Vik Pandit's Sorry Performance On Capitol Hill

Citigroup CEO Vikram Pandit's performance before the TARP oversight panel yesterday in Washington must have Walter Wriston spinning in his grave.

So craven was Pandit that he renounced the bulk of Wriston's vision of money as an equivalent of information. Instead, Vik basically apologized for Citigroup ever attempting to be more than your good ole' neighborhood bank with a heart, only on a global basis.

He prostrated himself, verbally, in front of the panel, thanking them profusely for taxpayer funds which saved his bank.

When attacked for Citi's overseas presences and investments, Pandit claimed that Citigroup wasn't global, but American. Indeed, America's global bank.

How heartwarming. Patriotic, even.

Then Vik went on to assert that, after much rumination, he personally decided that Citi should be a bank. So he's been selling everything that isn't a bank. When asked how he felt about the "Volcker Rule," Pandit disingenuously claimed he was adhering to it by selling off little pieces of Citigroup. Of course, what Volcker really means is for banks like Citi, which enjoy FDIC deposit insurance protection, to stop risking solvency, and, thus, taxpayer funds on proprietary trading.

Either Pandit is so naive as to not understand this, or so clever as to believe his claims would fool the panel and viewers of his live act.

I wrote this spoof of an interview with Pandit 2 1/4 years ago, upon his being named CEO in December, 2007. The nearby price chart for Citigroup and the S&P500 Index for the past two years illustrates how much Citigroup has lost in value for its shareholders under Pandit.

The second chart provides a longer term perspective from five years back for the same series. About the best that could be said is that Pandit chose to accept the promotion from relative safety, running Citigroup's asset management unit, at an inauspicious time. Whether simply greedy, egotistical, or foolish, he walked into a maelstrom from which he, his bank and its private, non-governmental shareholders have yet to emerge.

There will be those, like someone who commented on one of my posts about Citigroup last year, who are short term opportunists, and have profited from the relative rebound of the company's equity since early 2009. But the risks associated with such a strategy were not low, and it appears that markets have taken back about a third of that temporary increase.

Even this morning, perennial Citigroup bullish analyst Dick Bove was, as usual, giving a glowing vision of the bank's future and firmly endorsing Citigroup as an investment.

I just can't get the image out of my mind of Pandit groveling before the government panel, clearly afraid of being accused of yet more misdeeds, made to suffer more penalties, perhaps even dismembered under the implementation of the Volcker Rule.

Is it realistic to bet on such a timid, defensive posture for Citigroup and its CEO for the coming years?

Alan Mulally's Wall Street Journal Interview

This past weekend's edition of the Wall Street Journal featured, as its signature long interview, Paul Ingrassia's discussion with Ford CEO Alan Mulally.

I wrote some initial posts about Mulally's arrival, in September of 2006, and early tenure at Ford here, and here.

I wasn't very optimistic at first, as this passage from the first linked post demonstrates,

"Will Mulally's sensible initiatives matter? Truthfully, I doubt they have the time. Still, oddly, I can't but help root for the guy. Maybe in 3-4 years, Ford will make my equity portfolio selection list. Although, my hunch is, not as an independent company. Perhaps as part of an alliance with Nissan. If it merges with GM, I would lower the probabilities of its performing sufficiently well to make my selection list."

I was more impressed in the next post, nearly two years ago, when I noted,

"But, as I have asked in prior posts about 'turnarounds' at other firms, what will constitute a successful turnaround?

To me, net income performance, impressive as it has improved under Mulally, is not alone sufficient.

The pattern and magnitude of a firm's fundamental operating results create investor perceptions that underpin a firm's attainment of consistently superior returns for its shareholders.

Unless Ford is planning on really strong, consistent double-digit revenue growth in the years ahead, it's going to have to achieve any consistent total return performance mostly by productivity improvements.

It's clear that the Journal likes Mr. Mulally very much. All three articles about him provide unfailingly upbeat, flattering profiles. And my guess is they are not wrong.

Even this piece's details about Mulally's pushing to sell Jaguar and Land Rover, redesign the Ford Focus, and attack inventory problems all ring with the sense of a really good manager at work.

Still, call me sceptical. It's not just that Mulally must haul Ford back from the brink of bankruptcy or sale. He must, in my opinion, then lead the company to several years of unexpectedly good performance, either with new revenue and volume growth, or incredible productivity gains, in order to provide the basis for consistently superior total returns for shareholders.

