How sharper than a serpent’s tooth it is to have a thankless child! –King Lear.
When the U.S. House of Representatives rejected the $700 billion Wall Street bailout last week, stock markets promptly plunged. Advocates of the plan were quick to blame opponents for the record drop in the Dow. Dire warnings were issued that incalculable damage would be inflicted if the bill were not passed. It was portrayed as a rescue of Main Street and something that was absolutely essential to avoiding Armageddon in the credit markets. The fate of the economy and the ability of families to send their children to college were hanging in the balance, we were told.
When the House finally passed the Senate’s revised legislation on Friday, stock markets again promptly dropped. No recriminations were heard this time, only demands for more. And more. 
So it is with the largest single expenditure in the history of government, where nearly one trillion dollars was added to the taxpayer credit card with the stroke of a pen. Once again, Main Street has failed to satisfy Wall Street.
Aided by a battery of the best lobbying firms money can buy, Wall Street worked overtime to push for passage of the bill. And it worked. For its part, the Senate approved a bill on Wednesday with add-ons that were on an obvious equal footing with the emergency economic measure triggered by the most serious financial crisis since the Great Depression: $192 million for rum producers; $129 million for NASCAR tracks; $33 million for companies doing business in American Samoa and $6 million for toy arrow producers. Relief from the current crisis will come sooner for some than others, it appears.
Both before and during the House vote to approve the measure on Friday, the stock market soared. Only when it was passed did the Dow start to sink. By the close, it had erased all the day’s gains and finished down 157 points. Wall Street types, some from the floor of the New York Stock Exchange itself, were saying the bill wasn’t enough; more intervention was required. One analyst told CNBC “the idea of passing the bill was a lot better than passing the bill. The more time we had to digest it, the more we realized maybe it’s not such a great bill. Maybe it’s not going to rescue us.”
Another manager with more than $800 billion under management remarked “What we really need in addition to this now is a confidence booster from the Fed.” Don’t you just love Wall Street and its sense of gratitude?
President George W. Bush, who was quick to point out how much the Dow sank on the day the original House bill was rejected, had nothing to say this time about the Dow’s falling by over 300 points. And the bill that was so essential to getting things rolling for Main Street and freeing up those car loans? He said it would now take some time for the measures to have their impact. Why are we not surprised that what is revealed afterwards is not exactly as it was laid out in the case that was made for the bill in the first place? It is a familiar modus operandi for the Bush administration. Exhortations are issued like a thundering herd; equivocations follow soon on cats paws and in whispers.
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, which will now require additional and more targeted government intervention if that problem is to be really solved. One more thing: The freezing of the credit markets was, in significant measure, the result of allowing Lehman Brothers to collapse without any steps being taken to mitigate the blow to other parties. That created anxiety in credit markets around the world. It is another example of how officials in the administration and at the Fed have misread significant signals on the road to this crisis and have taken many missteps along the way.
We expect the bailout will quickly rise to the status of the largest boondoggle of recent times. Huge sums will be misspent. Scandals, delays and ineptitude will emerge that hobble the plan, and it will become a great source of contention -even on Wall Street itself. Many will also manage to make fortunes for helping to “solve” the problems their industry created. It wouldn’t be Wall Street without the aforementioned trademarks.
The era that has culminated in the greatest economic crisis in several generations was the product of unchecked greed and excess on the part of those who have lost any sense of proportion regarding value and forgotten the respect the risk deserves. One might have expected greater due diligence on the part of lawmakers as to what the bill’s intentions were -and what it was actually capable of achieving. Instead, the country is being saddled with and called to underwrite a vague and half baked collection of untested ideas and untried schemes. It is bad enough when taxpayers can’t understand what Washington is proposing; it is a worry of considerably higher magnitude when it appears that Washington and its key players don’t understand it either.
Sill, the mother of all financial bailouts is what Wall Street wanted; what it demanded, what it lobbied for and what it got. It raised few doubts and insisted upon swift and immediate passage. Yet now it appears that even this is not enough for Wall Street. The crisis continues. The reason is simple: Wall Street is the crisis, which is why its disingenuous actions and those of its supporters leading to this thankless point are our choice for the Outrage of the Week.
