Wall Street Bailout | The Finlay Centre for Corporate & Public Governance

Outrage of the Week: The Real John Thain Revealed

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 passengers 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.

Reshuffling the Crew on the Citigroup Titanic

True to form for a company that has proven itself consistently too late and too slow, Citi’s board is now moving backwards with the choice of its new chairman, Richard D. Parsons.

Mr. Parsons is part of the old guard and has been a director since 1996. He is among the crew that missed more red flags than are on an admiral’s ship and has presided over the obliteration of billions in share value.

What Citi needs is new people and bold action to steer it into prosperity. That begins with Citigroup’s directors. Rearranging the crew on the Titanic after it hit the iceberg would not have done much to avoid the impending calamity. Citigroup and its board have repeatedly managed to hit one iceberg after another over the past several years. Reshuffling its current directors isn’t likely to have any better outcome.

Outrage of the Week: The Two Americas

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…)

Two Faces of Governance at Citigroup

The board says it continues to stand behind current management, led by CEO Vikram Pandit. But can a board stand up while sleeping? This is a question investors must ponder.

If you are wondering how Citigroup could have lost tens of billions, seen the value of its stock pared by more than three-quarters, and required taxpayer guarantees and capital injections mounting into the hundreds of billions, look no further than two figures who have played a prominent role in defining the Bank’s corporate governance culture. (more…)

The Cerberus-Chrysler Bailout: Time to Open the Mouth of the Whale

The myth that removing the company from what some now regard as the shackles of quarterly statements will make all the difference is just one of the ironies in this deal. Cerberus, like the other members of this secretive club of private funds, is known neither for its patience nor its altruism. When you move from the cold of the storm into the mouth of the whale it may seem warm and quiet. But it’s only a short-term feeling.

You’re still in the mouth of the whale.

Finlay ON Governance, May 16, 2007 (more…)

In the New York Post

Our comments about Citigroup’s hapless board of directors made their way into the New York Post today in a piece by business journalist Paul Tharp. Some of the observations first made here at Finlay ON Governance were reflected in the Post’s editorial, as well.

The Post’s story got quite a lift, appearing in the headline of the newspaper which was much discussed on CNBC this morning. Here is part of what was quoted:

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.

Noting that Citi’s stock has lost more than $133 billion this year alone, Finlay said, “Citigroup’s board has demonstrated that it has not been on top of any major issue in more than a decade, much less ahead of it.”

You’ll be seeing some significant changes in Citi’s boardroom in the not-too-distant future. It’s one thing for directors to be portrayed as sleeping on the job. It drives them crazy when they are presented as clowns.

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