On Wednesday, former Citigroup executives Chuck Prince and Bob Rubin, along with Tom Maheras, broke some major news by divulging that they had simply followed the lead of their consultants, primarily Oliver, Wyman, in taking their company deeply into CDO origination and trading.
Unfortunately, I missed that session, due to prior commitments that kept me away from a television. But I managed to listen/watch much of Thursday morning's FCIC session.
I'd say the Wall Street Journal article describing those proceedings got it mostly right. Chuck Prince came across as an apologetic buffoon, while Bob Rubin continued to evade and deny any responsibility, whatsoever, for the consequences of his recommendations as non-executive chairman of Citigroup.
Prince, a lawyer and ultimate 'survivor' of a long-running contest at Citibank and, then, Citigroup, to succeed to the CEO's office, basically said he just had Citigroup ape the other large commercial and investment banks. So much for any unique value-added from the multi-million dollar per year CEO of what was once the nation's largest commercial bank.
Reinforcing Prince's image as a highly-paid dunce was his revelation that he held on to all of the Citigroup stock which he had received as compensation over 30 years.
If you need to understand why Prince couldn't identify risk if it hit him in the ass, this fact, alone, tells you all you need to know. The guy was so clueless as to not even diversify his personal finances.
Rubin, as usual, was an entirely different kettle of fish. Aloof and cool, he steadfastly denied any significant role in Citigroup's demise. No apologies, no admissions of involvement. Nothing.
Mind you, he has, on prior occasions, admitted to having advised the board on the relative safety and lack of risk in plunging into exotic fixed income origination and trading. His prior day's revelation about the role that Oliver, Wyman played in his decision to advise the board to enter those businesses would certainly be seen by most observers as an admission of involvement.
Rubin, however, insists this is wrong. He is simply in total denial, and nothing that anyone says will cause him to acknowledge reality.
The Journal's article cites both Prince and Rubin as supporting more and heavier regulation in the financial services sector.
However, after hearing their testimony, why would anyone believe more regulation would have stopped these two executives from wrecking their institution?
They didn't do anything illegal. Prince even contended that he requested federal regulators to rein in other banks in the same risky businesses. It's pretty clear that the two call for more regulation because that seems to shift responsibility elsewhere, and allow them the excuse that they were merely complying with existing rules and regulations.
If they blew up their bank, well, it wasn't really their fault. It was inadequately devised and implemented regulations.
Of course, human beings will, again, be asked to implement any new regulatory regime. Why would you think the outcome will be different next time?
Showing posts with label Chuck Prince. Show all posts
Showing posts with label Chuck Prince. Show all posts
Friday, April 09, 2010
Tuesday, November 25, 2008
Vikram Pandit's Failure At Citigroup
It's a measure of the abject failure of Vikram Pandit's reign as CEO at Citigroup for nearly a year that his most recent measures for fixing the ailing, failing bank, described here, just a week ago, have had the perverse impact of requiring a Federal rescue, as I described here, earlier today.
I wrote, in last week's post,
"Pandit clearly has no clear grasp on the severity of Citigroup's problems. He's been in the job nearly a year, yet look at the firm's performance, as seen in the third Yahoo-sourced chart.
Citigroup has declined by about 70%, while the S&P has lost a relatively modest, by comparison, 40% over the past twelve months.
Citigroup has declined by about 70%, while the S&P has lost a relatively modest, by comparison, 40% over the past twelve months.
Yet Pandit has offered nothing in the way of strategic change at Citigroup. It's entirely possible that, like Rick Wagoner's GM, Pandit's Citigroup won't make it long enough to see those 'future opportunities.'"
By Friday afternoon of last week, as seen in the nearby Yahoo-sourced 5-day price chart, his bank's equity price had fallen more than 50%, while his erstwhile-competitors of size, Chase, Wells Fargo and BofA, held steady with the S&P.
After yesterday's rescue announcement, Citigroup's equity popped back up to only a 20% loss since last week.
What's really amazing is this chart from today's Wall Street Journal article in the 'Heard On The Street' column. Citigroup isn't even in the top four of US banks by market capitalization any more. The almost-unheard of US Bancorp is now ahead of it.
Even newly-minted 'commercial' bank Goldman Sachs, a fraction of the employee and business volume size, is within $6B of Citigroup.The longer term view of Pandit's continued mismanagement of Citigroup, begun under Sandy Weill and left on autopilot by his successor, Chuck Prince, appears below. For the past year, Citigroup again underperforms its (now) larger, one-time rivals, having lost far more than 50% of its value in the timeframe.
Unfortunately, the only thing worse than Pandit's misguided actions at Citigroup- too little action, sans a strategy, too late- is the firm's do-nothing board. Headed by greatly-enriched, do-nothing non-executive chairman, Bob 'he started this mess' Rubin.
A more responsible board would not have handed this overwhelming job to Pandit in the first place. But, having done so, might have at least relieved him this summer, when it was clear he wasn't waking up to the fact that Citigroup is a simply unworkable conglomeration of businesses and assets. Failing that, they would use yesterday's rescue to end Pandit's reign of futility and clear the decks for someone to break the firm up into manageable chunks.As usual, don't hold your breath for that outcome. Instead, count on shareholders continuing to be punished for the board's inaction.
Thursday, December 27, 2007
Finance Parable
With Christmas Day past, and just 2 1/2 slow, thinly traded market days left this year, I'm back at posting in my blog. I hope you enjoyed the Christmas holiday, and are looking forward to the new year.
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.
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.
