Enigmatic Fred Carr : Insurance: Junk bond troubles have put the spotlight on the chief of loss-plagued First Executive. But much about him remains a mystery.
Fred Carr lets it be known that he yearns for one thing above all else these days: To be left out of the limelight.
The beleaguered head of First Executive Corp.--the big, troubled Los Angeles-based life insurance holding company built mainly with junk bonds--knows, however, that he isn’t likely to get his wish.
The company last week reported a net loss for 1989 of $775 million. First Executive’s second-largest shareholder has publicly demanded his ouster. The firm has virtually stopped writing new business. And as ratings sink and customers pull out, regulators have been watching closely to see if there is any danger of First Executive going under.
The ordeal has left the 59-year-old insurance executive looking like a victim of battle fatigue. It is the second time in his life that he has been deeply embroiled in controversy.
In the 1960s, Carr was one of the most prominent figures of the so-called go-go days of Wall Street. A Business Week magazine profile in 1969 said Carr, then a manager of mutual funds, “may just be the best portfolio manager in the U.S.” But, just months later, he resigned and cashed in his equity in the funds. As it happened, the long bull market soon collapsed, and investors in Carr’s Shareholders Management Co. funds were particularly hurt. He had invested heavily in unregistered “letter stock” of small companies, for which there was virtually no market.
Now, 20 years later, the issue isn’t letter stock but junk bonds. They make up 45% of First Executive’s invested assets, and their drop in market value caused the company this week to announce a staggering $859-million charge against fourth-quarter earnings. But Carr doesn’t waver in his claim that First Executive’s misfortune results from a monumental misunderstanding, and he shows no sign of walking away.
“I am certainly expendable,” he admits. But Carr says it is his duty to return First Executive to a “calm place,” adding, “I’m concerned about doing the responsible thing, as opposed to doing the easy thing.”
Carr built First Executive from virtually nothing, using the high return on junk bond investments to offer customers rates they couldn’t get anywhere else. The company became the largest buyer of bonds from Michael Milken when he headed Drexel Burnham Lambert’s junk bond operation in Beverly Hills.
Now, Drexel is in bankruptcy, Milken is under indictment and Drexel’s biggest junk bond buyers seem to be dropping one by one under the weight of their portfolios. But Carr, seemingly more with self-pity than with anger, maintains that the company’s problem isn’t junk bonds but repeated waves of unfair and misinformed press coverage. He asserts that much of it has been fueled by short-sellers anxious to profit by driving down the price of First Executive’s stock. “I believe they’re big suppliers of ideas to the press,” he says.
Carr also charges that the press has convinced the public that “junk bonds are un-American.” He remains faithful to the Milken gospel that junk bonds give companies the money to grow, create jobs and turn out products. Despite the mind-boggling writeoffs that First Executive has had to take, Carr has no regrets about investing in junk. “I’m proud to have invested in America,” he says.
Carr’s relationship with the press is paradoxical. Although he blames it for destroying his company’s reputation, probably no other chairman or chief executive of a major U.S. company is as accessible to the press as Carr is. Pick up the phone with a question for an article, even a routine question, and one is more likely than not to get Carr on the phone. Just before the deadline for this article, he called back to say that he didn’t want to be on record criticizing the press.
Carr at first resisted the idea of a profile by The Times. But when told that the newspaper planned to do one anyway, he invited a reporter to his apartment, and he and his fiancee, Toby Mouchette, cooked and served dinner.
Accessibility, however, doesn’t necessarily yield insight into this self-made man. Friends say that Carr, who grew up in a family that for years eked out a living by running a fruit and vegetable stand in Watts, is intensely private, an enigma to many who have dealings with him. Television comedy writer Ben Joelson, one of Carr’s closest friends, says he can hardly recall an occasion when Carr talked freely about himself. And at dinner in Carr’s apartment, this is painfully evident. Carr would much prefer to talk about the visitor than himself.
Carr, for example, declines to explain the presence in his living room of dozens of little wooden models of Pinocchio, the fairy tale character whose nose grew when he told fibs. The only comment he allows to be extracted about the long-nosed figurines is that “it’s good to collect things that aren’t expensive.”
Carr’s home surroundings suggest that, indeed, his taste in material things is modest. Since his divorce four years ago, he has lived in an undistinguished two-bedroom apartment on the fourth floor of a very ordinary-looking apartment building. The building is on a street with heavy traffic in an unfashionable part of the borderlands between Century City and Beverly Hills.
Carr doesn’t wear flashy clothes. Except for the annual foreign trips he organizes to reward top insurance agents, he seldom takes vacations. At dinner in his apartment, the music--jazz--emanates not from a costly sound system but from a portable cassette player.
