Saturday, May 10, 2008
Of the various developments in my professional life since beginning this blog in the fall of 2005, just after hurricane Katrina struck the US Gulf Coast, this email represents perhaps the most unexpected.
Not being a professional writer, in the sense of living off of income derived from the activity, I wasn't fully prepared for what many columnists must also experience at some point in their careers, i.e., affecting someone sufficiently to trigger a heartfelt outpouring of their own personal aspect of a story about which they have written, or 'covered.'
For me, it's GE. And totally unintended, by the way. I've never owned the equity, choosing instead to simply voice my amazement that anyone else would.
However, here are a few excerpts from my reader's letter,
"I have been checking out your blogs pertaining to GE since your appearance on the O'Reilly Factor about GE and Iran. I recently was laid off from GE West Burlington, Iowa - Switchgear Operations. I got a recall to return temporarily for a few weeks starting soon. ..... The security though is another thing, which leads me to write this to you. I just wanted to pass onto what we've been going through as GE employees the last year and a half, and all that GE does is not surprising to anyone that works for them. As a shareholder though it has been very disappointing since Jeff Immelt has taken over.
The CEO in charge of the Powell-GE mess is Lloyd Trotter, whom ...left and came back as Vice President of GE Consumer & Industrial. He retired at the end of 2007. With the mess that was created, he may have been asked to retire. Now he serves on the board of directors for Pepsi Co. Lloyd was a Plant Manager for GE Burlington in 1986. He wrote articles back then as GE was leading in the market, that to come and see him in 25 years, as he was expecting GE to be still leading the way in Switchgear. And thanks to Lloyd, it may not make it to 25 years. It's a HUGE mess and it's getting worse even though technically the transition is supposed to be pretty much done. It's just the kind of ineptness there is among GE CEOs.
They just want to do business overseas, they don't care about GE Americas anymore. Though the Industrial side of GE should be with GE Energy instead of GE Consumers - has never made sense to me. Though they restructure all the time and change the names every so often you can't keep up from week to week, year to year.
GE just has gotten away from what they built their foundation on. All the attacks on Immelt are deserving. The last time GE lost money was in 2003, and whom was in charge, the same guy. A lot of people in GE are sooo disappointed of the direction of the company.
It sucks being a GE employ right now, and particularly in America. They don't care and it isn't taking much to sell everyone out here in America. GE should be #1 in everything they do, but they don't care and don't put the money back into the company like they should. They've created a mess, and what's sad is all those that have worked their asses off for GE - even after they sell part of the businesses - have to pay for it.
GE used to have an Integrity website when Jack Welch was in charge, they made everyone sign a paper on it. Though they no longer have the site, and maybe since Jeff Immelt has taken over, there is no longer any integrity in the company."
I find it interesting to learn from my reader that, in his opinion, what I've observed as top-level ineptitude on Immelt's part since becoming GE CEO in late 2001 is mirrored down in the trenches among the hourly workers.
Notice how he can attest to Welch's impact at the line employee level, having everyone visit and 'sign' the webpage regarding integrity. During Welch's last CNBC appearance, he talked about the need to knit employees together and create a sense of leadership in which they felt invested and to which they felt committed.
My reader seems to be indicating that Immelt did the opposite.
So there you have it. One GE employee's view from the frontline trenches in Immelt's version of WWI- no forward movement but plenty of casualties. Except for the senior officers.
Friday, May 09, 2008
It Seems Many Do Not Agree with You-see Times Article
From: Art Effron (email withheld for privacy reasons)
Date:Sun, 4 May 2008 9:47 pm
THIS E-MAIL WAS SENT TO BILL O'REILLY TODAY
It seems your info relative to Jeff Immelt is quite flawed:
GE IS NOT losing money
GE IS rated very highly among most creditable business and financial institutions
GE has NEVER MISSED a dividend in the history of its existence.
Most business and financial experts recommend GE as a very reliable investment (call your broker).
Your expert,Charles Neul, hasn't the slightest idea about GE and his views have absolutely based on faulty input.
GE's stock has not performed as we would like but only missed its projection in the last quarter.
GE manufactures many medical electronic devices that has saved many lives (maybe some of your family).
Have you really checked on Mr. Murdock's business activities as it related to Iran ?
Jeff Immelt has proven to be one of GE's most successful CEOs(check his track record as to his many
Bill, I really hope your E-Mail screeners show you my E-Mail.
