We spent the past week debating the merits—the value added and the risk factors—of Hank Paulson, Patrician Dunn, Brian Hunter, backdating, Phil Goldstein and John Mack. And now the crucial moment has come to name the person we think is most deserving of the title DealBreaker of the Year.
Well, not actually right now. We’re giving the award on Monday. But stay tuned.
We’ve finally completed our survey of the official candidates for the DealBreaker of the Year award. Now DealBreaker’s committed staff of experts is busy debating who should be the winner. While the debate behind the scenes continues, we’re giving you the chance to influence the outcome. Although the final outcome won’t actually be determined by this DealBreaker Reader poll, we’re certainly taking that into account as a factor. So cast your vote below for DealBreaker of the Year.
It was not that long ago that it seemed Morgan Stanley was in meltdown mode. It had recently paid out $54 million in a sex discrimination suit, it was bleeding money in SEC fines and a Florida court had leveled a $1.450 billion judgment against the bank. The stock was underperforming, and shareholders were in rebellion, calling for the head of CEO Phil Purcell and a break-up of the company. Top bankers were clearing out of Morgan Stanley faster than day workers from a Home Depot parking lot when the INS shows up.
The man brought in to fix Morgan Stanley is today’s candidate for DealBreaker of the Year, John Mack. And there is little doubt that he has fixed his firm. The exodus of senior bankers has stopped. Morgan Stanley has been acquiring hedge funds in order to remain competitive with its rivals. The stock is up over 40% this year. Profits are up. And very few people are looking to breakup Morgan Stanley.
Mack, the son of a Lebanese immigrant,was born in the last years of the Second World War in North Carolina, and went to Duke University. After college he went to Smith Barney, where he worked on the muni-bond desk. A few years later he landed at Morgan Stanley, where he rose through the ranks of the fixed-income division. In 1993, Mack succeeded Robert Greenhill as president of Morgan Stanley. He gained the nickname “Mack the Knife,” although stories very about exactly why he had this name. One colorful tale from this period has him screaming over the trading floor, “There’s blood in the water. Let’s go kill!”
When Morgan Stanley merged with Dean Witter in 1997, the top job at the combined firm went to Phil Purcell. Mack spent close to four years working under Purcell, leaving his beloved Morgan Stanley only when it became clear that Purcell was not planning to step down or anoint a successor any time soon. For the next few years he served as CEO of Credit Suisse First Boston. When Purcell was eventually forced out at Morgan Stanley, Mack made a triumphant return to the bank where he had made is reputation.
Value Added: There was a time when nearly everyone who wanted to be a bond trader wanted to be a bond trader working for Mack. That was where the action was. And in the last few years, he’s remade Morgan Stanley into a place that was clearly a Wall Street loser into one of the Street’s top firms.
Risk Factors: Mack was known as a ferocious competitor and an intimidating guy to work for. Not for nothing is he called Mack the Knife. (An alternative, even less complimentary name we’ve heard used is “Lady Mackbeth”—for Shakespeare’s lethal woman who always had blood on her hands.) A cloud was cast over him earlier this year when a former SEC investigator claimed that he was fired by SEC officials intimidated by Mack’s political connections. The former investigator had been looking into the possibility that Mack had tipped friends at Pequot Capital about a transaction involving Heller Financial while he was running CSFB, which played a role in the deal. Mack has since been cleared.
Should Mack be the DealBreaker of the Year? So far, Mack is up against challenges from Hank Paulson, Patricia Dunn, Brian Hunter, backdating and Phil Goldstein. He is our final nominee. Tomorrow we will unveil which one of our nominees will win the title of DealBreaker of the year. We invite you to let loose with your inner-most feelings in the comments section below. The best comment to this post will win a copy of Winning: The Answers: Confronting 74 of the Toughest Questions in Business Today.
One of the biggest stories in finance this year was going to be the rule that hedge fund managers would be required to register with the SEC. Instead, it turned out to be that this regulation was surprisingly short lived, thanks to the bold lawsuit filed by Phil Goldstein, the founder of Bulldog Investors and today’s candidate for DealBreaker of the Year. Many in the hedge fund industry had complained about the rules but despite having the wealth to sustain a lawsuit, none of them put their money where their mouths were except Goldstein. This might have been testimony to the industries fear of angering the regulators, or to the lack of interest on the part of people who run hedge funds from engaging themselves in anything that doesn’t involve making money.
Goldstein’s suit argued that the registration rules were arbitrary and not based on existing securities laws, and a federal appeals court agreed. The SEC set about reconsidering its rules, and decided it would not—at least for now—attempt to find a creative way around the court’s ruling by adopting some other registration rules. Instead, it took several months to consider the rule and just today adopted a rule requiring raising the financial bar for “accredited investors” permitted to invest in the funds. Recently Goldstein launched a second lawsuit, contending that rules requiring funds to disclose assets violate the intellectual property rights of hedge fund managers by revealing their investment strategies to others.
