One is forced to reach back to 1917 and a delusional Russian czar on the eve of his abdication to find such a comparative detachment from reality.
The almost heart-stopping disintegration of the value of Citibank shares seems unrelenting. It is not entirely surprising, however. This is a company that has had three CEOs in the past five years and is very likely headed for its fourth. Sandy Weill had to give up the reins when he failed to check a wave of scandals and regulatory run-ins that became costly to the institution’s reputation and stock price. Charles Prince had to relinquish power after he failed to stem an excess of overleveraging and mortgage-related bad bets that led to an unprecedented wave of losses and write-downs. Under the newest CEO, Vikram Pandit, the largest destruction of shareholder wealth in the company’s history continues unabated. As these words are being written, Citi’s stock has crashed through the dreaded $8 floor. Most investors have taken to averting their eyes every time their stock appears on the ticker. I am one of them.
Common to these problems has been Citigroup’s board of directors, which increasingly resembles a first-class sleeping car on a train wreck that just keeps happening. Almost whatever it does, it is too slow and too late. It can take months for Citigroup’s directors to clue into what others in the real world have known for some time. Sometimes they never do.
Nothing reveals the dysfunctionality of the board, and the utter failure of leadership on the part the current CEO, more than the position the company has taken on executive bonuses. Tens of billions have been wiped out in write-downs and losses. Over the past year alone, its share value has declined by $133 billion. Yesterday, Citi announced intentions to eliminate 52,000 jobs. Yet with all this, the board wants to take until January of next year before it decides whether or not it will award bonuses. One is forced to reach back to 1917 and a delusional Russian czar on the eve of his abdication to find such a comparative detachment from reality.
If the board can’t get a basic thing like executive bonuses right (meaning eliminated) at a time when the stock is in free fall and the company is receiving critical injections of capital from the American taxpayer, how can it be dealing with the larger challenges to Citi’s business model and where it fits into a radically redefined 21st century financial landscape? The answer is obvious. Citigroup’s board has demonstrated that it has not been on top of any major issue in more than a decade, much less been ahead of it. How it ever allowed the company to take on the level of risk it did and become almost suicidally overleveraged, how it permitted its once great franchise to become a laughing stock, and how it missed the mark with the company’s two recent CEOs –these are questions that quickly fall under the category “What were they thinking?” But that is a question that proceeds from a fundamentally flawed assumption. As we will show from the outdated and discredited structure of Citi’s board in our next posting, there hasn’t been a lot of thinking going on there for some time.
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.
“And the surest path to that growth is free markets and free people. (Applause.)”
-from the official White House text of a speech by President George W. Bush.
President George W. Bush reassured a Wall Street audience and the world of his commitment to free enterprise today, after his administration took over, nationalized and forced equity stakes in dozens of businesses, requiring the largest single emergency spending bill in U.S. history. Or did we just dream all this?
The President is obviously getting nervous about his legacy, which, given his standing with the American people, is understandable. Still, that slight smile on his face while he was giving his talk tended to remind us of the fox, who, having eaten the entire hen house, tries to ease the farmer’s angst by claiming that he’s really a vegetarian at heart.
The magnitude of the financial injury worldwide and the costs to repair it are breathtaking. But the loss of faith occasioned by what so many see as a colossal betrayal on the part of leaders and institutions may prove the most damaging of all.
The tenth month in the Gregorian calendar will go into history (please!) as the time when more money was lost by shareholders around the world and then found by governments to prop up the global financial system than any four-week period since civilization began. The amounts may well exceed ten thousand billion dollars when you consider the plunge in stock markets worldwide and the sums public treasuries are coming up with to bailout the banks and just about anything else that has a profit and loss statement.
The ultimate costs both human and financial of this economic carnage and unprecedented public monetary infusion will not be known for many years. The impact on the economy and monetary stability from the “solution” may carry unforeseen repercussions, just as the problem it is designed to solve went under the radar for too long. Without doubt, the interaction between capitalism and government has fundamentally shifted, as has confidence on the part of millions of citizens in the institutions they once admired but, alas, no longer even wish to be seen associating with. It may well be that a generation of investors which has lost so much will choose to forsake the stock market for the rest of their lives. Many young people could be left with an indelible impression of a system that can never be trusted, except that is to work profitably for a handful at the top until their folly and greed reaches the point where even they become its victims, too. The seeds of individual bitterness and social unrest have often been sown when the whirlwind of momentous events unearths the land.
Here’s a question –call it the ten trillion-dollar question: If bankers had done the jobs expected of them in a diligent fashion; if boards of directors had taken an interest in debt and leverage ¾two subjects that didn’t seem to be part of their vocabularies, much less on their agendas; if regulators had been breathing and perhaps even conscious; if policy makers had had the vision to see the possibility of failure and not just the mirage of endless prosperity, do you think all this would have happened? And what does it say about institutions and leaders in the 21st century that so many seemed incapable of exercising sound judgment and common sense, even when some were receiving compensation on a scale never seen in the history of professional managers?
