My father owns shares of Chesapeake Energy. He likes the high dividend yield. He also wants to be “diversified”, so he doesn’t go 100% into gold and silver ETFs.
This story was interesting. The CEO of Chesapeake Energy got a controversial perk. It’s the Founder Well Participation Program. The CEO gets the option to buy 2.5% of every well that Chesapeake energy drills.
As you can imagine, that’s a very lucrative perk. That’s 2.5% of every single well.
Right away, you can see the potential conflict of interest. If it’s a borderline decision whether or not to drill a specific well, the incentive is for the CEO to drill anyway. That maximizes the value of the call option, by maximizing the number of wells drilled.
The CEO borrowed against his 2.5% equity stake in the wells. Due to declining natural gas prices, the CEO got margin called on his loans. Natural gas is one of the few commodities whose price isn’t skyrocketing due to hyperinflation. It was revealed that the CEO had $1B of loans outstanding, with his 2.5% well stake as collateral.
Chesapeake Energy has a market capitalization of $12B. If the CEO’s 2.5% stake is worth $1B, that means that the CEO stole $1B from Chesapeake energy shareholders. That’s nearly 10% of the value of the corporation.
That’s why the stock market is a bad investment. Even though Chesapeake Energy has a tangible product and earnings and a dividend yield, the CEO still robs the shareholders with a ridiculous compensation agreement.
A pro-State troll says “That’s the compensation agreement. It’s fair and square.” The problem is that a CEO salary negotiation is not a true free market exchange. The board of directors sets the CEO salary, BUT the CEO usually gets to pick the Board of Directors. The Board of Directors are spending the shareholders’ money and not their own personal money, so there’s no incentive for them to spend wisely. That’s the usual Principal-Agent Problem. If you’re on a corporation’s Board of Directors, that’s a high-pay low-effort low-skill job. You aren’t going to rock the boat and risk your gravy train, by refusing the CEO’s salary demands.
There’s another potential conflict of interest. The CEO may have borrowed $1B from the same bank that does business with Chesapeake Energy. The bank may give the CEO a lucrative rate on his loan, in exchange for Chesapeake Energy’s business. That wasn’t in the articles I linked.
This also shows the greed of the CEO. The well call options were worth $1B. Rather than cashing out over time, the CEO wants his money *NOW*. The CEO took out a loan for $1B against the call options, cashing out his equity immediately.
Negative real interest rates are also a factor. If interest rates are 5% and true inflation is 20%-30%, then the CEO does maximize his profit by maximizing his leverage. With an interest rate of negative 20% on $1B, that’s a gift of $200M per year from the State banking cartel. The CEO takes the $1B and invests in other businesses. Those other businesses may also profit via leverage and negative interest rates. In this manner, the State credit monopoly favors insiders at the expense of individuals. Insiders get to use greater leverage at lower interest rates. In this case, the CEO got stuck with a margin call when natural gas prices declined, and the scam was exposed.
The only reason the CEO got caught was that he was too greedy. If he didn’t borrow $1B and get a margin call, nobody might have ever known. Getting a $1B perk from a corporation worth $12B crosses the line into ridiculousness. It’s so bad that even a hardcore Statist would say “Wait a minute. That’s excessive.”
The Founder Well Participation Program was a ridiculous perk. The CEO robbed his shareholders. That’s why the stock market is one big scam. As a small shareholder, you can’t prevent the CEO from paying himself a ridiculously large salary, diluting your ownership.