Thursday, November 08, 2007
GM's Latest Setback
Today's Wall Street Journal, entitled "GM Turnaround Shown Off-Track," carries an article discussing GM's announcement, yesterday, that it is taking a $38.6B write down of a tax benefit. The importance of the write off is captured in this passage from the Journal article,
"GM's persistently weak financial performance prompted the company to take the big write-down for what are known as net deferred tax assets. They stem from past losses and can be used to offset taxes incurred on current or future profits for a certain period of years. In writing them down, the company is essentially saying it may be unable to use them because it isn't clear that the company will return to black ink in the near term."
Regarding GM's results being received by investment analysts, the article reported,
"GM's results surprised many analysts because it had appeared to be making progress in stemming its losses, and its global automotive operations were profitable in the first half of the year, helped in part by some hot models like the Buick Enclave and GMC Acadia, new seven-passenger vehicles. The company is finding it can't cut costs fast enough to offset declining industry sales in its core North American and European markets and can't sell assets fast enough to cover the cash it is using up."
As I wrote in prior posts, here, here, and, more recently, here, I don't believe GM will successfully execute a "turnaround" with its current management team. Particularly, with CEO Rick Wagoner remaining at the helm of the ailing auto maker.
The fact is that GM just lost $39B this past quarter. The face that I watched Rick Wagoner try to put on this appalling loss, in an early morning CNBC interview with correspondent Phil LeBeau, was that it is a non-cash charge that has no real meaning for investors. Skipping over the implicit acknowledgement that removing the asset from GM's balance sheet means the firm has no expectation of returning to profitability anytime soon, Wagoner attempted to paint a rosy picture of the firm's recent UAW contract, and longer term future.
As the Journal pointed out,
"The big loss occurred even after GM cut tens of thousands of jobs in North America and Europe, launched a volley of new models and boosted revenue in the quarter to $43 billion, a record level."
Wagoner admitted that North American sales are slow and headed down. When pressed by Becky Quick on when investors might see profits again, Wagoner launched into a long, deliberately-obfuscating response that avoided giving her an estimate of that date.
As I reflect on the last few weeks in American business, I wonder why anyone bothers to interview CEOs of troubled companies at all?
Between Stan O'Neal's and Chuck Prince's lack of candor all year long, you have to wonder if any embattled CEO is going to be honest about his and his company's troubles. A face to face interview on CNBC or Fox Business Channel is just an opportunity to engage in damage control. Truth is to be rationed, and high spirits, plus a 'can do' attitude, are to be paraded before the audience of analysts potential investors.
I think I'd prefer to view a good discussion by a panel of relevant, experienced observers of a troubled company than be painfully subjected to the propaganda dished out by the CEO of a GM, GE, etc., via live interview, as to why their own numbers are irrelevant, and their company's future will certainly be bright and profitable, come what may.
After all, the history of Prince's and O'Neal's statements all year long, and Wagoner's for years, have all belied the actual fundamental operating performances of their firms this year, haven't they?
"GM's persistently weak financial performance prompted the company to take the big write-down for what are known as net deferred tax assets. They stem from past losses and can be used to offset taxes incurred on current or future profits for a certain period of years. In writing them down, the company is essentially saying it may be unable to use them because it isn't clear that the company will return to black ink in the near term."
Regarding GM's results being received by investment analysts, the article reported,
"GM's results surprised many analysts because it had appeared to be making progress in stemming its losses, and its global automotive operations were profitable in the first half of the year, helped in part by some hot models like the Buick Enclave and GMC Acadia, new seven-passenger vehicles. The company is finding it can't cut costs fast enough to offset declining industry sales in its core North American and European markets and can't sell assets fast enough to cover the cash it is using up."
As I wrote in prior posts, here, here, and, more recently, here, I don't believe GM will successfully execute a "turnaround" with its current management team. Particularly, with CEO Rick Wagoner remaining at the helm of the ailing auto maker.
The fact is that GM just lost $39B this past quarter. The face that I watched Rick Wagoner try to put on this appalling loss, in an early morning CNBC interview with correspondent Phil LeBeau, was that it is a non-cash charge that has no real meaning for investors. Skipping over the implicit acknowledgement that removing the asset from GM's balance sheet means the firm has no expectation of returning to profitability anytime soon, Wagoner attempted to paint a rosy picture of the firm's recent UAW contract, and longer term future.
As the Journal pointed out,
"The big loss occurred even after GM cut tens of thousands of jobs in North America and Europe, launched a volley of new models and boosted revenue in the quarter to $43 billion, a record level."
Wagoner admitted that North American sales are slow and headed down. When pressed by Becky Quick on when investors might see profits again, Wagoner launched into a long, deliberately-obfuscating response that avoided giving her an estimate of that date.
As I reflect on the last few weeks in American business, I wonder why anyone bothers to interview CEOs of troubled companies at all?
Between Stan O'Neal's and Chuck Prince's lack of candor all year long, you have to wonder if any embattled CEO is going to be honest about his and his company's troubles. A face to face interview on CNBC or Fox Business Channel is just an opportunity to engage in damage control. Truth is to be rationed, and high spirits, plus a 'can do' attitude, are to be paraded before the audience of analysts potential investors.
I think I'd prefer to view a good discussion by a panel of relevant, experienced observers of a troubled company than be painfully subjected to the propaganda dished out by the CEO of a GM, GE, etc., via live interview, as to why their own numbers are irrelevant, and their company's future will certainly be bright and profitable, come what may.
After all, the history of Prince's and O'Neal's statements all year long, and Wagoner's for years, have all belied the actual fundamental operating performances of their firms this year, haven't they?
Monday, November 05, 2007
"Prince Of The Citi" No More- Rubin New Citigroup Chairman
It's official this morning. Chuck Prince is gone as Citigroup CEO.
In his place, Bob Rubin, head of Citi's executive committee, becomes interim Chairman, and Sir Win Bischoff, a senior, non-board member of Citigroup, becomes interim CEO.
