Even in the face of their debacles of historic proportion, many of these institutions persist in acting in a manner more resembling an economic sociopath than a responsible steward of the public interest, whose salvation has essentially been made possible and underwritten by the American taxpayer.
Reminiscent of another major Bush administration blunder where what was advertised did not exactly work out that way in reality, there are signs that the great bank bailout that is the centerpiece of the $700 billion Treasury infusion is taking on a life of its own. Instead of loaning out their injection of public capital to small businesses and consumers, banks are either hoarding the money or using it to buy up other institutions. One sure example of this is PNC’s announcement on Friday of its purchase of National City, a smaller regional bank. The purchase price comes in at $5.8 billion. The amount PNC got from Treasury’s recent redistribution of taxpayer wealth to Wall Street and the financial sector (not in his wildest dreams could Karl Marx ever have thought that his theory would find such unlikely adopters) was $7.7 billion. Do you suppose the two are related?
The New York Times’s Joe Nocera thinks so. In an impressive bit of reporting, he recounts in his Saturday column how a JPMorgan executive set out the Bank’s view of the government’s injection in a recent employee conference call:
What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.
Lending money does not appear to be high on JPMorgan’s To Do list. And it is probably not on many other banks’ either.
The third bit of evidence that the public has been blindsided big-time by how the banks are handling their windfall came courtesy of Citigroup. They set aside $25 billion for bonuses this year, even after their record losses and write-downs, which were substantially beyond $25 billion. How much do you suppose they got under the first round of the bailout plan? Twenty-five billion, exactly.
The reality is swiftly emerging that the United States government has become a gigantic hedge fund. It is providing the money and guarantees that are permitting the banks to use their own capital in ways that will inure to greater advantage for top employees and insiders.
Mr. Nocera, whom I think has the normally impressive street-smart intuition of a native New Yorker, had a more optimistic view of why the $700 billion bailout had to be passed on an urgent and virtually unquestioned basis:
I don’t think they are going to wait much past the weekend. No deal, no credit markets. It’s as basic as that.
And if that happens, the consequences will be far more pressing than the failure of a Morgan Stanley or a Goldman Sachs. You won’t be able to get a mortgage. Credit card rates will skyrocket. Businesses will be unable to expand and grow. Unemployment will rise.
We were a tougher sell on the bailout and remain so today for obvious reasons. Here’s part of what we predicted.
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….
Confidence has been the missing partner in the economic voyage of recent months. The consequences have been devastating. Prominent in accounting for its absence have been colossal misjudgments and self-indulgence on the part of Wall Street and its major banks. The entire economy has been turned upside down to repair the damage they have caused, at a cost no one ever could have conceived possible. Yet in the face of these debacles of historic proportion, many of these institutions persist in acting in a manner more resembling an economic sociopath than a responsible steward of the public interest, whose salvation has essentially been made possible and underwritten by the American taxpayer. Too many insist upon hoarding their rescue proceeds or using the money to expand or to reward themselves with huge bonuses. Last week we had the AIG junkets and the propsect of tens of millions being paid out to failed CEOs. Soon it will be the auto companies looking for a handout, with Cerberus Capital bigwigs doing all kinds of contortions to justify why the private equity firm that claimed Chrysler was better without the investing public should now have the full backing of the American taxpayers to save it. Somebody should add an index to the stock market which would measure hypocrisy, like the VIX gauges volatility. It might give investors a better clue as to a company’s real future.
Wall Street’s leaders have offered few words to quell the raging public opprobrium that is mounting against their actions. They have expressed virtually no criticism of the practices of their industry that led to the credit calamity. And they have had little to say to the shareholders and taxpayers who are carrying the can for their failures. They seem to think that their self-absorbed ways will continue into the future, this time with ordinary Americans footing the bill. They are wrong on so many levels.
Neither our economic system nor the millions of stakeholders who place their trust in it can afford captains of capitalism who demonstrate, time after time, such titanic misapprehension of both business reality and the role of public confidence that is essential to success, which is why the bank CEOs and boards that continue to remain tone deaf to the historic new dimension of their responsibilities resulting from the bailout they made necessary is our choice for the Outrage of the Week.
The once powerful and still influential former Fed chairman took no lessons at all from the carnage of Enron and other scandals that occurred on his watch, where boards had shown themselves to be utterly incapable of monitoring the ethical and financial health of company after company, and management’s approach to risk was the financial equivalent of the three-pack-a-day cigarette smoker.
