The 5 Dumbest Things on Wall Street: May 16
1. Exxon: One Less Job for CEO Tillerson?
When it comes to quelling shareholder agitation, sometimes all it takes is a well-worded email. At least, that's what
Exxon Mobil
(XOM) - Get Report
execs must have thought on Tuesday when they emailed their investors, beseeching them to back off from their mounting calls to restructure the oil titan's board and remake its business plan.
Despite Exxon's efforts to grease the skids, Chairman and CEO Rex Tillerson may soon have to pick which of his two jobs he likes better. The oil company faces an onslaught of criticism from a professional posse, including descendants of Exxon patriarch John D. Rockefeller and the proxy firms Glass Lewis and RiskMetrics.
In recent weeks, the Rockefeller spawn have repudiated their family legacy, urging Exxon to more actively pursue alternative energy strategies as well as alternative accountability measures for management.
As John D.'s great-great-grandson Peter O'Neill remarked in an April 30 press release, "Having an independent chairman leading an independent-thinking board of very experienced directors will substantially improve Exxon's ability to look the future squarely in the face and will increase its flexibility. The current members of the board appear to have considerable skills that are not being tapped fully." Which may be a nice way of saying the board has no control.
Last Friday, RiskMetrics jumped on the bandwagon, saying Exxon would benefit from increased board oversight -- the kind that happens when management and the chairman aren't the same person. Then on Tuesday, the proxy firm Glass Lewis advanced the notion that Exxon should set "a pro-shareholder agenda without the management conflicts that a CEO or other executive insiders often face."
Last year's resolution calling for an independent chairman garnered 40% of the shareholder vote. Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, told
The Wall Street Journal
that Exxon's "highly unusual" email indicates that the company is genuinely worried about a shakeup.
We don't have long to wait before this verdict comes in. Exxon's annual meeting, complete with fireworks, is slated for May 28.
Dumb-o-Meter score: 95. Next time, send an e-card.
2. AIG and Pains
Last Thursday,
American International Group
(AIG) - Get Report
set its personal record in quarterly losses by hemorrhaging $7.8 billion between January and March. Enhancing the catastrophic performance were write-downs of the insurance giant's credit default swap portfolio totaling $9.11 billion.
As it reported the blunder, AIG reassured investors by announcing it would raise $12.5 billion in fresh, albeit dilutive, capital to build what CEO Martin Sullivan called a "fortress balance sheet." Then, despite the liquidity scramble, AIG said it would devote some of the capital to raising its dividend 10% to 22 cents a share in a move that puzzles Wall Street observers.
The plans were less than music to investors' ears; they sold the stock down 9% in ensuing action.
Enter former AIG chief and current dismayed shareholder Hank Greenberg, who
wrote Monday in a letter to AIG's board
that the insurer is "in crisis." Greenberg left AIG in 2005 amid an accounting scandal for which he still faces civil charges, so he's not one to use the term lightly.
The Street has begun to speculate that Sullivan's days are numbered, but AIG's board announced Tuesday that it's sticking with its man. If only the board showed similar devotion to shareholders.
Meanwhile, International Lease Finance Corp., one AIG's most profitable units, reportedly is casting about for a way to get spun off from the conglomerate, in hopes of saving itself from the turmoil.
"We can't predict the future," Sullivan said last December, "but we have a high degree of certainty in our businesses."
The ones that stick around, anyway.
Dumb-o-Meter score: 83. Speaking at AIG's annual meeting, Sullivan said, "the "spotlights are very hot today." "Should be," returned one shareholder.
3. MBIA: A Balance Sheet That's Capital-Shy?
MBIA
(MBI) - Get Report
once again tested the market's generosity Monday. The faltering muni bond insurer posted its third straight quarterly loss, this time to the tune of $2.41 billion. For those keeping score at home, that's 40% of MBIA's market cap, or slightly less than the $2.6 billion it raised in capital during the same three months.
Those stomach-churning results were nonetheless good enough for investors, who sent MBIA shares up 4%, at least for that day, on the news. Comments from CEO Jay Brown may have played a role in the optimism. "MBIA continues to be a sound financial institution," he said in a press release. "Our business model is proving that we are adequately capitalized to satisfy any potential claims on our insured portfolio."