Goldstein was raised in blue-collar Brooklyn, and worked as a New York city civil engineer for 25 years before moving into money management. With $225 million under management, Bulldog may be small compared to some funds but it’s clear that Goldstein is anything but small time.
He’s also very modest, referring to his investing strategy as “investment for dummies.” He comes off as witty and friendly in person but he can be absolutely devastating in arguments. When confronted by one supporter of the SEC disclosure rules who kept insisting that nothing of value was being disclosed because the information was often dated. This was Goldstein’s trap. If the information was worthless, collecting it was an arbitrary exercise, and all the more reason for the courts to overturn it, Goldstein replied. Ouch!
Goldstein’s lawsuit changed the hedge fund world this year. And that is why backdating is a candidate for DealBreaker of the Year.
Value Added: Goldstein stood up where no others would, daringly risking provoking the wrath of the SEC. The entire hedge fund world owes Goldstein a debt of gratitude.
Risk Factors: The end of registration for hedge funds helped provoke a world-wide cry for new regulations in the industry, and has most recently resulted in the SEC imposing stricter requirements for hedge fund investors. One day we might look back on the old registration process and wonder if it really was worth overturning. Should Goldstein be the DealBreaker of the Year? So far, Goldstein is up against challenges from Hank Paulson, Patricia Dunn, Brian Hunter and backdating. But we’re not done yet. We invite you to let loose with your inner-most feelings in the comments section below. And if you have other candidate you’d like to nominate, please feel free to email us at firstname.lastname@example.org. (If you can use the format we’ve laid out above, all the better. If it’s a hassle, we’ll take ‘em as we get ‘em.) If we use your nomination, you’ll get a free copy of Winning: The Answers: Confronting 74 of the Toughest Questions in Business Today.
More on Phil Goldstein:
A David Toppled Hedge-Fund Rule, But Was Goliath Really So Bad? [Wall Street Journal] Do Hedge Funds Hold ‘Trade Secrets’? [Business Week] Hedge-Fund Hero? Maverick Attacks SEC Restrictions [Wall Street Journal
Sponsored by Winning: The Answers: Confronting 74 of the Toughest Questions in Business Today – the ultimate stocking-stuffer. No list of the biggest movers and shakers of 2006 would be complete without including Brian Hunter—the once esteemed and envied energy trader who move and shook the hedge fund Amaranth right out of business. Hunter came to Wall Street from Calgary, where he had worked for a pipeline company that was getting into the energy trading business. After a tumultuous few years at Deutche Bank that ended with Hunter suing his employer, Hunter was hired by Amaranth founder Nick Maounis and Amaranth’s top energy trader Harry Arora (who had come to Amaranth after the collapse of Enron to start the energy desk). For a couple of years, the Hunter and Arora team did extraordinarily well, becoming the primary source of gains for Amaranth during a period when its equity investments are said to have lagged behind its competitors.
Hunter was richly rewarded, reportedly pulling down $75 to $100 million in compensation in a single year. SAC Capital’s Stevie Cohen attempted to hire Hunter away from Amaranth, and Maounis responded by making Hunter the co-head of energy trading and allowed him to move his operation up to Calgary. That was the year that Hunter bet big on natural gas futures, and won big when hurricane Katrina struck and disrupted energy supplies. Some reports say that Hunter made $1 billion for Amaranth in 2005.
Things changed in 2006 but Hunter stayed the same. Arora left to start his own energy trading fund, leaving hunter as the undisputed head of energy trading at Amaranth. He once again bet that the spreads on natural gas futures would widen. All the best forecasts were predicting another stormy summer. Al Gore had a hit movie explaining that global warming was more or less permanently transforming the Caribbean into a cauldron of hurricanes. But the storms never came to pass. The margins on gas futures contracted. Amaranth found itself forced to sell off assets to meet margin calls. Before long it was clear that the losses from Hunter’s trades would bring down the hedge fund altogether.
If Hunter’s story just involved the collapse of one fund, he probably wouldn’t be a candidate for DealBreaker of the year. But Amaranth’s collapse gave new life to calls for hedge fund regulation. Regulators were relieved that Amaranth didn’t turn into another Long-Term Capital Management, the hedge fund which famously failed and required action by the Federal Reserve to bail out its creditors. But talk of “systemic risk” from hedge funds started to emerge from the mouths of regulators in the US and Europe. If the European Central Bank gets its way and creates a global regime of hedge fund registration, hedge funds everywhere will have Hunter to thank. Value Added: It’s been said that in finance that you’re only as good as your last trade. But that’s not true. Over the years Brian Hunter made quite a lot of money for a lot of people. Even his last, disastrous trades can be seen as providing two important lessons—that even the mighty can fall and that capital markets can thrive in the wake of a multi-billion dollar collapse. Risk Factors: One word—Amaranth. Should Brian Hunter be the DealBreaker of the Year? So far, Brian Hutner is up against challenges from Hank Paulson, Patricia Dunn and backdating. We invite you to let loose with your inner-most feelings in the comments section below. And if you have other candidate you’d like to nominate, please feel free to email us at email@example.com. (If you can use the format we’ve laid out above, all the better. If it’s a hassle, we’ll take ‘em as we get ‘em.) If we use your nomination, you’ll get a free copy of Winning: The Answers: Confronting 74 of the Toughest Questions in Business Today.
