I have been astonished by the speed of the collapse of our financial system. There is no precedent in my lifetime for such a rapid collapse. And I doubt that the lessons of the Great Depression pertain to the current situation. This is the Greatest Depression -- about which I posted in March -- and the lessons of this one are likely to expose five fundamental flaws in our financial architecture.

These flaws are the reason for the rapid meltdown and they include:

1. Securitization -- the popularity of shifting risk from an originator to a group of investors in a package wrapped in a AAA credit rating based on flawed analysis.
2. Lack of transparency -- the inability to estimate the future cash flows of such a complex security -- thereby creating massive uncertainty in a period of decline.
3. Leverage -- borrowing way too much money with too tiny a sliver of capital to protect against risk -- making it possible to wipe out all the capital with a 6% decline in the value of these securities.
4. Heads-I-win, tails-you-lose pay -- Paying deal makers for the size of their deals and sticking taxpayers and shareholders with the losses.
5. Global interconnectedness -- thanks to information technology and ease of investment rules, a sneeze in the US causes hurricanes around the world.

How could we cure these problems? As I posted, we could end securitization, demand complete transparency, raise capital requirements, link pay to profits rather than sales, and create firewalls to prevent problems in one market from infecting the rest. But with the global financial architecture crumbling worldwide, there's no time for this now.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Lehman Brothers Holdings Inc. (NYSE: LEH) Chief Executive Richard Fuld, Wall Street's longest serving CEO, has no reason to fear being ousted if he can't turn around the company around. In fact, on some level, he may welcome it because he stands to reap more than $241 million.

Fuld, who has been Lehman's chief executive since 1993, and other members of Lehman's senior management team do not have employment contracts or change in control bonus arrangements, according to the company's most recent proxy statement. He is also declining a bonus for this year for obvious reasons. Nonetheless, his turnaround effort announced this morning, which includes slashing Lehman's dividend by 93%, selling a 55% stake in its investment management division and a spin-off the vast majority of its commercial real estate assets into a public company, got a mixed reception on Wall Street.

Shares of the New York-based company, which fell 45% yesterday, tumbled in pre-market trading. They later rebounded following Lehman's conference call which Fuld personally oversaw. But as my colleague Peter Cohan noted, the company's earnings, which were issued a week early, were even more awful than Wall Street expected. The company reported a preliminary net loss of $3.9 billion, or $5.92 a share. Net revenue was a negative $2.9 billion.

It looks like the CEOs pushed out at Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) will do very well. According to MarketWatch, "Daniel Mudd, the outgoing CEO of Fannie Mae, could receive more than $9 million in combined severance pay, retirement benefits and deferred compensation." The head of Freddie, Richard Syron, could do even better. The amounts may come down a little if performance clauses in the contracts cut bonus pay.

The complaining is misplaced. The departing CEOs at places like Merrill Lynch (NYSE:MER) and Citigroup (NYSE:C) did much better. Paying financial firm chief executives large sums is part of doing business. That issue is not confined to banks and brokerages. It extends to almost every other large industry.

The US business culture has become one of paying CEO hundreds of times more than entry level workers at the same companies. The entire systems would have to be altered for that to change. Activist investors have been working on the problem for years, and nothing has happened.

The excitement over the Fannie and Freddie CEO comp deals only serves to show that the company's boards believed that the executives would do a good job when they came into the firms and that, at the time, there was no reason to think that their stocks would trade for under $1.

No one puts together a pay package on the assumption that a corporation's stock will fall 99%. It is hard to find senior management who will take $1 as an exit package, even if things do go wrong..

Douglas A. McIntyre is an editor at 247wallst.com.

Both Republican and Democratic members of Congress agree that Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) may need a taxpayer-funded bailout. Amounts of the bailout have ranged as high as $25 billion.

While this is a whopping big bucket of money, it pales in comparison to the $217 billion worth of non-agency securities that have fallen in value and the $1.5 trillion in debt downgrades in 2Q alone. In order to mitigate objections from taxpayers opposed to using public monies to bail out a quasi-private industry, those bulwarks of fiscal responsibility in Congress are beginning to draw up plans to curb executive compensation for those who will help Fannie and Freddie crawl out of the hole.