Alan Greenspan, who used to be called the voice of “God” when it came to financial matters, appeared before the U.S. House Committee on Oversight and Government Reform this week. But rather than delivering his testimony with heavenly authority, this one-time head of the Federal Reserve gave a performance more like Woody Allen doing an impression of Captain Renault of Casablanca fame. Dr. Greenspan said he was “shocked, shocked” to discover how far astray the markets and financial firms went in the past several years in their abuse of mortgage-related securities.
He put it this way:
I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.
This is not the first time Dr. G looked like he had just stuck his finger in a light socket. We thought his vision was a little clouded in March of 2007, when he was among a crowd -which included U.S. Treasury Secretary Henry M. Paulson Jr.- that was pushing for less regulation of business. He said at a conference then that he didn’t see a need for most of the Sarbanes-Oxley legislation of 2002. He joined a loud chorus of business heavyweights who argued that boardroom regulation was sapping the competitiveness of American business. Talk about a near-terminal case of myopia.
Yet it seems odd, with all the carnage from Enron and other scandals that occurred on Dr. Greenspan’s watch, where boards had shown themselves to be utterly incapable of monitoring the ethical and financial health of company after company, that he still would have relied upon management to protect shareholders. In business, as with most large organizations these days, the right thing does not happen by default or through auto pilot. It requires intricate and robust mechanisms to ensure the right thing is clearly identified and is the subject of constant internal checks. Shareholder protection as far as management is concerned has too often been reduced to the cliché of the fox guarding the hen house.
Here is what we said about Dr. Greenspan’s earlier, and now discredited, view that there was no need for regulation that raised boardroom standards:
If we are to take Dr. Greenspan at his word, during the time he headed the Fed he didn’t see the need for changes in governance when huge corporate icons were crashing down about him and taking the stock market with them. He didn’t see the need for codes of ethics that would have protected whistleblowers who tried to prevent Enrons from occurring. He didn’t see anything wrong with the hundreds of millions in loans boards were doling out to CEOs that were never repaid. He didn’t see anything wrong with audit committees that were meeting less frequently than compensation committees while permitting huge liabilities in “off book” arrangements. He wasn’t bothered by auditors who were making all kinds of fees from non-accounting jobs and were more interested in pleasing management than reporting on the true health of the books. He didn’t see a problem with paying CEOs hundreds of millions in stock options without expensing them on the company’s balance sheets.
We then asked the question:
What else can’t this man see?
The answers have been coming in battalions of destruction over the past couple of years. The landscape is littered with the ruins of the financial system, the deaths of century-old banking houses, withering consumer confidence in an era of spreading job losses and stock market decimation, and an avalanche of multi-trillion dollar government bailouts and interventions that few can fathom and whose eventual toll in monetary impact and taxpayer cost absolutely no one can accurately predict.
It is significant that one of the main features of the legislation he was telling high paying business audiences not long ago was unnecessary was a provision to make boards more responsible for overseeing financial risk. Risk, as everyone now knows, was the six-ton elephant that was running amok throughout Wall Street, creating disaster out of anything related to subprime mortgages.
We had a different vision of where the world was heading when Dr. Greenspan was trying to turn it back. Twenty months ago, we noted the following:
A global market that is becoming increasingly volatile and upon which so many depend for their livelihoods, their prosperity and very often their dreams, requires new rules for the road —not a free-for-all. In this complex environment that has too often in recent years experienced the consequences of those who play only by their own rules and tend to forget the trust from others they hold, a premium will flow to where the regulatory structure and corporate governance regime demand and produce transparency, integrity and ethics. Companies and markets that become synonymous with those values will enjoy a competitive edge. Those that do not will suffer.
Alan Greenspan is a poster child for an era that was too quick to raise up human beings to godly status and attribute to them, and countless CEOs who were thought to actually deserve the hundreds of millions they received, feats of vision and abilities that mere mortals could not begin to comprehend, much less imitate.
As it turns out, the Richard Fulds, Angelo Mozilos and James Cayneses could not even manage to keep their own companies –or their reputations- from falling into an abyss fashioned by an excess of greed, hubris and poor governance. No, it wasn’t what Dr Greenspan feared: too much regulation like Sarbanes-Oxley. It was exactly the opposite.
