H&R Block's Mark Ernst Quits, Breeden Named Chairman (Update4)

Nov. 20 (Bloomberg) -- H&R Block Inc., the biggest U.S. tax preparer, replaced Chairman and Chief Executive Officer Mark Ernst after $1 billion of losses tied to subprime mortgages.

Richard Breeden, the hedge fund manager and former head of the U.S. Securities and Exchange Commission, was named chairman, H&R Block said in a statement today. Alan M. Bennett, who retired this year as Aetna Inc.'s chief financial officer, becomes the interim CEO of Kansas City, Missouri-based H&R Block.

Breeden, who waged a proxy fight to win a board seat in September, had urged Ernst to ``stop the bleeding'' at Option One Mortgage Corp. amid five quarters of losses. Ernst, 49, put Option One up for sale a year ago and said in March it might fetch as much as $1.3 billion. H&R Block said in August an agreement to sell the unit to hedge fund Cerberus Capital Management LP was falling apart.

``Unfortunately, Ernst's departure isn't going to remove the uncertainty over the sale of Option One,'' said analyst Scott Schneeberger at CIBC World Markets Inc. ``They're so mired now in subprime and the troubles there are getting so out of hand that his resignation isn't as momentous.''

H&R Block, which lost 17 percent this year in New York Stock Exchange composite trading through yesterday, gained 25 cents to $19.32 as of 4:02 p.m.

Option One's Future

The statement didn't say what will happen to Option One, which ranked as the sixth-largest U.S. subprime home lender through Sept. 30, according to trade publication Inside Mortgage Finance. Ernst had said the unit may be closed if it isn't sold. The company now plans to focus on ``activities where H&R Block can generate significant shareholder value,'' Breeden said in the statement. He controls about 1.85 percent of H&R Block's shares.

``I don't think people can argue with a back-to-basics strategy when the basics is the truly excellent tax business,'' said Alexander Paris Jr., research director at Barrington Research Associates in Chicago. ``Mark Ernst generated a lot of economic value for his shareholders, but with the clarity of 20- 20 hindsight, he stayed in the mortgage business about a year too long.''

Ernst's resignation follows the departure earlier this month by Chief Financial Officer William Trubeck. Treasurer Becky Shulman was named acting CFO. Bennett, 57, won't be the permanent CEO and a search committee has been formed, H&R Block said. Ernst, the CEO since 2001, will stay as a consultant through the end of this year.

Subprime Loans

Breeden, 57, and Ernst didn't immediately respond to requests for comment. H&R Block expects to have a new CEO in place within six months, Breeden said in a CNBC interview.

Ernst's strategy of trying to expand H&R Block beyond tax preparation hinged on a misguided desire to make year-round use of its offices and sell more services, said John Hewitt, a former H&R Block regional manager who is president of Liberty Tax Service, a closely held rival based in Virginia Beach, Virginia.

``It's not like he was the first guy to ever think of that,'' Hewitt said. ``But what's wrong with good old-fashioned tax service?''

Subprime mortgages are given to people with the weakest credit and the highest risk of default. Nationwide, late payments on subprime loans rose to a five-year high in the second quarter, driving down the value of mortgage-backed securities and companies that create such loans and bonds.

More than 100 home lenders have halted operations or sold themselves in 2007 amid the worst housing slump in 16 years. The fallout has toppled more than half a dozen hedge funds and the CEOs at three of the world's biggest banks.

More Targets

Breeden is also likely to sell or close H&R Block Financial Advisors, the company's securities arm that had 936 advisors as of July 31, Paris said. ``Breeden has said H&R Block shouldn't be in that business, either,'' Paris said.

Citigroup Inc. and Merrill Lynch & Co. ousted their CEOs this year after bigger-than-expected writedowns tied to subprime mortgage assets. H&R Block also has more writedowns ahead, according to Gimme Credit, the fixed-income analytical firm.

``We expect that with Mr. Ernst out of the way, HRB will finally come clean with the full extent of its losses on Option One, and the picture won't be pretty,'' said a report today by Gimme Credit analyst Kathleen Shanley.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

To contact the editor responsible for this story: Rick Green at rgreen18@bloomberg.net