In 2007, Fannie Mae President Daniel Mudd earned a $2.2 million bonus on top of his $10 million salary. Members of Congress want to know why the executives who ran the ship aground were rewarded handsomely for doing so. Some members of Congress have suggested that previous executive bonuses should be given back to the companies. I bet some taxpayers might want to apply this same reasoning to Congressional salaries and perks.

Lehman Brothers Holdings Inc. (NYSE: LEH) is trying real hard to convince its Gucci-clad workforce not to abandon ship.

According to CNBC, employees will receive 20% of last year's bonus in stock that vests over three years. "Lehman's decision to issue additional stock to employees is being interpreted by some in the market as a sign that the Lehman is not planning to sell itself for a below-market price," writes CNBC ON-Air Editor Charlie Gasparino.

Hmm. Didn't the same conventional wisdom believe that Bear Stearns was too big to fail and that the end of the write-downs at Wall Street banks was near? So, pardon me if I am a little skeptical.

As Fortune magazine notes, Lehman, like other Wall Street banks, got itself into trouble by making scores of bad real estate investments.

"Because it prided itself on real estate expertise - it helped popularize real estate-backed securities in the early 1970s - and investment prowess, Lehman risked far bigger proportions of its own capital doing deals than its major competitors did," the magazine notes. Little wonder that the stock is down more than 65% this year.

Sorting out through this mess will take years. Any Lehman employees who were smart enough to get hired probably know a bad deal when they see it. This well-timed leak to CNBC is part of Lehman's efforts to avoid becoming the next Bear Stearns.

For now, the ploy is working. Shares of the New York-based investment bank are trading up on the news -- Lehman shares closed up 6.68%. Over the long run, though, investors and Lehman employees will see through the smokescreen.

There ought to be a law. That would be legislation which limits what public company CEOs get when they are fired. Maybe the limit should be $1 million. How much is failure really worth?

The departing head of American International Group (NYSE: AIG), Martin Sullivan, will pick up $47 million as he hits that door. According to the FT, "Mr Sullivan's departure was deemed a resignation for "good reason", according to AIG." His "good reason" was that the board would not allow him to stay in the building. What better excuse can a man get?

Sullivan can hardly be blamed for taking the money and retiring about his yacht to hit golf balls into the ocean. The AIG board shoulders that burden. The chairman of that board, Robert Willumstad, took Sullivan's job. Maybe it was easier to move up to CEO with Sullivan fat and happy.

But, there ought to be a law.

Douglas A. McIntyre is an editor at 247wallst.com.

Lehman Brothers Holdings Inc. (NYSE: LEH) Chief Executive Richard Fuld continues to keep his job even though shares of the New York-bank have slumped more than 60% this year. Meanwhile, American International Group Inc. (NYSE: AIG), whose shares are down 42%, ousted CEO Martin Sullivan because of the continued poor performance of the world's largest insurer.

Why didn't Fuld follow Sullivan onto the unemployment line, albeit the cushy one for failed CEOs? It makes no sense.

Last week, Fuld shocked investors by pre-announcing that Lehman lost $2.8 billion, or $5.14 per share, results that were officially confirmed today. In the earnings release, Fuld proclaimed the results as "unacceptable" and vowed to "take the necessary steps to restore the credibility of our great franchise." Well, at least he says that's what he wants to do. He dismissed Lehman President Joseph Gregory and Chief Financial Officer Erin Callan last week. On the conference call, Fuld even took responsibility for the loss and investors cheered this act of contrition, sending shares of Lehman up.

The euphoria is not going to last. I am not sure why Wall Street believes that Fuld can extricate Lehman from the financial quagmire that occurred on his watch. They certainly did not give Merrill Lynch & Co.'s (NYSE: MER) Stan O'Neal and Bear Stearns & Co.'s (NYSE: BSC) James Cayne or Citigroup Inc.'s (NYSE: C) the benefit of the doubt.

The Associated Press reports that "as the American economy slowed to a crawl and stockholders watched their money evaporate, CEO pay still chugged to yet more dizzying heights last year." The average S&P 500 CEO took home a pay package valued at $8.4 million in 2007, an increase of 3.5%. The top 10 highest paid CEOs took home a total of more than $500 million, but 5 of those companies saw huge drops in profitability at their companies. It's good to be the boss, even when it stinks to be the shareholder.