The greatest challenge to capitalism and economic stability since the 1930s is in no small measure the product of the unregulated and opaque actions of self-aggrandizing titans of excess, whose overweening ego and blinding greed seldom permitted them to see anything beyond more zeroes at the end of their next paychecks and whose approach to risk was the financial equivalent of the three-pack-a-day cigarette smoker. The boards that should have been the watchful stewards of shareholder interests, but failed thoroughly in that role -as they have in so many times of testing over the past 100 years- were happy to light the match as often as it was demanded.
And Alan Greenspan, it turns out, was somewhat less than the all-knowing font of wisdom he enjoyed portraying and the media and others delighted in extolling. His Congressional appearance was a testament to failure, or at least to the folly of heedless acceptance of a system that worked very well for a few at the top and gave little cause to its adherents, which included Dr. Greenspan, to consider anything else. Conventional wisdom can be such a pleasingly temperate island, especially when its most favored residents are the ones dispensing the wisdom and setting the conventions.
Dr. Greenspan’s testimony included this revealing note:
This modern risk-management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year.
That would be a revelation possible only for those in urgent need of a trip to the eye doctor. Normal vision, possessed by most ordinary men and women who have some experience seeing how the real world works and the costly recurring blunders of narcissistic and overrated leaders, would have advanced the conclusion by several years.
Alan Greenspan has been a gifted and erudite figure on the stage of American public policy for several decades. He has also made a number of mistakes. Far greater, however, has been the mistake of many observers who have tried to make of him more than the man of earth he really is. There have been occasions, we think, when he has taken those expectations a little too seriously.
Memo for the future: before society decides to elevate someone to godlike stature, make sure he can at least see beyond the next seven days.
The law has finally caught up with the stumbling insurance giant’s out-of-control compensation and highflying junkets.
It took the sight of flashing red and blue lights in their rearview mirror before the visionless directors of AIG finally got the message about their failures and shortcomings. Last week, we commented on the excesses in executive compensation and numerous public relations disasters that have occurred on their watch. That was, of course, in addition to the complete meltdown of the company that resulted in the U.S. government’s huge bailout. We said at that time:
AIG’s directors should either get a grip on the company and show they comprehend the new public dimension to their duties, or they should find another line of work.
Yesterday, New York state’s top cop and Attorney General, Andrew Cuomo, sent a blistering letter to each member of AIG’s board demanding that they shape up and behave like the trustees of billions of dollars in public funds which they have become. As Mr. Cuomo wrote:
In the last several months, as AIG was teetering toward bankruptcy, and operating with unreasonably small capital, AIG nevertheless made numerous extraordinary expenditures in the form of executive compensation payments, junkets, and perks for its executives.
The letter went on to demand:
…the Board should immediately cease and desist these improper and extravagant expenditures which exploit the taxpayers of this Nation.
Today, in the wake of yet another revelation -this time, AIG executives taking a private jet to enjoy an $86,000 weekend of pheasant shooting at an English estate- the company announced a new policy to retrain pay, account for previous compensation deals and end highflying parties.
Is it possible the sirens of public outrage have finally awakened the slumbering insurance giant’s board? Stay tuned.
The British breakthrough, and how it managed to smash the U.S. bailout logjam and get it moving, is just one more of those crazy, topsy-turvy turns on the bumpy road to financial sanity -and another indication that America’s global preeminence is facing some challenges.
Finally, a coherent plan seems to be emerging to address some, and some is the operative word, of the excesses, failings and weaknesses that have arisen in the financial markets. The origin is revealing. U.S. Treasury secretary Henry M. Paulson Jr.’s plan has had more iterations and setbacks than a bad Hollywood script. They were the product of a Republican administration which had a reputation for being pro-business. The British plan, on the other hand, was not only a model of speed and simplicity, conceived and adopted in a matter of days, but it came from a Labor government. Generally, business does not find itself applauding that leaning. Credit belongs to Prime Minister Gordon Brown, who actually seems to know what he is doing and what is necessary to restore confidence in the functioning of the markets.
Now, the U.S. has decided to follow the British lead and announced tonight a massive injection of capital into nine banking institutions. These measures notwithstanding, more needs to be done to understand how the world was hurled to the shaky edge of the financial abyss, who is responsible and what the costs are for the solutions that are being proposed. No reasonable person can be happy or satisfied that the excesses and senselessness of Wall Street and its counterparts elsewhere must be underwritten by public funds that soar into the trillions. Evidence suggests that public outrage is soaring just as high.
The British breakthrough, and how it managed to smash the U.S. bailout logjam, is just one more of those crazy, topsy-turvy turns on the bumpy road to financial sanity -and another indication that America’s global preeminence is facing some challenges. Perhaps Mr. Paulson should try a cup of tea more often.