Perhaps the biggest business story of the year—the story of backdating, today’s candidate for DealBreaker of the Year—kicked off when the Wall Street Journal stated investigating the options granting practices of several companies beginning in March. Executives at these companies seemed to have been the beneficiaries of having their stock options granted on a day when the stock was trading at historic lows. Following the work of some academics, the Journal calculated that the odds were very much against this kind of luck. What really seemed to be happening was that the companies involved were granting stock options on one date, and pegging them to an earlier date when the stock price was low.
It subsequently came to light that backdating was not something confined to a handful of companies, but a practice that had become quite common in corporate America. Although backdating has the same effect of granting options at lower than the current market price—a practice which is referred to as granting an “in the money” option and is completely legal—or making direct grants of restricted stock, backdating options allowed both the companies and the recipients certain accounting and tax advantages. Those advantages, however, may have come at the price of violating securities laws and tax regulations, and pretty soon the SEC was announcing investigations of companies it suspected as backdating.
Soon scores of companies found themselves under investigation or felt the need to launch an internal investigations. When these investigations turned up evidence of backdating, quite a few executives were forced to resign. Criminal charges were filed against some corporate leaders. Most pleaded guilty. One chief executive, Kobi Alexander of Comverse, went fugitive and turned up in Namibia, where he is fighting extradition.
Two thousand and six would have been a very different year without the revelations of backdating. And that is why backdating is a candidate for DealBreaker of the Year.
Value Added: Many have questioned whether backdating should even be regarded as a scandal. The Journal’s Holman Jenkins has pointed out that the accounting rule which allowed companies to treat “at the money” options—including backdated options—as valueless but required them to expense “in the money” options was nonsensical, and practically invited creative avoidance. SEC commissioner Paul Atkins would later go on to explain that well-timed options were a good way for a company short on cash to compensate employees without giving rise to real or accounting costs.
Risk Factors: Regardless of whether backdating is seen as an over-hyped pseudo-scandal or just the latest chapter in a long series of corporate crimes and executive lootings, it has unseated many executives and cost scores of companies millions of dollars as they investigated the practice. Backdating may have been a useful fiction when it was done but in retrospect it probably doesn’t seem worth it to many executives who have lost their jobs or reputations and shareholders who have seen the value of their investments sink.
Should backdating be the DealBreaker of the Year? So far, backdating is up against challenges from Hank Paulson and Patricia Dunn. In terms of its impact on corporate America in 2006, it seems pretty clear that backdating probably comes out on top. But we’re not done yet, and backdating might well be a passing fad. We invite you to let loose with your inner-most feelings in the comments section below. And if you have other candidate you’d like to nominate, please feel free to email us at firstname.lastname@example.org. (If you can use the format we’ve laid out above, all the better. If it’s a hassle, we’ll take ‘em as we get ‘em.) If we use your nomination, you’ll get a free copy of Winning: The Answers: Confronting 74 of the Toughest Questions in Business Today.
Sponsored by Winning: The Answers: Confronting 74 of the Toughest Questions in Business Today – the ultimate stocking-stuffer.
Our second candidate for DealBreaker of the Year might be a bit unexpected choice—former Hewlett Packard board chairman Patricia Dunn. Just today news broke that Hewlett Packard will have to pay $14.5 million to settle the civil case stemming from the spying scandal that resulted in Patti Cakes stepping down. But the DealBreaker of the Year award is beyond good and evil. Sometimes the world of finance is moved by the forces of light and sometimes by the forces of darkness. This year, Pattie Cakes clearly claimed her place in American corporate history, on the front pages of the business sections and, certainly, all over DealBreaker.
The pretexting story is now very well-known. At least one member of the board of directors of Hewlett Packard was leaking information to the press. The board investigated but the leaks persisted. A second round of investigations was authorized by Dunn, and that’s when the trouble started. The investigators charged with finding the leak lied to telephone companies to obtain the phone records of board members and journalists, and when news of this kind of corporate spying broke, America was scandalized. Hearings on Capitol Hill were called, criminal charges were filed, heads rolled. Dunn’s now jobless and facing possible jail time while she attempts to deal with cancer.
