. Actual to budget reporting and accountability

Over the years, large bankruptcies and troubled company situations have gotten away from these former tenets of last resort lending. It would appear that Obama is leading us back there.

By the way, if YOU were the lender of last resort to some company that may not survive, wouldn't you make sure that the money wasn't spent on expenditures that you thought were excessive?

I haven't seen all the details yet, but I hope it doesn't go further than financially-troubled companies and that there is a provision for troubled company experts who are hired to be paid a market rate. If troubled company advisors are subject to such rules, I suspect the best of them won't work as executives on such situations and that would be bad answer. Also, the cap should just apply to executives at the very top and not reach too far down. Nor should the cap apply to performance based compensation of the star performers of any organization. You wouldn't want your stars to an "exceptional assistance" company to go to the "garden variety" assistance company or to a non-assistance company, whoever they are.

One last thought, has anyone heard anything from any board of directors of a large public company? Where are these people? Let me know if you have.

Cheers, Mike

WHERE HAVE ALL THE LEADERS GONE? (Part 5 of 5)

This is the final installment of my commentary on the Fortune Magazine interview with author Jim Collins.

One item that I would add to his list of how companies turn crisis into opportunity, is communication. A leader's ability to be straight forward and direct in a crisis is critical.

I witnessed this first hand a few years ago.

When Arthur Andersen was engulfed in the Enron scandal and selling off most of its business, I was the global leader of Andersen Business Consulting. When I was preparing to leave my first voicemail to the employees regarding a potential way forward, many communication experts told me I should not say what I had planned.

Their advice was that there were too many unknowns which would upset and unnerve people. But that was the truth! There were many things I did not know at the time. Including, if a deal was even possible.

I followed my instincts and told them very directly what was happening, what I knew and did not know, and described the process we would follow to work through the issues.

It has been seven years since I sent that voicemail. To this day, I run into people from around the world that mention that first voicemail. They all comment that it was direct, honest, and personal.

In concluding this 5 part series, I ask you the following questions:

How many business or political "leaders" have you noticed that are leveraging Jim Collins' three points- enduring values, the best talent, or "zooming out" to see past the chaos?

How many business or political "leaders" are communicating in a straight forward and direct manner?

How many business or political "leaders" are communicating the process that will be followed to address the challenges?

This leads me to my initial question and the title of the blog series-

WHERE HAVE ALL THE LEADERS GONE?

Until Next Time,
Gail

WELLS FARGO & VEGAS

One of our followers commented on the Citi story that Wells Fargo's planned trips to Vegas was insulting. Whether it is Well's Vegas trip, Citi's private plane use, Bank of America's bonuses or Thain and his office, it is a sense of business as usual and a sense of entitlement.

It reminds me of a story. A number of years ago a venture capital guy with a pretty large office and numerous significant holdings had to hire me as an advisor because he owed $500 million more than he could pay back to his lenders.

This gentleman had leased two private airplanes. I told him day one that the planes had to go. He was not a fan of this advice. Finally I had to go to Boston for a meeting. He lived outside of Boston and after the meeting he asked me to meet him at Signature Aviation building at Logan. We boarded his plane and took the 25 minute trip to Teteboro Airport in North Jersey.

As we landed, he said, "So, what do you think of flying private?" I replied, "It is the only way to travel and you can't do it anymore." The next day I called the leasing company and asked them to take back their planes.

Cheers, Mike

CITI AND THE METS

Isn't cash fungible? How can Citi say it is not using TARP funds for the naming rights on the NY Mets new stadium? Those rights are currently slated to cost Citi $400 million per the WSJ.

Citi says, "We are not using TARP funds for the naming rights." Let me see if I get this straight. You took $45 billion from TARP presumably because you needed the funds. If you don't spend the $400 million on the new stadium, don't you need $400 million LESS of the TARP funds?

Really, can you say are not using TARP funds when cash is fungible???

Even though I posted twice already today, I could not let this go by. Victor please tell me you didn't endorse the "we aren't using TARP funds" spin.

Cheers, Mike

WHERE HAVE ALL THE LEADERS GONE? (Part 4 of 5)

The last item covered by Jim Collins in his interview in Fortune Magazine is the ability to "zoom out" and see past the chaos in front of you.

He makes a great point about how worried people are right now. He then uses the example of a rock climber.

In the interview he states," As a rock climber, the one thing you learn is that those who panic, die on the mountain. You don't just sit on the mountain. You either go up or go down, but don't just sit and wait to get clobbered."

Unfortunately, I have been in too many meetings to count in my career in which no decision is made. They just keep asking for more data or another meeting is set.

Leaders are paid to make decisions. Go up the mountain or down, but go! You can always modify later but your employees need to know what you want them to do.