Will this change Citigroup's near term prospects? Probably not. Here are a few reasons why I believe that- quotes in this morning's Wall Street Journal's Money & Investing section's article from Rubin,
"The direction that Chuck set is exactly where the institution needs to go."
"The board is a very strong board and a very good board."
Just unbelievable. Here's a bank that has engaged in questionable lending practices, via their reputed $80B of face-valued SIVs. Now the bank is reported to be planning additional write downs of $8-11B on their own assets. The hydra-headed cultural monster encompassing the former Salomon Brothers, Smith Barney, and other remnants of Sandy Weill's acquisition campaigns, plus Citi's original quadrapartite consumer-institutional-transactions-asset management businesses, remains out of control.
More sanguine are observers quoted in the Journal piece, such as Doug Kass,
"I and others should hold Rubin partially responsible" for Citigroups' struggles."
And Robert Lamb, former Weill aide,
"The board has been part of the problem not part of the solution. They were willing to give more and more rope to Chuck Prince."
It's hard to disagree with these outside observers, when you view Citi's performance going back more than four years. Remember, Weill created a regulatory mess which accelerated his own departure, and left Prince with the job of cleaning that up. Which he largely did.
The trouble is that Citi is an entity which is unlikely to ever be a better investment opportunity, long term, than the S&P500 Index. "However, the real damage has been occurring, continually, for nearly four years under Prince. As the nearby Yahoo-sourced price chart for Citigroup and the S&P500 Index shows, the bank has treaded water since late 2003 under Prince's mismanagement."
The problems with Citi included Chuck Prince's ineptitude, but in now way were or are limited to that. The company's structure is now inherently flawed.
In a world of successful private equity and hedge fund shops, all of which have far less business diversification than the modern, large US money center banks- Chase, BofA, and Citi- the hypothesis remains unproven that such a large commercial bank, in so many diverse businesses, can ever provide investors with long term prospects of outperforming the much less expensive, less volatile S&P500 Index.
A lot of people are using Prince's resignation to heap even more accolades on Chase's late-coming CEO, Jamie Dimon. Dimon, of course, was the one-time heir-apparent at Citi, before his mentor, Sandy Weill, fired him. As I wrote here, recently, one quarter does not a successful long term track record, nor business model validation, make.
No, I think Citigroup is simply the worst-managed, most dis-organised of the three American commercial bank Goliaths. None are likely to be a better investment bet, through time, than a broader index, such as the S&P, when risk is considered.
As for Rubin, isn't he up to his armpits in this mess already? Didn't he oversee and favorably pass on the major business decisions, such as the SIV creations, and holding various now-bad assets in portfolio, at Citigroup?
Rubin doesn't actually have a track record as a hands-on manager anywhere. At Goldman, he was Mr. Outside to his co-head, Steve Friedman's Mr. Inside. And at Treasury, Rubin was actually responsible for draining the US financial system of liquidity by retiring the long bond, thus indirectly helping to trigger the 2001 contraction by engaging in unnoticed monetary base shrinkage.
I continue to believe that Citigroup will remain a poorly performing company so long as its current organizational structure and business scope is left intact. The only person who could 'save' Citi, in my opinion, is s/he who would destroy it via spin offs or sales of units, to pare the pieces back to understandable, accountable, motivated sizes which allow for competent management.
Saturday, November 03, 2007
Citigroup's CEO Chuck Prince To Resign
This mornings weekend edition of the Wall Street Journal carries a lead story that Chuck Prince will resign his position as CEO of Citigroup at a meeting of the firm's board tomorrow.
Back in January of this year, I wrote two posts, here and here, contending that it was already time for Prince to leave Citigroup.
To be fair, it's unlikely that much of the recent financial damage Citi has sustained would have been much less if Prince had been fired nine months ago.However, the real damage has been occurring, continually, for nearly four years under Prince. As the nearby Yahoo-sourced price chart for Citigroup and the S&P500 Index shows, the bank has treaded water since late 2003 under Prince's mismanagement.
Originally handling the regulatory mess that Sandy Weill left for him, Prince foundered as soon as that phase of Citi's troubles were behind him.
Don't you wonder why Citigroup's board allowed Chuck Prince to run the firm with such lackluster, market-underperforming results for so long? According to this piece on the Forbes website, Prince has been paid, through last year, just over $49MM as CEO. Just over $15MM per year of failure to best an index whose performance can be purchased through Vanguard for about .2 cents/dollar.
The Journal article alleges that Prince, who, like Merrill's Stan O'Neal, incomprehensibly worked sans contract, may leave Citi with as much as $31MM. How much of this amount was counted in the Forbes compensation is not clear to me, but I'm willing to bet that at least half of the amount reflects new payments upon his exit.
Citigroup's board, which is listed here, would seem to be ultimately culpable for allowing this long, slow slide into mediocrity of the country's largest commercial bank. Despite the Journal's reporting that either Bob Rubin or Dick Parsons might be considered to move from board member to interim chairman, it's hard for me to see how members of this already tainted group could be candidates to correct the situation.
And isn't it odd that, along with his longer term management failures, Prince allowed the seven SIVs which Citigroup operates, reputedly worth some $80B of purchased asset value, to be created? Of all the functional skills a CEO would need to understand whether, and how much, risk Citigroup ultimately has from these entities, a lawyer would seem most capable.
Didn't Prince understand that the SIVs were simply off-balance sheet tactics to imply that Citi stood behind the entities, while carefully avoiding explicitly leaving a paper trail as such?
Isn't this the type of regulatory corner-cutting Prince was supposed to have avoided? Didn't his board wonder, as these SIVs were created, precisely where the risk went? Especially Rubin, a onetime co-head of Goldman, Sachs, and Secretary of the US Treasury?
