Monday, September 24, 2007

It's a Rich Man's World at Luminent Mortgage Capital

On September 11, Luminent Mortgage Capital Inc (LUM-$1.59), a real estate investment trust that has struggled with liquidity issues facing many of the participant’s in the U.S. residential mortgage markets, said it repaid all its warehouse credit lines that were financing the purchase of outstanding commitments.

In addition to reducing debt, the mortgage lender said it was eliminating staff positions to stabilize its business. These initiatives could not have come at a better time for shareholders, for last month the asset manager suspended its quarterly dividend and had received default notices for about $2.3 billion of its debt.

Ironically, the CEO and CFO of Luminent do not share equally in the suffering of these same shareholders, who have watched their holdings lose some 85 percent in value since July 2007.

In a regulatory filing on August 31, Luminent disclosed that it agreed to pay retention bonuses of $1 million to President and CEO S. Trezevant Moore Jr., and $750,000 to Senior Vice President and Chief Financial Officer Christopher J. Zyda.

“The purpose of these bonuses was to incentivize [sic] Mr. Moore and Mr. Zyda to remain in [its] employ through December 31, 2007 in light of the unprecedented conditions affecting the mortgage industry ... and for their efforts in managing the company during this period," the Company said in the regulatory 8-K filing.

Each executive will receive the retention bonus for services extending through just the fourth quarter of fiscal 2007: “in equal payments over the remaining eight (8) paychecks of the fiscal year beginning September 15, 2007.”

The 10Q Detective begs to differ with the Board’s decision to pay both Moore and Zyda their respective retention bonuses. In our view, the two executives are being rewarded for past behavior that lead to the dislocation of risk in the monitoring of residential mortgage originations and the dissolution of shareholder equity.

Irrespective of performance, as part of their [prior} Employment Agreement for fiscal year 2007, Moore and Zyda were already guaranteed minimum cash performance bonuses of $500,000 and $125,000, respectively.

In fiscal 2006, Moore and Zyda were awarded 50,000 shares and 35,000 shares, respectively, of restricted stock with award date values of $497,000 and $347,900, respectively [or $9.94 per share].

Money, money, money
Must be funny
In the rich man's world
Money, money, money
Always sunny
In the rich man's world

Perhaps Moore and Zyda are staying put just long enough to recoup the aggregate losses of their now worthless stock awards.

All the things I could do
If I had a little money
It's a rich man's world

As common stock shareholders are not afforded similar risk-reduction benefits, the only recourse is as plaintiffs in securities class action litigation against Luminent –two lawsuits of which have already been filed.

It's a rich man's world. ~~ ABBA (Money, Money, Money)

Editor David J. Phillips does not hold a financial position in any REITs. The 10Q Detective has a Full Disclosure policy.

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