It was a week that illustrated how not to be a leader.
The CEOs of the big three auto makers appeared before the United States Congress, and showed a level of ill preparedness on even rudimentary questions about their bailout pleas that would have incurred the ire of a fifth grade teacher. Their separate arrivals in three luxury private jets reminded us of when Robert Nardelli, then head of Home Depot, cut off shareholder questions at the company’s annual meeting after 60 seconds. (more…)
There is a reason why the bank’s board appears little more than a bystander to the destruction of shareholder wealth. A good part of it has to do with its discredited governance structure.
Watching Citigroup’s shares crash through the 10 dollar level, then nine, then eight, seven, six -like some kind of inexorable countdown leading to the inevitable disaster- investors might be excused for asking, Where is the board? The answer is that it is stuck somewhere back in the 1940s, when it was considered bad form for directors to actually direct. (more…)
One is forced to reach back to 1917 and a delusional Russian czar on the eve of his abdication to find such a comparative detachment from reality.
The almost heart-stopping disintegration of the value of Citibank shares seems unrelenting. It is not entirely surprising, however. This is a company that has had three CEOs in the past five years and is very likely headed for its fourth. Sandy Weill had to give up the reins when he failed to check a wave of scandals and regulatory run-ins that became costly to the institution’s reputation and stock price. Charles Prince had to relinquish power after he failed to stem an excess of overleveraging and mortgage-related bad bets that led to an unprecedented wave of losses and write-downs. Under the newest CEO, Vikram Pandit, the largest destruction of shareholder wealth in the company’s history continues unabated. As these words are being written, Citi’s stock has crashed through the dreaded $8 floor. Most investors have taken to averting their eyes every time their stock appears on the ticker. I am one of them.
Common to these problems has been Citigroup’s board of directors, which increasingly resembles a first-class sleeping car on a train wreck that just keeps happening. 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. Sometimes they never do.
Nothing reveals the dysfunctionality of the board, and the utter failure of leadership on the part the current CEO, more than the position the company has taken on executive bonuses. Tens of billions have been wiped out in write-downs and losses. Over the past year alone, its share value has declined by $133 billion. Yesterday, Citi announced intentions to eliminate 52,000 jobs. Yet with all this, the board wants to take until January of next year before it decides whether or not it will award bonuses. One is forced to reach back to 1917 and a delusional Russian czar on the eve of his abdication to find such a comparative detachment from reality.
If the board can’t get a basic thing like executive bonuses right (meaning eliminated) at a time when the stock is in free fall and the company is receiving critical injections of capital from the American taxpayer, how can it be dealing with the larger challenges to Citi’s business model and where it fits into a radically redefined 21st century financial landscape? The answer is obvious. Citigroup’s board has demonstrated that it has not been on top of any major issue in more than a decade, much less been ahead of it. How it ever allowed the company to take on the level of risk it did and become almost suicidally overleveraged, how it permitted its once great franchise to become a laughing stock, and how it missed the mark with the company’s two recent CEOs –these are questions that quickly fall under the category “What were they thinking?” But that is a question that proceeds from a fundamentally flawed assumption. As we will show from the outdated and discredited structure of Citi’s board in our next posting, there hasn’t been a lot of thinking going on there for some time.
In a time when the restoration of confidence, perhaps more than even financial liquidity, is paramount in calming markets and providing stability, neither the Treasury secretary nor the chairman of the Fed acquitted themselves well this week.
As the war in Iraq unfolded, and then morphed into disaster in its first several years, the world discovered the consequences when what is given with absolute assurance as the urgent reason for taking action turns out not to be the case.
As the current economic crisis unraveled, the Bush administration claimed that it had spotted the greatest danger to the economy and the credit markets in generations. Toxic mortgage based assets held by financial institutions were cited as the threat and a $700 billion government intervention was needed to buy them up.
As President George W. Bush said in September:
Under our proposal, the federal government would put up to $700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system.
It had to be done immediately, he said, or a grave and gathering peril in the financial system would make its pain felt soon on Main Street. The President painted a bleak picture of what the world would look like without the bailout.
More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.
