Never in the history of modern business leadership have CEOs been paid so much to achieve so little at such cost to so many.
At the opening hearing of the Financial Crisis Inquiry Commission held in Washington this week, key players in the worst financial meltdown since the Great Depression admitted they did not see it coming. The chairmen and CEOs of JPMorgan Chase and Goldman Sachs, Jamie Dimon and Lloyd Blankfein, and the chairman of Morgan Stanley, John Mack (who used to be its CEO as well) all testified that they were surprised at what happened. They now agree they were overly leveraged and did not handle risk with the respect it deserved. Mr. Dimon apparently never contemplated the possibility that housing prices would stop rising, much less decline.
It seems that Messrs. Dimon, Blankfein and Mack had as much vision in anticipating the downturn, and the folly of some of their assumptions about growth, as over- extended buyers of subprime mortgages had. Except that Dimon, Blankfein and Mack were not struggling low-income homebuyers who took on one too many bedrooms. They were among the highest paid executives on the planet whose word commanded deference and awe among much of the investing public, the media and an ever-admiring circle of policymaker-groupies.
Over the five years leading up to the subprime debacle in 2008, these three men were collectively paid more than $310 million. For the year 2006 alone, when so many of the seeds of disaster were being sewn on Wall Street and among its top banks, Mr. Dimon was paid $57 million and Mr. Blankfein $38 million. When Mr. Mack rejoined Morgan Stanley in June 2005, he was awarded stock worth $26 million on day-one, and a further $13 million in compensation and benefits for his first five months of work. In December of 2006, Mr. Mack was awarded a bonus of $40 million on top of his $1.4 million salary.
As they were being paid these sums, much of the world was increasingly convinced that these were proper incentives to ensure alignment with shareholder interests. They earned every penny million, it was thought. The prevailing view, especially among the wishful thinking and the non-thinking alike, was that such men were really superheroes whose ability was so unique and so far beyond those of ordinary mortals, the fact that their feet touched the ground when they walked was seen merely as one of their many generous concessions to convention.
They were not alone, of course. There have been hundreds of CEOs who have happily participated in the greatest transfer of wealth of its kind –a transfer that, for all the soaring salaries, bonuses and stock options, has ultimately seen the worst economic crisis since the 1930s, the highest job losses in generations and a stock market performance over the past ten years that has produced virtually zero gains, except for the titans and bankers who managed to cash out before the fall.
The 21st century began with a series of corporate scandals involving companies like Enron, WorldCom, Tyco and Hollinger. It ended its first decade in the throws of the worst financial failure in modern time. One thing stands out to mark the beginning of this period and its end: the folly of executive compensation. In 2002, we warned Congressional committees: “The most corrosive force in modern business today is excessive CEO compensation. Such lofty sums tempt CEOs to take actions that artificially push up the price of the stock in ways that cannot be sustained, and to cash out before the inevitable fall.” The extent of that corrosion and fall is apparent today. The consequences in taxpayer dollars soar into the trillions. The costs in human terms remain beyond calculation, as does the loss of confidence in corporate leadership.
More than just Lehman Brothers, a few banks and a couple of Detroit automakers went bankrupt in this period. The trust of workers, the middle class and pensioners in corporate management and governance has also collapsed. There may be a seismic ruin of jobs, dreams and foreclosed homes on Main Street. But on Wall Street, where people like Mr. Dimon, Mr. Blankfein and Mr. Mack still command adulation for their leadership and vision, the Fed-supported, taxpayer-rescued towers of finance give hope and comfort to those still requiring generous bonuses to get through their Tiffany-challenged day. The magnitude of their gains this year, less than 18 months from a once- in-a-lifetime experience looking into the abyss, promises also to set new records, which, like housing prices, is something Mr. Dimon thinks should go only one way, too. Recently, he announced that he was sick and tired of the criticism being leveled against Wall Street on the compensation front.
These are forceful accelerants to the rise of Turbo Populism, the term we coined on these pages and will be speaking more about in the future.
Had the world the benefit of a modern Churchill capable of battling the monstrosity of betrayal and failure these titans of excess have wrought, he would surely have given voice to a mood that is thundering across the land from kitchen tables and church pews to swelling unemployment lines and Twitter postings: Never in the history of modern business leadership have CEOs been paid so much to achieve so little at such cost to so many.
This is a reality that escaped the CEOs who appeared before the Congressional committee this week. They do not escape our sense of outrage.
Does FASB’s change in accounting standards improve investor confidence or detract from it? Is it a move consistent with a renewed commitment to transparency, or is it that famous political game of dressing up disaster like putting lipstick on a pig?