The magnitude of the financial injury worldwide and the costs to repair it are, indeed, breathtaking. But the loss of faith occasioned by what so many see as a colossal betrayal on the part of leaders and institutions who acted as though they had the wisdom of prophets, but in truth had not even the foresight of blind men, may prove the most damaging of all. It is a lesson that will be remembered long after this October of the fleeting trillions has faded.
Even in the face of their debacles of historic proportion, many of these institutions persist in acting in a manner more resembling an economic sociopath than a responsible steward of the public interest, whose salvation has essentially been made possible and underwritten by the American taxpayer.
Reminiscent of another major Bush administration blunder where what was advertised did not exactly work out that way in reality, there are signs that the great bank bailout that is the centerpiece of the $700 billion Treasury infusion is taking on a life of its own. Instead of loaning out their injection of public capital to small businesses and consumers, banks are either hoarding the money or using it to buy up other institutions. One sure example of this is PNC’s announcement on Friday of its purchase of National City, a smaller regional bank. The purchase price comes in at $5.8 billion. The amount PNC got from Treasury’s recent redistribution of taxpayer wealth to Wall Street and the financial sector (not in his wildest dreams could Karl Marx ever have thought that his theory would find such unlikely adopters) was $7.7 billion. Do you suppose the two are related?
The New York Times’s Joe Nocera thinks so. In an impressive bit of reporting, he recounts in his Saturday column how a JPMorgan executive set out the Bank’s view of the government’s injection in a recent employee conference call:
What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.
Lending money does not appear to be high on JPMorgan’s To Do list. And it is probably not on many other banks’ either.
The third bit of evidence that the public has been blindsided big-time by how the banks are handling their windfall came courtesy of Citigroup. They set aside $25 billion for bonuses this year, even after their record losses and write-downs, which were substantially beyond $25 billion. How much do you suppose they got under the first round of the bailout plan? Twenty-five billion, exactly.
The reality is swiftly emerging that the United States government has become a gigantic hedge fund. It is providing the money and guarantees that are permitting the banks to use their own capital in ways that will inure to greater advantage for top employees and insiders.
Mr. Nocera, whom I think has the normally impressive street-smart intuition of a native New Yorker, had a more optimistic view of why the $700 billion bailout had to be passed on an urgent and virtually unquestioned basis:
I don’t think they are going to wait much past the weekend. No deal, no credit markets. It’s as basic as that.
And if that happens, the consequences will be far more pressing than the failure of a Morgan Stanley or a Goldman Sachs. You won’t be able to get a mortgage. Credit card rates will skyrocket. Businesses will be unable to expand and grow. Unemployment will rise.
We were a tougher sell on the bailout and remain so today for obvious reasons. Here’s part of what we predicted.
Let’s be clear: the central purpose of the bill was to help Wall Street restore the glitter, glitz and gravy train to Wall Street. It is designed to help banks and bankers go back to the future and pretend that the mess they made never really happened. Nearly a trillion dollars can help rewrite a lot of history. It has much less to do with easing credit for Main Street….
Confidence has been the missing partner in the economic voyage of recent months. The consequences have been devastating. Prominent in accounting for its absence have been colossal misjudgments and self-indulgence on the part of Wall Street and its major banks. The entire economy has been turned upside down to repair the damage they have caused, at a cost no one ever could have conceived possible. Yet in the face of these debacles of historic proportion, many of these institutions persist in acting in a manner more resembling an economic sociopath than a responsible steward of the public interest, whose salvation has essentially been made possible and underwritten by the American taxpayer. Too many insist upon hoarding their rescue proceeds or using the money to expand or to reward themselves with huge bonuses. Last week we had the AIG junkets and the propsect of tens of millions being paid out to failed CEOs. Soon it will be the auto companies looking for a handout, with Cerberus Capital bigwigs doing all kinds of contortions to justify why the private equity firm that claimed Chrysler was better without the investing public should now have the full backing of the American taxpayers to save it. Somebody should add an index to the stock market which would measure hypocrisy, like the VIX gauges volatility. It might give investors a better clue as to a company’s real future.
Wall Street’s leaders have offered few words to quell the raging public opprobrium that is mounting against their actions. They have expressed virtually no criticism of the practices of their industry that led to the credit calamity. And they have had little to say to the shareholders and taxpayers who are carrying the can for their failures. They seem to think that their self-absorbed ways will continue into the future, this time with ordinary Americans footing the bill. They are wrong on so many levels.
Neither our economic system nor the millions of stakeholders who place their trust in it can afford captains of capitalism who demonstrate, time after time, such titanic misapprehension of both business reality and the role of public confidence that is essential to success, which is why the bank CEOs and boards that continue to remain tone deaf to the historic new dimension of their responsibilities resulting from the bailout they made necessary is our choice for 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.
