Friday, May 02, 2008

Commercial Bank Problems, CEO Firings, & Total Returns

Earlier this week, in Monday's Wall Street Journal, the paper's minority-owned analytic shop,, made a big deal out of how Chuck Prince, Stan O'Neal and Marcel Ospel were kicked out of Citi, Merrill and UBS, respectively.

But the CEOs of badly performing WaMu, Countrywide, National City and RBS, the authors complained, remain in power.

What gives?

The article's authors say that the composition of these banks' boards tends to be local, and such familiarity breeds an unwillingness to fire the CEO.

Instead, I would opine that local business figures' presences on these boards explains the appalling lack of oversight and inability to feel sufficiently powerful to oust these CEOs. I would guess it's a case of the CEOs recruiting local businesspeople whom they can intimidate, influence and control. That is, it's much less a sense of social discomfort than feelings of inferiority and insecurity on the part of the carefully-chosen local business lapdogs.

But something else has already happened, and breakingviews, and we, should not overlook what it is.

Stock prices at these institutions are off big time. Some by more than 60% in a year, others by as much as 80%.

The important phenomenon, if you are like me, is already evident. Shareholders who finally had had enough simply sold the stock. Enough of them, relative to buyers, it appears, to push prices down so low as to create the large negative total returns over the last year.

Isn't this in itself a statement of capital markets efficiency? Sure, it doesn't speak well for 'corporate governance,' but I don't believe in that anyway. That's for Congress to legislate and some accounting firm to audit compliance thereto. It doesn't really affect the operations of these banks. And it never will.

The CEOs and senior management of these smaller, but well-known financial service firms still made bad risk decisions, lost tons of money and have therefore seen shareholders vote with their feet/dollars.

As to the CEOs? I don't think you're ever going to see the perfect corporate world where failing CEOs get axed, with loss of tremendous amounts of compensation, when their decisions go wrong.

That's fantasy. Not reality.

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