China’s ‘Duh’ Moment over Bear Stearns
BEIJING: (AP) China’s Citic Securities Co. on Tuesday called off a deal to invest in Bear Stearns Cos. after the troubled Wall Street bank was acquired by JP Morgan Chase & Co.
Now, that is a surprise.
Prisoners of Irony: America and the Fallout from the Bear Stearns Bailout
Americans cannot permit free enterprise to reign just when CEOs and companies are making piles of money only to have it replaced by socialism when they are teetering on disaster.
It was the kind of deal you might expect to see among business and government cronies in China. A large bank gets into trouble. Another one comes in and is given an exclusive opportunity to buy the good assets at fire sale prices with the state agreeing to take over billions in liabilities. The head of the ruling party gives his blessing to the deal on the advice of the top regime official who, 18 months earlier, headed an investment bank himself.
Except this was not China. It happened on Wall Street, ground zero for free market capitalism, or so it is claimed. JPMorgan struck a sweetheart deal with the Fed in taking over the remains of Bear Stearns. While its demise comes as no great surprise after Friday’s run on the bank, it appears that no other institution was given the opportunity to work out a competing offer or at least one that is supported by the government and the Fed. President George W. Bush and Treasury Secretary Henry M. Paulson, Jr. approved the deal.
At $2 a share and with 7,000 to be laid off, Bear Stearns employees will call it a betrayal. The firm’s top management and inside directors, after all, have made hundreds of millions in compensation and bonuses in the past few years and it would not be surprising if arrangements have been made for some to walk away with a tidy severance/change of control package. JPMorgan will call it a good buy. Still others will call it a bailout that gives a level of comfort to the financial sector which otherwise might not prevail and may not be deserved. But in truth, this deal is hypocrisy on stilts.
When it comes to the wave of titanic bonuses, platinum parachutes and multimillion-dollar pensions for its CEOs that have swept across Wall Street and elsewhere in business, America is told it is the free market that sets the rates. Boards are merely responding to these larger economic forces over which they have no control. The same is said about enforcing provisions of the Sarbanes-Oxley Act, the Enron era package of reforms which corporate luminaries have argued overly restricts American capital and makes it tougher to compete. But when it comes to dealing with the mistakes and misjudgments of those CEOs and boards, it is government that Wall Street and others call on to intervene and save the day. The supreme, or perhaps subprime, irony, of course, is that the same financial institutions that created the problems with their overly complex and exotic investment vehicles which they themselves did not fully comprehend and cannot today accurately value are demanding relief from the Fed and anywhere else they can find it.
Ironic, too, is the fact that Americans, as consumers, investors and members of pension plans, are the ones who actually pay for the monster compensation that has come to symbolize the modern boardroom. And when the lure of great rewards prompts CEOs and boards to take risks that later prove calamitous, as the subprime fiasco demonstrates, it is the American taxpayer who is asked to pay again through the inflation-creating printing of money or the taking on of more public debt. There are many unanswered questions concerning the implications of what the Fed and the White House have sanctioned in the Bear Stearns bailout, and in the larger issue of exactly how much is being committed to prop up other financial institutions -and at what cost.
Americans cannot permit free enterprise to reign just when CEOs and companies are making piles of money only to have it replaced by socialism when they are teetering on disaster. They are entitled to more than being relegated to the position of prisoners of irony conveniently contrived by corporate and public leaders, while being stuck with a multibillion-dollar price tag for the privilege.
Outrage of the Week: Leadership Fiddles While Bear Stearns Burns
With absentee leaders like Jimmy Cayne at the top and a corporate governance culture straight out of the 1920s, the surprise is not that Bear Stearns fell into a confidence chasm. The surprise is that calamity did not strike earlier.
When the subprime meltdown was already giving a chilling preview of coming attractions last summer and his company’s mortgage-based hedge funds were collapsing around him, the CEO of this Wall Street icon was off on a bridge and golf vacation. Last week, during a liquidity crisis that saw the near death of the company and the resulting intervention of the Fed that carried with it echoes of the Great Depression, he was at a bridge tournament in Detroit, according to the Wall Street Journal. It is not certain where this long-time investment banking figure is right now, but odds are soon Jimmy Cayne may not have an office or a company to return to.
Last January, when the company posted the first loss in its 84-year history, Mr. Cayne turned over CEO duties to Alan Schwartz. When he’s not away escaping a corporate crisis as executive chairman -a post he has held for seven years- Mr. Cayne presides over the Bear Stearns board. And what a board it is -another one of these all male clubs that acts like a throwback to black and white movies.
The board meets only six times a year, according to company documents. The real work seems to be done by Bear’s executive committee, which in 2006 met a whopping 115 times. All of the directors on the executive committee are management insiders, including Mr. Cayne, making management effectively accountable to itself. Maybe this helps to explain why, despite the lessons of Enron and the risky nature of much of the company’s business, Bear Stearns’s board did not get around to creating a finance and risk committee until January of 2007 and why there has been so much patience with Mr. Cayne’s card-playing antics.
Just a year ago, the firm was boasting that it was well insulated from the subprime fallout. Then the stock was trading around $160. On Friday the stock closed at $30. It lost nearly half its value in just one day. When Rome burned, it is said that Nero fiddled. When Bear Stearns melted down, its one-time emperor played bridge. We will leave it to others to determine whether any smoke was present at the occasion this time.
