Lack of daylight in boardrooms and in the way business was done on Wall Street and in the financial sector is what brought this company and the world to this perilous and costly state. Darkness and a lack of transparency are still being employed today under the guise of bringing a solution to the problem and in failing to disclose who the real beneficiaries of American taxpayer dollars are.
It has been asserted that the directors of AIG did not fully understand what a small unit within the organization, which was responsible for spinning out hundreds of billions of dollars in credit default swaps and other derivatives products, was doing. According to them, they were kept in the dark, so to speak. Throughout much of the financial sector, excesses in leverage and in the syndication of risk were also taking place. Regulators did not fully appreciate the extent of the risk or the complexity of these special investment vehicles. They are of the view that they, too, were kept in the dark. They are not alone. A lack of daylight has also brought serious injury to millions of investors who trusted banks to operate in a sound manner, but alas discovered a lot of gambling going on behind their backs in respect of investment devices, obligations and transactions that were taking place in the dark of night and without full disclosure to shareholders. (more…)
In a time when the restoration of confidence, perhaps more than even financial liquidity, is paramount in calming markets and providing stability, neither the Treasury secretary nor the chairman of the Fed acquitted themselves well this week.
As the war in Iraq unfolded, and then morphed into disaster in its first several years, the world discovered the consequences when what is given with absolute assurance as the urgent reason for taking action turns out not to be the case.
As the current economic crisis unraveled, the Bush administration claimed that it had spotted the greatest danger to the economy and the credit markets in generations. Toxic mortgage based assets held by financial institutions were cited as the threat and a $700 billion government intervention was needed to buy them up.
As President George W. Bush said in September:
Under our proposal, the federal government would put up to $700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system.
It had to be done immediately, he said, or a grave and gathering peril in the financial system would make its pain felt soon on Main Street. The President painted a bleak picture of what the world would look like without the bailout.
More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.
We expressed some skepticism on these pages as the President’s words were being digested. Portraying financial Armageddon if American taxpayers did not come up with the largest government expenditure in history struck us as not a very faint replay of the approach taken in Iraq, where the administration not only claimed that weapons of mass destruction posed an immediate threat but that it knew where they were.
So we posed the question nobody else it seemed was even considering:
Is America stumbling into a financial Iraq? … Are we dealing here with the financial equivalent of threatened mushroom clouds and weapons of mass destruction?
As it turned out, toxic assets, like weapons of mass destruction, were not the real problem. In the case of Iraq, they were never found. In the situation involving the credit crisis, none were ever bought under the government’s rescue plan. And a new solution was pursued instead: taking equity positions in financial institutions.
This week,Treasury secretary Henry M. Paulson Jr. announced that the original plan, the one upon which the $700 billion bailout was approved and which so many officials and commentators said was absolutely essential to financial stability, would be abandoned.
Even before the Bush-Paulson plan was approved by Congress, we had some doubts about its principal focus:
How the Bush bailout plan will be managed, what assets it will buy, how it will value and how long it will hold them are all undisclosed. It is hard not to be doubtful that the compromise proposal now being discussed will offer much more information. There is considerable dispute that the plan even addresses the fundamental problems in the banking sector.
And the astronomical $700 billion that Mr. Paulson initially insisted was needed in one fell swoop? Congress gave Mr. Paulson $350 billion and required reauthorization for the remaining amount. Mr. Paulson said he had no plans to ask for it now.
Elsewhere last week, the Fed refused requests by Bloomberg News and others to account for the more than two trillion dollars it has pushed out its lending window. It apparently believes the country is not entitled to know how much the Fed is lending, whom it is lending to, or details about the collateral that is being offered.
Both Fed chairman Ben S. Bernanke and Mr. Paulson have said that an absence of openness and transparency were factors that helped to create the current financial crisis in the first place. But transparency is something the Fed talks; it does not walk.
Last spring, we suggested what the Fed had said about the Bear Stearns collateral did not fully compute.
Actually, the Fed did not make a traditional $29 billion loan to JPMorgan Chase, as its official statements would have us believe. It was more of a wink-and-a-nudge deal to take on the poorer assets without going through the formality (and the barrage of questions that would follow) of actually purchasing them.
