The Conseco melt down deserves alot more attention that it has gotten. They had a large mortgage loan origination business, as well as a fair-sized derivative portfolio. It's another serious sign that the mortgage lending/real estate bubble is giving way, and I expect it will rapidly accelerate as more pressure is applied to the system in the form of rising rates.
nytimes.com
Good article by Floyd Norris in the New York Times today. IMO, Norris is among the best financial journalists in the U.S. today.
Founder Resigns Conseco Post, Under Pressure of Falling Profits
By FLOYD NORRIS
Stephen C. Hilbert, the man who founded Conseco 21 years ago and built it into a highflying insurance industry giant through a series of acquisitions, was forced to resign Friday.
The ouster came less than two years after Conseco made its largest acquisition, of the former Green Tree Financial, a mobile home financier that Conseco is now desperately seeking to unload for far less than it paid.
Conseco was unusually frank in explaining the departure of Hilbert, 54, the chairman and chief executive, and Rollin M. Dick, 68, who has been the chief financial officer since 1986.
"Last night, the board of directors concluded that the current senior management team simply could not convince the financial community that the company had adequate liquidity and that it was prepared to take the necessary measures to restore its historic level of profitability," David W. Harkins, a director who was named acting chief executive, said in a conference call with investors.
The departure of the men who built Conseco ended an era in which the company, which is based in Carmel, Ind., became a leading corporate citizen in Indianapolis, where the symphony hall, botanical garden and a sports arena are all named for Conseco or Hilbert. Hilbert for many years was one of America's best-paid corporate officials, earning $14.5 million in salary and bonus in 1998, the last year for which figures are available.
Hilbert, in a statement issued by the company, agreed that "over the last few quarters it became clear that my and Rollie's ability to engender investor confidence was impaired."
That confidence suffered another blow as the company announced a sharp decline in first-quarter profits, leaving them well below Wall Street expectations. Conseco reported net income of $77.4 million, or 22 cents a share, down from $287.8 million, or 87 cents a share, a year earlier. The results showed declines in both Conseco's insurance operations and in the former Green Tree businesses.
Conseco stock fell 25 cents, to $5.25, in New York Stock Exchange trading, a price that is 91 percent below the peak price for the stock, reached in April 1998 just before the Green Tree acquisition was announced.
Conseco officials said Friday that they were confident the company had enough liquidity to meet its obligations, and Lehman Brothers' effort to to find a buyer for Conseco Finance, as Green Tree is now known, was going well. But it is clear that investors remain dubious.
One issue of Conseco preferred stock, with a face value of $50, fell 25 cents, to $8.875. Those shares pay an annual dividend of $3.50, for a yield on Friday's price of 39 percent -- assuming the company can continue to pay the dividend. Conseco cut its common dividend earlier this year, but continues to pay an annual dividend of 20 cents.
A.M. Best, the insurance rating firm, cut its rating of Conseco's financial strength from A to A-minus. That is a relatively low rating from Best, and could hurt the ability of Conseco to sell new policies.
One issue confronting insurance regulators is that many of Conseco's insurance subsidiaries have invested in securities issued by other Conseco subsidiaries. With Conseco's securities selling at depressed prices, they will have to decide if the companies need additional capital.
Harkins, the new acting chief executive, said a board committee would immediately begin looking for a new chief executive and a new chief financial officer.
The slide in Conseco's fortunes is an embarrassment for Harkins, who is the president of Thomas H. Lee Partners, an investment firm that invested $500 million in Conseco on Nov. 30, and said that it had done complete due diligence and concluded that concerns about the company's financial prospects were unwarranted.
The company did not say what severance packages, if any, would be given to Hilbert and Dick. A major issue for both men -- as well as for many other Conseco executives -- is the status of bank loans the men took out to buy Conseco stock. Those loans were guaranteed by Conseco, which has also paid the interest on them. At the end of last year, the loans to all executives totaled $575.8 million, for the purchase of 19 million shares -- shares that are now worth about $100 million.
It is not clear how much of that is owed by Hilbert and Dick, but at the end of 1998, Hilbert owed $107 million and Dick $51 million. Since then, both men have made substantial share purchases, at prices far above the current level, and presumably owe far more money. If the company does not agree to pay off those loans, the men could face severe financial pressures.
For many years, Hilbert was viewed very favorably on Wall Street, as his strategy of buying insurance companies with borrowed money and then cutting costs and improving operations seemed to work out. Adjusted for numerous stock splits, the stock rose from a 1985 offering price of 44 cents a share to the peak of $58.125 in 1998.
It did that by reporting steadily rising profits, which impressed Wall Street despite frequent criticism by some. Abraham J. Briloff, an accounting professor writing in Barron's in 1992, said the profits were "enhanced via accounting legerdemain" that was sometimes "highly questionable."
Until last fall, the rising profits continued, but investors grew steadily more dubious. And on Friday the company's board concluded that the men who built the company were no longer trusted by investors. |
