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Taking stocks: Finance chiefs have a lot to answer for

Image: David Lyttleton

Fannie Mae
The rescue of Fannie Mae and Freddie Mac was unquestionably the single biggest
indication that the credit crunch was going from bad to appalling. The two
organisations ­ mandated by Congress to support the US mortgage market and yet
having their own Wall Street listings ­ were not without their own chequered

Taken into conservatorship early this September, Fannie Mae was effectively
nationalised by the US government. The previous month the business declared a
dividend of five cents a share, down from 35 cents so as to conserve almost $2bn
of capital.

Fannie Mae’s CFO at the time of the crunch was (and still is) Stephen Swad.
Aged 46, he became CFO just over a year ago. He had previously been CFO at AOL
for four years, which must have given him plenty of experience in the business
of difficult markets. Swad also has finance function experience with Turner
Broadcasting and Time Warner. His proving ground for his accountancy skills was
at KPMG and the
Securities and
Exchange Commission
, where he served as deputy chief accountant.

Swad received a $500,000 signing-on bonus when he joined Fannie Mae. On top
of a base salary of $650,000 last year, he also earned a $955,000 annual bonus
and a long-term incentive award worth $3.2m.

Sounds great, but Swad joined an organisation that had been through a hell of
a time. An interim CEO and an interim CFO, Rob Levin, were appointed at the end
of 2004 after it was revealed that Fannie Mae’s accounts and controls weren’t up
to scratch. In fact, the business was forced to withdraw its accounts for the
period 2001 to 2004 and was declared to be “significantly undercapitalised” by
one of its most important regulators. Levin stepped into a different role in
January 2006 and was succeeded by Robert Blakely, CFO of MCI. But Blakely
stepped down the following year and was succeeded after a transition period by
Swad. By the time Fannie Mae published its 2006 annual report, the accounts had
been restated, the controls tightened and the balance sheet significantly
strengthened ­ but Fannie Mae was getting onto its fourth FD in as many years.
What role did such a high level of churn in the finance department play in the
organisation’s downfall?

Freddie Mac
The chief financial officer of Freddie Mac was Anthony Piszel, 53, known as
‘Buddy’, and was an accountant right down to his MBA degree from Golden Gate
University. A former audit partner with Deloitte & Touche, he also served
with the
Accounting Standards Board
. He spent more than a decade in the
finance department at Prudential Financial before joining healthcare group
Health Net Inc in 2004.

Barely two years later, however, he joined Freddie Mac as CFO, receiving a
$2.5m golden hello. Piszel introduced greater disclosures, including a new
non-GAAP financial measure called ‘adjusted operating income’.

Piszel earned a salary of $650,000 in 2007 plus a bonus of $1.35m ­ about 35%
higher than target ­ plus another $200,000 in restricted stock units and $3.2m
in a long-term equity award. His performance that year was deemed to be “above
plan” in the realm of accounting and controls and in putting Freddie Mac in a
position to resume quarterly reporting, a practice it had suspended several
years earlier. Results for 2001 through to 2002 had had to be restated, and the
group was late in reporting for years after that.

Internal controls were in an unacceptable state and it took years to sort
them. While work on that score had already been taking place when Piszel
arrived, his skills were said to provide the finishing touch.

Piszel was fired, however, barely two weeks after the bail-out in September.
While the sacking was reported to be “without cause”, Freddie Mac’s regulator
said that severance payments totalling more than $4m should not be paid.

Piszel was the third FD to leave the company in five years, and was the
fourth in eight years. He was replaced by Freddie Mac’s controller and principal
accounting officer, David Kellermann, but even he won’t necessarily have the job
for long as he takes on the role on an interim basis until a permanent successor
is appointed. Kellermann has been with the mortgage firm for 16 years and has a
masters in finance and a bachelors degree in political science and accounting ­
a good if unusual combination, perhaps, for the government-supported

Lehman Brothers
A fawning profile in The Wall Street Journal last May drew attention to
CFO Erin Callan, a tax lawyer-turned-investment banker who had been promoted as
recently as December 2007 to the CFO role without having been in any way
encumbered by such a thing as experience in accounting, or even the finance

The 42-year-old was said to prefer a slimmer volume of daily reports than did
her predecessor, which presumably left her more time to (again, as The Wall
Street Journal
put it) “embrace” television, making frequent appearances on
CNBC and the like. In January this year, she forecast the bank would make a
return on equity in the mid-teens percent. By May, ROE was around 9%.
“Sometimes,” she said, “in hindsight, your forecast will not have been accurate
based on the real world outcome.”

In June, Lehmans reported Q2 losses of $2.8bn ­ worse than expected, thanks
in part to “negative net revenue” ­ and unveiled plans for a $6bn capital
injection. Moreover, Moody’s put Lehman’s credit rating on watch, calling into
question the bank’s risk management practices. Within days, she found herself
“rejoining the investment banking division in a senior capacity”, and being
replaced by Ian Lowitt, 44, the bank’s co-chief administrative officer ­
responsible “for the global oversight of corporate real estate, expense and
sourcing services, finance, operations, productivity and process improvement,
risk management, and technology”.