In a time when the restoration of confidence, perhaps more than even financial liquidity, is paramount in calming markets and providing stability, neither the Treasury secretary nor the chairman of the Fed acquitted themselves well this week. Mr. Paulson only added to the impression that what he and the administration say cannot be trusted or taken at face value. Mr. Bernanke showed his commitment to transparency is a one-way street. What the world needs from its leaders is candor, clarity and competency. It did not find these virtues in either man, which is why the actions of the secretary and the chairman are the Outrage of the Week.
The once powerful and still influential former Fed chairman took no lessons at all from the carnage of Enron and other scandals that occurred on his watch, where boards had shown themselves to be utterly incapable of monitoring the ethical and financial health of company after company, and management’s approach to risk was the financial equivalent of the three-pack-a-day cigarette smoker.
Alan Greenspan, who used to be called the voice of “God” when it came to financial matters, appeared before the U.S. House Committee on Oversight and Government Reform this week. But rather than delivering his testimony with heavenly authority, this one-time head of the Federal Reserve gave a performance more like Woody Allen doing an impression of Captain Renault of Casablanca fame. Dr. Greenspan said he was “shocked, shocked” to discover how far astray the markets and financial firms went in the past several years in their abuse of mortgage-related securities.
He put it this way:
I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.
This is not the first time Dr. G looked like he had just stuck his finger in a light socket. We thought his vision was a little clouded in March of 2007, when he was among a crowd -which included U.S. Treasury Secretary Henry M. Paulson Jr.- that was pushing for less regulation of business. He said at a conference then that he didn’t see a need for most of the Sarbanes-Oxley legislation of 2002. He joined a loud chorus of business heavyweights who argued that boardroom regulation was sapping the competitiveness of American business. Talk about a near-terminal case of myopia.
Yet it seems odd, with all the carnage from Enron and other scandals that occurred on Dr. Greenspan’s watch, where boards had shown themselves to be utterly incapable of monitoring the ethical and financial health of company after company, that he still would have relied upon management to protect shareholders. In business, as with most large organizations these days, the right thing does not happen by default or through auto pilot. It requires intricate and robust mechanisms to ensure the right thing is clearly identified and is the subject of constant internal checks. Shareholder protection as far as management is concerned has too often been reduced to the cliché of the fox guarding the hen house.
Here is what we said about Dr. Greenspan’s earlier, and now discredited, view that there was no need for regulation that raised boardroom standards:
If we are to take Dr. Greenspan at his word, during the time he headed the Fed he didn’t see the need for changes in governance when huge corporate icons were crashing down about him and taking the stock market with them. He didn’t see the need for codes of ethics that would have protected whistleblowers who tried to prevent Enrons from occurring. He didn’t see anything wrong with the hundreds of millions in loans boards were doling out to CEOs that were never repaid. He didn’t see anything wrong with audit committees that were meeting less frequently than compensation committees while permitting huge liabilities in “off book” arrangements. He wasn’t bothered by auditors who were making all kinds of fees from non-accounting jobs and were more interested in pleasing management than reporting on the true health of the books. He didn’t see a problem with paying CEOs hundreds of millions in stock options without expensing them on the company’s balance sheets.
We then asked the question:
What else can’t this man see?
The answers have been coming in battalions of destruction over the past couple of years. The landscape is littered with the ruins of the financial system, the deaths of century-old banking houses, withering consumer confidence in an era of spreading job losses and stock market decimation, and an avalanche of multi-trillion dollar government bailouts and interventions that few can fathom and whose eventual toll in monetary impact and taxpayer cost absolutely no one can accurately predict.
It is significant that one of the main features of the legislation he was telling high paying business audiences not long ago was unnecessary was a provision to make boards more responsible for overseeing financial risk. Risk, as everyone now knows, was the six-ton elephant that was running amok throughout Wall Street, creating disaster out of anything related to subprime mortgages.