Paul Krugman made some interesting observations on these points in The New York Times on the day the Nobel committee announced his prize for economics. It’s good to see someone win who has demonstrated a keen grasp of the human dimension to economics. A giant of that field, the late John Kenneth Galbraith, never received the Swedish honor, though many of his followers, including this observer, felt it was an unfortunate omission. Just before his death, Mr. Galbraith predicted the coming of a major disruption in the banking and credit sectors. He was a student of the market crash of 1929 and never really bought into the idea that it couldn’t happen again. He was correct.
Mr. Krugman is in good company taking up the Galbraith banner of making economics accessible to the people most affected. We wish him well and salute him for his distinguished achievement.
Incidentally, Mr. Krugman publicly became one of America’s newest millionaires today. The prize is accompanied by a cash award of $1.5 million. I believe the technical term economists use to describe such events is “awesome”.
The board’s actions and events in the company it oversees have already made its members look like fools. They should not be permitted to add the trappings of clowns to the boardroom as well.
It was a board that presided over the largest insurance company in the world. Yet it was apparently oblivious to the mounting derivates risks being taken on by AIG’s Financial Products unit. When the Office of Thrift Supervision sent a letter to the company in March, advising of material weaknesses in oversight of the unit and in the valuation and accounting of its products, whatever steps were decided upon did nothing to remedy the problem. Even the company’s own auditors warned the board about accounting problems in the unit. These two revelations should have set off alarm bells in the boardroom. There is no evidence that anyone even woke up long enough to call 911. The board was apparently stunned to discover the dire state of the company the day federal regulators and officials walked in to say liquidation or nationalization were the only choices remaining, and the first option was not really on. It is the history of countless corporate catastrophes to find boards dazed and suprised about the arrival of disaster in the boadroom when everyone else could hear its heavy footsteps coming closer and closer for some time.
In 2007, the board’s compensation committee agreed to ignore AIGFP’s losses so that executive bonuses would not be adversely affected. How thoughtful a board can be when times are tough for its friends at the top. But as losses soared into the billions and obligations because of risk failures spun out of control, the company foundered and the U.S. government had to prop it up with an $85 billion loan.
Undeterred by the outrage the unprecedented bailout prompted among taxpayers and shareholders, the company’s tone-deaf public relations talents masterminded another blunder. AIG decided to spend $440,000 on a weekend retreat at a luxury spa in California for employees and independent agents. It was explained that the event was planned for some time and that the agents were looking forward to it. There would be no reason why the near-collapse of the company and the unprecedented rescue by the federal government should cause any disruption to the social calendar.
Just today, it was announced that the government had to put up a further $38 billion to keep the company going. Share value is all but shattered and with its close today at $3.19, the stock remains a faint shadow of its 52-week high of $70.13. It is difficult to know why directors with a record like this are still on the job. The question also needs to be asked, especially in light of this second multi-billon dollar bailout and recent spa-junket, how many more disasters are going to occur on their apparently shut-eyed watch?
The board’s actions and events in the company it oversees have already made its members look like fools. They should not be permitted to add the trappings of clowns to the boardroom as well.
AIG’s directors should either get a grip on the company and show they comprehend the new public dimension to their duties, or they should find another line of work.
It would be difficult to see how the company would fare any worse for their absence.
When the market is going up, much of the world treats CEOs like superheroes who are worth every penny of the extraordinary sums they command. But when fate and fortune retreat and reverse direction, these CEOs suddenly claim only to be human, an attribute with which they had previously never shown much familiarity.
It was, in many ways, a script that has become all too familiar in recent months. The well-dressed CEO appears before a committee of the U.S. Congress, says he takes full responsibility for the collapse of the company he headed, and then goes on to blame short-sellers, the housing market and a run on the bank. He says there was no need for more capital, but now, as a result of that decision, there is no company either. And yes, he, too, was worth the fortune he was paid. The problem was that, although its CEO received close to half a billion dollars since 2000, the company that prevailed for 158 years through a civil war, financial panics, economic depressions and two world wars could not survive the leadership of Richard S. Fuld Jr. So Lehman Brothers is no more.
There is a way that the spotlight of Congressional investigations and live television reveal dimensions to CEOs like nothing else can. Yesterday, it was Mr. Fuld’s turn before the U.S. House Committee on Oversight and Government Reform. A familiar pattern emerged from the hearing.