Call me a broken record, but as I opined regarding Merrill, here, I think Citigroup, too, should be dismantled upon Prince's departure. It's not as if a long string of stellar years of performance were briefly interrupted under Prince's tenure.
The truth is, ever since Sandy Weill fused his insurance-asset management conglomerate with Citicorp some years ago, the firm has had trouble consistently outperforming the market for its shareholders. The diversified financial giant has proven too unwieldy and complex for anyone to run profitably to shareholders' lasting benefit, as measured against the less risky step of simply buying the S&P500 Index.
Most of Citigroup's businesses don't really positively affect each other. Oversight obviously continues to be a problem, both regulatorily, and for risk management purposes.
With the board having collaborated with Prince in allowing these omissions to fester and grow for four more years, after Weill, I'd suggest that the biggest favor the Citi board can grant its shareholders is, at least, to break up the company into separate, manageable units, spun back as separate equities to current Citigroup owners. Perhaps, in a few cases, buyers can be found for the units. It's unlikely that the old commercial bank unit could merge with another bank. But various asset management, investment banking and other non-core commercial banking units could be sold or split off.
Look at it another way. The company has suffered under two successive CEOs, and the board that allowed the pain to continue. Should anyone connected so far with this travesty have a hand in improving it within the same framework, going forward?
I don't think so. That way probably lies more failure and loss for shareholders.
Monday, October 29, 2007
O'Neal, Merrill Lynch & Its Search For a New CEO
This morning's Wall Street Journal's Money & Investing section has, as its lead story, a handicapping of contenders for the top job at Merrill Lynch, now that Stan O'Neal has been cashiered for incompetence.
Despite the stories circulating about his call to the CEO of Wachovia about a possible merger, it seems far more believable that O'Neal is going simply because he proved himself unable to appropriately manage Merrill's growth without incurring disastrous risks which have resulted in losses of $8B so far this year. And it's only the end of October.
Among the putative replacements for O'Neal, the Journal article mentions,
"A dream pick would be Mr. Thain, CEO of NYSE Euronext.....However, people close to him have thrown cold water on the speculation he may throw his hat in the ring for the Merrill job. One reason: he may be holding out for a bigger job, possibly the top spot at Citigroup, Inc., although it currently isn't open.
Gary Cohn and Jon Winkelried, co-president and chief operating officers of Goldman, Sachs, could be wild cards in the race."
Geez....dream pick, indeed. Does anyone, besides Susanne Craig, who authored the Wall Street Journal piece, really think Goldman executive among the top three managers of the firm, past or present, would really be interested in running Merrill?
Merrill represents the last of an otherwise dead model, the retail wire house. Sure, Merrill bought and grafted on investment banking in the past decade. But it hasn't internalized the risk management skills which seem to have prevented Goldman Sachs, Morgan Stanley, and Blackstone from suffering the same losses during this year's financial crises.
As for Citigroup, it's the worst example of the hydra-headed model now known as a 'universal bank,' the former moniker, 'financial supermarket,' evidently being dropped sometime in the past decade.
Neither Merrill, nor Citigroup, has a reputation for attracting and retaining the best financial minds. Nor, for that matter, do any other large US commercial banks.
Why would a senior executive who has run part or all of Goldman Sachs need to prove himself running a less-robust financial services business model with less talented personnel?
For Larry Fink, on the other hand, it would represent an opportunity to run a larger, more complex operation than he has had to date. If the inherent problems in Merrill's structure, including the dying retail brokerage business, don't cause him to think twice.
Should be interesting to see who wants the top job at Merrill. An insider, such as McCann or Fleming, is understandable- the move would be a natural accession and bring more money. For an experienced, capable outsider, though, the job might ultimately hold more risk than opportunity.
Perhaps the most interesting aspect of O'Neal's departure is whether it speeds Chuck Prince's outster at nearby Citigroup.
Despite the stories circulating about his call to the CEO of Wachovia about a possible merger, it seems far more believable that O'Neal is going simply because he proved himself unable to appropriately manage Merrill's growth without incurring disastrous risks which have resulted in losses of $8B so far this year. And it's only the end of October.
Among the putative replacements for O'Neal, the Journal article mentions,
"A dream pick would be Mr. Thain, CEO of NYSE Euronext.....However, people close to him have thrown cold water on the speculation he may throw his hat in the ring for the Merrill job. One reason: he may be holding out for a bigger job, possibly the top spot at Citigroup, Inc., although it currently isn't open.
Gary Cohn and Jon Winkelried, co-president and chief operating officers of Goldman, Sachs, could be wild cards in the race."
Geez....dream pick, indeed. Does anyone, besides Susanne Craig, who authored the Wall Street Journal piece, really think Goldman executive among the top three managers of the firm, past or present, would really be interested in running Merrill?
Merrill represents the last of an otherwise dead model, the retail wire house. Sure, Merrill bought and grafted on investment banking in the past decade. But it hasn't internalized the risk management skills which seem to have prevented Goldman Sachs, Morgan Stanley, and Blackstone from suffering the same losses during this year's financial crises.
As for Citigroup, it's the worst example of the hydra-headed model now known as a 'universal bank,' the former moniker, 'financial supermarket,' evidently being dropped sometime in the past decade.
Neither Merrill, nor Citigroup, has a reputation for attracting and retaining the best financial minds. Nor, for that matter, do any other large US commercial banks.
Why would a senior executive who has run part or all of Goldman Sachs need to prove himself running a less-robust financial services business model with less talented personnel?
For Larry Fink, on the other hand, it would represent an opportunity to run a larger, more complex operation than he has had to date. If the inherent problems in Merrill's structure, including the dying retail brokerage business, don't cause him to think twice.
