Wednesday, October 17, 2012

Citi Gets A New CEO

Readers who are familiar with my sentiments involving Citigroup's just-resigned CEO Vikram Pandit will not be surprised to learn that I feel it was long overdue. But I do not wish to engage simply in negative bashing of the departed Citi CEO. I do not recall which cable television channel I was viewing when news of Pandit's resignation appeared on the screen in the form of horizontally-scrolling text. So I know I was watching neither Bloomberg nor CNBC. However I quickly switched to one of those two business-oriented channels. For which I was rewarded with some very sensible commentary in the person of Wilbur Ross and a few other pundits.

Ross expressed approval that Pandit's exit will likely result in the simplification of the financial utility's business mix. Between the remarks by Ross and other guest commentators. I learned that Citi had failed a recent bank examination by the Fed. It was also the shared opinion of the pundits that Pandit's strategy (such as it was) which never seemed to depart from that of his predecessor, Chuck Prince. Was at odds with the views of Citi's chairman, Michael O'Neill. who is said to favor higher margin businesses than those to which Pandit had continued to allocate capital.

Wilbur Ross expressed a sentiment which  I heard my old boss and mentor Gerald Weiss (one-time chief planning officer of Chase Manhattan Bank NA) express often concerning Chase. Ross bemoaned Citigroup's complexity rather than simply its size per se. Weiss a former senior planning executive at General Electric went further, observing that successfully managing the unusually broad mix of businesses then in Chase's business portfolio would be a difficult challenge even for senior executives from GE or other industrial firms with senior executive ranks possessing experience bases of much greater diversity than that found at Chase or other typical money center banks of the period (the late 1980s).

Is it thus so surprising that Citi's shareholder value declined so precipitously on Pandit's watch? The ballpark figure of a 90% decline was widely cited by pundits yesterday and today.

Ross also pointedly scoffed at the hackneyed notion, as expressed by one of the anchors of the network on which he appeared hat Citigroup has to be in such a broad spectrum of businesses because 'its customers demanded it'. Ross correctly observed that most investment banking businesses had been adequately served by non-commercial banks. And further, he was unaware of such customer requests. 

Perhaps shareholders of Citigroup one of which, I am not, have happier times ahead soon.

Potentially providing additional tangible value from Michael O'Neill's becoming Citigroup's chairman.

Tuesday, October 16, 2012

The Enduring Fundamental Importance of Economics

Watching a recent program concerning the fall of ancient Egypt brought home the enduring importance of economics to understanding the sources of power of nations. For according to the program. The end of annual flooding of the Nile delta brought about the collapse of Egypt's agriculture within one generation and the nation's ability to feed itself. And thus its terminal fall from power. Ironically just this morning I saw a piece I believe on Bloomberg discussing the effects of recent climatic changes i,e, drought, on corn grown in Kansas. The corn belt is moving north.

It reminds us that United States economic power may also wane over time.

Monday, October 15, 2012

Belated reflections

In the months during my recovery from a stroke late last year. I have occasionally contemplated posts which I should have liked to have written. One which comes to mind involves Chase's billions of dollars of losses from trades placed by its London unit. The risk management for which the bank's CEO James Dimon was responsible. As I watched a steady drumbeat of daily coverage of the mess on Bloomberg television. I would rail, unheard. "Have we learned nothing from decades of risk management disasters?"

 Recalling discussions with old colleagues from my days as the first Research Director at then-independent consultancy Oliver Wyman & Co. In large financial entities like Chase the reporting structure of the risk management function is every bit as important as the technical tools and metrics. In this instance all one needs to understand regarding the reporting structure design flaw. Is to ask, with the bank's pugncious CEO as risk manager for the unit which young junior officer was capable of, saying, when necessary, "No," to Dimon regarding the positions which have come to prove so costly and embarrassing?

 It disappoints me that evidently no board member thought to have an objective review and recommendation of the arrangement undertaken by an outside party. Even there, however, which risk management consultant would want to make an enemy of such a powerful rainmaker as the Chase CEO? In truth? Sadly probably few if any.

 Imagine such a senior consulting partner defending such an assignment to his partners. What would be the upside to becoming silently blacklisted from further work at Chase?

Regardless of the financial outcome. If the recommendation was to remove Dimon as the London unit's ultimate risk manager there would be the imagined affront to the CEO. Moreover if the recommended replacement risk manager sustained a loss. The presumption would be that the consultant should have let Dimon remain in place as the London unit's senior risk manager.