Carl Icahn Focuses On Yahoo!

This week's news about Yahoo has suddenly involved Carl Icahn. It's an almost surrealistic twist, involving the former corporate raider taking a 10MM share position in the company, and options for another 49MM.

As well as Microsoft's switchboard refusing to connect Icahn to Steve Ballmer, when the former called the latter recently. You can't write fiction this good.

The Bloomberg account reports,

"Icahn said in a letter to Yahoo's board yesterday that a combination with Microsoft ``is by far the most sensible path'' if the Internet company wants to take on Google Inc.

``The board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft,'' said Icahn, 72. ``I sincerely hope you heed the wishes of your shareholders and move expeditiously to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary.'' "

On would have to admit, looking at the nearby, Yahoo-sourced price chart of the past week for Yahoo, Microsoft and the S&P500, that Icahn's move has gained nearly-instant credibility.

Notice how Yahoo's price rocketed upward on the news of Icahn's focus on the company and its board?

Icahn further commented, again, according to Bloomberg,

"Accepting Microsoft's offer is a better option than going it alone, Icahn said. The board ``completely botched'' negotiations with Microsoft, prompting some Yahoo shareholders to ask Icahn to step in, he said."

Looks like investors agree, looking at this 6-month Yahoo-sourced chart of the same companies and information.

Yahoo's price shot up upon news of the Microsoft offer, then plunged when it was taken off the table recently. Major institutional shareholders were livid, and said so publicly.

The Bloomberg piece describes Icahn's slate of directors,

"Icahn's board nominees include Mark Cuban, owner of the Dallas Mavericks basketball team, and Frank Biondi Jr., former chief executive officer of Viacom Inc. Icahn said he has sought regulatory clearance to buy as much as $2.5 billion in Yahoo stock, about 6.7 percent of the company's outstanding shares as of April 30.

Icahn also nominated himself for Yahoo's board, along with Keith Meister, principal executive officer of Icahn Enterprises Inc. The other nominees are Lucian Bebchuk, a professor at Harvard Law School; John Chapple, the former CEO of Nextel Partners Inc.; Adam Dell, managing general partner of Impact Venture Partners; Edward Meyer, CEO of Ocean Road Advisors Inc.; Brian Posner, former CEO of ClearBridge Advisors LLC; and Robert Shaye, co-CEO of New Line Cinema. "

There have been a handful of articles discussing how Microsoft is still in the driver's seat, has the advantage, may still not want to risk the acquisition, etc. And there's probably some truth to all of that.

Carl Icahn can't unilaterally make this happen, as he has with some other recent deals, like BEA-Oracle, or the Blockbuster situation.

But it's fair to say that if there's even a scintilla of interest remaining on Microsoft's part, which would, admittedly, probably be bad for those shareholders, you can bet Icahn's going to revive that and get more for himself and his new fellow Yahoo shareholders.

More and more, Icahn is my kind of guy, in terms of having the money and tenacity to push for the shareholder returns he believes are reasonable, usually stopping short of Eddie Lampert's mistake of thinking he can actually run the company.

Should be an interesting time until the Yahoo annual meeting. With any luck, Yang, Yahoo's co-founder, will be kicked out, and Yahoo shareholders will recover some of the lost return for which the inept Yang is responsible.

Pickens Trumps Trump On Oil Economics

Yesterday morning, while busy writing and working, I listened to what is best described as an entertainment segment on CNBC's Squawkbox morning program.

In its continuing quest to demonstrate that they can call on any CEO anywhere, thus to better position themselves against Fox's nascent Business Channel, the program had Donald Trump on an extensive telephone interview. It was one of those fawning pieces, where the co-anchors gushed about The Donald, and Trump kept blathering about whatever came into his self-absorbed mind.

On the subject of oil, Trump castigated President Bush and anyone else involved in US government regarding oil, contending that we needed a team of seasoned, hardened negotiators to just, and this isn't a quote, but a paraphrase,

'go over to the Gulf and tell them these prices won't fly. And negotiate with OPEC to just lower prices.'

I can't recall if Trump included himself in the group of people he saw doing this, but he did name a few names. He continued on declaring that the country just had to stand up to OPEC and get the price of oil down. Period.

Trump went on to declare that the US is in a recession. Nevermind economic indicators. The Donald just knows, you know?

The Squawkbox co-anchors 'oohed' and 'aahhed' at how forceful and plain-spoken The Donald was, and how effective he'd be as a President, but could never be elected.

About ten minutes later, Boone Pickens was also on a telephone interview with the program's co-anchors. Pickens has a good, perhaps special, relationship with Becky Quick, whom he has taken with, at CNBC's expense, on a recent Chinese business trip.

When asked about oil prices and Trump's remarks, Pickens responded, again, this is a paraphrase,

'Yes, I heard Donald. And let me just say, I think he should probably stick to real estate. Because he doesn't understand how the oil business works. The Arabs have the oil, so they're going to dictate prices by how much oil they produce. That's just how it is, and no amount of talking is going to change that.'