Can Mulally accomplish this? Who knows? I'm a 'show me' kind of investor, and Ford has years to go before it can possibly, in my view, be accorded the title of a 'successful turnaround,' or 'recovery.'"

The nearby five-year price performance chart of Ford and the S&P500 Index shows that Mulally is actually only even with the index after 3 1/2 years on the job.

Considering the risk inherent in owning a single equity, risk adjusting the implied returns would put Ford below the index.

Still, Mulally's Ford is still alive and kicking. He's managed to reduce hourly labor costs impressively, down to $50 from $75. Regardless of GM's inventory excuses, Ford did outsell GM this past month, which is a milestone. Ingrassia was certainly very positive in his expectations for the new Ford.
But looking at the second price chart of Ford and the S&P500, from 1977-present, provides a context in which to more soberly evaluate Mulally's and Ford's prospects.

The company's value managed to rise again in the mid-late 1980s, and again through the 1990s.

But its fall from its 1999 peak has been precipitous, losing nearly all the value built from its early-80's nadir. The steepness of the rebound in its equity price since last year has been nearly alpine-like. Such a relentless pace of price improvement and the implied total return is simply unlikely to be sustainable.

My proprietary equity performance research has uncovered many companies which rebound sharply, like Ford, and post a few years of outsized returns. Only to then fail to sustain the momentum and plateau, falling back to being a fairly staid, unremarkable company to own.

Ingrassia wrote glowingly of Mulally, and justly so. But he didn't touch on topics like longer term total returns for the recovering auto maker. It wasn't really the point of the interview.

So I will.

Thanks to global government support of various auto producers, industry over-capacity remains. Ford has to grapple with a government-owned and -subsidized competitor, GM, and a Congress and administration willing to and capable of attacking that failing auto maker's competitors, e.g., Toyota.

Ingrassia did get Mulally to discuss Ford's balance sheet challenges. This only hints at the real issue. In order to continue superior revenue growth, Ford will have to both out-compete rivals on many performance dimensions, both internal and external, as well as be capable of affordably funding such growth. But the sector, at least in the US, is at a crossroads.

Political expediency drives Ford to hybrids and alternative fuel sources for its cars, while end-user demand isn't necessarily there for the longer term. Nor is the economy healed, portending a potential slump in demand in the next few years.

Unless Mulally continues to pull more very sizable rabbits out of his hat at Ford, the pace of revenue growth, cost reductions, and, thus, total return performance, is likely to slow. Ford still competes in a business with too much capacity, a government-owned competitor, capital intensity and fairly volatile demand over time.

For all of the adulation given to someone like Warren Buffett, you don't see him piling into Ford, do you? No, he bought Burlington Northern.

Carol Bartz & Yahoo One Year Later

I wrote this post slightly more than a year ago, roughly six weeks after Carol Bartz assumed command at Yahoo. In it, I expressed hope that Carol Bartz could turn the troubled company around, and noted approvingly how she began her tenure at the firm's helm.

In July of last year, I wrote this post concerning Bartz' Yahoo tie-up with Microsoft. Looking at my posts as last year progressed, I confess to seeing myself having become more doubtful and much less enthusiastic regarding Bartz' ability to salvage the badly-damaged internet pioneer.

The nearby price chart of Yahoo and the S&P500 Index tells a disappointing story. Roughly since Bartz' arrival at Yahoo, it has trailed the index returns, roughly 19% vs. 50%.

Yesterday's 30 minute interview has, sadly, increased my scepticism about anyone's, even Carol Bartz' ability to fix Yahoo. Bartz' comments and answers to questions were vague, non-quantitative and, I believe, wishful thinking. She didn't do a good job answering Dennis Kneale's simple question about what Yahoo stands for. Yes, information, but that's old and hardly unique.

In fairness, the nearby price chart for the company and S&P500 Index over 5 years shows that the firm has been struggling for quite some time.

But after a year, having read and listened to Carol Bartz' statements as to how she would turn Yahoo around, I must admit that there's nothing new in her promises or assessments that weren't there a year ago.

Sadly, she stooped to taking an easy way out, when offered it, and complaining that the firm's equity isn't appropriately priced. That it's too cheap, and should be higher.

Uh huh.

When you're hearing that, you know the CEO is out of ammo and just desperate.