What an American civil war, two world wars and the Great Depression could not do has now been achieved by something called the subprime credit crisis, along with the assistance of an overly deferential corporate governance system that was blind to the risks being faced and a Napoleonesque CEO who could not see the disaster that was looming.
Richard S. Fuld, Jr. has always liked to run Lehman Brothers as though it were a one-man show. The way the company’s fortunes are shrinking, it may come to that. Short of a miracle in the form of a last-minute white knight, as of Monday, Lehman -Wall Street’s fourth-largest, and one of its most storied, investment dealers- will in all likelihood face bankruptcy. Frantic weekend-long meetings at New York Federal Reserve headquarters involving top government officials as well as leading Wall Street bankers, and Mr. Fuld, whose teetering firm prompted the emergency Friday detours from the Hamptons, have failed to produce the solution Lehman needs to stay afloat. There is no buyer and no massive infusion of capital. Bankruptcy lawyers have already been called in.
Lehman’s descent into the horror world of overleveraging and sagging confidence, insufficient capital and mounting losses, like that of Bear Stearns before it, must ultimately be seen as a failure in corporate governance. It is the duty of every board to serve as a check on management and to take care that risks to the survival of the institution are scrupulously avoided. As we noted some time ago, all meaningful positions of corporate power and responsibility have been vested in company CEO Richard Fuld. He heads management as well as chairs the board. He also chairs the executive committee, whose only other member is John D. Macomber, now 81 years old. Mr. Fuld, whom Forbes reports received more than $354 million over the past five years, has been the driving force behind the decisions that have brought the company to its plight. It is a fall that might have been arrested by an active and engaged board of directors, except Lehman does not appear to have one. What it has, instead, is a Dick Fuld fan club.
This is a board where, of the 10 independent directors, three are in their seventies and two are in their eighties. The finance and risk committee, chaired by 80-year-old Henry Kaufman, as first revealed by Finlay ON Governance, met only twice in 2007 and in early 2008 even when risk was becoming the 800-pound gorilla in every Wall Street boardroom. The idea that some of Mr. Fuld’s power should be shared more broadly or that an independent director should head the board is not something these directors have tackled.
After other companies have been faced with multi-billion dollar losses -Merrill Lynch, Citigroup, AIG and UBS jump to mind- the CEO has been replaced. At Lehman, it appears that the board and Mr. Fuld are determined that the fate of the company and its driving force will be inextricably intertwined, perhaps forgetting how that approach ended for Captain E.J. Smith and the ill-starred Titanic. Not even Mr. Fuld’s now famously shortsighted proclamation, made several billion dollars in losses ago, that “the worst of the impact of the financial markets is behind us,” was enough to prompt the ire of his hand-picked directors.
For at least half a year, there have been signs, and rumors, of distress at Lehman. There has also been evidence that management has been in a state of denial, as the conference call remarks last June by its former CFO, Erin Callan, revealed: “We stand extremely well capitalized to take advantage of these new opportunities. From a risk management perspective, we continued to operate in our disciplined manner we’re known for.”
Over the ensuing weeks, losses and write-downs mounted. Lehman’s stock has drifted, and at times plunged, since February. But there is little evidence that the board itself became seized of the issue. No changes in the governance regime were announced. No special committee of independent directors was formed. The obvious need for capital infusion, which the company frequently denied, was never answered adequately. At one point, as recorded here previously, the company was even taking on more shaky investments in the form of Alt A loans.
The market has been giving the board and management its unequivocal and unvarnished reaction for some time. But there was scant evidence that Lehman’s boardroom really grasped the depth of the market’s dissatisfaction, or the untenability of its own financial condition, until last week, when the company’s .share price fell even below the level of Bear Stearns after its collapse and Fed-led rescue. On Friday, the stock closed at $3.65. Only seven months ago, it stood at $65.00.
