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It was a new angle on the historic scale of the Great '90s Bubble: WorldCom's recent announcement that former CEO Bernard Ebbers owes the company $408 million. Never before, apparently, had a board of directors lent so much cash to the board's own chairman, drawing the funds from the coffers of the company they are legally obliged to protect. Ebbers is in no position to pay. His wealth was largely in WorldCom stock, which is down 97 percent over the past three years, reducing the value of his holdings to less than $20 million. He and the company have agreed on a five-year repayment schedule, heavily backloaded, though exactly where Ebbers will be getting $200 million in 2007 no one is saying. So for now the company includes among its assets a $408 million receivable from an ex-employee who doesn't even plan to begin paying it off until next spring. Has there ever been anything like it?
Ebbers seems to hold the record for money borrowed from an employer, but the Rigas family is even deeper in hock. As the founders and main shareholders of Adelphia Communications, a cable-TV operator, they have borrowed at least $2.3 billion from banks, with Adelphia guaranteeing the loans. They invested most of that money in Adelphia shares, which have plunged 99 percent in the past three years. Federal prosecutors arrested three members of the Rigas family and others July 24 on fraud charges related to Adelphia.
The stock market may have gone bust these past couple of years, but plenty of other things are booming: fraud, bankruptcy, shareholder lawsuits, recriminations, criminal charges, and, inevitably, personal debt crises. Ebbers, the Rigases, and other CEO mega-borrowers (such as Stephen Hilbert, formerly of Conseco) could learn a lot from a man extraordinarily wise in these matters, the one and only Donald Trump. No joke.
Trump's personal net worth 11 years ago was a negative $900 million. There's some law of nature that says real estate developers always get in over their heads, but Trump, as usual, had to outdo the rest: He was carrying some $960 million of personally guaranteed debt. And he got out of that hole, a feat that apparently has never been matched.
He understood a famous axiom: If you owe the bank $1 million and can't pay, you're in trouble, but if you owe the bank $1 billion and can't pay, the bank's in trouble. The moment that captured his strategy perfectly came when Trump's CFO received an $800,000 quarterly insurance bill for Trump's yacht, Trump Princess, which was, of course, mortgaged. He simply sent the bill to the Bank of Boston, which held the note on the boat, with a reminder that if the Princess sank uninsured, there'd be no collateral for the loan. The bank paid the bill.
Similarly, Trump convinced his main real estate lenders that if he had problems, they had problems. They could have taken over his Atlantic City casinos, but that would have left the banks with two unsavory options: selling the casinos into a recession for a fraction of the loan values, or operating them, which would have forced the bankers to deal with characters who were not exactly People Like Us, to put it mildly. So the banks cut Trump some slack, which was all he needed.
The extra breathing room let Trump get the casinos into better financial shape, and that enabled the final step in his audacious debt rehab: going public and selling some $1.5 billion of stock and bonds. Thus, the banks didn't really bail out Trump. Through our pension and mutual funds, if not individually, you and I did.
That's how it's done by a master. Could today's doyens of debt pull off something similar? Maybe. But there's another possibility. While Trump borrowed from banks, many on the modern roster of America's Most Lumbered got their loans from their employers. Those companies could just forgive the loans -- and don't think it can't happen. Kmart recently forgave multimillion-dollar loans to its failed ex-CEO and other former top executives who managed the company into bankruptcy.
Any more such misplaced kindness would be a real shame. These executives, like Ebbers, the Rigases, and other CEO debtors, were hailed as brilliant managers by their companies and cheerleading Wall Street analysts back when they were borrowing all that dough. Now that the chips are down, why deprive them of this opportunity to reclaim their reputations by turning around their seemingly hopeless finances? It's time for some tough love. These guys certainly -- definitely emphatically, imperatively -- deserve one more chance to show what great managers they really are.
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