Now onto the issue of "zooming out" and seeing the big picture.

My brother is a retired fire department captain from Union City, NJ. Over the years as we have discussed leadership skills, he has always had great insights. In his profession bad leaders don't just lose money, they lose lives. So, I have tended to listen to him.

He has said the best leaders are those that can simultaneously be in the moment- fighting the flames right in front of them- but also be able to see the big picture and where it is going, what will happen next.

In my own experience dealing with crisis, I can tell you that it is overwhelming. There is so much to do, so many people that want your time, so many individual issues and challenges, and all items are urgent.

In addition to the leadership skill of being able to see the bigger picture, I strongly recommend getting a third party advisor.

Certainly, they bring an expertise on the issue you are facing. But I actually think they bring something even more valuable then their expertise on the topic.

They will be the only one not looking for answers from you as the leader. They are there to give you some answers and some help.

This is someone you, as the leader, can trust. They can be objective and they do not have a vested interest in the outcome.

Until next time,
Gail

MARKOPOLOS ON MADOFF

(Harry)
Harry Markopolos tried to warn the SEC about Madoff. He tried to warn his friends and he tried to warn other investors. He feels badly that he wasn't successful in all cases to warn people off of Madoff. Publicly so far, he feels more sorry that the perpetrator, Bernie!

Check out this piece in the WSJ on Markopolos. Further, here is the copy of the report that Harry submitted to the SEC in 2005 entitled, The World's Largest Hedge Fund is a Fraud!

Catchy title that didn't catch much attention at the time.

Cheers, Mike

NO FREE LUNCH, BUT DENNY'S HAS A FREE BREAKFAST!

Denny's is offering a free grand slam breakfast to anyone who stops by any of their restaurants in the US on Tuesday. I am posting this early so you can grab a free breakfast this morning! (Grand Slam)


The CEO says this is a way to get people to experience how Denny's is operating these days. Check out this video from CNBC of the Denny's CEO interview.

So, how many of you are going out for the free breakfast? If any of you go, let us know what you think.

Cheers, Mike

WHERE HAVE ALL THE LEADERS GONE? (Part 3 of 5)

Continuing with my commentary on the Fortune Magazine interview of author Jim Collins, this post is about his second point which is the need for the best talent.

This is like motherhood and apple pie- who does not want the best talent?

Although I was once in a meeting when a "leader" said he was only looking to hire people that were "good enough" as that was all he could afford and they were easier to find. Thank goodness he was only employed there for a short time after that insightful statement.

Yet even though we know this and pledge allegiance regularly to the concept, when times are good, many of us fall into the mediocrity trap. There are a million reasons why this happens.

To name just a few:

It takes time to weed out the poor performers and replace them with the best talent.

Top talent is demanding in every way- money, attention, freedom, perks, etc.

We convince ourselves we can/should develop the poor performers. But we know better. In our gut we know which ones will not get better.

But when a crisis occurs, you especially need the best talent and particularly in leadership positions. This is not a job for lightweights.

I have seen time and time again that an organization will break at its weakest link- the mediorce talent they have in leadership positions. We all think we will get to that issue one of these days. It is on your To Do list.

Well, that might be okay in good times, but it will not fly in times of challenge. Does anyone think the business climate is going to get easier anytime soon?

If not, what are you doing today to make sure you have the best talent?

Until next time,
Gail

GM AND ITS TAX BILL

So the word is out that GM is worried about the tax it will incur because of the US government mandated reduction in GM's debt. Check out this small piece from Bloomberg.

Here is how it works. Let's say GM exchanges $10 billion of stock for $27 billion of unsecured bonds. That results in a gain of $17 billion. This gain is taxable and in this example would result in taxes of around $7 billion.

So, by complying with the US government's requirement that GM reduce its debt and union obligations, GM will incur significant tax obligations that it can't pay. I don't know why this is a surprise. This is the way it works.

Years ago, there was a stock for debt exception in the IRS code that would have not taxed the gain on the stock for debt swap. However, that was changed and such a gain is currently taxable. I would have thought that this would have been dealt with at the time of the auto bailout loans.

It does not make sense for this tax treatment to be changed without proper consideration. It would seem that the answer here is for GM to pay the taxes on the gain and for Congress then to provide for the tax payment to be rebated back to GM. Obviously this is an issue for Chrysler also.

Stay tuned for more.

Cheers, Mike

A BERNIE CONFERENCE

Can't get enough Bernie? The Harvard Club in NYC is holding a Conference on Bernie, courtesy of CNBC, covering topics such as the different causes of legal actions and the tax ramifications of Bernie's scheme. Still time to sign up. Off to the Super Bowl.
Cheers, Mike

(The Harvard Club, wikipedia)