It is the end of the Lehman era. What an American civil war, two world wars and the Great Depression could not do has now been achieved by something called the subprime credit crisis. It was ably assisted, or perhaps prompted, by a widespread attack of corporate amnesia regarding the dangers of treating risk without the respect it deserves and the failings of boards that slumbered while CEOs saw only the upside of deals and the compensation rewards they would bring and never the other part of the intractable law of gravity.
As far as power and accountability are concerned, there has been really only one man at Lehman Brothers. That’s about the way it will wind up when the lights are turned out, the sign comes down and one of Wall Street’s longest running chapters comes to an end. It is another sad lesson in the dangers of hubris, blindness to the realities of risk and the delusion of invincible status that too long marked the direction and culture of this fabled institution.
A brief essay on the subprime credit consequences when CEOs fail to lead, directors fail to direct and regulators fail to regulate
It began as a term that few had even heard of barely 18 months ago and most experts dismissed as an insignificant blip in a fundamentally robust economy. But yesterday, George W. Bush signed into law the most extensive -and expensive- free market repair bill since the Great Depression, thanks to what we have come to know as the subprime mortgage meltdown. The legislation marks another ironic milestone for this Republican, MBA-trained apostle of the private enterprise system. In 2002, he put his signature to the Sarbanes-Oxley Act, which, in the wake of Enron and numerous more accounting-related corporate frauds, also brought the power of the federal government closer to the boardroom than at any time since the 1930s.
The Housing and Economic Recovery Act of 2008, which also serves as a bailout for Fannie Mae and Freddie Mac, addresses precisely the flaws and failures which successive business leaders and government officials said would never occur in the modern era. Depression-time failures, runs on banks, and the collapse of huge financial institutions that were typical of the 1930s, they said, were a thing of the past. But just as those events were a product of human shortcomings and unbridled greed, so too is the present day crisis the result of CEOs whose bonus-obsessed lack of vision made them unsuited to lead, directors whose risk-oblivious nature made them incapable of directing and regulators whose focus on the battles of the past made them incapable of regulating. Exhibit One in this regard is the more than $30 million in compensation the CEOs of Fannie Mae and Freddie Mac, the struggling mortgage giants that prompted the recent government bailout, were awarded by the boards of those companies during the past year when the seeds of their horrific losses were being sewn.
Only a few months ago, the priority of the new treasury secretary, Henry M. Paulson Jr., and the Bush administration was to roll back enforcement under Sarbanes-Oxley, which many in the business community claimed was hampering American competitiveness. Blue ribbon committees composed of impressive and accomplished corporate men and women were formed to look at ways of blunting the regulation of business. All the time they were focused on this objective, the time bomb of the subprime credit disaster was ticking away. But the business world, and Wall Street in particular, disposed typically to hearing only the siren song of great bonuses and increased fees, did not heed the tick, tick, tick of impending calamity that was of their own making. No alarm bells sounded, at least on Wall Street, about the overly complex financial instruments that were being created, or the possibility that the ever- faster moving gravy train would meet with an abrupt generational derailment. So much has the landscape shifted that the man from Wall Street who was brought in to loosen the reins of corporate regulation has now become the architect of the most sweeping government intervention since FDR. And his boss, the first MBA graduate in presidential history, will have presided over the most staggering run up of the national debt in U.S. history.
Republicans and other traditional advocates of government restraint have fallen so far from their Milton Friedman, laissez-faire pedestals that they have given Secretary Paulson what amounts to a blank check for unlimited backing of these government-sponsored enterprises whose names sound like something out of a 1920s Gershwin musical. It is a hard swing from earlier days, when Fed chairman Ben S. Bernanke testified before Congress that he didn’t expect the credit crisis would spread to other parts of the economy. Just days before the meltdown at Fannie and Freddie, Henry Paulson was predicting “we are closer to the end of this problem than we are to the beginning.”