You are way too smart to believe some of the background information passed to you as true.
Art Effron (email address and phone number withheld)
I wrote in reply,
Dear Mr. Effron-
It's evident from your ranting email that you understand little, if anything, about my approach to equity performance analysis, as expressed on my blog, or the manner in which most successful portfolio managers seek to outperform the market.
The bulk of your points have nothing to do with GE's, and Immelt's inability to earn a total return for its shareholders which is better than that one can achieve by simply buying and holding an inexpensive S&P500 Index fund from one of many fund complexes. Some of your points, while perhaps true, are irrelevant to the matter at hand, i.e., has GE, under Immelt, outperformed the S&P, or not? To paraphrase a business partner of mine,
'Just because we might want to buy a company's products does not mean we want to own it's stock.'
For your information, as I have noted in several posts on my blog regarding GE, my information source for data on GE's performance is from Compustat, which is considered to be the leading institutional-quality source for fundamental and technical data on publicly-held companies. My information regarding Immelt's compensation is either directly from the Wall Street Journal or Forbes, both considered reputable and unimpeachable information sources.
As I mentioned on Mr. O'Reilly's program, the reason many in the media or investment circles do not criticize GE involves their not wanting to see their share of GE's large volume of corporate spending evaporate.
You would probably do yourself a favor in terms of your own credibility if you first gained a better grasp of the issues which were discussed on O'Reilly's segment on GE. Until then, it might be prudent of you to cease broadcasting your naivete.
I'm not sharing this email and my reply just for fun. Mr. Effron's email provides at least one answer to Mr. O'Reilly's question of me about GE's equity,
"Who would own this stupid stock? Who would buy it?
People who think like Mr. Effron.
'Investors,' and I use the term here very loosely, who mistake profits and the nature of a company's businesses for its ultimate delivered benefit to shareholders- total return.
And, in an ironic way, the fact that people like Mr. Effron choose to continue holding GE is what helps it remain a mediocre performer.
You see, if a lot more investors sold the stock now, it's price would, of course plummet even further than it has in the past year or month. But as the price dropped, it would probably reach a level so cheap that some 'value' investors would begin to accumulate the equity.
Then, GE's continued so-so fundamental earnings performances might justify more investor interest, and, thus, a short-term rise in the stock's price and, with it, a higher total return.
That so many GE shareholders continue to hold it, in effect voting every day to 'not sell' the stock, supports its price in the face of mediocre earnings performances.
The smart money, as I wrote of the sellers of regional bank equities in this recent post, has already left the building in GE's case.
The remaining shareholders would seem to have motivations, valuation and performance criteria similar to those of Mr. Effron.
And that, my friends, is what makes markets. Different views of and valuations for the same instrument.
In this case, we're fortunate to have one of those, in Mr. O'Reilly's words, 'stupid enough to own this stock' actually tell us why he does.
Thursday, May 08, 2008
As miserably as Microsoft has performed for years, it will probably only do worse as it attempts to do several new things: integrate a large acquisition, deal with various staffing exits and other related issues, and then have to actually make good on the promise that the Yahoo acquisition will somehow solve all of the firm's ills."
Wednesday, May 07, 2008
In last Tuesday's Wall Street Journal, the bank's missteps with its Falcon and ASTA/MAT hedge funds were detailed. Rather than holding low risk securities for its investors, these two Citigroup funds actually held instruments which were savaged by the recent credit crunch.
According to the Journal article, the Falcon hedge funds lost about 80 cents on the dollar for investors, who are being offered between 45 and 54 cents on the dollar, if they promise not to sue the bank.
Moreover, only aggressive lobbying on behalf of the loss-plagued customers by Sallie Krawcheck brought the settlement offer to life. Other executives at Citigroup were willing to let their customers take the entire loss, despite the bank's probably misrepresentation of the hedge funds as being less risky than they in fact were.
Citi will spend about $250MM in payments to customers to partially compensate them for losses and allow them to exit the funds.
As if that isn't bad enough for the sprawling, mismanaged finanicial titan, this weekend's Wall Street Journal disclosed that nearly all outside investors in the bank's Old Lane hedge fund, which it purchased from Vikram Pandit and his partner John Havens. According to Jenny Strasburg's article entitled "Citigroup Lets Investors Bail From Old Lane,"
"In March, Citigroup gave Old Lane's outside investors, who have claims on about $3 billion of the fund's money, permission to withdraw early as a result of changes in the fund's senior management. The biggest: Old Lane co-founder Vikram Pandit became Citigroup's chief executive in December. John Havens, another co-founder, now runs Citigroup's investment bank.