We had a different vision of where the world was heading when Dr. Greenspan was trying to turn it back. Twenty months ago, we noted the following:
A global market that is becoming increasingly volatile and upon which so many depend for their livelihoods, their prosperity and very often their dreams, requires new rules for the road —not a free-for-all. In this complex environment that has too often in recent years experienced the consequences of those who play only by their own rules and tend to forget the trust from others they hold, a premium will flow to where the regulatory structure and corporate governance regime demand and produce transparency, integrity and ethics. Companies and markets that become synonymous with those values will enjoy a competitive edge. Those that do not will suffer.
Alan Greenspan is a poster child for an era that was too quick to raise up human beings to godly status and attribute to them, and countless CEOs who were thought to actually deserve the hundreds of millions they received, feats of vision and abilities that mere mortals could not begin to comprehend, much less imitate.
As it turns out, the Richard Fulds, Angelo Mozilos and James Cayneses could not even manage to keep their own companies –or their reputations- from falling into an abyss fashioned by an excess of greed, hubris and poor governance. No, it wasn’t what Dr Greenspan feared: too much regulation like Sarbanes-Oxley. It was exactly the opposite.
The greatest challenge to capitalism and economic stability since the 1930s is in no small measure the product of the unregulated and opaque actions of self-aggrandizing titans of excess, whose overweening ego and blinding greed seldom permitted them to see anything beyond more zeroes at the end of their next paychecks and whose approach to risk was the financial equivalent of the three-pack-a-day cigarette smoker. The boards that should have been the watchful stewards of shareholder interests, but failed thoroughly in that role -as they have in so many times of testing over the past 100 years- were happy to light the match as often as it was demanded.
And Alan Greenspan, it turns out, was somewhat less than the all-knowing font of wisdom he enjoyed portraying and the media and others delighted in extolling. His Congressional appearance was a testament to failure, or at least to the folly of heedless acceptance of a system that worked very well for a few at the top and gave little cause to its adherents, which included Dr. Greenspan, to consider anything else. Conventional wisdom can be such a pleasingly temperate island, especially when its most favored residents are the ones dispensing the wisdom and setting the conventions.
Dr. Greenspan’s testimony included this revealing note:
This modern risk-management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year.
That would be a revelation possible only for those in urgent need of a trip to the eye doctor. Normal vision, possessed by most ordinary men and women who have some experience seeing how the real world works and the costly recurring blunders of narcissistic and overrated leaders, would have advanced the conclusion by several years.
Alan Greenspan has been a gifted and erudite figure on the stage of American public policy for several decades. He has also made a number of mistakes. Far greater, however, has been the mistake of many observers who have tried to make of him more than the man of earth he really is. There have been occasions, we think, when he has taken those expectations a little too seriously.
Memo for the future: before society decides to elevate someone to godlike stature, make sure he can at least see beyond the next seven days.
The promise of this new era of market miracles has been shamefully betrayed by a self-serving collection of greedy CEOs, disengaged directors and regulators who, far from envisioning the new frontier of the global economy, have shown themselves unable to see even into the next week.
It was advertised as a sure path to wealth and prosperity for the world. If only American capitalism could be left unfettered. If only regulations would be loosened. If only CEOs could be incentivized with huge bonuses that would be paid out when their efforts resulted in a rise in stock. Just let the market work its magic, and the world would be changed forever. History will record that, in September of 2008, part of that promise was fulfilled. The world was changed, but not exactly in the way that was promoted. Over the course of a day or so, the world actually held its breath while the financial system glided Titanic-like ever so close to the iceberg that was Wall Street’s creation.
During the years leading up to the near calamity and the tsunami of disbelief that finally overtook Wall Street this week, more wealth was transferred by shareholders to CEOs than to any similar group or at any other time in history. Directors, too, made a huge cash grab to compensate, they claimed, for the heavy work load that was now being required of them. And regulators, like the Federal Reserve, were willing to do whatever Wall Street and the financial sector needed to keep the fees rolling in.