We expressed some skepticism on these pages as the President’s words were being digested. Portraying financial Armageddon if American taxpayers did not come up with the largest government expenditure in history struck us as not a very faint replay of the approach taken in Iraq, where the administration not only claimed that weapons of mass destruction posed an immediate threat but that it knew where they were.
So we posed the question nobody else it seemed was even considering:
Is America stumbling into a financial Iraq? … Are we dealing here with the financial equivalent of threatened mushroom clouds and weapons of mass destruction?
As it turned out, toxic assets, like weapons of mass destruction, were not the real problem. In the case of Iraq, they were never found. In the situation involving the credit crisis, none were ever bought under the government’s rescue plan. And a new solution was pursued instead: taking equity positions in financial institutions.
This week,Treasury secretary Henry M. Paulson Jr. announced that the original plan, the one upon which the $700 billion bailout was approved and which so many officials and commentators said was absolutely essential to financial stability, would be abandoned.
Even before the Bush-Paulson plan was approved by Congress, we had some doubts about its principal focus:
How the Bush bailout plan will be managed, what assets it will buy, how it will value and how long it will hold them are all undisclosed. It is hard not to be doubtful that the compromise proposal now being discussed will offer much more information. There is considerable dispute that the plan even addresses the fundamental problems in the banking sector.
And the astronomical $700 billion that Mr. Paulson initially insisted was needed in one fell swoop? Congress gave Mr. Paulson $350 billion and required reauthorization for the remaining amount. Mr. Paulson said he had no plans to ask for it now.
Elsewhere last week, the Fed refused requests by Bloomberg News and others to account for the more than two trillion dollars it has pushed out its lending window. It apparently believes the country is not entitled to know how much the Fed is lending, whom it is lending to, or details about the collateral that is being offered.
Both Fed chairman Ben S. Bernanke and Mr. Paulson have said that an absence of openness and transparency were factors that helped to create the current financial crisis in the first place. But transparency is something the Fed talks; it does not walk.
Last spring, we suggested what the Fed had said about the Bear Stearns collateral did not fully compute.
Actually, the Fed did not make a traditional $29 billion loan to JPMorgan Chase, as its official statements would have us believe. It was more of a wink-and-a-nudge deal to take on the poorer assets without going through the formality (and the barrage of questions that would follow) of actually purchasing them.
In a time when the restoration of confidence, perhaps more than even financial liquidity, is paramount in calming markets and providing stability, neither the Treasury secretary nor the chairman of the Fed acquitted themselves well this week. Mr. Paulson only added to the impression that what he and the administration say cannot be trusted or taken at face value. Mr. Bernanke showed his commitment to transparency is a one-way street. What the world needs from its leaders is candor, clarity and competency. It did not find these virtues in either man, which is why the actions of the secretary and the chairman are the Outrage of the Week.
The funny thing about prescience, Mr. Secretary, is that it should occasionally bear some relationship to the future, or even just next week.
Treasury Secretary Henry M. Paulson Jr’s announcement today of yet another rejiggered financial recovery plan contained enough reversals in direction to make an Olympic swimmer dizzy. But it was his Carnac statement that really got our attention. He actually claimed to be prescient. Here’s part of what he said at today’s press conference:
We were prescient enough, and Congress was, that we got a wide array of authorities and tools under this legislation.
Here is a man who came from the upper tiers of Wall Street who apparently had no idea of the problems building in the credit default market or in the mortgage-backed securities field. His first priority as Secretary was helping to blunt the effects of what he claimed to be too much regulation that made business less competitive. He got off that train in a hurry.
As the subprime disaster unfolded, he made a number of statements that indicated he did not fully grasp the enormity of what was happening. Only a few months ago, he asserted that the economy was strong and that the worst of the crisis was behind. After Bear Stearns collapsed, he said they had saved the financial system. He said the same thing after the AIG bailout. When he went before Congress, he presented a plan to buy up toxic assets which he said was absolutely critical to the survival of the credit market and to the well-being of Main Street. Approval was urgent. He seemed shocked that there had been such an over extension of leverage on Wall Street –the place where he had earned a fabulous living for decades.
