THE LOCAL AREA WATCH

LOCAL BOY HITS JACKPOT AT SINKING FIFTH THIRD

Kevin Kabat rose through the ranks of that venerable West Michigan institution, Old Kent Bank & Trust, and played a key role in suppressing a shareholder revolt when the big bank from Cincinnati, Fifth Third Bancorp, gobbled it up in April 2001.  Two years later, after Fifth Third reduced Old Kent to its Michigan subsidiary and then ousted its discredited mole, David Wagner, from the top spot there, Kabat took the reins of Fifth Third-Michigan.  Then last April, Kabat was rewarded for keeping the Fifth Third-Old Kent merger skeleton in the closet with promotion to chief executive officer of the entire bank.  So he packed his bags and moved to Cincinnati.

Now we learn from the Securities & Exchange Commission that after less than a year running the show at Fifth Third Bancorp, the board of directors paid him $10 million in 2007.  That includes a base salary of $866,534, perks and benefits totaling $140,400 such as $28,682 in country club dues, a $3,000,0000 performance bonus, and $6,000,000 in Fifth Third stock and options.  So Kabat bagged $10 million while his shareholders got what in 2007?  Well, Fifth Third's stock (ticker symbol: FITB) plummeted from a high of $43.32 a share in 2007 to $22.13 a share this morning.  That wiped out about $10 or $12 billion in shareholder value since Kabat took over.

Well, maybe Kabat deserved his big payday, because in a tough market, he had managed Fifth Third better than its competitors.  Sounds good.  However, there's the inconvenient fact that Fifth Third's performance ranking has been at or near the bottom of the top fifty largest banks in the U.S.  The big bank from Cincinnati continues to sink after the Federal Reserve put the kibosh on ex-CEO George Schaefer's running-on-water strategy designed to outpace the discovery of irregularities in Fifth Third's acquisitions of competitors, especially Old Kent.

And do not doubt that Kabat won a jackpot from the directors.  Even Jeffrey Immelt, chairman and CEO of General Electric did not make as much as Kabat.  GE's directors paid him only $9.1 million for running a company with a shareholder value thirty times the size of Fifth Third.  If Kabat had been paid accordingly, he would not have even earned half of his base salary.  It appears that our local boy is still collecting from grateful Fifth Third's directors for keeping shareholders in the dark about the crooked deals surrounding the Fifth Third-Old Kent merger, such as Toxic Towers.

KABAT NEW TOP DOG AT FIFTH THIRD; NO WORD OF THANKS TO DISCREDITED WAGNER

As heirs apparent to Fifth Third Bancorp bigwig George Schaefer fell by the wayside as his go-go strategy of gobbling up smaller banks stalled exposing managerial and financial problems at the big bank from Cincinnati (click here for links to these stories), opportunity beckoned for Kevin Kabat.  This past week he got the nod and is now the chief executive officer of the Fifth Third empire.

Kabat was a top executive at Old Kent Bank who helped his boss David Wagner, the CEO and chairman of that venerable Grand Rapids institution, deliver the bank to Fifth Third at the climax of Schaefer's acquisition campaign during 2000-2002.  One important job Kabat did for Wagner and Fifth Third was quelling a pre-merger shareholder suit threatened by key directors of Old Kent who were disgusted with Wagner's performance, especially his mismanagement of the bank's mortgage business, that had made Old Kent weak enough to be bought out.  That suit would have aired out all the dirty laundry during Wagner's regime, including irregular lending practices to Grand Rapids "players", and probably would have also put the spotlight on Fifth Third's dubious due diligence in buying up smaller banks.

No small thing what Kabat did.  One of the directors was furious enough with Wagner to call him a "crook".  By pacifying discontent, Kabat prevented a lawsuit that could have put the kibosh on Fifth Third's acquisition of Old Kent.  So it went through.  However, Schaefer's go-go strategy caught up with him after that.  Old Kent was too big for Fifth Third to digest easily, and loose management of the merger finally caught the attention of the feds.  The Federal Reserve investigated the merger starting in September 2002 and gave Fifth Third its verdict in March 2003.  The feds only slapped Schaefer on the wrist, but they also stopped the Fifth Third merger steamroller -- but only after Schaefer got his big prize, Old Kent Bank.  (Wagner, however, paid a big penalty when Schaefer ousted him from Fifth Third in April 2003 under the pretext of early retirement.)