On Tuesday, ratings agency Moody's begged to differ, saying recent losses mean MBIA's triple-A rating just might still be in jeopardy. Over the following two days, shares resumed their downward trend, falling 6% to close below Monday's opening price.
MBIA mounted a strongly worded retort Wednesday, saying "there are significant differences between subprime second lien pools referenced in Moody's report and the prime second lien securitizations we have guaranteed." If anything can restore confidence, it's splitting hairs over which kind of mortgage-backed paper investors should be worrying about.
At any rate, in a May 7 letter to shareholders, Brown had dropped a slightly less polished nugget about valuing his company's credit default swap portfolio: "I can tell you with great certainty that no two people could ever agree on this calculation, so don't be surprised when external sources propose wildly different possibilities for MBIA."
It's encouraging to see a CEO display such certainty about the staggering uncertainty of his company's own balance sheet.
Dumb-o-Meter score: 91. We're sure MBIA would be just fine, were it not for those pesky external ratings agencies constantly weighing in.
4. Freddie Fudges It
Freddie Mac
(FRE)
helped the market to rally early Wednesday on what -- by its own scoring -- were less-than-disastrous first-quarter results.
The company lost $151 million, or 66 cents a share, better than the Street's estimate of a loss of $1.57. The shallower crater helped to spur a buying rally on Wall Street, as investors breathed a sigh of relief that Freddie and fellow mortgage backer
Fannie Mae
(FNM)
, two of the subprime crisis' biggest cesspits, may finally be steadying themselves.
What exactly those pits are filling up with, though, is a different question. Freddie said that its earnings beat involved some
that removed from its profit tally a nearly $32 billion revaluation -- to the downside -- of its mortgage assets and credit guarantees. And in spite of a Treasury that's apparently willing to go to great lengths to avoid letting the mortgage insurer go up in flames, Freddie said it would raise $5.5 billion in an equity offering. Freddie appears to be willing to pay its own way, at least for a while.
Clever accounting is familiar territory for both Freddie and Fannie. Over the past decade, both companies have come under government scrutiny for fraud. In 2003, Freddie had to pay $125 million to the Office of Federal Housing Enterprise Oversight to settle fraud charges, and in 2006, Fannie took a paddling for similar infractions.
Despite the continued draining of value from the housing market, Freddie said in a press release that it's "on a better foundation to manage through the current cycle." Considering Freddie's past performance, this is hardly reassuring.
Dumb-o-Meter score: 95. Built on foundations like these, Freddie Mac may still be the quintessential mortgage money pit.
5. Barbie v. Bratz
In an effort to reassert its dominance over the toy doll sector, Barbie maker
Mattel
(MAT) - Get Report
is launching a copyright lawsuit against rival toymaker MGA Entertainment, which sells a competing line of dolls known as Bratz.
Caught in the catfight is Carter Bryant, the brains behind Bratz. Mattel accuses Bryant of conceiving the Bratz dolls while under contract, meaning that MGA's dolls are rightfully Mattel's. Bryant maintains his innocence, saying he was between Mattel gigs when his muse started singing. He says he was living in Missouri with his parents at the time, and some children he saw inspired him to design the trinkets.
Intellectual property rights aside, Mattel has some motivation to turn to the judicial system. In the past year, shares have fallen some 30% and now hover around the $20 level. During that time, the toymaker has contended with recalls of lead-filled Sesame Street and Nickelodeon figurines. In April, the company announced that it swung to a loss of $46.6 million from a profit of $12 million a year earlier.
So stakes are high in the
Barbie v. Bratz
litigation. Since their 2001 debut, Bratz, with their distinctly oversized heads and lips, have been eating into the 5-to-9-year-old doll-playing demographic, Gerrick Johnson of BMO Capital Markets told
Bloomberg
. That's historically the purview of Barbie, whose body is exaggerated in other ways, but who paradoxically holds sway over girls younger than 5.
Now, Mattel contends it is owed as much as $360 million in damages and another half-billion in annual direct MGA sales and licensing fees from Bratz. Needham analyst Sean McGowan told
Bloomberg
that he believes the suit is potentially worth at least a couple dollars per share for Mattel.
Not to be out-dolled, MGA has replied with its own suit, saying Mattel stole from the Bratz line for its line of "My Scene" figurines.
Dumb-o-Meter score: 78. When it comes to defending her market share, Barbie doesn't play around.