Wachovia and Golden Parachutes

Wachovia Bank has been one of the casualties of the current financial crisis.  Trading in the $40s a year ago, the stock has plummeted to somewhere around $5. Perhaps the third quarter said it all.  According to the Washington Post, Wachovia:

• posted a $23.7 billion quarterly loss yesterday, the largest ever for a bank, as its portfolio of loans deteriorated and deposits fled. The report laid bare the serious financial straits the company was in before Wells Fargo announced earlier this month that it would buy Wachovia. On top of $10 billion in losses earlier this year, the quarter wipes out nearly all the profit Wachovia has earned since 2001, when it merged with First Union and became a much bigger, national bank. 

The Bank will, of course, disappear as an independent entity as it is swallowed by Wells Fargo. There is no realistic change of a higher, competing bid since the board voted to issue to Wells Fargo shares equal to about 40% of the bank's total voting power.  Ordinarily, this sort of action requires shareholder approval under the listing standards of the NYSE.  But the NYSE is a for profit company.  Tough enforcement of listing standards could hurt the bottom line.  The NYSE opted to allow Wachovia to proceed without shareholder approval.

While investors and employees watch the bulk of their investment evaporate, one group will apparently still make out reasonably well.  It turns out that ten executives at Wachovia have Golden Parachutes.  And what will they earn?  According to the Wachovia proxy statement:

• In addition, certain executives have employment agreements with Wachovia that provide for severance payments in connection with a qualifying termination of employment following a change in control. Assuming that the merger is completed on December 31, 2008 and all Wachovia executive officers who have employment agreements experience a qualifying termination of employment immediately thereafter, the 10 executive officers as a group would be entitled to receive an aggregate amount of up to approximately $98.1 million, as severance payments.

Not all of them will take the payments. Apparently one executive, David Carroll, was eligible for $19.1 million but because he is joining Wells Fargo will not accept the payments.  Nonetheless, most of the top executives (although not the current CEO, Robert Steel, who became CEO in July and apparently does not have a severance agreement) will do quite well from the Bank's demise.

The payments at Wachovia are symptomatic of a legal standard that largely allows executive compensation to escape judicial review.  The board gets to determine the circumstances that will trigger lavish payments and there is little or no review of these determinations.  It is further illustration that the matter cannot be left to determination by state courts.