Wall Street and American business had pretty much all they wanted, except for those nagging requirements of the Sarbanes-Oxley Act of 2002. They, too, were well on the road to being blunted with the arrival on the job a couple of years ago of Henry M. Paulson, Jr. as the fresh-from-Wall Street Treasury secretary. Loosening the clutches of regulation was his first priority. “We must be careful not to kill the goose that lays the golden egg,” was the mantra of lobbyists, the Business Roundtable, right-wing think tanks, dark paneled boardrooms and not a few well-financed politicians.
But the promise of this new era of market miracles has been shamefully betrayed by a collection of greedy CEOs, disengaged directors and regulators who, far from envisioning the new frontier of the global economy, have shown themselves unable to see even into the next week. A few months ago, Secretary Paulson claimed we were closer to the end of the crisis than the beginning. Two weeks ago, he asserted that “the American people can remain confident in the soundness and resilience of the financial system.” His opinion seems to have changed with each of the crises he was incapable of foreseeing until it struck.
Rather than seeing itself transported to the promised land of a new prosperity, Main Street America finds itself today squarely plunked at the junction of Crisis Road and Bailout Boulevard. And those well-heeled CEOs who were trumpeted for their out-of-this-world skills with pay checks to match? They turn out to be as authentic and respectable as a third-rate circus act.
The tax-cutting Republican administration and Treasury secretary who were the biggest boosters of American business and free market capitalism have now become the biggest interventionists, writing the biggest bailout checks in American memory.
History will have much to say about the circumstances that led to this crisis. And it will ask with a decidedly more demanding voice than heard thus far among policy makers and commentators, how was it possible for American capitalism to have been permitted by its regulators, guardians and gatekeepers to have reached a point where decisions of CEOs and boards were so reckless that they ultimately brought the world’s financial system to the brink of collapse?
The answer will be seen, symbolically at least, through the prism of excessive CEO compensation, which some six years ago we described to the U.S. Senate Banking Committee as the most corrosive force in American business. We said then that the lure of huge bonuses tempted CEOs to take risks that cannot be sustained. The subprime meltdown is unsustainable risk writ large. It is another story of greed overcoming responsibility and of boards yet again, as they have in so many scandals in the past, acting more as a combination of cheerleader and ATM machine for overreaching CEOs instead of the wary sentries they are supposed to be.
As we predicted at the beginning of the year when it became apparent that Countrywide Financial would not survive on its own:
This is only the beginning of the bailout process that is unfolding…. Main Street always pays for the wild parties Wall Street throws and the cleanup required afterwards.
Significantly, all the failures, bailouts, meltdowns and write-downs have carried with them the earmarks of high abuses in CEO pay. Over the past five years, when the faulty, risk-oblivious decisions that led to the present crisis were being made, the CEOs of Merrill Lynch, Citigroup, AIG, Lehman Brothers and Bear Stearns received an aggregate compensation in excess of one billion dollars. One only has to recall the antics of Bear Stearns’s James Cayne, the colossal greed of Contrywide’s Angelo Mozilo, the dissembling of Lehman’s Richard Fuld and the narcissistic actions of Merrill Lynch’s Stanley O’Neal -who waltzed off with more than $160 million after leaving investors stung with multi-billion dollar write-downs and losses- to be persuaded of the depths to which the leadership of Wall Street and the financial community has fallen. With captains like this, and the apparently vision-blind Henry “the American people can remain confident in the soundness and resilience of the financial system” Paulson at the helm, the surprise is not that the financial system has been teetering on the abyss, but that it has not fallen in more often.
Now the $700 billion price tag for the excesses and failures of those in charge has arrived at the doorstep of every American home with a gigantic thud. This is on top of the estimated $800 billion in federal commitments and outlays caused by the subprime debacle so far.
And a larger cost is yet to be calculated. It is in the form of a crumbling in the pillars of confidence necessary to the functioning of free markets and a collapse in respect for those who claimed they could be trusted to do the right thing. As we have noted before, in many cases boards could not even be trusted to meet regularly and assess the risks they were presiding over. Another consequence of the massive sums that will require mammoth increases in foreign borrowing: the United States will be thrown further into the embrace of China, a traditional major buyer of U.S. debt. What geopolitical ramifications may result from the U.S. becoming even more beholden to that communist regime do not appear to have found their way onto the radar of most American policy makers.