I don't hold this against Bartz. It's understandable that she was ready for a change, having successfully led AutoDesk for well over a decade. How could she resist such a train wreck as Yahoo?

Much like CEOs like Lou Gerstner at IBM decades ago, it must have seemed that she couldn't lose. If she failed, it would be viewed as having been an impossible task. If Bartz succeeds in rebuilding market value for Yahoo, she's a hero.

It's looking like it's the former. Yahoo's total returns are less than you'd get in the diversified S&P, and Bartz is offering no explanation of what will change in the near future to make that different.

To me, it does really demonstrate that the massive damage Yahoo suffered under Terry Semel and then, again, Jerry Yang, has been too much for even Bartz to reverse.

The Unrealized Value of The Indvidual Pre-Tax Health Insurance Benefit

Recently, a friend who is a retired industrial senior executive wrote me regarding the ongoing debates on government health care legislation,


"Have you ever done a blog on the rationale for a tax on employer-provided health care? I realize that this is a third rail in Congress, but you could make the point that people are economic animals and until an individual has his own interest in the outcome there will be no change in behavior. The government has always encouraged the provision of uneconomic fringes with its tax policy - and this has lead to the demise of the airlines, the autos and the steels."


His point is correct. Government-subsidized health insurance, by way of the tax code and so-called "fringe benefits," have led to third-party payers insulating health care consumers from the costs of their own behaviors. And they are insulated in two ways. First, by the tax-free nature of the implied compensation of health insurance. Second, by being given that benefit as a defined obligation, rather than a defined level of value.


In prior posts, I've mentioned the origin of this sorry state of affairs, i.e., Senator Harry Truman's Senate Committee freezing wages during WWII. The result was non-price competition in the form of then-novel "fringe benefits." These included paid health insurance and pensions.


Thanks to this bone-headed war-era move by Congress, businesses foolishly turned what was a controlled expense, wages, into an open-ended obligation, health insurance and pension promises.

I'm not inclined to excuse the corporate CEOs of the era for this mistake. There were other methods of enabling individuals to receive these benefits, if only by making them defined contribution, rather than defined benefit in nature.

That's really the key point. Most of the private sector has moved non-union employees from the latter to the former when it comes to pensions. It's time to do so for health insurance, as well. It's true that defined-benefit approaches to health insurance and pensions did much to sink the US auto, airline and steel sectors.

One could, as my friend does, argue for removing the tax-preferenced nature of health insurance premiums from businesses, so that they are on an equal footing with individuals who buy their own health insurance with after-tax dollars. I'm fine with doing this, too, if only, as he points out, to force individuals to pay for the implied compensation.

But I think, by far, the more important element in reforming US health care is to move corporate compensation in the form of health insurance obligation, to a cash payment as a wage component. This removes the open-ended obligation from the corporation's balance sheet and income statement, replacing it with a simpler, more easily-valued and controlled cash payment. The obligation's value then becomes the choice of individual employees.

As I wrote in yesterday's related post,

"For example, in direct contrast to several Wall Street Journal editorialists with deeper backgrounds on the subject than Buffett, he blithely declared increased spending as essentially wasteful and a crushing burden on American competitiveness.

What Buffett ignored, but others have noted, is that greater discretionary spending on health care is a hallmark of wealthier society.

Here's one way to see Buffett's error.

Americans spend more time and money on leisure activities now than they did fifty years ago. And, given the relatively lower costs, in percentage terms, of various other household expenses, almost certainly more in percentage terms, as well.

Oh my God!

We have a leisure spending crisis! Fifty years ago, nobody spent money downloading music to iPods! Now, they do.

What will we do? American businesses must be shouldering the burden of all that digital entertainment expense, mustn't they?

Buffett confuses changes in discretionary spending with escalating costs for a controlled level of consumption.

Oil prices are higher now than they were fifty years ago, too. Isn't that another crisis? Shouldn't that be tackled by Congress?

The key flaw in Buffett's argument, much as Boone Pickens' over energy costs, is to pick one input to our economy, note the rise in its cost, and declare an emergency, while failing to observe the rise as at least partially attributable to consumer discretionary spending and business use to create even higher-value outputs."

What my friend astutely notes, whether tax-preferenced, or not, is that by shielding workers from the true costs of their behaviors, they over-consume health care. It's one thing for an employee to use his cash wages to buy gasoline, food, health insurance, and save for his own retirement. When all these claims on a household budget are explicit, real lifestyle choices result.