Won’t Discuss Wealth
As with much about Carr, the amount of his wealth is a mystery. It is, however, clearly in the millions. A significant portion of his net worth is tied up in First Executive stock, which has plummeted in price. The firm reported a year ago that he held about 1.2 million shares. But in 1988, he reportedly earned compensation of over $2 million from First Executive, and in 1989 he was ranked 97th in Forbes magazine’s list of the 800 best-paid executives in America. It is believed that over the years he has nurtured extensive outside personal investments.
But Carr won’t discuss money. “All of my personal net worth is tied up in my children,” he says, hinting that he isn’t necessarily referring to financial net worth. He refuses to elaborate.
The roots of Carr’s personality go back to his earliest, not very easy days in Southwestern Los Angeles. Before he was born, Carr’s father made a living from a push cart on Delancey Street in Manhattan’s Lower East Side. After migrating to Los Angeles, his parents had to work seven days a week at the vegetable stand and later at the liquor store his father bought, a fact which Carr says influenced his own work habits.
He declines, however, to put a reporter in touch with his one sibling, brother Jerry, who just turned 70. Carr was born with a club foot, and the fact that his mother frequently had to take him by streetcar to the hospital for treatment meant that his brother had to start working in the family business at a very early age. Carr claims that an interview with his older brother would unfairly make Jerry relive those unhappy years.
Although he doesn’t explain exactly why or how, Carr says he became intensely interested in stocks around the age of 10. He spent parts of summer vacations visiting what were then called “board rooms”--stockbrokers’ lobbies where share prices were posted.
Carr attended two high schools--George Washington and Manual Arts. Despite his early interest in stocks, Carr didn’t get started on his career in investments until relatively late. He went to Los Angeles City College and what was then called Los Angeles State College but was drafted into the Army before he graduated. He confirmed that he worked at a variety of jobs, including at a gas station and selling insurance door to door, until he was 32.
Carr today is said to maintain very close relations with his three adult children, a son and two daughters, although he won’t talk about them. He declines to arrange an interview with them. “They don’t need to be part of the public scene,” he says.
Carr also won’t talk much about his fiancee, Toby Mouchette, whom he claims to have met “over the beets” at a restaurant salad bar. Mouchette, an expert chef with an enormous collection of cookbooks, is a former manager at a Beverly Hills restaurant, the Cheesecake Factory.
No Buyer in Sight
Mouchette’s cooking skills are being challenged by Carr’s preoccupation with a healthy diet. Friends say he eats virtually no meat and religiously avoids fats and cholesterol. The defender of junk bonds will eat no junk food. Carr is known for scooping out the insides of bagels and eating the husks dry. At the dinner in his apartment, Mouchette makes an elaborate preparation of spaghetti and many kinds of vegetables but, in deference to Carr, no sauce.
The big question now is whether Carr can restore confidence in the health of his company.
The firm is retaining a new investment banker to aid in a review of strategic options. Carr is famous for shrewd, sophisticated business moves that in the past have gotten him out of tight spots. Now, despite the enormous difficulties facing him and First Executive, it isn’t inconceivable that he will pull off a coup that will leave him in control, or bring in a merger partner on terms favorable to him.
In the current lull in corporate takeovers, there doesn’t seem to be much prospect of anyone stepping forward with a hostile bid for First Executive. Rosewood Financial, the firm’s second-largest shareholder, apparently has stalled in efforts to put together a credible offer. An earlier offer, conditioned on Carr resigning, was rejected.
ICH Corp., a Kentucky-based insurer which is First Executive’s largest shareholder, was recently freed from a standstill agreement so that it too could put together an acquisition offer. But it, likewise, seems to have made no progress.
And Kidder, Peabody & Co., the investment banking firm, apparently hasn’t been able to locate a buyer, either, despite more than a month of searching. Kidder is said to be anxious to find a buyer for First Executive because the Wall Street firm has sold a lot of Executive Life annuities through its network of retail brokers, and sources say it is worried about potential liability to customers if the company defaults.
First Executive’s seven-member board is considered quite docile. Herbert E. Goodfriend, an insurance industry analyst at Prudential-Bache Securities and a friend of Carr’s, says: “The directors are loath to press him hard for a change in direction.” So, for the moment, Carr remains without a serious challenge.
His optimism rests on the insurance units, Executive Life of California and Executive Life of New York, which continue to produce healthy operating earnings, a fact which he says the press has ignored. Under the arcane rules of accounting imposed by insurance regulators, a decline in new business actually boosts profits, since costs associated with writing new policies, such as commissions paid to agents, disappear. Customers pulling out money by surrendering policies or annuities in most cases must pay a fee, which is booked as profit. And, the company claims, surrenders haven’t reached a panic level that might trigger a liquidity crisis.