Should be interesting to see who wants the top job at Merrill. An insider, such as McCann or Fleming, is understandable- the move would be a natural accession and bring more money. For an experienced, capable outsider, though, the job might ultimately hold more risk than opportunity.
Perhaps the most interesting aspect of O'Neal's departure is whether it speeds Chuck Prince's outster at nearby Citigroup.
Monday, October 22, 2007
On The M-LEC Master SIV Fund: Part Two- Commercial Bank CEOs
On Saturday, I wrote this post, discussing the mechanics of the US Treasury's proposed financial sector M-LEC, or Master- Liquidity Enhancement Conduit- a fund to be owned by a consortium of US financial sector firms. Having thus treated structural aspect of the current SIV problem, and a proposed solution, in this post, I want to discuss who is "in," and who is still "out" on subscribing to this "solution."
Thursday's Wall Street Journal featured a fawning piece on Chase CEO Jamie Dimon, including this passage,
"Mr. Dimon defended the bank's decision to join Citigroup and Bank of America Corp. in forming a massive investment fund that is aimed at shoring up sputtering credit markets. J.P. Morgan, (i.e., Chase) doesn't own any of the structured-investment vehicles that are in trouble, leading some analysts to question why it is participating in a rescue plan. "It's very reasonable for J.P. Morgan to play a role in trying to help the system, and that's what this is," he said in a conference call. "
Thus, we see that the three largest US commercial banks, by asset size, are supporters of the M-LEC.
Late last week, I saw an interview on CNBC with John Mack, CEO of Morgan Stanley. He expressed reservations on just how the M-LEC would help the credit situation. I do not notice Goldman Sachs signing up, either.
So, conspicuously absent from the M-LEC list thus far, are large investment banks.
Why is this? Let me opine. In brief, it's a combination of commercial bank CEO experiences and talent, combined with a confusion of most bank CEOs regarding their priorities- shareholder returns versus financial system protection at shareholder expense.
Quite simply, as a group, US commercial bank CEOs are typically less-broadly experienced and, frankly, less 'smart,' in a business sense, than their investment banking CEO counterparts. Stretching back to the 1970s, I think only David Rockefeller and Walter Wriston were, among commercial bank CEOs, possibly on a par with their investment bank peers in terms of vision and business acumen. Even then, these two were encumbered by the inherent obligation, as leaders of large US banks, to act to protect the banking system, rather than focus primarily on their shareholders' interests.
A look at the nearby Yahoo-sourced price chart since the early 1990s for Goldman Sachs (public since 1999), Morgan Stanley, Chase, Citigroup, Wells Fargo, BofA, Wachovia and the S&P500 confirms this.
Back in the early 1980s, as a Chase Manhattan officer, I watched Chase, Citibank and BofA (California- the original one, run by Sam Armacost) all take huge write-downs for billions of dollars of bad loans which were the eventual result of petro-dollar recycling from the oil crisis of the mid-late 1970s.
Several of us in the Corporate Planning & Development group, all exclusively non-bankers hired by SVP Gerry Weiss, former senior strategic planner at GE, observed that, smart as Wriston and Rockefeller had been in cutting their banks in on this massive dollar flow in the form of loans to developing nations, they forgot to take a healthy risk premium off the top for Chase's and Citi's risks. We paid the price in the 1980s. Thus was spawned the following joke,
Q: How do you create a good regional bank?
A: Start with a money center bank and shrink it with loan write-offs.
Think I'm wrong? Look at the current five largest US commercial banks.
Citigroup is the ailing, mismanaged hodgepodge of acquisitions resulting from non-banker Sandy Weill's grab for the commercial bank's assets. More on this in a future post. For now, note that Weill never ran an investment bank, either. He was seen as a sort of financial version of a Seventh Avenue rag merchant, combining and running retail 'wire houses.' He took ShearsonLehman in and out of American Express, but had to buy Salomon Brothers to actually get an investment bank.
Chase is the result of several mega-mergers of the other mediocre New York money center banks- Manufacturers Hanover, Chemical, JP Morgan- and struggling midwest banks that had once been, separately, BancOne, First Bank of Chicago and, I believe, National Bank of Detroit.
Bank of America is the name appropriated for itself when the one-time North Carolina National Bank, a/k/a NCNB, then Nationsbank, gobbled up the weakened San Francisco financial giant.
Wachovia, the other surviving North Carolina regional bank of the 1980-90s, took over the third North Carolina one-time regional, First Union.
Finally, Wells Fargo is the name taken by a Minnesota bank conglomerate, resulting from the takeover of the crippled Norwest by First Bank System, when that combine grabbed the remaining west coast commercial bank.
The original leaders of all of the large US commercial banks of the 1990s lost their companies to acquirers. The US regional banks which avoided the devastating effects of the LDC loan losses of the late 1980s, plus the real estate development problems of the early 1990s, consolidated the sector and took the marquee names of US commercial banking. So we now have the same names, but with a different CEO lineage. Mostly CEOs supplied by regional banks or second-tier securities trading firms.
It's my contention that the commercial banks are backing the M-LEC because they simply aren't as good a group of CEOs as the investment banks. They will obligingly put their shareholders' capital at risk because they feel they must, as part of the 'bargain' for having access to the Fed discount window.
"had all the fun I can stand in investment banking at the moment."
BofA had reported something like a 90% drop in quarter-over-year-ago-quarter in investment and corporate banking income. You almost feel sorry for Lewis. He's so over-matched when he attempts to use the bank's enormous balance sheet to try to muscle into the rough-and-tumble capital markets. Maybe the Countrywide move of this summer will work out. Maybe not.
