This is my personal blog. Travel, financial and political observations. Notes to myself and my friends. Content development for my monthly newsletter, Porter Stansberry's Investment Advisory (www.stansberryresearch.com).

Tuesday, March 14, 2006


The top three executives at North Fork Bancorp…stand to receive $288 million from the large New York Regional Bank’s $14.6 billion acquisition by Capital One Financial.”
-- WSJ, March 14, 2006

These payments to the executives of North Fork Bancorp are obscene.

There are 475 million shares outstanding of North Fork Bancorp stock. So, each shareholder will give about $0.60 to the top three executives, just for selling the company. That’s more than half a year’s dividend!

A small shareholder, say a 1,000 share round lot buyer, will give $60 directly to the top three executives – just for selling the company!

These payments come mostly in the form of accelerated stock option vesting and cash payments to cover the tax burdens of such equity grants. The IRS requires people to pay taxes on all compensation. So, when ten years worth of stock options get vested all at once, there is a big tax bill. Covering these tax payments has become a regular executive benefit, although such payments are expected to occur over the life of the executives’ employment, not all at once. In any case, North Fork Bancorp’s CEO, John Kanas, will receive $111 million in cash, just to cover his tax bill, when the deal closes.

Why should some employees have their taxes paid by the corporation? They justify it by explaining that if the CEO had to pay his own taxes, he’d have to sell half the shares he earns and that selling might negatively impact share price. But that, of course, is a retarded argument. It assumes that a temporarily depressed share price is a bad thing – it’s not. A weak share price for a week or ten days is a blessing for other shareholders, who could buy more at a better price.

The real explanation for the obscene payments being made each year to executives is a corporate governance system that’s still completely broken – because it’s dominated by third party, institutional shareholders who have deeply conflicted interests.

Board members have to approve executive compensation deals. Board members also have to approve mergers. Shareholders vote on who gets on the board. Therefore, board members check in with big shareholders, to make sure their interests are being represented.

So, who are the large shareholders of North Fork Bancorp…? Whose interests are being rewarded by this merger…? And whose interests are served by paying the top three executives more than a quarter billion dollars…?

In this case, it’s JP Morgan, which owns 4.42% of North Fork Bancorp (a little more than 21 million shares). JP Morgan is also the world’s largest derivatives trader and has a large, proprietary trading group. Is it possible that JP Morgan encouraged this deal in order to prop up its own trading account? JP Morgan’s share of the executive compensation bill for the top three North Fork Bancorp executives comes to nearly $13 million.

Would JP Morgan agree to spend $13 million for nothing…?


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