But the more lasting outcome of this crisis and the cost to extricate the financial system from it will be that American citizens will have to pay for it with their own well-being. It is difficult to imagine how any universal health care plan will be possible in a new administration; nor will the huge sums being committed to the bailout of Wall Street’s excesses permit major outlays for job creation or infrastructure support. Inflation and a lower dollar will be harsh taskmasters in this new American economy and will hurt most of the very citizens on Main Street the Bush/Paulson Wall Street bailout plan purports to help.
As the United States now comes to grips with this trillion-dollar-plus inflection point in its history and how close it has come once again to a Titanic-like collision with the financial system, the enormity of the betrayal will become even more painfully evident.
Part of the social covenant binding America, built up over generations of struggle, is that capitalism must serve the public good and not just the privileged few. A stable, functioning economy and the right to prosper in it is the birthright of every American. Both have been hijacked by the self-serving purveyors of subprime governance, leadership and regulation.
They are a fitting focus for the indignation and anger of millions of Americans who have lost so much in jobs, homes and hope, and will be called upon for still more. We join them in their outrage.
We will examine the bailout plan, and the bankruptcy of the vision and moral leadership that produced it and are now seeking to profit from it, in a future commentary.
It is bad enough that an insurance company, which should know a thing or two about risk, was so badly run that it needed to have the U.S. government nationalize it to the tune of an $85 billion purchase. But when the White House admits that taxpayers may not even see their money returned, you have to wonder if everyone has become a drunken spendthrift sailor. In answer to the concern that taxpayers may never see the money again, White House Press Secretary Dana Perino responded yesterday: “That’s true.”
Most people are smart enough to get a warranty when they buy a new washing machine. When it’s other people’s money that the Fed can just “print,” as many of its supporters remind those of us concerned about the now $900 billion that has been paid out or committed as a result of the subprime credit disaster, the standard of care appears to be less rigorously observed. And Republican administrations have always claimed to own the playbook on responsible fiscal management.
I suppose they may have caught the same disease as AIG, which, even though it was one of the world’s leading assessors and insurers of risk, still allowed risk to run out of control and drive the company into the ditch. It will be interesting to see whether this latest White House admission that the $85 billion may have just been thrown away will make its way onto the campaign trail and into Congressional hearings.
Only the hapless and accident-prone administration of George W. Bush could make the Chinese and the Russians looks like prudent stewards of the public purse.
Without a shot being fired or a ballot being cast, the United States government has been overtaken by an act of socialism on a scale that is as incomprehensible as it is shocking. Now, in addition to being the world’s largest mortgage backer as a result of its takeover of Fannie Mae and Freddie Mac, the U. S. government is the owner of the world’s largest insurance company following yesterday’s seizure of AIG Insurance. The implications of the $85 billion dollar bailout, which brings the tab (so far) for U.S. government rescues and Fed loan facilties related to the current crisis to be in excess of $900 billion, have not even begun to be considered. This much is clear: Financed by the Federal Reserve, whose head, Ben S. Bernanke, mused last year that the subprime credit crisis would not spread to the larger economy; led by Treasury Secretary Henry M. Paulson, Jr., who proclaimed months ago that “We are closer to the end of this problem than we are to the beginning;” and approved by George W. Bush, the most disconnected and unpopular President in modern U.S. history, the judgment of these players inspires little confidence.
American capitalism has abrupty changed course and headed into waters that may prove far more harrowing than the collapse of even a giant insurance company. Resourceful men and women can always find ways to manage disaster wrought by inattentive executives and directors such as those who drove AIG to the point of disaster. They can rarely survive or prevail when fundamental and guiding principles themselves become the object of disregard and abuse.
*Birthplace of Vladimir llyich Ulyanov (Lenin)
Lack of daylight in boardrooms and in the way business was done on Wall Street and in the financial sector is what brought this company and the world to this perilous and costly state. Darkness and a lack of transparency are still being employed today under the guise of bringing a solution to the problem and in failing to disclose who the real beneficiaries of American taxpayer dollars are.