Conseco Collapse Deals New Blow to CEO Cult

Even now, nobody is connecting the dots when it comes to Gary Wendt's role in the demise of Conseco.

Most reports about Tuesday's bankruptcy filing by the Carmel, Ind., insurance and lending behemoth have suggested that the former CEO's turnaround plan was more or less doomed from the start. The assumption appears to be that, given the large debt load taken on by previous management, Conseco was too sick to be cured even by Wendt -- who joined the company in June 2000 with one of the most impressive reputations in corporate America.

But if the popular myth is that Wendt was overwhelmed by an insoluble mess, a look at some before-and-after numbers suggests otherwise. Indeed, rather than overseeing a sharply focused belt-tightening, the Wendt regime appears to have added to the cash-crunched company's many problems.

His massive pay package and his apparent reluctance to cut back on Conseco's most wretched business excesses -- including making loans to borrowers with the shakiest of credit histories -- certainly did not guide Conseco on the promised path toward recovery. Indeed, they may have hastened the collapse. Conseco didn't immediately return a call seeking comment.

Headliners

Why care about how much Wendt is to blame? Because so often investors hitch their wagons to star CEOs conducting turnarounds, only to see their investments wilt when the corporate messiah fails to follow through.

Take a look at what's going on right now at Tyco ( TYC). There, ex- Motorola executive Ed Breen is trying to rescue the wheezing debt-laden conglomerate, but many skeptics don't believe he can do it, despite a sharp run-up in the stock. The hopes built into Wendt were similarly ardent. Conseco's stock soared to over $20 from under $5 in the months after the executive came on board. It now trades for pennies.

Wendt's feted status stemmed from his 15-year tenure as leader of GE Capital, during which he built the unit into the financial services giant that it is today. He left GE in 1998 amid reports of tension with then-CEO Jack Welch. The previous year, he was in the headlines a lot because of his high-profile divorce case. Wendt vacated the CEO post at Conseco in October, two months after the company missed some bond payments, and he now holds the post of chairman.

Great Expectations

So what should Wendt have done? Seeing as a burdensome debt level was the main problem for Conseco, surely Wendt would've got leverage down a lot. But he didn't. While he did manage to get Conseco's bank creditors to cut some slack, the debt and debt-like securities held at the Conseco parent barely dropped. (Conseco also has debt and other liabilities in its lending and insurance subsidiaries, but because these are tied to assets, it is assumed that holders of this credit are likely to get their money back.)

In June 2000, just as Wendt joined, Conseco had debt of $3.63 billion and debt-like securities of $2.4 billion, for a total of $6.03 billion. In June 2002, it had debt of $4.01 billion and debt-like holdings of $1.92 billion, for a total of $5.93 billion. If you add in investment borrowings to this calculation, the 2002 total is actually slightly higher. And if "other liabilities" are included, the 2002 amount is way in excess of the two-years-earlier figure. Whichever way you slice it, Wendt did not oversee a big drop in liabilities.

Wouldn't Wendt have restructured Conseco by sharply cutting back in troubled businesses? One would think. But its bad-debt-ridden mobile-home loan business hardly shrunk. At the end of June 2002, it had average loans of $24.8 billion, only 3% below the June 2000 total. In fact, under Wendt, Conseco actually increased lending to people of rock-bottom creditworthiness by writing loans on repossessed mobile homes.

Big Talk

A good turnaround artist will come clean with investors and recognize reality. Even if the stock tanks, creditors know they are working with a trustworthy person who has a viable recovery plan. It's impossible to say that about Wendt. Soon after joining, he said Conseco would make as much as $3.30 per share by 2004, even though the company ended up reporting a net loss of $3.69 in 2000.

Plus, the earnings releases Conseco published under Wendt were deeply misleading, with all sorts of negative operating items removed from what management considered core earnings. And the practice of lending down the credit ladder meant loans made under Wendt went bad a lot faster than those made by the previous management over equivalent time periods.

This deterioration led Wendt's managers to go to apparently dubious lengths to post improved bad loan numbers. Conseco loan collectors told TheStreet.com that their bosses had pressed them to allow troubled borrowers to skip payments and have their loans restructured. "Our managers were most concerned about reducing loans that were more than 60 to 90 days past due, so that they didn't get into numbers reported to Wall Street," a sickened ex-Conseco employee said at the time.

Finally, there is Wendt's pay. He got $45 million in cash, in addition to options and restricted stock, when he came on board, and an added $8 million bonus this year, when Conseco was breathing its last. That's $53 million that Conseco could've used to pay off its debt. Moreover, a good turnaround artist would eschew large cash payments till the company is on an even keel. Sure, Wendt had a hard job when he came on board, but he himself impeded the recovery. Is it any surprise investors now wonder what skeletons are lurking in GE Capital's closet?

In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to peter.eavis@thestreet.com.

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