Much of the litter prompting the actions of the Bush clean-up crew came about through Wall Street’s obsession with bigger bonuses and more fees, and insufficient attention as to how they were achieved. A good part of the world, though happily we did not count ourselves among this group, really believed for a while that some of these fellows actually deserved and earned their bonuses, which, in many cases, amounted to $40 million, $50 million or even more than $100 million in a single year. We have long contended on the subject of excessive CEO pay that it is well to remember that its recipients are endowed with no superhuman traits.
Unfortunately, too many in the boardroom and on the stock exchange floor seemed to think the more a CEO received, the more he was able to jump over tall buildings in a single bound. But as Merrill Lynch’s Stanley O’Neal and Citigroup’s Charles O. Prince schlepped out of their offices for the last time after presiding over record multi-billion-dollar losses, they seemed remarkably fallible -even with the millions in bonuses and severance they carted away in the process. Also gone with the toppling of CEO after CEO who failed to live up to their Marvel Action Comics billing is the idea that their compensation is the business just of shareholders. Look at the casualties of home ownership and the record foreclosures that are sweeping America, a trend that can be traced to the creation of flimsy investment vehicles designed only for their quick fee and bonus producing content for Wall Street and mortgage lenders, and you see how much Main Street America has at stake in the compensation inducements that crony boards hand out to their country club CEO buddies.
It was a nice party while it lasted. Shareholders did well. Directors commanded ever higher fees for their slumbering counsel in what was an impressive reprise of their roles during the Enron era scandals and long before, during another time of Wall Street excess culminating in the market crash of 1929. Top management became elevated to god-like status with remuneration packages commensurate with that standing.
The shell game continues. Just this week, Merrill Lynch announced that it was selling off $6.7 billion in what many regard as toxic mortgage investments. The problem is, only two weeks ago those assets were valued by the company at $11.1 billion. The company’s write-downs -so far- we are told exceed some $40 billion. But to be honest, whenever numbers climb over the $25 billion mark we generally have to reach for the oxygen mask and lose track of the details in the process. Another problem: Merrill has to loan the buyer most of the money to take over the sludge. It’s a little like the Fed buying up $29 billion in feeble Bear Stearns assets to help out with the JPMorgan Chase deal. Except they called it a loan at the time. Nobody is calling it that now. Thinking about Fannie Mae, one is reminded of the scandal there when government investigators found top management fiddled with the books in order to prop up their bonuses. In 2006, U.S. regulators filed more than 100 civil charges against former CEO Franklin Raines and other officials of the company, accusing them of manipulating earnings to maximize their bonuses. It was among many ethical lapses that will be uncovered during the heady times of recent years.
Now the party is over. And, as they had to in the 1930s, it is the taxpayer who must pick up the tab for the broken furniture and all the other casualties of the splurge of over-indulgence that marked what we have called before the Modern Gilded Era. When incomes in America begin to approach the level of disparity which existed in the 1920s, as they did in the past couple of years, perhaps it is a warning sign that reason and judgment have reached a dangerous state of undersupply in the economy, and in society as well.
With the stroke of a pen this week, America’s debt will have been increased by nearly a trillion dollars; its deficit now the greatest in the country’s history. Many of the owners of the corporations who gambled and lost on these ill-conceived schemes will be bailed out. Some homeowners may benefit from the legislation, and a higher standard of regulation -which should not have required a Titanic-like catastrophe before its need became obvious, will prove beneficial in the future. But the greatest beneficiary is Wall Street, which has consistently held the view that there is no better system than modern free market capitalism, except, of course, modern government enterprise when it shows up with its purse open. For there is no more beautiful sight to the errant Wall Streeter than when Mr. and Mrs. America come to junior’s rescue after he wraps the BMW of self-aggrandizement around the lamppost of ever looming, but never fully contemplated, reality.
The point of all of this is not to disparage capitalism, especially the idea of responsible capitalism -a principle we have long advocated and believe is fundamental to the innovation, creativity and advancement of a free and prosperous society. But it is to further illustrate that capitalism is merely an engine, not an Adam Smith-invented autopilot. How well it operates, what value it creates, what havoc it wreaks are dependent upon the skills, vision and integrity of the men and women to whom it is entrusted.