It is widely asserted, especially on these pages, that what boards do matters. Yet it seems clear that if Bear Stearns had had no board whatever, the results could not have been any worse. One can understand how utterly lacking in effectiveness Bear’s board is when it is being led by an absentee chairman.
Mr. Cayne, who is 74, would have known the crisis his company faced given the extraordinary nature of the press release it issued on March 10th which denied any liquidity problems. Still, even when Wall Street’s fifth largest investment bank was sitting on a precipice later in the week, a bridge game trumped the fight for corporate survival for the firm’s well paid chairman.
As we have said on more than a few occasions, the stratospheric compensation that many boards award CEOs increasingly shows that both directors and top management are living on another planet. Excessive CEO pay has been a leading indicator of disaster in companies that run the gamut from Enron and Computer Associates to Countrywide and Hollinger. Bear Stearns can now be added to this list. Just last year, many commentators were celebrating the genius of Jimmy Cayne and how he deserved every penny of the $34 million he received for 2006 and the $23 million for 2005. You might think that would entitle shareholders to a little more than the calamity that has been unfolding for the past several months. You might also think it would entitle shareholders to a CEO or a board chairman who clocks in during the hours when disaster has decided to pay a visit.
Bear Stearns also makes the case that if investment banks are now able to enjoy the benefit of the Fed’s intervention -and these firms have already shown that their misjudgments are capable of causing enormous turmoil in the capital markets and ultimately in the wider economy, members of the public have a huge stake in what companies do and how well they govern themselves. They also have a major investment in whether board compensation programs reflect a rational level of thinking or whether they reflect a mentality that says the CEO is king and temps them to pursue high paying subprime-like schemes that cannot be sustained.
With absentee leaders like Jimmy Cayne at the top and a corporate governance culture straight out of the 1920s, the surprise is not that Bear Stearns fell on Friday into a confidence chasm from which it may not recover. The surprise is that calamity did not strike earlier. Which makes the failures of the Bear Stearns board and its chairman our choice for the Outrage of the Week.
The Education of Henry Paulson
Less than a year ago, Treasury Secretary Henry M. Paulson, Jr. was giving a lot of support to efforts that were designed to loosen business regulation and Sarbanes-Oxley reforms. We had some thoughts on the subject at the time. Fresh from the top post at Goldman Sachs and on the job for only a few months, the Secretary noted:
A consequence of our regulatory structure is an ever-expanding rulebook in which multiple regulators impose rule upon rule upon rule. Unless we carefully consider the cost/benefit tradeoff implicit in these rules, there is a danger of creating a thicket of regulation that impedes competitiveness.
Today, Secretary Paulson called for a tightening of rules in a whole range of market areas and indicated that new regulations are on the way. Meltdowns in the housing market and downturns in the economy that get people thinking about the 1930s, and where weak oversight and unfettered risk creation were major contributors to the turmoil, have a tendency to do that. In his speech, Mr. Paulson observed:
We must have better policies, processes and mechanisms to understand and manage complexity, to discourage its excess, and to better understand and manage risk.
It’s amazing how different the world looks when the perspective shifts from what’s good for Wall Street to what’s needed on Main Street.
More Straight Talk, Less Fed Speak
There has not been much critique of the latest Fed move, the ninth since August, to fix the ailing credit market. We would like to remedy that with the following observation.
The Fed cannot possibly continue to argue that it has given Americans and their policy makers a fair and accurate picture of the economy while making these frequent, unprecedented and horrifically costly interventions.
Americans are not passive and unaffected bystanders in what the Fed does or does not do. They are stakeholders who are entitled to assess its performance and whether it is ultimately acting in the public interest. That means more than what might be expedient for financial institutions, mortgage lenders and hedge funds that are struggling with the consequences of their risk misjudgments and still do not appear to understand the extent of their own folly.
Straight talk, not Fed speak, needs to be part of the intervention, too.
Update: The Fed’s move made a lot of money for some investors and company insiders. The stock of Countrywide Financial, for instance, a big player in the subprime mess, soared 17 percent for the day (Tuesday).
Some of these remarks were posted on The New York Times blog of Floyd Norris, one of our favorite commentators .
Memo to MBIA: Don’t Stop at the Rating Agencies. Why Not Choose Your Investors, Too?
MBIA, the monoline insurer, announced last week that it no longer wanted to be rated by Fitch Ratings, the only holdout on its AAA status. The move has opened up quite a Pandora’s box, especially for people who have been skeptical of the AAA ratings MBIA received from Standard and Poor’s and Moody’s. We have been among them. But perhaps some creativity is called for in this time of credit turbulence.
When the sea is churning and the waves are heaving the ship, naturally it helps to call for a change in the weatherman. But why stop with Fitch? Reporters are a bit of a pain to MBIA right now. Why not just tell the troublemakers you don’t want them to write about you any longer. Same with columnists, commentators and bloggers. Especially bloggers. Also, certain investors have had way too much to say about the company. Tell them you don’t want them to own your stock. There’s also the SEC, which has an annoying habit of asking a lot of pesky questions. Fire them too. People will begin to get the message about MBIA.
Actually, we think they already have.