Daily Lesson from Life 05 August 2008

"August 5, 2008, 3.45 pm (Singapore time) Freddie Mac chief disregarded warning signs

US mortgage market giant Freddie Mac's chief executive dismissed internal warnings that could have protected the company from some of the financial problems now engulfing it, the New York Times said, citing more than two dozen current and former high-ranking executives and others.


In 2004, chief executive Richard Syron received a memo from Freddie Mac's chief risk officer warning him that the firm was financing questionable loans that threatened its financial health, the paper said.


Though the current housing crisis would have undoubtedly caused problems at both companies, Freddie Mac insiders say Mr Syron heightened those perils by ignoring repeated recommendations, the NY Times said.



Mr Syron refused to consider possibilities for reducing Freddie Mac's risks, the paper cited Mr Andrukonis as saying. 'He said we couldn't afford to say no to anyone,' the paper quoted Mr Andrukonis as saying. Over the next three years, Freddie Mac continued buying riskier loans, the paper said.


Citing many executives, the paper said Mr Syron was also warned that the firm needed to expand its capital cushion, but instead that safety net shrank. Mr Syron was told to slow the firm's mortgage purchases, but they accelerated, the paper said.


Those and other choices initially paid off for Mr Syron, who has collected more than US$38 million in compensation since 2003, the NY Times said."



I am sure there are many more similar stories we can find in many other distressed companies with similar kind of compensation package for their CEOs and senior executives.



US$38m is not a small sum. The USA has debated about the appropriateness of CEO pay for more than a decade or two now since the popular business and mass media press created this unique creature called: the STAR CEO! That a STAR CEO can singlehandedly rescue a company in deep trouble by his or her sheer charisma, visionary thinking, and immense wisdom! This is a deep rooted culture that will NOT be easy to break and restore the old saner culture of CEO pay of fixed US$1 or 2 million and 3-year rolling performance bonus of x% from profit earned package that I firmly believed should be the standard.



The lessons for me are:



1. no CEO makes a company but he sure can wreck it!;



2. when you ignore the check-and-balance system you put in yourself, you have exceeded your authority. You have fallen madly in love with your own wisdom and power. You are playing God and that is not natural! Can you recognize when that state is reached? Listen with your head and your heart and soul. Maybe you will know when the limit is breached!;



3. people allowed a bad culture to develop. People allowed a reward system that disproportionately reward the top guy who will take risk to fatten his own performance bonus. Design a package that tie to a reasonable fixed salary (say 10x the lowest paid employee?) and a variable bonus that at least tie to a 3-year rolling performance. Paying by the quarter and by 12 or 24 months is just too short to build great company!



Notes: In Germany, the Green Party is trying to limit the pay of CEO by laws!! Maybe this is the right thing to do as when you leave the cats to guard the fish when the cook goes for a break, you know the result!!



p/s: This is the second for 05 August 2008 as I am playing catch up for missing the 04 August 2008 blog!