He’d been CAO of Lehmans Europe and was also global treasurer and global head
of tax. He’s got a clutch of university degrees and is ex-McKinsey. In his role
as co-CAO Levitt earned a salary of just $200,000 last year, but a bonus of
$2.65m, plus another $6.6m in so-called restricted stock units (RSUs).

No salary details were disclosed for Callan, but her predecessor, Chris
O’Meara, was on the same deal as Lowitt. O’Meara was promoted to global head of
risk management. The promotion of O’Meara and Callan was specifically cited in
the 2007 annual report as examples of “putting the right talent where it is
needed most”.

O’Meara was named CFO at the end of 2004 at the age of 43 after ten years
with the bank, most recently as global controller. Chief executive Richard Fuld
praised O’Meara’s experience in “financial control, business performance
planning, measurement, reporting and analysis, financial and regulatory
reporting and accounting policy” ­ skills that were apparently not regarded as
necessary three years later when Callan succeeded him.

Bear Stearns
The cover page of Bear Stearns’ 2006 annual report reads “Eighty-three years of
profitability” and back then the bank was worth some $18bn. In March this year
the bank, Wall Street’s fifth-largest, was taken over by JP Morgan Chase for
just $240m, with $30bn of central bank support.

The previous August, CFO Samuel Molinaro was also named COO, just weeks after
two of Bear Stearn’s big, highly-geared hedge funds collapsed under the weight
of bad sub-prime mortgages. At the same time, Molinaro raised $4.5bn it didn’t
need, simply to prove to the market that it could still raise huge amounts of
capital (though they paid 2.45% over five-year Treasury bonds for this show of

In December, Molinaro said the firm was able to meet all its “unsecured debt
maturities over the next 12 months without issuing additional unsecured debt or
liquidating assets,” reported the New York Sun. “We like to hope we have the
worst of the mortgage marks behind us,” he said, using a phrase that has been
repeated in articles headlined ‘Famous last words’. Molinaro admitted, however,
that “people keep saying that every quarter”.

Molinaro had one of the best remuneration packages at the bank ­ not
surprising as he had been CFO since 1996. He made just $250,000 in basic salary
according to the bank’s proxy statement for 2006, but his $13m bonus almost
matched his bonus earnings for the previous two years together ­ so call that
almost $28m cash in three years, plus long-term stock awards of $21m and another
$5m in other compensation and earnings.

Small change short of $55m earned over 2004, 2005 and 2006. It’s not all good
news, though: Molinaro had almost $30m in unvested equity at the time of the
bank’s 2007 proxy statement, so most of that will have been lost.

Northern Rock
Nearer to home, the nationalisation of Northern Rock damaged the government
almost as much as it damaged confidence in British banking.

The Bank of England provided emergency funding for Northern Rock in September
2007 but to no avail: in February it was taken into “temporary” public
ownership. Now, if customers are seen queuing outside the bank again, it’s to
put their money back in, given that the Rock is as safe as the Bank of England
(nationalised in 1946).

Finance director Bob Bennett was with the bank for 13 years, steering it
through its 1997 flotation after it converted from building society status to
fully-fledged bank. In his last five years, Bennett helped ‘young blood’ chief
executive Adam Applegarth take the bank from total assets of £42bn to just over
£100bn. An accountant twice over (ICAEW and CIMA), Bennett earned £455,000 in
salary plus £435,000 in bonuses in his last full year.

Bennett retired in January 2007 at the age of 59 and was succeeded by his
deputy FD, David Jones, 49, who was put on a salary of £415,000. Jones received
no bonus for his work in 2007 and in February this year he stepped down from the
board, but in other respects kept his job (and his salary). He was replaced by
Anne Godbehere, 52, who left her job as CFO of Swiss Re to take up the

Even though the succession of Bennett by Jones ought to have provided a
degree of continuity ­ Jones was, after all, a long-serving finance man with
Northern Rock ­ the Financial Services Authority still drew attention to the
question of succession in its report into the supervisory failures.

The new board, led by Sir Ron Sandler, asked law firm Freshfields to
investigate the conduct of the previous board. Bennett has been vociferous in
the financial press about what happened at Northern Rock after his departure and
makes no bones about having had disputes with Applegarth. In particular, Bennett
called into question why the bank had grown by almost 50% in the first half of
2007. “Our growth strategy was between 15% and 25%, and 20% was the centre of
the range,” Bennett told Financial Adviser. “So why did it grow 50% in the first
half of 2007 when economic conditions in the UK were clearly moving
unfavourably? It is my belief you cannot grow a business 20% compound. At some
stage the wheels come unstuck.” In fact, he says that had the business grown at
its trend rate in 2007, it would have needed £8bn less funding ­ “which would
have been enough to have stopped them going to the Bank of England for emergency

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