How Can I Never Repay You? The CEO Loan Racket
To the ever-growing mountain of evidence that corporate kingpins live in an entirely different world from the rest of us we can now add the latest revelations about the gargantuan loans CEOs receive from their companies: the $2.3 billion Adelphia Communications loaned to John Rigas and his kin, the $408 million WorldCom loaned to Bernie Ebbers, the $162 million Conseco loaned to Stephen Hilbert, the $88 million Tyco loaned to Dennis Kozlowski, and the millions upon millions in less ostentatious -- but no less outrageous -- raids on company coffers by senior executives all across the corporate landscape.
And if you're thinking that, because they're called "loans," they bear any similarity to the terms you and I would get if we went to our local bank and asked for a loan, think again. A loan in CEO-world is very different from a loan in non-CEO world.
For starters, how about the fact these loans are approved by corporate boards more often than not beholden to the very same executives seeking the loans. Not a bad deal, if you can get it. But you can't. Those TV commercials for the Lending Tree and Ditech.com may make it look like applying for a loan is more fun than a Roman orgy, but, for most people, it's a highly stressful, and onerous ordeal. How much nicer to be able to turn to your pals, help them ink up their rubber stamp, and tap them for a few million, and then go out to lunch (expensed to the shareholders, of course.)
Back in our world, just try calling your persnickety neighborhood banker and asking for a loan with a wildly discounted interest rate, or one, like those given to many executives, completely interest free. WorldCom, for instance, is charging Ebbers just 2.3 percent on the $408 million he owes. Before going under, Global Crossing made low interest loans of $8 million to its then-CEO Tom Casey and $1.8 million to its president, David Walsh. And Enron's "Kenny Boy" Lay was given a $7.5 million line of credit, which he could then repay with company stock he'd been given or allowed to buy at a greatly reduced price. In other words, he was given money that he could pay back with stock that he had also been given. I think that's what the imaginative bean counters at Arthur Andersen used to call a fiscally-integrated deal. Essentially, these are simply large gifts, dressed-up with paperwork and disguised as "loans." Money-laundering would be a more accurate description.
Often the busy CEO need not even dust off his calculator to try and figure out how much it will cost to pay off the umpteen millions he owes the company, as he would with a real loan. That's because CEO loan packages are routinely forgiven -- written off as a corporate expense. Troubled E*Trade, for example, allowed CEO Christos Cotsakos to skate on the $15 million it had lent him -- a move that didn't sit very well with shareholders, who raised such a stink that Cotsakos agreed to give back part of his 2001 salary (Don't feel too bad for him, though, he could afford it, having been paid $80 million last year). Senior executives at Home Depot, Compaq, and Maxtor have also been loaned millions that they won't have to repay if they stay on the job a few more years.
Amazingly, companies even forgive the loans of executives who do a lousy job. Mattel wrote off a $7 million loan to its former CEO, Jill Barad, even though the toy company's stock plummeted by more than 50 percent during her three-year tenure. And Kmart forgave the $5 million it lent to Chuck Conaway, whose shaky hand on the rudder helped steer the company to its recent bankruptcy. The loans are given to them, apparently, just for being them.
Well, you think, at least they have to pay taxes on these gifts, right? Not so fast -- the boards have thought of that, too. Many times, they often include a little extra cash just to cover the taxes that apply to forgiven loans.
Yet another important difference between insider loans and the kind you would get is the level of disclosure required. The billions Adelphia loaned to the Rigas family were made public only in a small footnote in an earnings filing. And, if that wasn't shady enough, check out the opaque language used to divulge the arrangement: "Certain subsidiaries of the company are co-borrowers with certain companies owned by the Rigas family." Adelphia's accountants deserve every dime they get for figuring out how to make a smoking gun look like a bouquet of daisies. The footnote went on to assert --without even an attempt at an explanation -- that even though the massive loan was not shown on the company's balance sheet, nevertheless, Adelphia (meaning, the shareholders) was on the hook for $2.3 billion if it wasn't repaid.
It's a neat trick, though, somehow, I've got a feeling it won't work as well for the rest of us. But why not give it a try next time you apply for a loan? When they ask you to list all your liabilities, just put a little asterisk, and down at the bottom of the form, in very small letters, write in: "Certain subsidiaries of my family -- i.e. my wife and children -- are co-borrowers with certain companies -- i.e. credit, car, insurance, etc. -- of certain assets that, if included on the family balance sheet, would result in a certain lack of positive cash flow, i.e. debt. Sort of."
To put the legal larceny of the CEO club in context, Adelphia's $2.3 billion loan to the Rigas clan is roughly three times what America is currently giving in foreign aid to all of sub-Saharan Africa. And it took Bono and years of international protests for western governments to even begin to consider forgiving Third World debt. But a CEO who can't pay back his loan is likely to be slapped on the back and told, "Ah, hey, forget about it."
So here is the question aching for an answer: how can all this be legal? How can corporate executives legally use the balance sheet of a public company as their own personal piggy bank? Doesn't the balance sheet belong to the shareholders? And don't CEOs have a fiduciary obligation to them? How then can they legally write their own checks for ridiculous amounts -- often from companies that are troubled and can't afford it, and at the expense of shareholders who can't prevent it? I'd like to know, and so, no doubt, would millions of shareholders.