According to a securities filing made Friday, "substantially all unaffiliated investors" -- meaning those who didn't help run Old Lane or work at Citigroup -- notified the bank they wanted out. The exodus will drain about $3 billion from Old Lane, according to people familiar with the fund. Investors have to wait until July 31 to get their money back."
Chalk up another shrewd move by non-executive Citigroup Chairman Bob Rubin, adding further luster to the record I described in this recent post. According to Ms. Strasburg, the ugly details of Rubin's hedge fund bet gone wrong include,
"After paying an estimated $800 million to acquire the hedge fund and bring in its management team last year, Citigroup last month wrote down the value of Old Lane by $202 million. Mr. Pandit got $165.2 million on a pretax basis from selling Old Lane to Citigroup, according to a securities filing in March.
Amid a string of hedge-fund blowups, Old Lane's returns weren't a disaster. But there wasn't much lure for investors to stick around. The multistrategy fund's returns are about flat since its 2006 inception, according to an investor. Founders boasted early on about raising $4 billion in less than nine months but gained little momentum after that.
In September, Citigroup closed its $2 billion Tribeca Global Investments LLC with plans to market Old Lane to bank clients as the company's flagship hedge fund. Those plans were scuttled."
This will result in Citigroup losing some $3B in assets which will be withdrawn from Old Lane, as it closes down.
Much as I prophesied in this post last year, Rubin made a colossal blunder which benefited the inexperienced hedge fund manager-cum-Citigroup CEO, Pandit. As I lampooned in that post about a fictional interview with the new Citigroup CEO,
"Pandit: And by asking me to head up alternative investments, I was able to shed any direct responsibility for Old Lane as soon as I had my picture laminated onto that Citi ID badge. Whew!
Talk about a tough business! In hedge funds, you have to perform. Back at Morgan Stanley, I always had lieutenants, or the market, or competition to blame if any of the areas under me messed up. But with a hedge fund, you're only as good as your last returns. And Old Lane's have really disappointed pretty much everybody."
Sadly, this has come true in spades. Now the original reason for bringing the ex Morgan Stanley investment banker into Citigroup has been totally discredited as an expensive mistake. What remains is Pandit's elevation into a job for which he has no obvious credentials or experience.
With management behavior like this at Citigroup- steering valued customers into too-risky hedge funds, arguing internally over compensating those customers for their losses due to the bank's misrepresentation of the funds, and buying a mediocre, untested hedge fund which has closed within two years of the purchase- its customers must wonder if the bank ever considers their long term needs and welfare.
All in all, not a good pair of outcomes for a bank in trouble across so many of its businesses.
Tuesday, May 06, 2008
Monday, May 05, 2008
The piece is just an incredible saga of an arrogant, fawned-over ex-co-CEO from Goldman, and ex-Treasury Secretary who both killed the 30-year note, contracted the economy through his injudicious paying down of long term Federal debt, and silently acquiesced to the demise of Glass-Steagal. The latter event, of course, is one of the major reasons for our recent credit market debacle.
I'm referring, of course, to Citigroup's non-executive chairman, Bob Rubin. The Times piece reports,
"But now, closer to home, another financial crisis is creating a very different type of notoriety for Mr. Rubin. The housing and credit mess here has cost Citigroup nearly $40 billion, forced the exit of its chief executive, Charles O. Prince III, and led to persistent rumors inside the bank that Mr. Rubin might soon be stepping down as well.
Mr. Rubin and others at Citigroup are quick to dismiss any talk of departure, but one senior insider says Mr. Rubin may soon change his job title in order to clarify a clutch of duties that have always been ambiguous. He currently serves as chairman of the executive committee; his new title hasn’t been decided.
“It’s not under consideration,” Mr. Rubin insists."
You sure can't beat Rubin for arrogance, can you? While watching the CEO over whom he titularly presided get canned for losing Citigroup some $40B, Rubin simply dismisses any talk of his own culpability.
The Times article continues,
"Titles aside, shareholders and analysts who have watched Citigroup run off the rails continue to ask a logical question about a financial statesman widely considered to be an astute judge of risk throughout a long and storied career: Where was Bob?