Reputed Caginess
In addition, Carr’s supporters claim, First Executive’s balance sheet is actually far more sound than those of several extremely big, well-known life insurance companies whose assets are heavily invested in shaky real estate loans.
These arguments, however, might be more soothing to investors and policyholders if Carr didn’t have a reputation for shrewd ploys--including transactions that later incurred the wrath of regulators and some stockholders. Most recently, First Executive confirmed that the Securities and Exchange Commission has opened a formal investigation into whether First Executive failed to disclose the worsening state of its junk bond holdings when it sold additional stock to the public in October at $15 per share. Less than three months later, First Executive announced that it would take a huge loss, and since then the stock has been trading at less than $3 per share.
In 1987, the New York State Insurance Commissioner imposed a $250,000 fine, the largest ever against a life insurance company, on First Executive’s New York subsidiary. New York regulators said that Executive Life of New York claimed to have laid off risk by buying surplus relief insurance but that the reinsurance was supported by phony or backdated documents and didn’t really exist.
And earlier this year, the California Insurance Commissioner forced Executive Life of California to reverse a controversial transaction that had appeared to take $750 million of risky junk bonds off the subsidiary’s balance sheet. The transaction had converted the bonds into supposedly safer “collateralized bond obligations.” But the department concluded that the transaction merely hid the risk.
Carr refuses to comment on the record about any of these events. But he maintains that any reputation for cagey dealings is undeserved. Noting the bad publicity he has gotten, Carr says: “I certainly haven’t been very clever.” He adds, “The people here and myself have attempted to do what we thought were the right things and the right approach.”
There are certain things, however, that Carr would do differently if given a second chance. “I clearly made an enormous number of mistakes,” he says. By and large, these relate to managing the public’s perception of Executive Life rather than specific business decisions.
“We certainly should have done more advertising and public relations with our various constituencies,” he says. “We were so busy delivering value to the policyholders that we really believed inaccurately that that was adequate.”
Lon Morton, head of Exceptional Producers Life Insurance Co., an agent-owned reinsurance company set up to benefit some of First Executive’s biggest producing independent agents, says agents for years tried to persuade Carr to bring in someone sophisticated with a more outgoing, salesman-like personality to handle relations with regulators, investors and customers. But until just a few months ago, Carr refused.
K. Tucker Anderson, principal of an investment management firm that until recently held a big block of First Executive stock, said: “Fred felt he had better things to do than to suck up to the Street or suck up to regulators.”
A Friend of Milken
Perhaps belatedly, Carr in January brought in Alan C. Snyder, a former consultant, as president, chief operating officer and a director. Snyder’s tasks will include improving the company’s relations with customers and investors.
Carr first came to First Executive in 1974, about five years after leaving the mutual funds business. Prudential-Bache’s Goodfriend, who has known him since the 1960s, says Carr had had a longstanding interest in insurance companies from following them closely as a stock picker. He invested some of his own capital in First Executive at a time when the tiny, mismanaged firm was on the ropes, about to default on its main bank line of credit.
Among the subjects Carr won’t discuss, few are as intriguing as his relationship with Drexel and Milken. A stockbroker named Maurice Weiss introduced Carr to Milken, who had come to Los Angeles in the late 1970s looking to purvey his high-yield bonds. Carr was looking for a high-yielding investment to give him an edge in the insurance business. “It was just a natural synergy for them to get together,” someone who knows them both says.
Few dispute that Carr and Milken were in an extremely close professional collaboration for a decade. Some junk bond industry insiders say that Carr’s willingness to buy big hunks of Drexel issues was an important aspect of Milken’s ability to keep the junk bond juggernaut in motion. Now, however, former Milken associates at Drexel take pains to deny that Carr bought bonds from Milken indiscriminately.
Milken himself declined to be interviewed for this article. But another former senior executive in Drexel’s Beverly Hills office, who asked not to be named, says the impression that Carr bought everything Milken offered is false. “I don’t think that Mike was his Svengali,” the former executive said. “There was never anything automatic about selling” to First Executive.
Another source in a position to know says Carr still talks to Milken. “It’s not daily or hourly, but they do talk from time to time,” the source said, explaining that generally they’re in touch by phone “several times a month.”
As to the future, Carr’s fortune may hinge on whether the junk bond market begins to revive in the next several months. In the 1969 Business Week cover story, he was quoted as saying about the mutual funds he managed: “When we can no longer do the job for our shareholders, we should get out.”
Asked about that today, Carr asserts: “I don’t disagree with that quote.” Despite First Executive’s depressed stock price, Carr seems convinced that he is the last, best hope for restoring First Executive’s reputation. Carr predicted that, in a couple of years, reporters will be writing about investors who were prescient enough to have bought junk bonds in early 1990, when the market hit its low.
