As the third man to run American International Group (AIG) in its nine-decade history, Martin J. Sullivan oversaw its disastrous run from one scandal to another. He took over on the ouster of his mentor, Maurice “Hank” Greenberg, amid the last scandal to strike the company (and the insurance industry), and he was shown the door by irate investors in June 2008, the eve of the company’s unprecedented bail-out by Uncle Sam.

In September, he landed at Willis Holdings (WSH), the perennially third-place insurance brokerage, named as deputy chairman of the company and chairman and chief executive of a new “Global Solutions” unit consolidating the firm’s multinational accounts.

It’s a bit of a come-down for the man who abruptly inherited what was then the most powerful and influential insurance company in the world. But we trust the pay makes up for it, judging from the employment agreement Willis filed with its 10-Q on Friday afternoon.

Sullivan will get $750,000 in salary, and is guaranteed a bonus of between $250,000 and $375,000 for the four months of 2010 that he’s with the company. In 2011, he’s guaranteed a bonus of between $750,000 and $1.125 million, but after that he has to convince the board he’s worth a bonus. For signing on with Team Willis, he’s getting 75,000 restricted shares — $2.45 million at Friday’s close — that vest over three years. Next year, he’ll get 50,000 more restricted shares ($1.6 million now) tied to the company’s performance.

Round off the deal with five weeks of vacation, and it’s not a bad gig for a dropout-made-good who not that long ago was being excoriated by lawmakers over the costliest corporate bailout of the financial crisis. Still, it’s less than the $14.3 million or so he made in 2007 (his last full year on the job), according to AIG’s proxy from then, and a far cry from the $47 million Sullivan was reported to be receiving when he left AIG. (The proxy filed in 2009 is vaguer, and Andrew Cuomo, the New York governor-elect who was then attorney general, was pushing AIG to hold on to some of that.)  It’s also worth noting that this isn’t the first time we’ve footnoted Sullivan’s pay.

In any case, the Peter Principle, that tongue-almost-in-cheek rule of management that suggests employees tend to settle at their level of incompetence, clearly has its exceptions: Scandal and disaster can shake anyone loose. But, at least in the insurance trade, those dislodged from the top don’t seem to sink too far too fast.

Image source: Tracy O via Flickr

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Now we know how the decision to walk away affected Hyatt: It made money, at least on paper. Here’s how the company puts it in the 10-Q it filed on Wednesday:

“A pre-tax gain of $35 million was realized on extinguishment of the $45 million secured mortgage debt.  … The pre-tax gain of $35 million has been recognized in other income (loss), net on our condensed consolidated statements of income (loss).”

The reason is pretty straightforward: The company carried a liability of $45 million on its books for the mortgage, and eliminated it. Reversing an obligation typically generates income in accounting — not hard cash, certainly, but it has the effect of contributing to net income on the financial statements.

Considering that Hyatt reported $46 million in pre-tax income for the quarter, the $35 million from Hyatt’s strategic default wasn’t inconsequential. All in all, not a bad outcome for a “strategic default,” to borrow a phrase from the Fannie Mae executive we cited in our previous post on this hotel.

Meantime, we hear that employees at the hotel are pretty nervous about what’s it all means for them, understandably. Hyatt offers a little information in the filing (on p. 12):

“The hotel continues to be operated as a Hyatt-branded hotel; however, the lender has the option to terminate Hyatt as the manager within one year after the ownership transfer. If the lender does not exercise the termination option within one year, our management agreement will terminate in 2021.”

So there’s a good chance the hotel will continue to operate, owned either by the lenders or by other investors if it’s sold again. Hyatt may even continue running it — collecting a management fee in the process.

So for Hyatt, walking away seems to be relatively painless. That isn’t always the case for a lot of Americans.

Image source: Hyatt website

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Like households across the country, one of Hyatt’s subsidiaries “did not have sufficient cash flow to meet interest payment requirements under its mortgage loan” on the property, in this case a 347-room hotel with a restaurant, bar and comedy club, just a mile from the famous university. The scenario sounds familiar after years of news about the still-struggling housing market.

At the same time, the Hyatt subsidiary was under-water on its mortgage, or, in the formal language of the 10-Q, “the appraised value of the hotel was less than the outstanding mortgage loan.”

Now, Hyatt, the parent company, has felt the sting of the recession like other hospitality companies, but it’s not like it lacks resources. As of June 30, Hyatt had $1.17 billion in cash and cash-equivalents on its balance-sheet. It reported revenues of $889 million for the quarter, and net income of $25 million, or 14 cents a share.

Just like plenty of American families, Hyatt has to decide where to put those resources. And it has decided it’s not worth throwing good money after bad at this particular property, presumably because it doesn’t expect the hotel to recover in value any time soon.

“When hotel cash flow became insufficient to service the loan,” the company said in the filing, “HHC notified the lender that it would not provide assistance.” In other words, Hyatt decided to walk away — the equivalent of “jingle mail,” when homeowners pack up, move out, and mail their keys to their mortgage servicer, abandoning both the house and the loan with which they bought it.

