Saturday, October 11, 2008

Chesapeake Energy (CHK) Forced to Sell Nearly All Shares to Meet Margin Call

Wow. Aubrey McClendon, CEO of Chesapeake Energy (CHK) is infamous for his constant buying of his own company stock. I wrote late last week that the stock of CHK was a case study of hedge funds blowing up and liquidating [Oct 9: Hedge Fund Liquidation in Pictures]. I guess it wasn't just hedge funds.
  • Aubrey K. McClendon, the billionaire chief executive of Chesapeake Energy Corp., has sold "substantially all" of his stock in the company over the past three days in order to meet margin loan calls, the company said Friday.
  • Chesapeake Energy did not disclose the size of the stock sale, pending the filing of documents with the Securities and Exchange Commission, but media reports have placed the number of shares at more than 33 million, making him the Oklahoma City-based company's third largest shareholder.
  • "I am very disappointed to have been required to sell substantially all of my shares of Chesapeake," McClendon said in a news release. "These involuntary and unexpected sales were precipitated by the extraordinary circumstances of the worldwide financial crisis."
  • Between Wednesday and Friday, he sold 31.5 million of those shares -- 94% of his holdings -- for $569 million
  • Last month, Forbes showed McClendon at No. 134 on its list of the nation's 400 richest people, with a net worth of $3 billion, an increase from $2.1 billion the previous year.
  • McClendon said he looked forward to rebuilding his ownership position in the company.
That's ok! First many of these shares were surely grants handed to him on a yearly basis by the executive compensation committee. Further, in our "heads we win, tails we still win" culture of payoffs (err I mean salary negotiations) the "company" will "independently" decide that if we want to keep the CEO working hard, we cannot just pay him a salary and his normal option grants - we need to load him with a boatload of new stock and options. Heck, with these low prices we can price the options at a price that poor Aubrey can make all the money he lost (and more) in 5 years. Because that's how it works. Because unlike normal workers in the rank and file - we cannot risk the CEO "not being incentivized" because their work ethic apparently disappears if the carrot is not immense. I am not going to watch this day in and day out but just you wait - there will be a massive option grant in the next 24 months because the board of directors of American companies are just the lapdog of the CEOs. You know - like using the companies profits to buy back stock, while simultaneously issuing tons of new stock and options to the top 5 insiders. It's just a big transfer of wealth from shareholder to the "elite few".

Sorry for being so cynical - but this is just the reality of our "fair and balanced" system. [Oct 4: Credit Crisis Sharpens Anger over CEO Pay] Just out of blanket curiosity sake I will be checking back in a year's time to see how the "incentive system" is "adjusted" so he can once again show he is the "biggest believer in his own stock by buying with his own money" (his own money provided by the compensation board of course). We saw a ton of this after the NASDAQ blowup where tech company insiders got loaded right back up once their stocks imploded so they can get rich the second time around. Because their stocks falling so far was a "Black Swan event" that only happens once in a lifetime. Or twice every decade. The spirit of fairness is so absent - how can the "rank and file" workers in public companies be expected to 'work as hard as possible' if the CEOs and CFOs and the COOs are going to get "retro fitted" with a new set of options and stock grants to make sure they "are motivated". This will be a carbon copy inside executive suites akin to post 2002 - watch for it. Because the board of directors are looking out for "shareholder interests". Yep.

Now as for the hedgies? If you are a very good hedge fund customer who throws a ton of business towards your prime broker, he can "let it slip" that the CEO of CHK is selling (not that this EVER happens - cough cough) and what can you do? Short CHK to the ground. Because Wall Street is a "fair and even playing field" ;)

No position

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