But long before she became known as Pretexting Pattie, Dunn was regarded as one of the woman the most accomplished and powerful women in corporate America. There may yet be more chapters to be written in this American life.
In many ways, Dunn’s story is tragic because she did so many things right. Well, if not right, then according to the books—she was a true believer in the reigning ideology of corporate governance and it was this zeal that was her undoing. This would have been a very different year if not for Patricia Dunn, which is why we’ve made her a candidate for DealBreaker of the Year.
Value Added: Other than the pretexting misstep, Dunn’s tenure at the head of Hewlett Packard’s board is considered exemplary. Her downfall also helped teach us two important lessons. First, that there is something wrong with the process-obsessed view of corporate governance. Second, by falling so publicly while Hewlett Packard’s stock continued to climb, we learned that corporate boards may be even less relevant than we thought.
Risk Factors: Dunn’s insistence that she didn’t do anything wrong struck us as, well, a little bit scary. It seemed so far removed from reality. She never seemed to get how frustrating or even insulting her testimony about the pretexting affair was. She gave the impression that no-one had ever challenged her authority. Being in love might mean never having to say you’re sorry. Being the chairman of the board certainly does not.
Should Pattie Cakes be the DealBreaker of the Year? Well, she’s only the second candidate we’ve named (the first was Hank Paulson), so this might be premature. But we invite you to let loose with your inner-most feelings in the comments section below. And if you want to nominate other candidates, please feel free to email us at tips@dealbreaks in Business Todayer.com. (If you can use the format we’ve laid out above, all the better. If it’s a hassle, we’ll take ‘em as we get ‘em.) If we use your nomination, you’ll get a free copy of Winning: The Answers: Confronting 74 of the Toughest Question.
Read More About Patrica Dunn: Patricia Dunn Archives [DealBreaker] Hewlett Packard Archives [DealBreaker] Wikipedia Entry [Wikipedia]
We’re starting off with what might be an obvious choice—Treasury Secretary Henry Paulson. Believe it or not, Paulson started the year under fire. While he was still Goldman Sach’s chief executive, a group of Goldman shareholders calling themselves the Free Enterprise Action Fund put forth a shareholder proposal claiming that Paulson was pushing the nefarious tree-hugging agenda of the Nature Conservacy, whose board he chaired, at the expense of shareholder value. Paulson, a Christian Scientist, refused the strong-medicine the FEAF wanted to administer, of course.
You might not think that an avowed environmentalist under fire from a conservative advocacy group would have much pull with the White House. But that’s why you’re not Hank Paulson, and he is. Because the next thing that happened was that Paulson was nominated to be George Bush’s Treasury Secretary. After spending sometime in prayer, consulting with his family and lots and lots of time on the phone, Paulson accepted the nomination and sailed through the Senate confirmation. Government ethical requirement to disgorge his interests in Goldman Sachs only served to make Paulson even wealthier at a time when Goldman Sachs share price was flying high (and perhaps giving him an excuse to liquidate that position before a possible 2007 downturn). Now Paulson is leading the charge on trade policy, particularly with regards to China.
Probably no other figure qualifies as the face of American capitalism, particularly American finance, as Henry Paulson does. And that is why he’s a candidate for DealBreaker of the Year. Value Added: Paulson is reportedly very well-respected in the White House, and is said to wield considerable power in the administration. Capitol Hill’s anti-trade protectionists and anti-China lobby seem to have retreated in the face of Paulson’s support for free trade. He’s all the stronger for his lack of political or financial motivation—no one on Capitol Hill understands how to deal with someone who isn’t out to win higher office or make a few bucks from the government. Paulson’s the first important economic leader of the twenty-first century. Risk Factors: Paulson is faced with a perhaps impossible task—making the Bush economic agenda seem credible. He’ll probably be lucky if he even succeeds in giving the impression that the Bush administration has an economic agenda. There’s also the lagging suspicion that Paulson is something of a post-national cosmopolitan—more interested in bird-watching and trading with China than the economic fate of his fellow Americans. Should Hank Paulson be the DealBreaker of the Year? Well, he’s the first candidate we’ve named so this might be premature. But we invite you to let loose with your inner-most feelings in the comments section below. And if you have other candidates, please feel free to email us at email@example.com. (If you can use the format we’ve laid out above, all the better. If it’s a hassle, we’ll take ‘em as we get ‘em.) If we use your nomination, you’ll get a free copy of Winning: The Answers: Confronting 74 of the Toughest Questions in Business Today.
More on Henry Paulson: DealBreaker’s Paulson Archive [DealBreaker] WIkipedia Entry [WIdipedia] Treasury Secretary: Designate Jr. Paulson ‘Likes to Hold Snakes [New York Observer] Hank Paulson’s secret life [Fortune via Wall Street Week]
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