In Hyatt’s case, the company

“and the lender agreed in principal to effect a deed in lieu of foreclosure transaction. We expect to complete transfer of ownership of the hotel to the lender within less than one year. As a result, we reclassified $45 million in long-term debt to current maturities.”

It’s a business decision, and it’s not terribly remarkable, in one sense. Companies across the country are doing this constantly; it’s a more or less accepted part of commercial-mortgage default. Homeowners, by contrast, have historically been more reluctant to simply walk away — Americans by and large don’t abandon their debts lightly.

That may be changing, of course. We’ve heard plenty of stories about homeowners walking away — thinking, and acting, more like American businesses. But here’s a difference: We doubt Hyatt will have trouble getting a loan after this.

By contrast, the companies that make and manage their mortgages aren’t always willing to cut a deal like the one Hyatt got — especially if they think the homeowners could in fact pay up.

And, as Bloomberg’s Lorraine Woellert notes in this June article, Fannie Mae — which with Freddie Mac backs a huge proportion of U.S. mortgages — is warning that homeowners who do the same thing “will be banned from obtaining new mortgages backed by Fannie Mae for seven years from the date of foreclosure…” Here’s the reasoning:

“Walking away from a mortgage is bad for borrowers and bad for communities,” Terence Edwards, Fannie Mae’s executive vice president for credit portfolio management, said in the statement. “Our approach is meant to deter the disturbing trend toward strategic defaulting.”

Image source: Hyatt website

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Once again, it’s about disclosure, and the agency’s press release puts it succinctly:

“Citigroup repeatedly made misleading statements in earnings calls and public filings about the extent of its holdings of assets backed by subprime mortgages. Between July and mid-October 2007, Citigroup represented that subprime exposure in its investment banking unit was $13 billion or less, when in fact it was more than $50 billion. “

Two executives are also named in the case: Gary Crittenden, the company’s former chief financial officer, and Arthur Tildesley Jr., once head of investor relations and now head of “cross marketing” at Citi. Like Citigroup, both men are settling along with the announcement of the charges.

Getting from $50 billion of exposure to $13 billion is more than a rounding error. Apparently, by the SEC’s account, Citi was neglecting to count “super senior” tranches of collateralized debt obligations — the ostensibly safer slices of pooled bonds or bond-like assets — and “liquidity puts,” effectively a customer’s right to hand failing instruments back to Citi. The agency cites at least four occasions in which Citi lowballed the number in public, even as internal documents recognized the total. At one point, officials even considered information that the company’s disclosures on the issue were misleading, according to the SEC.

Citi, as is usual in these circumstances, isn’t admitting or denying wrongdoing, though it is coughing up $75 million. Crittenden, who is paying $100,000, and Tildesley, who is paying $80,000, also don’t admit wrongdoing.

So far, the company doesn’t seem to have the gumption that General Electric did a couple days ago when it all but admitted foreign-corruption allegations against it; Citi doesn’t appear to have put out a formal statement yet.

Meantime, we see from today’s Wall Street Journal that Citigroup is among the financial firms cracking down on potty-mouthed emails, out of concern for the corporate image. There’s software for that, of course — as the WSJ article mentions, Bloomberg terminals have long declined to let employees send messages containing certain indelicate words.

Too bad financial firms can’t cobble together filters for questionable disclosures. that might do an even better job of protecting their images.

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But we were far more interested in the second quarter slideshow that JPMorgan Chase filed with the SEC on Friday afternoon.

While most of the slides aren’t all that different from the earnings release, a few definitely stood out. We particularly liked slide #10, which showed a sharp (and scary) increase in 30-day delinquencies for so-called prime borrowers. At the end of June, that number was running around 9%, compared with around 5% at the end of 2008 — yet another indication that the rosy economic headlines lately may be a tad bit overstated.

We also liked slide #19, which had Chase’s card services losses approaching 10%. That sounds pretty awful until you look at the very next line which notes that WaMu’s card losses “to approach 24% by the end of 2009.” Let’s think about that for just a moment: does this really mean that nearly 1 out of every 4 people who had a WaMu card aren’t able to pay it back?

And then we started to remember some of the posts we’ve done on WaMu over the years, like this one on the hiring of Stephen Rotella or this one on WaMu’s $1,325 an hour consultant and we started to get all misty-eyed. It’s hard to believe that it’s only been 10 months since WaMu fell.

We’ll be taking the rest of this week off from posting before Q season starts in earnest. But we’ll still be keeping an eye on the filings!

Having spent several years in Florida, I was familiar with the bank and footnoted readers should be too. Indeed, back in November 2007, we footnoted about one new disclosure in BankUnited’s 10K that jumped out at us:

Forty-two percent of our one-to four family residential loans were underwritten based on borrower stated income and asset verification and an additional 9% were underwritten with no verification of either borrower income or assets.

As footnoted readers know, it’s the new disclosures that are worth paying closer attention to. And while one reader jumped to BankUnited’s defense in the comments, arguing that the bank was still using credit scores and other methods to check income, by that time, the stock had already fallen sharply.

In June 2008, we footnoted BankUnited again for a late Friday amended Q that provided a lot more details on its Real Estate Owned (REO). Several months later, in October 2008, Alfred Camner stepped down as Chairman and CEO.