Many of the wrong people were entrusted with it this time. The price has been steep. The damage to the reputation of this unique economic system has been considerable. The consequences of insatiable greed, and of governance and regulatory systems that failed to check it, have been historic.
It might be hoped that for the hundreds of billions of dollars American taxpayers are shelling out for the economic debacle which in some respects rivals the Great Depression, they also will have paid for the education of future actors on Wall Street, in the boardroom and in the regulatory halls of government, who will have learned something of the vice of unrestrained excess, something of the virtue of a financial system more grounded in both value and values and something of the sacred trust that is bestowed when society loans power and opportunity to those whom it allows to lead, direct and regulate.
The recent G8 summit provided another revealing glimpse into how bankrupt the world’s top democratic heads are at addressing its most vexing problems.
When the leaders of the G8 nations descended on Japan this week for their annual gathering, their private jets left a carbon footprint larger than the Grand Canyon. With that as a prelude to their discussions, they decided that greenhouse gases could be reduced significantly -by 2050. Later, over a dinner which included corn-stuffed caviar, winter lily bulb and summer savoury, hairy crab “Kegani” bisque soup, roasted lamb with cepes and black truffle, and exquisite offerings from 19 other dishes, the group digested the growing world food shortage and the soaring prices that have caused riots from Port-au-Prince to Cairo. Yet the gathering produced only re-hashed statements on this global epidemic and no meaningful plans on how to combat it. The spiraling price of oil and looming economic turmoil failed to prompt concrete action as well. Disquieting forces set the world further adrift while its management dine on the fine repast of complaceny and self-satisfaction.
We have often asked on these pages what crisis has the G7 or G8 ever anticipated or adequately addressed? Where are the Marshall Plans that the scale of today’s global disasters call out for? Where is the vision a troubled world needs? Where is the hope that the hungry children of Africa, and so many now cowering in refugee camps across a continent caught in the grip of genocide, to come from? Far from displaying the foresight of real leaders, they give the impression of a bunch of people who even have trouble getting the picture right when looking at it in a rear-view mirror. To have the eyes of the world upon them -at their own behest- at this time of crisis on so many fronts and to engage in such a shameful spectacle of hypocrisy shows how out of touch this group is. What is it about the world’s democracies that its collective leadership appears so irrelevant and lacking in an authentic and inspiring voice? Why are we faced with a plethora of smaller than life figures who seem unworthy of the term leader?
Ultimately, it comes down to what stakeholders are willing to tolerate and how much folly, stupidity and self-aggrandizement they think is too much before meaningful change is produced.
To that end, the recent G8 summit provided another revealing glimpse into how bankrupt the world’s top democratic heads are at addressing its most vexing problems. It is our choice for the Outrage of the Week.
With this posting the Outrage will take a much-needed break for a few weeks, while reserving the right to return in the event that the usual suspects act up too much in its absence.
It rather neatly illustrates the farce that CEO pay has largely become when Lehman Brothers chief Richard S. Fuld, Jr. announces that he will decline a bonus this year. The board compensation committee has not yet met to determine if one would even be offered to him. But that probably is just a formality because it is Mr. Fuld who is really calling the shots here in his various capacities as CEO, chairman of the board and head of the executive committee.
Of course, eschewing a bonus in a company that just posted a staggering $2.8 billion dollars loss for the second quarter is a little like the customer who breaks a Limoges vase at Tiffany and tells the clerk not to worry about the gift wrapping service. It’s hard to see why any credit is due in making such a statement. A more meaningful gesture would be to give back some of last year’s $40 million bonus that was awarded when many of Lehman’s flawed, and horrifically costly, decisions were being made. But because it would actually carry some actual sacrifice, and show genuine leadership that is sorely missing from Wall Street in recent years, Mr. Fuld will not offer to do that.
It is another example of where CEOs have gotten so far offside both reality and perception. It is that reality and perception that is today, perhaps more than Mr. Fuld, shaping the future and direction of Lehman Brothers.