At Citigroup’s annual meeting last week, Joe Condon, a retired Citibank regional manager in New York, posed a similar question. “What kind of advice did he give to Mr. Prince?” asked Mr. Condon, who spent 38 years at the bank. “Citigroup bankers are losing their jobs, and Bob Rubin is collecting $10 million, $15 million a year.”
Answers to these questions are complex and laced with contradictions, which neatly fits Mr. Rubin’s personality. Over the last 43 years, he has glided between Washington and Wall Street, emerging as an outspoken Democrat supporting liberal candidates like Walter F. Mondale and Michael S. Dukakis even as he earned tens of millions of dollars as a top executive of Goldman Sachs.
As an economic adviser to President Clinton in 1993 and 1994 and as Treasury secretary from 1995 to 1999, he supported tax hikes and spending cuts to reduce the deficit, pleasing investors but disappointing liberals who wanted more money for social programs. And as chairman of the executive committee of Citigroup, he’s played the incongruous role of official éminence grise, advising top executives and serving on the board while, he says, steering clear of day-to-day management.
“By the time I finished at Treasury, I decided I never wanted operating responsibility again,” Mr. Rubin, 69, said during a two-hour interview in his office. Sitting in a red-cloth chair and propped against a thick book to support a bad back, he made it plain that responsibility for Citigroup’s staggering losses can’t be laid at his feet.
“People know I was concerned about the markets,” he says. “Clearly, there were things wrong. But I don’t know of anyone who foresaw a perfect storm, and that’s what we’ve had here.”
“I don’t feel responsible, in light of the facts as I knew them in my role,” he adds.
But did he make mistakes?
“I’ve thought a lot about that,” he responds. “I honestly don’t know. In hindsight, there are a lot of things we’d do differently. But in the context of the facts as I knew them and my role, I’m inclined to think probably not.”
Addressing the current round of criticism, Mr. Rubin makes a passionate defense without sounding the least bit defensive.
“There is no way you would know what was going on with a risk book unless you’re directly involved with the trading arena,” he says. “We had highly experienced, highly qualified people running the operation.”
That still doesn’t satisfy experts like Frank Partnoy, a former banker at Morgan Stanley who is now a law professor at the University of San Diego. He says he long admired Mr. Rubin as a “smart guy up against powerful forces in Washington who was consistently a voice of reason.” But he says Citigroup’s huge losses have shaken that faith.
Mr. Partnoy recently had his corporate finance students listen to a conference call from last November in which Mr. Rubin tried to explain Citigroup’s myriad financial woes and what role he played at the bank. “You could feel the air go out of the room as this incredibly well-respected guy struggled to answer,” Mr. Partnoy says of that class. “It was almost poignant.”
It would be one thing if Rubin were simply paid board meeting fees and had little else to do with Citigroup. But Rubin is among the most highly-paid of Citi's executives. He was recruited as much for his ability to snare new institutional clients as for his executive skills.
Let's make no mistake- Bob Rubin is a very smart man. If he accepted the title of Chairman, non-executive or not, that's what he agreed to be. If all he wanted was to pocket several million dollars per year as a high-end 'finder' and 'rainmaker,' then maybe he should have had business cards portray him as CRO, or 'Chief Rainmaking Officer,' instead of Chairman. He had an office next to Chuck Prince's and chaired the bank's executive committee.
Regarding Rubin's Treasury activities, the Times reports,
"Mr. Rubin in theory supported the legislation to repeal the Glass-Steagall Act but was concerned that it would strengthen the Fed’s powers at the expense of the Treasury. It was passed and signed into law under his successor, Mr. Summers."Of course, it was convenient that Rubin, as Bill Clinton's Treasury Secretary raised no objections to Sandy Weill's, then Citigroup CEO, plans to violate the law with his merger of Citibank and Travelers Insurance. And then left Treasury before the end of Clinton's administration to take his lucrative position as Chairman of.....Citigroup!
We'll never know if becoming Chairman of Citigroup was a quid pro quo for Rubin's remaining silent and, by doing so, implicitly supportive of Weill's demand that Congress abolish Glass-Steagal. I have at least one retired senior banking friend, B, who believes it was. I concur. But nobody has any proof to make this hypothesis ever become more than speculation.
