January 28, 1998
Green Tree Chairman Must Repay
Portion of His $102 Million Bonus
By JEFF BAILEY
Staff Reporter of THE WALL STREET JOURNAL
Green Tree Financial Corp. Chairman Lawrence M. Coss, whose huge
annual bonuses have raised eyebrows in recent years, will be forced to
repay part of his 1996 bonus of $102 million after the mobile-home lender
said it will restate results for that year and cut back on aggressive
accounting methods.
The St. Paul, Minn., company also said it will take $390 million in pretax
charges for 1996 and 1997 to devalue some of its asset-backed securities.
And Green Tree said it had a $17.3 million loss in the 1997 fourth quarter,
compared with a restated $42.6 million loss a year earlier.
Shares of Green Tree, one of the most highflying stocks in the financial
sector in recent years, fell 13% in New York Stock Exchange composite
trading. The stock, which traded as high as $50.25 during the past year,
Tuesday fell $2.8125 to $19.25 on heavy volume. Analysts attributed the
drop to reduced 1998 earnings projections and surprise by some at the
size of the charges.
The Green Tree announcement is the latest in a series of mishaps to hit the
so-called sub-prime lending industry, which makes loans to less
creditworthy consumers. A Wall Street favorite in recent years, the
industry's setbacks have been caused by aggressive accounting and overly
optimistic expectations.
Green Tree and its reclusive chairman and chief
executive officer, Mr. Coss, became widely
known in recent years for his unique compensation
agreement. The plan paid him an annual bonus
equal to 2.5% of the company's pretax profit. But
the payout came in Green Tree shares pegged to
their 1991 value of about $3 a share so that his
compensation was greatly magnified when the
stock soared. Mr. Coss' 1995 bonus totaled
$65.1 million following a 1994 bonus of $28.5
million.
In a statement Tuesday, the company said Mr.
Coss' bonus for 1996 would be adjusted in accordance with the
downward adjustment in profit for that year. The statement didn't
elaborate and company officials, including Mr. Coss, didn't return
telephone calls seeking comment.
Green Tree recently revised Mr. Coss' compensation to a more standard
plan that awards stock options rather than a percentage of profits. The
company didn't disclose what Mr. Coss' 1997 bonus would be.
Another Downgrading
Moody's Investors Service cut ratings on Green Tree debt Tuesday for the
second time in a week. And the rating concern said Green Tree's $2 billion
in debt outstanding could be downgraded further, pending a continuing
review.
Moody's said Green Tree's restating downward of its 1996 results "raises
concerns about the adequacy of Green Tree's operational controls."
Like many consumer-loan companies, Green Tree makes loans, packages
them into various kinds of investment pools, and then sells the loans in the
form of asset-backed securities. Its reduced corporate-debt ratings could
make issuance of such securities more expensive or more difficult. And
lower debt ratings certainly increase Green Tree's cost of borrowing
money to fund its operations.
"I'm chagrined," said Ben Crabtree, an analyst at Dain Rauscher Corp., a
Minneapolis securities firm. Mr. Crabtree upgraded his rating on Green
Tree in November, when its shares were trading at about $30, to a strong
buy from a buy, thinking all of the bad news had passed. Tuesday, Mr.
Crabtree again recommended the stock as a strong buy, and said that
"common sense tells me the bad news has passed us."
The company said in November that it would need to bolster its reserves
to reduce the carrying value of some securities -- ones that pay interest
only and whose value can swing drastically when borrowers prepay
principal.
Reserve Leads to Loss
Green Tree said it took a $190 million 1997 fourth-quarter "supplemental
reserve," similar to a charge, to reduce the securities' value on its books.
And it further cut the securities' value by $200 million by restating
downward its 1996 results.
The moves led to a 1997 fourth-quarter loss equal to 12 cents, compared
with a restated 1996 fourth-quarter loss equal to 30 cents a share. The
company didn't say whether the per-share results were diluted, which
includes the effect of stock options.
Excluding the fourth-quarter supplemental reserve, net income would have
been $100.5 million, or 72 cents a share. That was sharply lower than the
84 cents to 94 cents that the company had expected. It said the shortfall
was because of increased funding costs.
Full-year 1996 profit was restated to $184.7 million, or 1.31 a share, from
the previously reported $308.7 million, or $2.20 a share.
When companies sell loan-backed securities, they book immediately as
profit the estimated interest income they will receive on the loans
over-and-above the interest they have agreed to pay buyers of the
securities. The estimates often turn out wrong, however, due to changing
interest rates in financial markets, borrowers prepaying their loans, and
other borrowers failing to pay their loans at all.
Green Tree said it would adopt less-aggressive assumptions on future
loan-backed securities sales. That and higher borrowing costs will reduce
1998 profit, the company said, to an expected $2.50 a share. That is
below what analysts had been expecting. Mr. Crabtree, after the
November announcement of required additions to reserves, had expected
1998 per-share net income of about $3, he said.
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