On one level, criticizing rising executive pay based on the performance of the economy is grossly unfair: executives should be paid based on their marginal value to the company, not based on broader economic trends that they have no control over. The problem is that executives routinely benefit from factors they have no control over: any CEO of any oil company is doing quite well just for being in the game. When things are going well, everyone's happy, and shareholders generally don't complain about CEO pay when they're earning double-digit returns. But when CEOs don't take a hit with the shareholders on the way down, it's not fair. CEOs are in the ideal "Heads I win, tails it wasn't my fault and I still win" situation.

What can be done about executive compensation problems? That's easy: improved corporate governance that can only be achieved through an increase in shareholder activism. Large institutional shareholders need to get off their hands and threaten with proxy fights when corporate boards fail to do their jobs. For its part, the SEC can improve proxy access, making it easier for dissident shareholders to affect change if that is the will of the majority.

Right now, companies can be run by small clique of insiders who have virtually no stake in the company's long-term future -- and decades can go by without any accountability. Until that changes, executive compensation in America will continue to be a disaster.

The Wall Street Journal reports (subscription required) that if Nabors Industries' (NYSE: NBR) 78-year old chairman Eugene Isenberg died, the company would have to pay his estate "severance" of $263 million.

According to the Journal, "Dozens of other companies offer lush death-benefit packages to their top executives, according to a Wall Street Journal review of federal filings. Many companies accelerate unvested stock awards after a death, which by itself can amount to tens of millions of dollars. Some promise giant posthumous severance payouts, supercharged pensions or even a continuation of executives' salaries or bonuses for years after they're dead."

What?! A continuation of salaries and bonuses after the CEO dies? I have to tell you: it speaks volumes about how low the performance targets for bonuses are at America's public companies when they can be achieved from 6-feet under. How can a bonus possibly be performance-related when it's paid out even if the executive kicks off? I just don't get it at all.

It gets worse: executives are given hefty parting gifts in exchange for non-compete agreements -- by signing the employment contract, they agree not to go work for a competitor if they part ways. They still get those non-compete payments if they die. But maybe that makes sense: even a dead guy could probably deliver stronger results than Borders Group (NYSE: BGP) CEO George Jones has. Rumor has it that the company has considered replacing him with Tolstoy.

Be sure to read the Wall Street Journal piece. It's depressing, hilarious, and pathetic, all at the same time. If you needed more proof that corporate governance in America is a joke, look no further.

A new bit of research is out that shows CEOs are feeling the effects of the economy, much like everyone else...

One of the most tired defenses against criticism of executive pay gone wild is the comment that athletes and pop stars earn outrageous sums of money, so why not executives? It's exactly that argument that Marc Hodak uses in a column for Forbes: "When rock stars make big bucks, we can look at the ticket and album sales and understand where it comes from. But when a CEO makes rock star income, we figure he must be scamming the shareholders."

Here's why that analogy doesn't work: when an owner of a sports team decides to spend $100 million on a superstar shortstop, that's his choice. It's his money. He owns the team, and he's entitled to do whatever he wants with it. Similarly, if 12-year old girls want to collectively spend $100 million on Menudo posters (And who can blame them!), that's their prerogative.

But what if the owner of a sports team was forced to spend money on players based on the whims of retired politicians and economics professors who serve on 15 other boards, collecting $100,000 from each company in exchange for going to a couple meetings a year and have no particular stake in the outcome of the investment? And what if these decision-makers could only be voted out once every few years, but the ownership of the team was so fragmented and most of the owners were so inattentive that it was nearly impossible to get them replaced?

That is, in effect, the situation we have in executive compensation. If the owners of public companies actually had any meaningful say in how much CEOs were paid, the sports star analogy would work. Since they don't, it doesn't. Executive pay is a classic principal-agent problem, and it's one that can only be solved through improved corporate governance.

With CEOs taking home absurd amounts of money, many top companies are hearing calls from shareholders to limit pay to senior executives. The AP reports: "Fund managers and individual investors alike are campaigning for a 'say on pay' rule giving shareholders a vote on executive compensation at major corporations, especially America's biggest banks. This is the latest salvo in the battle against Wall Street's exorbitance, and this time it appears shareholders might stand a chance."

The argument for limitless compensation says that in order to attract the best leaders you need to pay them. I agree wholeheartedly. In fact one need only look at what happened to Ice-Cream maker Ben and Jerry's to see how the principle works in real life. They wanted to limit the CEO pay to a certain percentage of the lowest paid employee. What happened was that they couldn't find anyone worthy enough to take the job. In the end they gave in to the forces of capitalism and paid a normal CEO salary.