The stock market analysts also took a closer look at Fifth Third as a consequence, and they found problems that sent the Cincinnati bank's shares into a nosedive.  By October 2005 the crash in Fifth Third's stock sliced the share price in half (from its peak in 2002), destroying almost $20 billion in shareholder value.  Schaefer was in hot water, and his lieutenants fell on their swords for him.  By this time Kabat had made his way to Fifth Third headquarters in Cincinnati.  With no clear successor to Schaefer left, and other banks looking to exploit the weakness at the top of Fifth Third to acquire it, in June 2006 Schaefer tapped Kabat to be his second-in-command and heir apparent.  After all, if it hadn't been for Kabat keeping all the dirt swept under the rug until after the merger was completed, Schaefer may have never gotten his hands on Old Kent Bank.

In accepting his rise to the top spot last week, Kabat thanked all those who had made that possible, with one curious exception -- David Wagner.

HOW A SHARK BECOMES SHARKBAIT

A bit of information from the Wall Street Journal that probably won't make it into the Grand Rapids Press:  Institutional Shareholder Services, a preeminent advisory firm, urged shareholders of Fifth Third Bancorp to withhold support of embattled CEO George Schaeffer and other directors who are up for election this year.*

As reported here, Schaeffer led the big bank from Cincinnati through its go-go years until a declaration of bank fraud from your friendly neighborhood watchdog, the Local Area Watch, triggered a federal investigation of Fifth Third in the wake of its botched acquisition of Old Kent Bank in 2001.

That stopped Schaeffer's running-on-water strategy of buying up smaller banks quicker than the financial irregularities of these mergers (think of the financing of the Boardwalk project) could catch up with Fifth Third.  Dead in the water, the bank sank losing over 40% of shareholder value during the next three years.  With a bit of poetic justice, Schaeffer's crash and burn turned the tables on Fifth Third and now made the shark sharkbait.  Wells Fargo and US Bank have both looked into buying out Fifth  Third.

Click here for a list of past articles about Schaeffer and his bank.

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* However, most shareholders ignored the advice, as they too often do regarding mismanaged public corporations.  Think Enron.  So Schaeffer and his cronies were voted back in today, though with considerably less support than before.

FIFTH THIRD SCRAPING BOTTOM

Yesterday the Wall Street Journal reported Fifth Third Bancorp of Cincinnati ranked at the bottom of the pack in comparison to other publicly-traded banks.  Of the twenty-seven members of the banking sector that the Journal rated, Fifth Third posted the worst one-year total return to shareholders at minus 17.3%.  It was the bank to post a negative three-year total return at minus 11.3%, and only two other banks had a worse five-year total return.

Clearly once the Feds put the ki-bosh in 2002 on Fifth Third's strategy of hiding its loosey-goosey corporate governance behind a cloud of dust of acquisitions, the financial problems inherent its style of management caught up with the bank.  Apparently reality has finally intruded upon the top management of the bank.  Last year CEO George Schaeffer shamelessly passed out big bonuses despite the abysmal performance of his top executives.  This year, with the threat of takeover looming, there were no bonuses -- just big raises, some topping 15%.  Well, I suppose it costs a few bucks to keep people around to fall on their swords later on.

Here are some links to past articles about the big bank from Cincinnati, its acquisition of Old Kent Bank, and the corruption that flowed from that deal:

FIFTH THIRD CFO TAKES THE FALL - Why Fifth Third's new CFO isn't responsible for Schaeffer's mismanagement of the bank.

A BANK JOB, INDEED - The chain of events that followed from our report to the feds on the shenanigans involved in Fifth Third's acquisition of Old Kent.

DID FIFTH THIRD ABET ILLEGAL DUMPING SCHEME? - How Fifth Third/Old Kent cooperated with its development company to facilitate the illegal removal of contaminated soil from an urban brownfield.

THE FIXER, PART IV (PYRAMID DUST) - The background on how Old Kent got sold out to Fifth Third on the cheap.

All of our stories on Fifth Third can be found under the category "Banks".  If you have any news for us regarding Fifth Third, feel free to post comments to the relevant article or e-mail us at info@localareawatch.org.  Thanks.

FIFTH THIRD'S CROWN PRINCE RESIGNS

Fifth Third Bancorp of Cincinnati, Ohio, has lost another top executive.  Following the "resignation" of Chief Financial Officer Mark Graf last month, Executive Vice President Neal Arnold has left the bank.  Fifth Third quietly announced Arnold's resignation on Monday in a routine regulatory filing.  No explanation has been offered for his departure, which has raised eyebrows because Arnold was thought to be embattled CEO George Schaeffer's likely successor.

