To say that one of the most storied banking names in the world has become a ward of the state is to diminish the extent of the reliance. Citigroup has taken on the likeness of a crippled orphan in a Dickens classic, unable to stand on its own and unlikely to survive against the bitter winds of Darwinian, or in this case, free market, vicissitudes.
There is a scene in the movie Nicholas and Alexandra where, in the days leading to the outbreak of the First World War, the Czar finally orders a general mobilization of the Russian troops. Among his war council, only a single advisor -played masterfully by Laurence Olivier- voices dissent. Sensing the catastrophe that will soon befall his country, and the fate of the Romanov dynasty, he calls the decision “madness.”
It is a sentiment that quickly springs to mind over the latest tortured survival plan involving Citigroup and the American taxpayer, which, after pumping $45 billion into the institution, now becomes the largest single shareholder. Expectations are that still billions more will be required. To say that one of the most storied banking names in the world has become a ward of the state is to diminish the extent of the reliance. Citigroup has taken on the likeness of a crippled orphan in a Dickens classic, unable to stand on its own and unlikely to survive against the bitter winds of Darwinian, or in this case, free market, vicissitudes.
We have offered our comments and predictions about the unraveling of this institution, and the shortcomings of its board, for a number of months. It began with the overblown, ego-driven monstrosity created by Sandy Weill, who capped his career with a series of costly scandals. It continued with his hand-picked protégé, Charles Prince, who, after boasting that he had his arms around the challenges to the company, displayed a striking lack of judgment and experience in handling those twin vials of financial mercury known as risk and leverage. It then turned to a hedge fund manager, Vikram Pandit, for the bank’s salvation, which was more like the Titanic turning to the iceberg. Sound governance has been the missing voice in the room at every step along the way.
“Too big to fail”? Sandy Weill, Charles Prince and Robert Rubin invented the concept long before the current crisis made government the hesitant partner. There has never been a sense of mortality in the modern incarnation of this company. Personal hubris, the illusion of invincibility that comes when reality is viewed by distance, and a belief in the inevitability of never-ending success have been the chief prerequisites for entry into the executive suite. Accountability never even made its way into the elevator, much less into the boardroom, at Citigroup.
It may well be that weaknesses and failures in government oversight, especially in the previous administration that favored less regulation and soon became fixated on blunting the effects of Sarbanes-Oxley shortly after it was passed (as former Treasury Secretary Paulson betrayed in his first year on the job), played a role in bringing Citi to this sorry state. So, too, did the long vacation from reality that Wall Street and much of business took when they saw an endless horizon of people willing to pay any number of transaction fees, max out their credit cards and refinance their homes multiple times, and a banking system eager to make ever grander sacrifices to the god of high leverage. Citi pursued this path with unbridled enthusiasm.
What needs to be remembered is that Citigroup’s directors are the ones who were in the room -or were supposed to be- when the key decisions were being made and the big questions needed to be asked. They failed on both counts. As the New York Post quoted us on the subject some weeks ago,
Citigroup’s board of directors increasingly resembles a first-class sleeping car on a train wreck that just keeps happening,” said J. Richard Finlay, head of the Centre for Corporate & Public Governance.
“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”.
Public rescues and bailouts, including the most recent effort with Citigroup to twist itself into a pretzel by turning the government’s previous cash injections into the largest ownership stake in the bank, only give tacit approval to the governance disasters and shortcomings that have taken place. It is a bad model for the financial world in the best of times. But the worst financial crisis since the Great Depression makes this far from the best of times.
We remain skeptical, as we have from the outset of the TARP bailout, that the infusions of public investment are either wise or that they will work as intended. One of the reasons is that essentially the same players remain in the boardroom in most situations. This is especially true at Citigroup. A measure such as the unprecedented and costly type announced today should have been accompanied by an announcement of immediate changes in the boardroom and in the CEO spot. That it should be left to long-time director and current board chairman, Richard D. Parsons, to say that there is no time frame for making any changes at the top shows that he, the board and the administration still do not get it.
Much more than Citigroup’s stock has plunged 94 percent over the past year. Respect for capitalism, and the timeless covenant that the use of other people’s money must be accompanied by the most rigorous accountability at all levels, have been casualties on a grand scale.
The failures that have led to today’s most recent rescue, much of which can be traced to arrogance and lack of accountability at the top, are the doubtless outrage here. But when a government continues to buy into the notion that such institutions are too big to fail, by throwing billions after upon billions into propping up such a discredited model even after bailout after bailout fails, it is beyond folly. One cannot repeat the same actions in response to the same mistakes, which produce the same outcomes time and again, as now two separate administrations have done with their banking and insurance rescue plans, without the specter of madness being raised. The madness can be counted in the trillions now. More will surely follow with the horrific $60 billion forth-quarter loss anticipated for AIG, another showcase model of discredited corporate governance and risk management. With three bailouts totaling $150 million, the company has become a significant drain on the U.S. taxpayer – now the insurance giant’s largest single investor. What toll this and all the other apparently bottomless handouts and bailouts of former bastions of free market principles who, not long ago, wanted to be left alone by government, will take on other virtues, such as the credibility of a young administration and the confidence of an exhausted and battered American public in it business leadership, is yet to be written.
We can hope that the fate of the financial system and the trust that is indispensible to the institutions of both capitalism and government do not suffer anything like the fate of that other institution where indifference to the rising dissatisfaction of constituents had a very bad ending. It, too, proceeded on the mistaken belief that it was too great to fail and that the world could not possibly survive without it, until its financial excesses and arrogant missteps mounted so high that they toppled over even the gilded gates of the unthinkable and the unprecedented.