The price of tyranny is always corruption and the trampling of the human soul. These costs are now evident to the world, but more significantly, to the Chinese people, in a decimated Sichuan Province and in the shattered ruins of a thousand classrooms.
When the earth opened up in central China two weeks ago, and the extent of the devastation and suffering became apparent, the world forgot about politics for a while and concentrated on the human dimension. Central committees and secret police forces, two functions long associated with communism, were the last thing on anyone’s mind. Many countries offered praise toward the Chinese regime for the openness it showed in permitting the world’s media to report on what happened. There were hopes expressed that things were changing for the better in the governance of the world’s most populous nation.
But all that came to a screeching halt when Beijing announced that it would allow families who lost their only child in the disaster to apply for a certificate permitting them to have another. So it is in this country, whose authoritarian regime regulates all aspects of society with no accountability or opposition, that human life is now subjected to the ultimate bureaucratic indignity. Like so many other things in China, childbirth is relegated to a mere transaction that requires some official stamp of approval. Perhaps it is a predictable Orwellian-style turn in a state where the government has such a formal antipathy toward organized religion and the practice of religious rights. One need look no further than recent events in Tibet for that evidence. But the larger question is: How short is the step between making decisions about birth and making them about the last frontier of human existence? Will it someday become inconvenient for the regime to permit older people who are sick to have the care they need? Once a government crosses the bridge and begins to dabble with decisions about birth, will it have any compunction about making the ultimate determination at the closing stages of life?
When, in North America last year, store shelves were stocked with poisoned dog food and tainted toothpaste, contaminated vitamin pills and children’s toys painted with lead -all the result of wrongdoing in China- the world was properly outraged. Some suggested, as we did on these pages, that such defects were the inevitable result of a society that lacked transparency, accountability and good government. With revelations that many of the buildings that collapsed in the earthquake, killing thousands of children, were the result of shoddy construction, now even some Chinese are beginning to look inward at their own system. The government’s spirit of openness in showing the world the aftermath of the tragedy has suddenly been shut to its own media’s examination of the corruption issues that led to such devastation.
The party officials and central committees, the policies that favor the friends of those in charge while muting dissent on the part of others, all have far-reaching consequences in the lives of ordinary people. The shameful misconduct of those responsible who allowed the construction of such substandard buildings is part of a longer litany of betrayal, from carcinogenic air pollution to contaminated lakes and rivers, that is leaving the Chinese people and their children a legacy of pain and disease that the world has seldom experienced on such a scale. It is being done in the name of profit, which, first and foremost, is about enriching the party bosses in Beijing and their friends, regardless of the costs.
What the rulers at the top do not grasp (as juntas, central committees and tyrants rarely do) is that it is not possible to indefinitely buy the loyalty of a society with the prospects of greater economic wealth while denying it the larger privileges of citizenship and basic human rights. The world, and in this respect the great people of China are no different, is not just the sum of its transactions and accounting statements. No amount of money can console the grieving parent of a lost child. Double-digit economic growth, which China’s regime has trumpeted for years, is no substitute for honesty and transparency in public governance. The price of tyranny is always corruption and the trampling of the human soul. These costs are now evident to the world, but more significantly, to the Chinese people themselves, in a decimated Sichuan Province and in the shattered ruins of a thousand classrooms.
Freedom and democracy are the only tools that give people the ability to hold the powerful to answer for their actions. Without the discipline of accountability, no organization, whether it is a corporation or a government, will function in a manner that serves anything but the vested interests of those on the inside and at the top. It is possible now, in their moment of national sadness, that this understanding will begin to gain new adherents among the Chinese people. They may well come to see that something of the old (but still very current) regime collapsed and fell into the rubble on that terrible day as a result of its endemic corruption and lack of transparency.
Many of the people in China who lost their only child must now look upon the government for their hope of another. But in that mournful gaze they might also begin to question if humans are not entitled as a fundamental right to make such decisions on their own, without the stamp of some government official posted on their bedroom door like a local building permit.
To live under the all-snooping eyes of such a corrupt regime stifles more than family life. It is an offense against human nature itself.