Well, as regular readers here know, the big bank from Cincinnati has problems, which the Local Area Watch has been documenting for a number of years now.  For those who want to catch up on the story of Fifth Third and its decline over the past few years, here are links to key articles we have run about the bank:

FIFTH THIRD CFO TAKES THE FALL - Why Fifth Third's new CFO isn't responsible for Schaeffer's mismanagement of the bank.

A BANK JOB, INDEED - The chain of events that followed from our report to the feds on the shenanigans involved in Fifth Third's acquisition of Old Kent.

DID FIFTH THIRD ABET ILLEGAL DUMPING SCHEME? - How Fifth Third/Old Kent cooperated with its development company to facilitate the illegal removal of contaminated soil from an urban brownfield.

THE FIXER, PART IV (PYRAMID DUST) - The background on how Old Kent got sold out to Fifth Third on the cheap.

All of our stories on Fifth Third can be found under the category "Banks".  If you have any news for us regarding Fifth Third, feel free to post comments to the relevant article or e-mail us at info@localareawatch.org.  Thanks.

POT CALLS THE KETTLE BLACK

Mitch Stapley has a rather grand title.  He is the Chief Fixed Income Officer for Fifth Third Bank of Michigan.  Like Punxsatawney Phil, he pops his head out of his hole every so often to pronounce a forecast -- except that Mitch forecasts the financial markets, not the weather.  Last week Mitch told General Motors shareholders to drop their stock like a hot potato.  Whatever the merits of that advice, I must wonder what Mitch told Fifth Third shareholders over the past three years as CEO George Schaeffer and the gang destroyed half the bank's stock value.

GET YOUR FIFTH THIRD NEWS HERE!

A rumor broke yesterday that Fifth Third Bancorp of Cincinnati (ticker symbol: FITB) has become a takeover target after CEO George Schaeffer has managed to halve its stock value over the past three years since the trouble-plagued acquisition of our very own Old Kent Bank & Trust.  Scuttlebutt has it that U.S. Bancorp of Minneapolis and Wells Fargo & Co. of San Francisco are in the market.  On the news Fifth Third's stock bounced up a couple of bucks.  Who knows, with good management the big bank from Cincinnati may very well be a bargain.

For those visiting about website for the first time looking for news behind all of the takeover speculation, here are links to some previous articles we ran on Fifth Third:

FIFTH THIRD CFO TAKES THE FALL - Why Fifth Third's new CFO isn't responsible for Schaeffer's mismanagement of the bank.

A BANK JOB, INDEED - The chain of events that followed from our report to the feds on the shenanigans involved in Fifth Third's acquisition of Old Kent.

DID FIFTH THIRD ABET ILLEGAL DUMPING SCHEME? - How Fifth Third/Old Kent cooperated with its development company to facilitate the illegal removal of contaminated soil from an urban brownfield.

THE FIXER, PART IV (PYRAMID DUST) - The background on how Old Kent got sold out to Fifth Third on the cheap.

All of our stories on Fifth Third can be found under the category "Banks".  If you have any news for us regarding Fifth Third, feel free to post comments to the relevant article or e-mail us at info@localareawatch.org.  Thanks.

BILLIONS DESTROYED

This past week Fifth Third Bancorp's stock (ticker symbol: FITB) hit a new low of $35.05 per share.  Fifth Third's long unrelenting slide began in April 2002, after month after we had turned over to the U.S. Justice Department evidence of federal offenses committed in the course of Fifth Third's acquisition of Old Kent Bank.  From its peak at that time of almost seventy bucks a share, shareholder value has been sliced in half.  (No wonder Fifth Third hates us.)  That represents the destruction of $19.6 billion of value, and the big bank from Cincinnati still isn't a bargain as it struggles to churn out profits.  Trust me, folks, the recent ouster of Fifth Third's CFO as the fall guy for this disaster won't turn anything around.  CEO George Schaeffer has operated the bank on the go-go principles (or should I say "lack of principles") of the '90s.  But it's tough for any public corporation, let alone a bank, to play that game anymore, and looks like running Fifth Third the honest way isn't easy.