Further on the subject of Rubin and financial services regulation, the Times pieces notes,
“He was consistently more skeptical that market discipline alone is sufficient and more often in favor of using regulation to get a better balance between innovation and stability,” says Timothy F. Geithner, president of the Federal Reserve Bank of New York, who served as a senior Treasury official under Mr. Rubin and Mr. Summers.
But on at least one occasion, Mr. Rubin lined up with Mr. Summers as well as Mr. Greenspan to block a 1998 proposal by the Commodity Futures Trading Commission that would have effectively moved many derivatives out of the shadows and made them subject to regulation."
According to the article,
"WHEN Mr. Rubin left Washington and returned to New York in 1999, he weighed the pros and cons of his next career move. “I’d had the ultimate responsibility both at Goldman Sachs and at Treasury, and I didn’t want that again,” he wrote in “In an Uncertain World,” his memoir. “I was at a stage in my life where I wanted to try to live a little differently.”
That meant, he says, a position that didn’t carry direct management responsibilities and allowed him to serve as elder financial statesman — albeit one who was lavishly paid. Since arriving at Citigroup, Mr. Rubin has been awarded compensation worth at least $126.1 million, according to Equilar, a research firm. That would place him firmly in the top 25 percent of earners if compared to the chief executives of Fortune 500 companies."
Great work if you can get it, eh? A company pays you over $100MM, but requires that you assume no substantial or significant responsibilities. Isn't this the sort of Wall Street fat cat against which Rubin's old boss, Clinton, would rail? Then the Times reports support for Rubin from none other than a CEO who has hardly distinguished himself by his ability to secure consistently superior returns for his shareholders,
“Bob has been unfairly taken to task, I really do believe that,” says Richard D. Parsons, the chairman of Time Warner and a Citigroup board member. “He made an explicit deal when he came aboard. You can’t say this happened on his watch because this wasn’t his watch.”
But others disagree with Parsons. The Times article provides details of how Rubin could become quite involved in details of Citi's operations when he wished, including the genesis of the growth strategies which ultimately brought about Prince's demise and the appalling losses of last year,
“He is like the Wizard of Oz behind Citigroup, he is the guy pulling on all the strings,” said one Citigroup banker who was not authorized to speak publicly about the situation. “He certainly was the guy deferred to on key strategic decisions and certain key business decisions vis-à-vis risk.”
Early in 2005, Citigroup’s board asked the C.E.O., Mr. Prince, and several top lieutenants to develop a growth strategy for its fixed-income business. Mr. Rubin peppered colleagues with questions as they formulated the plan, according to current and former Citigroup employees. With Citigroup falling behind Wall Street rivals like Morgan Stanley and Goldman Sachs, Mr. Rubin pushed for the bank to increase its activity in high-growth areas like structured credit.
He also encouraged Mr. Prince to raise the bank’s tolerance for risk, provided it also upgraded oversight. Then, according to current and former employees, he helped sell the proposal to his fellow directors."
Sounds like Bob could get very involved in Citi's management when he chose, doesn't it? And he apparently played a major role in pushing Prince, who wasn't even a banker, to 'raise the bank's tolerance for risk.' And then 'helped sell the proposal' to other directors.
What Citigroup director was going to object to taking more risk when Bob Rubin, Chairman, former Co-head of Goldman, former Treasury Secretary, said it was the right thing to do?
To say Rubin has led a very charmed adult life seems to be an understatement. The Times article closes with an observation suggesting how drole Rubin has now become,
"Between college and law school, Mr. Rubin briefly lived on the Left Bank in Paris, spending hours at cafes that were frequented by Jean-Paul Sartre and Albert Camus. Like them, he says, he remains something of an existentialist.
“It’ll be what it will be, like everything in life.”
It's nice, when you've capped an already-impressive career with an essentially part-time job earning you more than $100MM over about a decade. To be so philosophical about presiding over Citi's $40BB in losses and dramatic loss of shareholder value, though, seems to me to border on reckless.
It's as if Rubin grew bored with the mechanics of 'managing' things and people, but relished the opportunity to pretend he was gambling at the tables at Monte Carlo, or maybe Rick's American Cafe in Cassablanca, with Citigroup shareholders' money. You can almost imagine him turning to Claude Rains after being wiped out on one spin of the roulette wheel, and wistfully intoning, as Rains laments Rubin's total loss of other people's money,
'It'll be what it will be, Claude, like everything in life.'