You never hear anyone in Congress complain that gasoline or food prices are hurting US business competitiveness, do you? Why should it continue to be so with health care?

It's almost moot whether one chooses to continue the pre-tax treatment of health insurance premiums and HSA accounts for individuals, or not. The really important change is to make end users pay those amounts out of their own pockets, from a defined cash compensation amount, so that consequences of their behaviors and choices are truly owned.

It's not hard to foresee Americans eating and behaving in healthier ways, once the cost of health insurance is seen as depending, in part, on the buyers' health status.

But, most importantly, by putting the choice of how much health care end users wish to buy and consume in the hands of those consumers, and not leaving it as an open-ended corporate obligation, those consumers will experience the true and full consequences of their behaviors. Thus, as my friend noted, almost certainly changing their behaviors, bringing down the care-level-adjusted cost of US health care.

It will also simplify and separate the US health care problem as distinct from costs of doing business for US businesses.

Warren Buffett's Muddled Understanding of Healthcare Costs

The Berkshire Hathaway annual meeting must be nearly upon us, as Warren Buffett spent three hours on CNBC this morning. Thanks to his close relationship with co-anchor Becky Quick, the Omaha-based asset manager spends a distressingly large amount of time on CNBC's programs nowadays.


If you are wondering what the term "halo effect" means, just tune into Buffett for 20 minutes or so. He is peppered with questions far outside the range of his asset management skills. And, looking at the nearby price chart of Berkshire and the S&P500 for the past 2 years, those skills are seen to have waned recently.

So we come to the CNBC co-anchors beseeching Buffett to share his vast font of health care knowledge with them, and their viewers.

Now, one thing you need to realize is that Buffett is not a stupid man. He knows he is a potential target of government, should he ever be seen as voicing outright disdain for or opposition to it.

Therefore, Buffett, I believe upon being advised Obama would win the 2008 presidential election, allied himself with the Democrat. Now, despite a year's worth of horrendous mismanagement as president, when asked how he views Obama's performance, Buffett is of course laudatory.

After all, he knows the value being out of the rifle scopes of a sitting administration and a Congress controlled by the same party.

Thus, Buffett then went on to declare his support for the current mess of a health care proposal, rather than have 'the status quo.'

But here's the problem. Buffett isn't viewing the current US health care situation correctly.

In a theme I'll continue in tomorrow's post, Buffett confuses choices about spending one's income, and quality of care, with total cost.

For example, Buffett made some incorrect statements about the quality of US healthcare, relative to other countries, then contrasted health care costs of decades past with those of today.

Unbelievably, Buffett never bothered to even make a glancing reference to the immensely superior level of medical care in the US today, versus the 1960s, nor the enormous increase in years of lives now made possible by more advanced, knowledgeable medical treatment.

At several points in the discussion, Buffett claimed to have no real knowledge of the sector, but then plunged ahead, again, tossing off wrong diagnoses and crying "crisis."

For example, in direct contrast to several Wall Street Journal editorialists with deeper backgrounds on the subject than Buffett, he blithely declared increased spending as essentially wasteful and a crushing burden on American competitiveness.

What Buffett ignored, but others have noted, is that greater discretionary spending on health care is a hallmark of wealthier society.

Here's one way to see Buffett's error.

Americans spend more time and money on leisure activities now than they did fifty years ago. And, given the relatively lower costs, in percentage terms, of various other household expenses, almost certainly more in percentage terms, as well.

Oh my God!

We have a leisure spending crisis! Fifty years ago, nobody spent money downloading music to iPods! Now, they do.

What will we do? American businesses must be shouldering the burden of all that digital entertainment expense, mustn't they?

Buffett confuses changes in discretionary spending with escalating costs for a controlled level of consumption.

Oil prices are higher now than they were fifty years ago, too. Isn't that another crisis? Shouldn't that be tackled by Congress?

The key flaw in Buffett's argument, much as Boone Pickens' over energy costs, is to pick one input to our economy, note the rise in its cost, and declare an emergency, while failing to observe the rise as at least partially attributable to consumer discretionary spending and business use to create even higher-value outputs.

Buffett is right in one respect, though. He doesn't understand the health care sector. And, thus, should probably just remain silent when questioned about it. In fact, that's probably a pretty good idea for him on anything outside a rather narrowly-defined scope of asset management questions.