John Stumpf was named Chief Executive Officer in June 2007, elected to Wells Fargo’s Board of Directors in June 2006, and has been President since August 2005. A 25-year veteran of the company, he joined the former Norwest Corporation (predecessor of Wells Fargo) in 1982 in the loan administration department and then became senior vice president and chief credit officer for Norwest Bank, N.A., Minneapolis. He held a number of management positions at Norwest Bank Minneapolis and Norwest Bank Minnesota before assuming responsibility for Norwest Bank Arizona in 1989. He was named regional president for Norwest Banks in Colorado/Arizona in 1991. From 1994 to 1998, he was regional president for Norwest Bank Texas. During his four years in that position, he led Norwest’s acquisition of 30 Texas banks with total assets of more than $13 billion. In 1998, with the merger of Norwest Corporation and Wells Fargo & Company, he became head of the Southwestern Banking Group (Arizona, New Mexico and Texas). Two years later he became head of the new Western Banking Group (Arizona, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, Washington and Wyoming). In 2000, he led the integration of Wells Fargo’s acquisition of the $23 billion First Security Corporation, based in Salt Lake City. In May 2002, he was named Group EVP of Community Banking.
So, there you have it. Lewis, Prince, Dimon, Stumpf and Thompson. The five largest US commercial bank CEOs. Most have careers almost entirely with their current employer. Prince was an attorney at a steel company, then a loan company bought by his current employer. Dimon was apprenticed to a wire house bottom-fisher, Sandy Weill, until Sandy fused the modern Citigroup together, causing massive infighting between four cultures- insurance, investment banking, commercial banking, and retail securities. Then Dimon got himself ousted and headed for the relative safety of an ailing, once-acquisitive midwest bank.
Former heads of Goldman Sachs or Morgan Stanley have become Treasury Secretaries or State Department officials. Sometimes they depart to found or join private equity firms or hedge funds, such as Pete Petersen, Larry Fink, et. al.
Even now, as Citi's Chuck Prince's future is in doubt, the newest rising star at the firm is an asset management czar hired from.... Morgan Stanley!
As I consider the M-LEC and its supporters, I can't help but see it as essentially an attempt by the less-savvy commercial bank CEOs to stave off a fire sale of fixed income assets which they abetted by their operation of various SIVs. Meanwhile, the savvier investment bank, hedge fund and private equity CEOs circle, like sharks in the water, waiting for the inevitable disgorgement of SIV assets to begin. They will wait for near-bottom prices, buy and hold and, eventually, realize tremendous profits for their risk taking.
The mere fact that the commercial bank chiefs back the M-LEC is almost enough, on its own, to convince me it's a bad idea.
In keeping with the overall theme of this blog, perhaps the concluding observation is that you can short commercial bank stocks, and buy publicly-traded investment banks. Even a handful of private equity groups.
Thursday's Wall Street Journal featured a fawning piece on Chase CEO Jamie Dimon, including this passage,
"Mr. Dimon defended the bank's decision to join Citigroup and Bank of America Corp. in forming a massive investment fund that is aimed at shoring up sputtering credit markets. J.P. Morgan, (i.e., Chase) doesn't own any of the structured-investment vehicles that are in trouble, leading some analysts to question why it is participating in a rescue plan. "It's very reasonable for J.P. Morgan to play a role in trying to help the system, and that's what this is," he said in a conference call. "
Thus, we see that the three largest US commercial banks, by asset size, are supporters of the M-LEC.
Late last week, I saw an interview on CNBC with John Mack, CEO of Morgan Stanley. He expressed reservations on just how the M-LEC would help the credit situation. I do not notice Goldman Sachs signing up, either.
So, conspicuously absent from the M-LEC list thus far, are large investment banks.
Why is this? Let me opine. In brief, it's a combination of commercial bank CEO experiences and talent, combined with a confusion of most bank CEOs regarding their priorities- shareholder returns versus financial system protection at shareholder expense.
Quite simply, as a group, US commercial bank CEOs are typically less-broadly experienced and, frankly, less 'smart,' in a business sense, than their investment banking CEO counterparts. Stretching back to the 1970s, I think only David Rockefeller and Walter Wriston were, among commercial bank CEOs, possibly on a par with their investment bank peers in terms of vision and business acumen. Even then, these two were encumbered by the inherent obligation, as leaders of large US banks, to act to protect the banking system, rather than focus primarily on their shareholders' interests.A look at the nearby Yahoo-sourced price chart since the early 1990s for Goldman Sachs (public since 1999), Morgan Stanley, Chase, Citigroup, Wells Fargo, BofA, Wachovia and the S&P500 confirms this.
Back in the early 1980s, as a Chase Manhattan officer, I watched Chase, Citibank and BofA (California- the original one, run by Sam Armacost) all take huge write-downs for billions of dollars of bad loans which were the eventual result of petro-dollar recycling from the oil crisis of the mid-late 1970s.
Several of us in the Corporate Planning & Development group, all exclusively non-bankers hired by SVP Gerry Weiss, former senior strategic planner at GE, observed that, smart as Wriston and Rockefeller had been in cutting their banks in on this massive dollar flow in the form of loans to developing nations, they forgot to take a healthy risk premium off the top for Chase's and Citi's risks. We paid the price in the 1980s. Thus was spawned the following joke,
Q: How do you create a good regional bank?
A: Start with a money center bank and shrink it with loan write-offs.
Think I'm wrong? Look at the current five largest US commercial banks.
Citigroup is the ailing, mismanaged hodgepodge of acquisitions resulting from non-banker Sandy Weill's grab for the commercial bank's assets. More on this in a future post. For now, note that Weill never ran an investment bank, either. He was seen as a sort of financial version of a Seventh Avenue rag merchant, combining and running retail 'wire houses.' He took ShearsonLehman in and out of American Express, but had to buy Salomon Brothers to actually get an investment bank.