FIFTH THIRD CFO TAKES THE FALL

After peaking at nearly $70 a share three years ago, the once high-flying stock of Fifth Third Bancorp (FITB) has fallen to under $37 a share, its lowest level in five years.  The slide has destroyed almost half the shareholder value of Fifth Third in the wake of its acquisition of our homegrown Old Kent Bank.  Of course, financial carnage like that means someone has to go.

On Friday the Wall Street Journal reported that the fall guy was the newbie to the Fifth Third executive suite, Chief Financial Officer R. Mark Graf.  The 40-year-old Graf was hired in only a year ago, but he’s been fingered for the collapse of Fifth Third’s stock.  Well, the official story is that he’s quitting to pursue other opportunities.  Yeah, right.  But then the unofficial story is also a howler:  Graf has to go because he downplayed to shareholders the bank’s recent bungling of the flattening yield curve.  (That’s when short-term interest rates rise as long-term rates fall.  This squeezes a bank’s profit margin because the cost of money goes up while the interest rates it charges on loans go down.)

The idea that Graf is responsible for the Fifth Third troubles is absurd.  He’s been onboard only for a year, but the bank’s stock has been falling like a rock for three years.  It’s no coincidence that the collapse began in April 2002 after we had reported to the U.S. Justice Department federal offenses that were committed during Fifth Third’s acquisition of Old Kent.  By September 2002 the Federal Reserve Bank of Cleveland opened an investigation of Fifth Third.  As a consequence the Fed imposed controls upon Fifth Third that stopped its merger mania strategy dead in its tracks.

Once Fifth Third was forced to grow through good management rather than buying up smaller banks with inflated stock, reality caught up with it.  No longer able to run on water, its stock sunk while banks as a group outperformed the market.  It is CEO George Schaeffer’s merger strategy that is a bust.  He got greedy trying to get Old Kent on the cheap.  (See Part IV of “The Fixer” series for more on this.)  Instead he got a pile of overvalued and impaired assets that’s been an albatross around his neck ever since.

Graf’s resignation will only give Schaeffer a temporary respite, because nothing’s changed.  Fifth Third’s fundamental problems remain, and it still has a potential $40 billion environmental liability hanging over it for concealing the Boardwalk’s contamination from regulators, shareholders, and its partner in financing the project, National City Community Development Corporation.  Expect the Fifth Third stock to go even lower as its profits continue to slip and its liabilities catch up with Schaeffer and his team.

FIFTH THIRD TANKING

The stock of Fifth Third Bancorp (ticker symbol: FITB) is dropping like a rock today on the NASDAQ exchange.  It's down two bucks this morning at around $38 per share.  That puts the bank's stock at nearly half of its $75 per share peak in 1999 when it began the process of acquiring Old Kent Bank.  Since closing the Old Kent deal in April 2001, there's been nothing but bad news for the big bank from Cincinnati, which has been dogged with a federal investigation, a class-action shareholder suit, and the prospect of a $40 billion environmental liability, all stemming from that transaction.

The collapse of Fifth Third's stock price is worse news for it than it would be for other banks, because Fifth Third has depended upon an inflated stock value to grow by using its shares like currency to buy other banks.  Cheaper stock sinks that growth strategy, which had helped to mask problems with Fifth Third's loosey-goosey controls over assets it took over from acquired banks.

The immediate cause of Fifth Third's freefall today was its downgrading as an investment by the five top financial advisors on Wall Street.  Even at its recent trading range in the low forties, Fifth Third was still an expensive stock on a P/E basis compared to other banks.  So the word from the advisors set off wave after wave of institutional selling of Fifth Third's stock.  As for a more fundamental cause of Fifth Third's demise, in August its shareholders motioned the U.S. district court in Dayton, Ohio, to approve the settlement of the class-action suit mentioned above.  On Tuesday the presiding judge convened a closed meeting between Fifth Third and the shareholders' attorneys.  No news has come out of that meeting, but it is likely that the details of the payment by Fifth Third to shareholders was hammered out in it.

Meanwhile, Fifth Third's development company for the Boardwalk project at the north end of downtown, 940 Monroe L.L.C., remains on the hook for huge environmental liabilities for dumping 26,000 tons of hazardous waste in the middle of the city.  Moreover, state and federal law enforcement has not closed the books on the bank's role in that dumping - and all this is just the tip of the iceberg of the foulness arising from Fifth Third's snatching of Old Kent three years ago.  The big bank is now beginning to reap the whirlwind for its profligacy.