When the market is going up, much of the world treats CEOs like superheroes who are worth every penny of the extraordinary sums they command. A company’s success is seen pretty much as a one-man show. This was especially true for Lehman’s Mr. Fuld, who apparently was so crucial to the bank that they needed to replicate him as chairman of the board of directors, CEO of the company and chairman of its executive committee all at the same time. No private jet is too luxurious, no pay package is too extravagant, no amount of directorial slumber too deep that otherwise might challenge the modern boardroom Caesar. As noted on these pages last month, the CEOs of Merrill Lynch, Citigroup, AIG, Bear Stearns and Lehman Brothers’ Richard Fuld received an aggregate compensation in excess of one billion dollars over the past five years.
But when fate and fortune retreat and reverse direction, these CEOs suddenly turn humble and claim only to be human, an attribute with which they had previously never shown much familiarity. They speak plaintively about the vicissitudes of life, look for empathy and understanding –and a lot of scapegoats.So much of the world they once ruled is, they admit, really beyond their control. As Mr. Fuld testified before the Committee:
In the end, despite all our efforts, we were overwhelmed… A litany of destabilizing factors: rumors, widening credit default swap spreads, naked short attacks, credit agency downgrades, a loss of confidence by clients and counterparties, and strategic buyers sitting on the sidelines waiting for an assisted deal were not only part of Lehman’s story, but an all too familiar tale for many financial institutions.
It’s a far cry from the tone struck before by executives like Mr. Fuld. In the good times, success pretty much has only one father and that’s the CEO, according to many board compensation committee reports. Failure’s paternity has many culprits, including always short-sellers and the occasional abrupt change in the weather.
We’ve heard this song before. Conrad Black when he headed Hollinger; Enron’s Jeffrey Skilling; James Cayne, who ran the board and management of Bear Stearns for many years; and Angelo Mozilo, the subprime czar of mortgage giant Countrywide Financial all cut a swath of media adulation and investor diffidence during their reigns. But the perverse gods of markets and boardrooms insist on having their laughs. The CEOs whom they raise up to such rarified heights that they actually begin to think they are god-like themselves soon have a harsh reconnection with human frailty and imperfection when they fall back to earth with a hard thud. For some, like Conrad Black and Jeff Skilling, that sudden descent to a decidedly undeferential world comes in the form of prison time for corporate crime. For others, like Cayne, Mozilo and Fuld, a different kind of prison locks them into a sentence of personal failure and public disgrace from which there is seldom any escape, no matter how impressive their mansions and luxury condos.
If you did not know that Mr. Fuld had run one of the largest and oldest investment banking institutions in the world and that he was compensated in sums that defy human comprehension, there would be nothing in his performance yesterday to suggest that he had ever occupied such lofty office. His speech was halting, his manner often disingenuous, his memory selective, his words unevocative, his judgment unimpressive. There was no hint of insight or foresight that was any greater than that of a million middle managers, let alone a five hundred million-dollar man. Mr. Fuld, who claimed the company was in good shape one week apparently could not see even into the next, showing his vision lacked something of the reputed prescience of the Davos clan. (Mr. Fuld is a long-time attendee at the World Economic Forum, another puffed-up institution of over-hyped CEOs and hangers-on that has become an annual fashion show for the emperor without clothes.)
One more thing that might give reason to pause and reflect about the man who presided over the largest collapse of any corporation in American history: Until a few weeks ago, Mr. Fuld was a director of the Federal Reserve Bank of New York. He was elected by other member banks –and hold onto your hats for this one– to represent the general public.
The besieged state of the world’s economy seems to be in the process of separating models of genuine leadership, which emphasize value and character, from their long-reigning impostors. It has taken the worst threat since the Great Depression for Wall Street and Main Street to comprehend the depth of the scam that has been occurring under their beguiled eyes over the past number of years. Assurance of value was taken for granted; the skill and accomplishment (and need) of grandly compensated egos was not even to be questioned. Their word was gold, so we were told. What we have discovered in recent months after trillions in losses and government interventions, however, is, to paraphrase Gertrude Stein, there was no there, there.
Perhaps when this unseemly procession of failed and discredited CEOs, whose arrogance, greed and misjudgments have brought Depression era fears to Main Street and necessitated the largest private sector bailout in history, is over and the extent to which the world was taken in by the myth of their excessively compensated abilities becomes inviolably clear, we can return to a time of real leaders whose attributes include some of the most paramount and uncommon abilities of all:good judgment, common sense and two feet planted squarely on the ground.
