Wednesday's Wall Street Journal carried a piece by their affiliate, breakingviews.com, comparing this year's various financial firm follies to a biblical parable involving 10 virgins.
The gist of the column, by one Hugo Dixon, is that, in contrast to the bible story, in which the foolish virgins paid consequences for their mistakes, in the financial version, Chuck Prince and Stan O'Neal left with their pensions intact. Other firms, Northern Rock and Fannie Mae, were either bailed out or left intact, with the assumption that the latter will, if need be, be rescued by the Federal Government.
Hedge funds which took 20% of many years of lush profits from their customers didn't share in this year's losses.
Dixon's point, in his closing sentence, is
"In this financial version, all 10 virgins are invited. The bridegroom looks around the room and scratches his head. Which are the real fools?"
If you ask me, it wasn't the '5 wise virgins,' who, according to Dixon, managed themselves prudently.
No, it would be the shareholders in the unwise virgins.
Whatever loss of options premium we incurred from one position in Merrill Lynch was more than offset by several profitable Goldman Sachs call options this year.
Our overall returns so dwarf any losses from cheaper money that we really weren't hurt by Fed easing, either.
I can't speak as a shareholder of Citigroup, but, from the outside, I'd be thinking twice about leaving my investment in the hands of that board. Same with Merrill, for that matter.
It's not the CEOs of these firms, as much as their boards, that ultimately have been unwise. Prince and O'Neal were each performing inconsistently, or simply poorly, for some years before 2007, as I've noted in prior posts about each of their erstwhile firms.
It's misleading to blame them, when they just worked the system in which they played. Their boards failed to ask about risk, tolerated mediocrity, and paid too well for failure. Is that Prince's or O'Neal's fault?
You, or I, might not like the fact that the two deposed CEOs walked away with so much money. But that's their board's fault.
The best way to discipline or punish those boards is to not buy, or sell, the shares of those companies. You can't change the boards, per se. But you can certainly find better firms, with better boards, in which to invest.
Meanwhile, both Merrill and Citigroup continue to limp along with ailing stock prices, as depicted in the nearby, one-year price chart comparing the two companies' shares with the S&P500 Index.You could take a chance on their new CEOs, and hope you are buying at a bottom. Maybe each will claw back some of the 2007 40% loss in the coming year, or later. Maybe not.
It's a pretty big risk to bet enough on just these two damaged firms to make it worth your while if either one recovers. And then there are opportunity costs for those investments.
As I mentioned earlier, I'd skip them, with their inept boards, and look at better-performing companies first.
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