To be sure, bad decisions on real estate played a major role in the downfall of the bank. But so did the bank’s former family-centric management that seemed to run the large bank with 80-plus branches like the family piggy bank. Though Camner wasn’t even mentioned in the hometown Miami Herald’s coverage of the story, BankUnited proxy statements are full of what we’d charitably describe as self-dealing. During 2006, for example, Camner’s employment contract, was rewritten three separate times.

Perhaps, then, it’s fitting that John Kanas, formerly of North Fork Bancorp will be running the show at BankUnited now. Kanas, as footnoted regulars may recall, got a deal valued at over $212 million when he sold North Fork to Capital One (COF) three years ago.

Enjoy the Memorial Day weekend. We’ll be back on Tuesday with whatever gets buried late this afternoon.

Still, the 8K that Circor (CIR) filed yesterday, which was brought to our attention by the folks at Equilar still seems a bit surprising. In the filing, Circor says it will spend over $500K to bail out executive Christopher Celtruda, whose home in Corona, Ca. is seriously underwater. Here’s a snippet from the filing:

Due to market conditions beyond his control, the value of Mr. Celtruda’s residence in Corona, California has diminished approximately 50% since it was purchased by Mr. Celtruda at the time of his relocation. At the same time, market conditions have prevented Mr. Celtruda from successfully selling his family home in Phoenix, Arizona. Under the Agreement, the Company has agreed to purchase Mr. Celtruda’s home in Corona, California at its current fair market value and to make payment on Mr. Celtruda’s behalf of an additional approximately $488,000 to payoff the outstanding mortgage on the Corona property. The Agreement also provides for the Company to pay such amounts to Mr. Celtruda as are necessary to cover all federal and state income taxes pertinent to this transaction on a grossed-up basis.

As surprising as the filing is, you just have to wonder how many other companies are taking similar steps, but not disclosing them in an 8K or some other filing, because they don’t judge it to be material. A quick skim of filings doesn’t turn up lots of other examples, yet this has to be happening to other executives at other companies. Any suggestions for finding more of these, even if they’re not material?

Image: Vikte Kukis

There’s about 20 homes on the block today and one of the things that jumped out at me is that some of these were for pretty hefty sums — $750K and higher — which means that it’s hard to chalk this up to a problem with poor people being in over their heads as some in Congress seem to want to blame. A quick skim of Countrywide’s foreclosures for Florida — something that I first began tracking in August 2007, shows that there’s now over 2,300, a nearly four-fold increase from the 588 back then.

And, for those footnoted regulars who are interested, I drove by the infamous sex party house, which locals tell me actually wound up selling for around $650K, compared with the $1.1 million Countrywide foreclosed on it for. And I couldn’t help but chuckle at the McCain Palin signs displayed prominently outside. Glad to know that the Arizona Senator can count on the people who buy sex party houses for a song demographic!

So perhaps it’s not all that surprising that when Sunpower (SPWRA) announced yesterday that it had hired Dennis V. Arriola as its new CFO, the 8K that followed the press release included “up to $500,000 of compensation for loss on the sale of his home”. Arriola, had been CFO of San Diego Gas & Electric and Southern California Gas, the regulated units of Sempra Energy (SRE) and judging by the filing, will be moving to the San Jose area, where Sunpower is based.

Though the contract wasn’t included in the filing, the 8K includes a description of a few other goodies, including a $300K signing bonus, 50,000 options and another 50,000 RSUs, temporary housing for a year, and $100K in relocation expenses. Keep in mind that Sunpower’s stock is down nearly 60% year-to-date.

But as I first reported two years ago, it’s the housing guarantee that sticks out here. That’s because there’s something incredibly ironic about protecting corporate executives — the very people who should embrace capitalism — from market forces.

Image source: Associated Press/Kevork Djansezian

So what was in that last Q? A quick skim of the filing shows a few interesting pearls:

• More lawsuits than I could reasonably count. Just about everyone is suing them — employees, shareholders, mortgage-backed security investors. While some of the suits seem to have been stayed, you have to imagine that the legal bills are really racking up. For full details, start digging into footnote #26 in the Q.
• Various state and federal regulatory investigations. It was already known that AGs in California, Connecticut, Florida and Illinois have filed suits and that the SEC is also investigating. The filing also notes that while various media reports have reported an FBI investigation, the company says that after contacting the DOJ, “The DOJ has stated to the Company that the DOJ cannot confirm or deny whether the FBI is conducting an investigation of the Company.”
• The carrying value of the company’s loans held for investment at the time of the merger were $94.2 billion, which Bank of America paid $8.1 billion for.
• Between June 2007 and June 2008, Countrywide’s headcount fell by around 8,000 to just over 50,000. But that’s still a large number of employees for Bank of America to absorb easily.

Also interesting, but not in the Q is that the number of homes that Countrywide is trying to sell continues to rise, according to this site. In Florida, an area I’ve tracked closely, it’s up to 1,839, while the asking price continues to fall.

One other interesting tidbit: Angelo Mozilo’s name was nowhere to be found in Countrywide’s last Q. Talk about the end of an era!