My question is simply why can't we compensate senior executives based on their performance? Why should a CEO who managed to lose his company $5 billion, and lose his shareholders 60% of their investment, receive $50 million plus stock? Why not incentavize CEO's so that if they do a good job, they make tons of money, and if not, they don't. On the other hand a CEO that creates shareholder value as well as corporate profits should make lots of money.

There is no doubting that CEO's work extremely hard and 99% of the population couldn't do their jobs. That being said we shouldn't be rewarding them just because they have the title "CEO." We should reward them based on their success.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 4/13/08.

Coming soon to investor email and mail boxes will be annual reports and proxy voting materials, complete with this year's shareholder resolutions. Hot topics this annual meeting season include the ever popular "say-on-pay." Shareholders are incensed that average or even sub-par executive performance and decision making is being handsomely rewarded with gigantic salaries and perks while they make due with crumbs. According to a recent article in CFO Magazine, 76 shareholder proposals dealing with executive compensation have made it onto the ballot.

Also on many ballots are shareholder resolutions dealing with socially responsible investing, particularly on matters revolving around the issue of global warming and/or climate change. So far, 56 shareholder resolutions have made it onto ballots. At least nine companies have taken steps to negate the need for such shareholder resolutions by rolling out policies addressing how the companies will cut back on greenhouses emissions and otherwise "go green."

As this is a presidential election year, there are at least 50 shareholder resolutions to force companies to disclose political contributions. These resolutions probably won't gain the necessary traction to force any action, but any resolution favoring greater corporate transparency is to shareholders' advantage.

New this year are numerous resolutions requesting senior management to disclose a company's exposure to subprime mortgage losses and secondary purchases in the mortgage market. This is a hot topic among investors right now, and many pension fund investors have taken hits. Look for union members to pressure their pension funds manangers on this one.

How will you vote on these subjects?

A piece on Portfolio.com reports on an increasingly popular trend in executive compensation: the $1 salary.

Of course, in this era of outrageous pay for poorly-performing executives, the prospect of a $1 salary has its allure for investors. It's refreshing. But when you hear about a $1 salary, you still have to dig deeper to learn how much a CEO really made.

For instance, Capital One (NYSE: COF) CEO Richard Fairbanks' 2007 salary of $1 made for great headlines but a look at the proxy statement pegs his total compensation for the year at more than $20 million because of generous options grants -- which can come back to dilute the shareholders in the future and are therefore a very real expense.

Why would he structure his pay like that? Portfolio reports that "Salary is taxed at rates as high as 35 percent, while capital gains from stock sales are taxed up to 15 percent. Cutting down the salary portion of an executive's compensation could help reduce the overall tax bill."

With the vast majority of large-cap CEOs in the 35% bracket, taking cash over stock may be leaving money on the table.

But the proxy statement for Apple (NASDAQ: AAPL) shows that Steve Jobs really does only earn $1 and, more impressively, essentially never sells stock. There's a guy who really is aligned with the company's long-term shareholders.

The point is that there's nothing wrong with a CEO boasting that he only takes $1 per year in pay -- but there's also nothing necessarily great about it either. To really understand compensation, you have to go past the sound bytes and read the proxy statement.

Marketwire reports that The Corporate Library's Editor and Co-Founder, Nell Minow, testified in front of a Congressional committee yesterday. Her message was "that if you make compensation all upside and no downside that will affect the executive's assessment of risk. It will make it clear to him that he can easily offload the risk onto shareholders. It's heads they win, tails we lose."

I agree with her. Unfortunately, she does not make clear what should replace this system. I've posted on this topic before and have proposed that people who make big bucks should keep on making those big bucks -- but with a twist. Instead of giving them all their compensation up front, put the money in an escrow account for, say, 10 years. If the decisions that these highly paid executives make end up paying off for shareholders, pay them the money in the escrow account. If, by contrast, those decisions lose money for shareholders, pay the money in the escrow account to the shareholders.

Nell Minow pointed out that "with executive compensation you get what you pay for and you pay for what you get." My proposal would provide a powerful incentive for decision-makers to take the risks of their decisions into account as well as the short-term benefits of closing a deal. This is a problem that is not limited to executives -- it has to do with anyone who is paid for closing a sale. These people receive a percentage of the deal amount as compensation -- this makes them eager to close big deals fast.