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Fuld and Cayne didn’t do so badly after all

By A. James Memmott

November 24, 2009 at 8:00am

Because they were major shareholders when their firms collapsed, James E. Cayne of Bear Stearns and Richard S. Fuld Jr. of Lehman Brothers have been seen as two of the biggest losers of the recession.

However, a just-published study written by three Harvard professors and entitled “The Wages of Failure” suggests that the executives’ losses were more than cushioned by bonuses and stock sales during the years 2000 to 2008.

Indeed, despite the crash, both men, Fuld especially, had net gains in the millions.

“There’s no question they would have done massively better had their firms not collapsed,” Lucian A. Bebchuk, one of the study’s authors, told The New York Times. “But the wealth of those top executives was hardly wiped out.”

Bebchuk, the director of Harvard Law School’s Program on Corporate Governance, was speaking not only of Cayne, the former chairman of Bear Stearns, and Fuld, the former CEO and chairman of Lehman Brothers.

The study also analyzed the income of four other top executives at each firm.

It did not include salaries in the analysis; rather it singled out compensation for performance in the form of cash bonuses and stock.

When first Bear Stearns and then Lehman Brothers collapsed, press coverage emphasized how much Cayne and Fuld lost because the shares they held in their firms plummeted in value.

According to the report, Cayne had a paper loss of more than $900 million when J.P. Morgan Chase & Co. bought Bear Stearns at the fire-sale price of $10 a share in March 2008.

The loss takes into account what Cayne would have made if he sold the same number of shares on Jan. 12, 2007, when Bear Stearns peaked at $171.51 a share.

Fuld’s 10.8 million shares of Lehman became worthless in September 2008 when the company filed for bankruptcy. This created a paper loss of $931 million, based on what he would have made had he sold the shares on Feb. 2, 2007 when Lehman peaked at $85.80 a share.

Bebchuk and his colleagues argue that focusing on those loses misses a point.

They note that Fuld and Cayne and the other top executives had made millions in stock sales and cash bonuses during the period leading up to the meltdown of their firms.

They compute the gains by starting with the value of Cayne and Fuld’s holdings in their firms at the beginning of 2000.

Looked at from that perspective, even with the paper losses of 2008, Fuld was ahead $240 million in bonuses and stock sales alone.

Cayne was ahead $28 million. (He did worse than Fuld because he held on to more stock.)

The authors of the study argue that Cayne and Fuld may have profited because of compensation practices at their firms that encouraged executives to take risks for short-term gains.

They propose several solutions. One would be to place a limit, perhaps 10 percent, on the number of shares and options an executive could cash out in a given year. Another would be to require a delay in the cashing out of some shares and options until retirement.

Some of these ideas could be put into practice at companies that have received bailout funds from the U.S. government, as Bebchuk is an adviser to Kenneth R. Feinberg, the Obama administration’s compensation czar.

Bebchuk’s study was co-written by Alma Cohen and Holger Spamann for the Program on Corporate Governance.

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