Something has gone fantastically awry in the risk management and oversight of some of the world’s most renowned investment bankers and financial institutions. The shortcomings in their controls and governance systems that permitted multi-billion dollar losses at Citigroup, Merrill Lynch, Bear Stearns, UBS and Swiss Re, and the overall failure of top management and boards to comprehend the risks of the subprime related investment vehicles they were packaging and selling, has been a recurring theme at Finlay ON Governance in recent months. We were taken aback, as we noted last week, when new Merrill Lynch CEO John Thain told the Wall Street Journal “Merrill had a risk committee. It just didn’t function.”
But nothing has been as breathtaking as the loss of more than $7 billion by Société Générale, apparently the result of a rogue trader acting on his own. (more…)
Main Street always pays for the wild parties Wall Street throws and the cleanup required afterwards.
Do you have your ticket for the Great American Boardroom Bailout Sweepstakes? Probably not. You need a special pass to get to the front of the line. Angelo Mozilo, CEO of Countrywide Financial, once the largest mortgage lender in the United States and now the poster child for financial ruin for itself and millions of homeowners, has one. And it’s a beaut. While steering his company into a Titanic-like credit collision and foisting loans on the most vulnerable and least able to handle them, the king of subprime mortgages has pulled in hundreds of millions in salary, bonuses and stock options since 2000 alone. (more…)
We have been saying for a while now that the U.S. Federal Reserve needs a better pair of glasses. Its ability to see even the obvious seems to have been severely challenged, beginning with Alan Greenspan’s era and carrying on with his successor, Ben S. Bernanke. Over a period of several years, the Fed failed to understand the destructive dimensions of the subprime trend or the need to regulate these faulty investment instruments. The New York Times details some of the background to this troubling performance in a major piece today. It paints an unsettling picture during a time of growing economic uncertainty and one that should prompt many observers to ask what else might the Fed be missing.
Here is an excerpt from the piece. (more…)
On top of its disturbingly myopic reading of the subprime contagion, the Fed now thinks handing out billions more in loans to the players that created the crisis is really just a private affair. Washington, we have a problem.
When financial institutions were riding a wave of fee-generated euphoria, creating their toxic sludge of subprime investment vehicles, the U.S. Federal Reserve registered few, if any, concerns. The Fed was happy to buy into the idea that the banks and investment houses were headed by shrewd successors to the J.P. Morgan mantel who had discovered a new world of financial instruments that were producing untold wealth –at least for their creators. Even when things started to unravel, official disquiet was muted. Earlier this year, Fed chairman Ben S. Bernanke told a committee of the U.S. Congress that he didn’t expect the meltdown would spread. (more…)
The precipitous drop in the Dow Jones index on Tuesday because the Fed lowered interest rates by a quarter point, instead of a half, shows the extent of the disease with which Wall Street has become afflicted. It is behaving like a cocaine addict who cannot live without a constant fix, in this case of cheap money. Each time it gets a rate reduction it can only perform for so long before it starts thinking about the next one and soon gets very jittery. If the amount delivered does not meet with the street’s expectations, it goes into a total panic.
The reaction also manifests Wall Street’s other disorder: the need for risk to have little place in the decision making process because credit, at least for a select few, is so plentiful. Lower interest rates provide a way for the big players to load up on debt in order to do a lot of things to take the focus off the subprime fiasco they created. It is worth noting, though Wall Street clearly does not, that it was a fiasco born in a significant fashion by the availability of cheap money thanks to the Greenspan era at the Fed, where risk, it seemed, took a holiday.
Two percent plunges in the stock market should be reserved for cataclysmic disasters and major reversals of economic or political fortune -not a show of pique because interest rates that have been obligingly in decline over the past several months haven’t quite slipped out of sight altogether. It’s time Wall Street had an intervention by some experienced tough love adults to help it get back to reality and stop being hooked on the false euphoria that comes from Fed-dependent cheap money.
The real purpose behind the Bush Administration’s plan is not to help the victims of the subprime turmoil, but rather the perpetrators of the economic crime who unleashed it in the first place.
To justify their out-of-this-world bonuses, the titans of Wall Street and the kings of the home lending business, like Countrywide Financial’s Angelo Mozilo, claimed they were merely being compensated according to the dictates of the market. No mere mortal dare challenge or question the end result where many received $40- or $50- or $100-million paydays. It was the invisible hand that decided. And it was sacred.
But now the results of that invisible hand look more like a rubble of confusion and ruin, at least as they related to the subprime mortgage industry and the unsettling economic blunders created by Wall Street on a global scale. So it is government that is expected to intervene to bring stability to the market’s jittery hand. An ever-receding Fed interest rate has been one response, along with world central bankers flooding the market with cash. One wonders how the same low interest rates, which saw the concept of risk take a very long vacation, will improve over the long run a situation that was created substantially by low interest rates.
Yesterday, President George W. Bush and Secretary of the Treasury Henry M. Paulson Jr., who are generally advocates of the free market when it is more convenient than present circumstances permit, announced a plan that purports to help distressed home owners by bringing lenders and borrowers together to solve problems. Only a fraction of those expected to need help will benefit. A more realistic interpretation of what is at work here is an effort to bring stability to Wall Street’s largest institutions, which are facing giant losses, slumping share value and increasingly nervous clients.
As much as we admire the discipline and innovations a well (and we hope fair) functioning market can produce, the case for the constructive use of government policy and influence in that market is well established. Some argue that FDR did more to save capitalism than all the J.P. Morgans combined. What is galling is that Wall Street and American business are eager to accept the idea when it is in their own narrow interests, such as now, while at other times –and especially at bonus time– government is exhorted to stay out of the market. And don’t think for one moment that the big players do not see a considerable direct benefit in government efforts, supported by Fed accommodations, that help to stabilize the effects of the housing meltdown.
The plan announced yesterday is something in the nature of saving the financial community that created the ticking time bomb of subprime loans and syndications from itself. Offensive as that may be to some, the indignation pales in comparison to the fact that those who created this mess are the ones that have benefited most handsomely from it. The sting of that image is not reduced as some, like Merrill Lynch’s Stanley O’Neal, are seen making a fast exit with piles of money to ease their pain. We set out some of our views on the public stake in CEO compensation as it relates to the subprime meltdown in a recent guest column on the corporate governance blog of Harvard Law School.
What might have restored confidence in the moral underpinnings of this system–without which it cannot continue to function– would have been a statement from President Bush or Secretary Paulson that they have also worked out a plan whereby a substantial part of the compensation and bonuses that were derived from these toxic loan concoctions would be given back and placed into a fund to assist distressed homeowners. The symbolism would have been significant and a major boost to the idea that fairness, too, is a commodity that the marketplace values.
That did not happen because the real purpose behind the Administration’s plan is not to help the victims of the subprime turmoil, but rather the perpetrators of the economic crime who unleashed it in the first place.