Chase is the result of several mega-mergers of the other mediocre New York money center banks- Manufacturers Hanover, Chemical, JP Morgan- and struggling midwest banks that had once been, separately, BancOne, First Bank of Chicago and, I believe, National Bank of Detroit.
Bank of America is the name appropriated for itself when the one-time North Carolina National Bank, a/k/a NCNB, then Nationsbank, gobbled up the weakened San Francisco financial giant.
Wachovia, the other surviving North Carolina regional bank of the 1980-90s, took over the third North Carolina one-time regional, First Union.
Finally, Wells Fargo is the name taken by a Minnesota bank conglomerate, resulting from the takeover of the crippled Norwest by First Bank System, when that combine grabbed the remaining west coast commercial bank.
The original leaders of all of the large US commercial banks of the 1990s lost their companies to acquirers. The US regional banks which avoided the devastating effects of the LDC loan losses of the late 1980s, plus the real estate development problems of the early 1990s, consolidated the sector and took the marquee names of US commercial banking. So we now have the same names, but with a different CEO lineage. Mostly CEOs supplied by regional banks or second-tier securities trading firms.
It's my contention that the commercial banks are backing the M-LEC because they simply aren't as good a group of CEOs as the investment banks. They will obligingly put their shareholders' capital at risk because they feel they must, as part of the 'bargain' for having access to the Fed discount window.
You can't accuse that bunch of being broad-minded, nor good at capitalizing on financial opportunity. In my opinion, they are just too narrowly experienced. Here, for example, are the company biographies of the CEOs of America's five largest commercial banks.
Ken Lewis, BofA CEO
Lewis has been chief executive officer since 2001. He joined North Carolina National Bank (NCNB, predecessor to NationsBank and Bank of America) in 1969 as a credit analyst in Charlotte and served as corporate banking officer and Western Area director in the U.S. Department before being named manager of NCNB’s International Banking Corporation in New York in 1977.
He was named Middle Market Group executive in 1983 when the group was created and was responsible for expanding and improving service to middle market companies throughout the Southeast. He led the bank’s operations in Florida and Texas in the 1980s, served as president of Consumer and Commercial Banking and chief operating officer in the 1990s, and was named chairman, chief executive officer and president of Bank of America in April of 2001.
Lewis was born April 9, 1947, in Meridian, Mississippi. He earned a bachelor’s degree in finance from Georgia State University, and is a graduate of the Executive Program at Stanford University.
To prove my point, Ken Lewis, on his investment banking 'experience' of this past summer, was quoted in Friday's Wall Street Journal as saying he,"had all the fun I can stand in investment banking at the moment."
BofA had reported something like a 90% drop in quarter-over-year-ago-quarter in investment and corporate banking income. You almost feel sorry for Lewis. He's so over-matched when he attempts to use the bank's enormous balance sheet to try to muscle into the rough-and-tumble capital markets. Maybe the Countrywide move of this summer will work out. Maybe not.
Chuck Prince, Citigroup CEO-
Mr. Prince began his career in 1975 as an attorney at U.S. Steel Corporation and in 1979 joined Commercial Credit Company (a predecessor company to Citi). He was named Executive Vice President in early 1996. Mr. Prince was made Chief Administrative Officer of Citi in early 2000 and Chief Operating Officer in early 2001. He was named Chairman and CEO of the Markets & Banking in 2002, became CEO of Citi in 2003, and was named Chairman in 2006.
Jamie Dimon, JP Morgan Chase CEO
Mr. Dimon became Chairman of the Board on December 31, 2006, and has been Chief Executive Officer and President of JPMorgan Chase since December 31, 2005. He had been President and Chief Operating Officer since JPMorgan Chase ’s merger with Bank One Corporation in July 2004. At Bank One he had been Chairman and Chief Executive Officer since March 2000. Prior to Bank One, he had held various senior executive positions at Citigroup Inc., its subsidiary, Salomon Smith Barney, and its predecessor company, Travelers Group, Inc. Mr. Dimon is a graduate of Tufts University and received an MBA from Harvard Business School.Interestingly, after Dimon's ejection from Citigroup, he didn't head for an investment bank, did he? No, he chose a sleepy, down-on-the-heels commercial bank in the midwest.
John Stumpf, Wells Fargo CEO
John Stumpf was named Chief Executive Officer in June 2007, elected to Wells Fargo’s Board of Directors in June 2006, and has been President since August 2005. A 25-year veteran of the company, he joined the former Norwest Corporation (predecessor of Wells Fargo) in 1982 in the loan administration department and then became senior vice president and chief credit officer for Norwest Bank, N.A., Minneapolis. He held a number of management positions at Norwest Bank Minneapolis and Norwest Bank Minnesota before assuming responsibility for Norwest Bank Arizona in 1989. He was named regional president for Norwest Banks in Colorado/Arizona in 1991. From 1994 to 1998, he was regional president for Norwest Bank Texas. During his four years in that position, he led Norwest’s acquisition of 30 Texas banks with total assets of more than $13 billion. In 1998, with the merger of Norwest Corporation and Wells Fargo & Company, he became head of the Southwestern Banking Group (Arizona, New Mexico and Texas). Two years later he became head of the new Western Banking Group (Arizona, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, Washington and Wyoming). In 2000, he led the integration of Wells Fargo’s acquisition of the $23 billion First Security Corporation, based in Salt Lake City. In May 2002, he was named Group EVP of Community Banking.
G. Kennedy Thompson, Wachovia Corporation CEO.
Joined the company: 1976
In current position since: 2000
Previous positions at the company: Head of Global Capital Markets; president of Florida banking operations; head of Human Resources; various other management positions
Education: B.A. in American Studies, University of North Carolina-Chapel Hill; M.B.A., Wake Forest University
So, there you have it. Lewis, Prince, Dimon, Stumpf and Thompson. The five largest US commercial bank CEOs. Most have careers almost entirely with their current employer. Prince was an attorney at a steel company, then a loan company bought by his current employer. Dimon was apprenticed to a wire house bottom-fisher, Sandy Weill, until Sandy fused the modern Citigroup together, causing massive infighting between four cultures- insurance, investment banking, commercial banking, and retail securities. Then Dimon got himself ousted and headed for the relative safety of an ailing, once-acquisitive midwest bank.