If you looked at all the causes of the great recession of 2008-2009 -which would doubtless include unbridled greed, an unconscionable obliviousness to risk, complacent regulators and sleeping boards- lack of transparency would figure high on the list. The extent of credit default swaps, for instance, which, in the case of Bear Stearns, Citigroup and AIG, appears to soar into the trillions, was a ticking toxic time bomb hidden from investors. They were nowhere on the radar of regulators, either. At some point, the silent ticking stopped and the world was abruptly awakened to the costs when risk and reality are allowed to be covered by a convenient curtain of concealment, if not outright deception.
It is, therefore, with some dismay that we greet the recent announcement by the Financial Accounting Standards Board (known as FASB, and another institution that does not exactly go to Herculean lengths to make itself clear and understandable to the average person affected by its decisions) to permit a retreat from current mark-to-market rules. These are the accounting principles that have required banks to place a current market value on their assets. Many of these assets have been categorized as “toxic” because they are based largely on mortgages that have plunged in value with the residential real estate market. Beginning with the collapse of Bear Stearns a year ago and all through the turmoil that has shaken the credit and capital markets, toxic assets have prompted trillions of dollars in bank losses, write-downs and interventions from the Fed and U.S. Treasury.
The accounting changes announced this week will allow banks to take a variety of approaches to valuing the assets under stress, and many will no doubt go into an impressive series of contortions to convince investors that they know better than the market their real value. If only somebody would pay that price, they could get back to the days when Ken Lewis of Bank of America was making $100 million, as he was in 2007, and bankers would be heroes again. But markets don’t always co-operate in the self-idolization aims of men, and it is not entirely clear that some banker’s valuation that supposedly trumps the market’s view is going to have any credibility at all. FASB’s move may be favorable for some banks in the short run. But will it accurately portray their state of affairs in a way that investors will trust when uncertainty has on more than one occasion given confidence quite a beating and knocked it down for the count? The New York Times’s Floyd Norris, long a follower of accounting standards and practices, has a number of insights on his blog into how this change came about.
What is most feared is that the gatekeepers are allowing another dimension of uncertainty to be introduced into the economy’s precarious equation just when it is widely agreed that what is needed is transparency with all the klieg lights it can marshal.
This is part of a disturbing trend that seems to favor the opaque over the undisguised. It is still unclear how all the original TARP funds (the program which, even before it was finally enacted, we dubbed the biggest boondoggle in the history of government) have been spent. The Congressional Oversight Panel, the body charged with monitoring the TARP, has been troubled by its lack of adequate controls and transparency. The watchdog’s head, Elizabeth Warren, has described the bailout as “an opaque process at best.” The TARP’s special inspector general, Neil Barofsky, recently reported that not all recipients of the government’s funds are willing or able to account for how the money was spent. “The most significant failing from a transparency standpoint: understanding the process and criteria Treasury used to decide who would receive TARP funds and what the recipients have done with the hundreds of billions of dollars that have been invested,” Mr. Barofsky told the Senate Banking Committee. The $175 billion funneled into AIG has not been fully documented, and only recently has it come to light that a large portion of it went to U.S. banks and financial institutions, like Goldman Sachs, which have already received TARP funds, as well as to foreign banks. Then there is the issue of compensation and bonuses, where awards have been made behind closed doors only to prompt public disbelief when they are finally brought to light. Trillions of dollars in Fed commitments and loans remain clouded by a veil of secrecy. The struggle to achieve transparency appears to be as challenging and arduous as the battle to restart the economy. It is not coincidental that the two are linked.
The lessons of the financial abuses and failures that came to light in the 1930s, like the excesses and deceptions of Enron and WorldCom some decades later, all point to the imperative of doing business in an open and accountable fashion. That applies especially to honest and accurate financial statements that reflect reality, not the pipe dream of a CEO who wants to put a happier face on the company’s situation -at least until he can cash in his stock options and retire in regal style. We have already seen too many companies shock their investors and the world by having carried on with a degree of leverage and risk that no sane person would have condoned. The solution, or at least a significant part of it, is to move accounting practices and everything else that determines the worth of a company out from behind the heavy curtains that for too long permitted bankers and other players to pull the strings for their own aggrandizement and into the sunlight of greater transparency that is essential to truth and confidence.
Does the recent change in accounting standards, during a time of the most profound unease in the economy and among investors since the Great Depression, improve investor confidence or detract from it? Is it a move consistent with a renewed commitment to transparency, or is it that famous political game of dressing up disaster like putting lipstick on a pig?
We see FASB’s decision as a regressive and very large step in precisely the wrong direction, which is why we chose it as our Outrage of the Week.
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…)
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.
The sudden fascination on the part of the former CEO of Merrill Lynch with expensive antiques paid for by beleaguered shareholders illustrates once again that sound judgment is the most underrated and unevenly dispensed attribute among modern leaders today.