In the weeks that followed, not a single mortgage-backed vehicle was bought in the famously vaguely crafted “reverse auction” process. Instead, and following the lead set by Great Britain and Europe, Mr. Paulson decided that banks needed capital investment. AIG got not one, but two more multi-billion dollar injections of cash, and the first deal was wiped out altogether. Meanwhile, stock markets continue their downward spiral, credit remains frozen for most consumers, and mortgages -which the original TARP fund was supposed to help- remain a major source of financial distress. Now, with the plan changed yet again under Mr. Paulson, not only is there no T(roubled) A(ssets) in the TARP, there is some question as to whether there is any (R)elief, or even a P(lan) at all. If this is the result of Mr. Paulson’s prescience, we all need a dose of the unseeing Mr. Magoo. Perhaps that’s what we really have, after all.
Looking at the debris that has followed the Treasury department everywhere it has gone in recent weeks, and the confusion that continues today, one gets the impression that Secretary Paulson might have trouble finding the door, much less divining the future.
When this bill of goods was first unveiled before the American public, we said it was unlikely to be successful because it was not targeting the right problem. We said it would be a boondoggle. Today, it was announced that the program would now turn its sights to the unease faced by the securitizers of credit cards and auto and student loans. Funny how they were never part of the original TARP. Still, it’s hard to be surprised. As we noted in September:
How the Bush bailout plan will be managed, what assets it will buy, how it will value and how long it will hold them are all undisclosed. It is hard not to be doubtful that the compromise proposal now being discussed will offer much more information. There is considerable dispute that the plan even addresses the fundamental problems in the banking sector…. There is no clear statement even as to the kind of weak assets the government proposes to buy, much less how they would be valued. I suspect it will soon work its way down to student loans, car loans and credit card debt.
The funny thing about prescience, Mr. Secretary, is that it should occasionally bear some relationship to the future, or even just next week.
The magnitude of the financial injury worldwide and the costs to repair it are breathtaking. But the loss of faith occasioned by what so many see as a colossal betrayal on the part of leaders and institutions may prove the most damaging of all.
The tenth month in the Gregorian calendar will go into history (please!) as the time when more money was lost by shareholders around the world and then found by governments to prop up the global financial system than any four-week period since civilization began. The amounts may well exceed ten thousand billion dollars when you consider the plunge in stock markets worldwide and the sums public treasuries are coming up with to bailout the banks and just about anything else that has a profit and loss statement.
The ultimate costs both human and financial of this economic carnage and unprecedented public monetary infusion will not be known for many years. The impact on the economy and monetary stability from the “solution” may carry unforeseen repercussions, just as the problem it is designed to solve went under the radar for too long. Without doubt, the interaction between capitalism and government has fundamentally shifted, as has confidence on the part of millions of citizens in the institutions they once admired but, alas, no longer even wish to be seen associating with. It may well be that a generation of investors which has lost so much will choose to forsake the stock market for the rest of their lives. Many young people could be left with an indelible impression of a system that can never be trusted, except that is to work profitably for a handful at the top until their folly and greed reaches the point where even they become its victims, too. The seeds of individual bitterness and social unrest have often been sown when the whirlwind of momentous events unearths the land.
Here’s a question –call it the ten trillion-dollar question: If bankers had done the jobs expected of them in a diligent fashion; if boards of directors had taken an interest in debt and leverage ¾two subjects that didn’t seem to be part of their vocabularies, much less on their agendas; if regulators had been breathing and perhaps even conscious; if policy makers had had the vision to see the possibility of failure and not just the mirage of endless prosperity, do you think all this would have happened? And what does it say about institutions and leaders in the 21st century that so many seemed incapable of exercising sound judgment and common sense, even when some were receiving compensation on a scale never seen in the history of professional managers?
The magnitude of the financial injury worldwide and the costs to repair it are, indeed, breathtaking. But the loss of faith occasioned by what so many see as a colossal betrayal on the part of leaders and institutions who acted as though they had the wisdom of prophets, but in truth had not even the foresight of blind men, may prove the most damaging of all. It is a lesson that will be remembered long after this October of the fleeting trillions has faded.