Former heads of Goldman Sachs or Morgan Stanley have become Treasury Secretaries or State Department officials. Sometimes they depart to found or join private equity firms or hedge funds, such as Pete Petersen, Larry Fink, et. al.
Even now, as Citi's Chuck Prince's future is in doubt, the newest rising star at the firm is an asset management czar hired from.... Morgan Stanley!
As I consider the M-LEC and its supporters, I can't help but see it as essentially an attempt by the less-savvy commercial bank CEOs to stave off a fire sale of fixed income assets which they abetted by their operation of various SIVs. Meanwhile, the savvier investment bank, hedge fund and private equity CEOs circle, like sharks in the water, waiting for the inevitable disgorgement of SIV assets to begin. They will wait for near-bottom prices, buy and hold and, eventually, realize tremendous profits for their risk taking.
The mere fact that the commercial bank chiefs back the M-LEC is almost enough, on its own, to convince me it's a bad idea.
In keeping with the overall theme of this blog, perhaps the concluding observation is that you can short commercial bank stocks, and buy publicly-traded investment banks. Even a handful of private equity groups.
Wednesday, October 03, 2007
Chuck Prince's Nine Lives
I'm beginning to think Citigroup CEO Chuck Prince is some sort of shape-change artist out of Harry Potter, who is, in reality, a cat. A nine-lived cat, to be precise.
How many mistakes can a CEO make and still keep his job? Perhaps due to Prince's example, GE CEO Jeff Immelt figures he has lots of time left to continue to mismanage his firm.
But, back to Citigroup. Having taken the helm from Sandy Weill in 2003, after the latter's excesses of merger-mania, Prince has presided over a performance that underruns the S&P for the timeframe.
As observed in the nearby Yahoo-sourced chart of stock prices for Citigroup and the S&P500 Index for the last five years, Prince has led the banking firm to a clear underperformance during his tenure.
Despite the company's major shareholder, Saudi Prince Alaweed bin Talal, commenting,
"No financial institution is immune from the financial turmoil in global markets....It's a hiccup in our journey to reach normalization at Citibank,"
Prince never seems to do more than 'normalize' mediocrity. As the two-year price chart nearby shows, even before this summer's fixed income markets crises, which have led to Citigroup posting third-quarter earnings that are 60% below last year's similar quarter, Citi was already lagging the index, suffering a plunging stock price since early this year.
As I wrote in these posts, here and here, in May and January of this year, Prince has been mismanaging Citigroup for quite some time. It has nothing to do with the market troubles of this summer.
Here's what continues to confound me. Prince would probably not suffer performance like his own in a lieutenant for as long as his board has suffered his own mediocre performance, without firing them.
Why is Prince still CEO? As I have written in prior posts, he's out of his depth trying to run the overly-diversified Citigroup. And financial service firms so diversified almost never manage to post consistently superior total returns.
As I wrote in my last (linked) post,
"Ideally, Citi needs to be split up into more easily led and managed, standalone units which may more nimbly respond to market and competitive forces in their particular financial service sectors. As a financial supertanker, Citi has proven unmanageable in a manner that performs consistently better than the markt for its owners. Can it really do worse as a number of smaller, more responsive entities?"
And Prince should go- break up, or not. He is simply overmatched by the firm's and market's complexity. It would be nice if the Saudi Prince considered other shareholders, and voted to boot the American Prince.
How many mistakes can a CEO make and still keep his job? Perhaps due to Prince's example, GE CEO Jeff Immelt figures he has lots of time left to continue to mismanage his firm.
But, back to Citigroup. Having taken the helm from Sandy Weill in 2003, after the latter's excesses of merger-mania, Prince has presided over a performance that underruns the S&P for the timeframe.
As observed in the nearby Yahoo-sourced chart of stock prices for Citigroup and the S&P500 Index for the last five years, Prince has led the banking firm to a clear underperformance during his tenure.Despite the company's major shareholder, Saudi Prince Alaweed bin Talal, commenting,
"No financial institution is immune from the financial turmoil in global markets....It's a hiccup in our journey to reach normalization at Citibank,"
Prince never seems to do more than 'normalize' mediocrity. As the two-year price chart nearby shows, even before this summer's fixed income markets crises, which have led to Citigroup posting third-quarter earnings that are 60% below last year's similar quarter, Citi was already lagging the index, suffering a plunging stock price since early this year.As I wrote in these posts, here and here, in May and January of this year, Prince has been mismanaging Citigroup for quite some time. It has nothing to do with the market troubles of this summer.
Here's what continues to confound me. Prince would probably not suffer performance like his own in a lieutenant for as long as his board has suffered his own mediocre performance, without firing them.
Why is Prince still CEO? As I have written in prior posts, he's out of his depth trying to run the overly-diversified Citigroup. And financial service firms so diversified almost never manage to post consistently superior total returns.
As I wrote in my last (linked) post,
"Ideally, Citi needs to be split up into more easily led and managed, standalone units which may more nimbly respond to market and competitive forces in their particular financial service sectors. As a financial supertanker, Citi has proven unmanageable in a manner that performs consistently better than the markt for its owners. Can it really do worse as a number of smaller, more responsive entities?"
And Prince should go- break up, or not. He is simply overmatched by the firm's and market's complexity. It would be nice if the Saudi Prince considered other shareholders, and voted to boot the American Prince.
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