A year ago, at the beginning of 2008, investors in U.S. financial stocks had already begun to see their fortunes dwindle. Major icons of American capitalism, including Merrill Lynch, had already lost or written down billions. Layoffs had already begun in the financial sector, including at Merrill Lynch. And families were losing their homes to foreclosures in record numbers. At Merrill Lynch, a new CEO was called in to clean up the mess that the misjudgments of his predecessor, Stanley O’Neal, had caused. Bringing in John Thain was considered a real coup for Merrill, and they paid handsomely for that privilege -to the tune of nearly $80 million. It was, a year ago, a sobering time for Wall Street, where confidence was evaporating faster than an Irishman’s bottle of whiskey. Many had begun to glimpse a gathering financial storm like no other imagined.
In the peculiar world of John Thain, however, it was just the right time for something else: a spending spree of more than a million dollars to redecorate his personal office. Evidently, investors at Merrill Lynch, who had already lost big-time, had not paid enough. They needed to fork over more than a million dollars for things like a George IV chair at $18,000, a carpet for $85,000 and four pairs of draperies for $28,000. (The complete list is available here.)
Keeping Mr. Thain happy became a very expensive proposition. And the amazing thing is, he thought he could really get away with it at a time when the world was so distracted by the implosion of Wall Street and the credit markets. Had he been a passenger on the Titanic, he no doubt would have pulled a Bruce Ismay. (He was the head of the White Star company, owner of the Titanic, who took one of the last lifeboats off the ill-fated ship while more than 1,500 crew members and pa
ssengers were left to perish onboard.)
It has become increasingly common in recent months to discover a certain disquieting reality about America’s CEO class. When times were good, it seemed to many that they could do no wrong. They were lauded as superheroes and garnered celebrity status on a level with rock stars and sports giants. But now that the economy is not proceeding ever upward with the obliging assistance of absurd levels of leverage and a blind eye to any notion of risk, the pressure is on. Many CEOs in this environment simply don’t cut it. They don’t seem to possess the sea changing abilities they once did. Problems appear more intractable. Many have decided to pack it in rather than keep up the pretense that they really know what they are doing.
Then there are the John Thains, who rake in tens of millions just for showing up, demand a $10 million bonus even at the lowest ebb of the company’s fortunes when thousands have been sent packing, and need a more impressive office from which to preside over the company’s shrinking fortunes, its dwindling share value and, ultimately, its disappearance as a standalone entity.
This kind of conduct, in addition to his decision to award $4 billion in bonuses company-wide just days before the deal with Bank of America closed and further losses of $15 billion were reported, shows the extent to which Mr. Thain did not grasp the radically changed landscape on Wall Street. There are many CEOs, unfortunately, whose actions also illustrate a nearly complete disconnection from reality.
As we have said before, sound judgment is the most underrated and unevenly dispensed attribute among modern leaders today, in politics and in business. Without it, even the brightest stars eventually sputter out, usually in some kind of stupid scandal quickly captured under the category “What were they thinking?” Astrological awareness is something few leaders possess. Believing their own press clippings and the unfailing deference of the media, politicians and boards of directors to their every action, many begin to think that the earth and all the other planets really do revolve around them. Clever public relations people can do many things, but they cannot forever defy the laws of physics. Sooner or later, there is a stumble involving conduct that is, at best, unacceptable and, at worst, one hundred percent weird (see Admiral Bobby Ray Inman). Many cannot adjust to the sudden reality that a different set of laws governs the universe and that they are not the center of it. It is generally an episode that causes others to question how these people actually got as far as they did, or whether they were just among the luckiest people in the world -for a while.
Mr. Thain’s actions, including his shameful attempt to claw back a $10 million bonus just after the company’s forced sale to Bank of America, also fall into the bizarre category. But this is about more than the spectacle of the patently over-praised engaging in the unmistakably despicable. Mr. Thain has brought discredit to the company he once headed, the industry of which he has been a life-long part, and Wall Street itself at a time when what they all need is genuine leadership that can regenerate lasting confidence. He is a deserving choice for our Outrage of the Week.
On one side, there are the quiet heroes who perform deeds of courage and generosity every day, often saving their fellow citizens from disaster. On the other, there are the overpaid CEOs at Citigroup and Bank of America who cannot even save their own companies from their misguided schemes and have made them financial wards of the state.
It was one of those weeks where one’s neck got quite a workout from all the surprises happening around it. On a cold afternoon in New York, an Airbus A320 was forced to make an emergency landing on the Hudson River, gliding like a gigantic bird onto the frigid water with 155 passengers and crew on board. Earlier that day, investors woke up to learn that giant Bank of America would, like its ailing competitor Citigroup, need billions more in government handouts to keep it afloat. By the end of the week, both institutions would post billions more in losses and write-downs.
Thanks to the skills of pilot Capt. Chesley B. Sullenberger, and one of the most remarkable feats of airmanship of its kind ever, the engineless US Airways Flight 1549 made an emergency landing in the busy lower Manhattan harbor and awaited the rescue that came fast. The stock of Citigroup and Bank of America was not so lucky. Both crashed to near record lows, leaving shocked shareholders wondering where their help will come from. They are still wondering. (more…)
