A Reversal of Fortune For Sallie Mae Chairman

With no sale, the value of Albert Lord's stake takes a huge tumble. (By Susan Biddle -- The Washington Post)

The value of Sallie Mae Chairman Albert L. Lord's stake in his firm has declined sharply since the unraveling of his months-long effort to sell the student loan company to a group of private investors.

Lord's remaining stock options, which would have produced a gain of $162.5 million if the $60-a-share sale had gone through as planned, were worth only $2 million at yesterday's closing price of $27.90.

Lord had also been sitting on 1,309,988 shares, but he was forced to sell 1,265,401 of them Friday -- 96.6 percent -- to cover an unspecified obligation.

The numbers reflect a reversal of fortune for an executive who had been on the verge of a spectacular triumph. When the proposed leveraged buyout of Sallie Mae was announced in the spring, it was the ultimate exit strategy -- not least, a way for Lord to revive the company's flagging stock price and lock in the gain.

At $60 a share, the buyout would have enabled Lord and other shareholders and employees to cash in their interests for much more than the $40.75 per share price at which Sallie Mae stock was trading before news of the deal was reported.

The deal began to fray months ago, when Congress moved to cut subsidies for student lenders such as Sallie Mae. Around the same time, global credit markets began to deteriorate, souring the outlook for leveraged buyouts, in which the acquirers borrow heavily toward the purchase price. The leader of the buyout group, J.C. Flowers, asserted that the subsidy cuts entitled the buyers to walk away from the deal.

Last week, Sallie Mae announced Flowers had declined to negotiate further. Now, the two sides are battling in court over whether the buyers are obligated to pay a $900 million termination fee.

Lord's personal credit crunch added a twist to the saga.

In a news release Friday, Lord said his stock sale was dictated by the terms of his securities account. He had pledged shares as collateral in a margin account, which can be used to make investments with borrowed money. If the investments go bad, the collateral can be seized.

"Top-notch CEOs should be able to manage their investments so that they can hold onto the company stock and not be forced to sell it," said Lynn E. Turner, former chief accountant of the Securities and Exchange Commission.

Sallie Mae spokeswoman Martha Holler did not provide any additional details yesterday about the investment or investments that led to the liquidation of Lord's shares.

"Other information is not available to the company," Holler said by e-mail.

In the news release, Lord said the transaction was painful, adding that he identified "with shareholders' disappointment and frustration."

The liquidation came despite Lord's having sold $18.3 million of Sallie Mae stock in February. That sale, which came days before the Bush administration presented a budget proposal to cut subsidies to student lenders, prompted the Securities and Exchange Commission to open an investigation. Sallie Mae spokesman Tom Joyce has said Lord was not aware of the administration's plan when he sold the stock.

In the news release, Sallie Mae said the shares Lord sold Friday represented "approximately 10 percent of his equity units."

A review of regulatory filings shows, however, that the stock represented the vast majority of the Sallie Mae interests that Lord had the ability to liquidate.

Besides the 413,310 options that he could exercise at a gain of $2 million, Lord still has 5.3 million options that are worthless at the stock's current price, 4.5 million newly awarded stock appreciation rights that would pay off only if Sallie Mae's share price climbs significantly, and additional "phantom stock units" -- credits accumulated in a deferred compensation plan.

Lord now has a chance to rebuild the value of his equity stake. In November, when he was named executive chairman, the company awarded him a new pay package that includes $3 million in cash annually plus the 4.5 million stock appreciation rights, which begin to pay off if the stock reaches $52 a share.