I like Pickens a lot. While I may differ with some of his economic theories, as I did in this recent post, he clearly understands how the current oil market works. And he's committed himself, as he announced yesterday on CNBC, to actually building the beginnings of the vast wind farm about which he spoke in February.

Given a choice of whom to believe on the subject of oil prices, I'll take Pickens over Trump any day.

Whither Mark Hurd's HP?

Mark Hurd became CEO of HP just over three years ago, In that time, he has undeniably improved the operating performance of the firm, as well as its total returns.

When he took over HP, Hurd had to finish making sense of the mess left by Carly Fiorina's acquisition of Compaq. The logical comparison for the firm at the time was Dell, the major direct PC seller.

After running somewhat similarly on a total return basis since 2003, Hurd's arrival at HP coincided with, if it didn't actually affect, Dell's steady negative total return performance for most of the years since. On that comparative basis, HP has clearly pulled ahead of its major PC manufacturing competitor.

Now, Hurd is buying EDS. Allegedly, he is fashioning HP into a firm capable of going after the likes of IBM and Accenture.

The trouble is, in my view, what the performance of IBM and EDS already appear to be. The nearby, Yahoo-sourced five-year price performance chart of HP, Accenture, IBM, EDS, Dell and the S&P500 Index tells a very revealing story.

Over five years, IBM's stock price is just even with the S&P, while EDS has been flat, while Dell has lost ground. So, from a performance standpoint, Mark Hurd has already done a better job for his investors than has IBM for its shareholders. And Hurd has clearly outperformed the still-struggling Dell.

HP has even outperformed Accenture (in the interest of full disclosure, a firm for which I once worked, when it was still Andersen Consulting) over the past five years, and since Hurd assumed command of HP.

So my question is,

"What does Mark Hurd intend for the EDS acquisition to do for HP shareholders?"

He's already outperforming current and future comparable firms- Dell, IBM and Accenture. And he's planning to acquire a firm whose own total return performance has been dismal.

From a Schumpeterian dynamics view, HP is bound, at some point, to meet, rather than exceed, investor expectations, and see its total returns flatten out. It might even be that this would occur within a few years.

The question is, will it have a better chance continuing to focus on excellence in its major businesses, which now feature personal computers, or does it need to risk diluting its focus by building up/entering the IT consulting services business?

In terms of competitive position, HP would seem to be at least temporarily advantaged in its current businesses. Consumer computing and the evolution thereof is going to continue to make the market leader serious money going forward. Whether the PC and laptop morph into new devices, or just get more involved, better, etc., HP could still seek to dominate this market.

By buying EDS and turning HP's attention to the business of cutthroat, big-contract consulting services, Hurd may well stumble into a hornet's nest of unrealized difficulty.

I don't know for certain, of course. But few business expansions of this type work out as well as the architects hope.

Mark Hurd has done a tremendous job truly 'turning around' HP after Carly Fiorina. He's brought it to a fine edge of dominance in its product markets, and in terms of shareholder return.

My proprietary research has shown that, on average, a company can outperform the S&P500 consistently for less than a decade. Things happen that eventually hinder its consistent, ongoing excellent total return performance- limits to growth, competition, regulation, or simply investor expectations catching up with the reality of the firm's performance.

The nearby 30+ year view of these same companies' equity price performances demonstrates, perhaps surprisingly, that Dell is actually still the best performer, despite flattening out for most of this decade. IBM and EDS, both around for decades, and the former, for more than the last decade, heavily into computer services and consulting, have nearly identical pre-dividend returns, slightly below the S&P.

Even allow for the maturity of the PC industry, I can't help but look at Dell's long term performance and wonder if HP's Hurd isn't unwisely taking his eye off of the more attractive segment, and potentially committing HP to a grueling, ugly slugging match in a business where differentiation is difficult, customers can be troublesome, and engagement costs can run amok.

Then there will be the internal management attention drawn away from the now-dominant PC business. And probably issues of succession as EDS takes on more importance in HP's fortunes going forward.

Mark Hurd has distinguished himself both at HP and with his former employer. His acquisition of EDS probably marks the largest risk he will have taken. Perhaps within a few years we'll see whether it has cost HP any ground in its consumer computer business, and whether Hurd has been able to prove the exception to Schumpeterian forces in business.

More Bad News From The Trenches of Ken Lewis' Hapless BofA

Due to a seeming nearly-endless succession of mergers, the very small local bank at which I opened a DDA account years ago is now....BankAmerica.

Thus, I am now subject to the operational mishaps of one of the nation's three largest banks. To wit, I recently received a 'letter,' i.e., mass-mailed notice/apology, which begins thusly,

"Dear Valued Customer,

We have learned that some information from certain Bank of America Check Cards may have been compromised. your Check Card number may have been part of this compromise. To ensure that your privacy is protected to the best of our ability we have taken the following steps.

Please know that Bank of America is working hard to keep your financial information secure.

Sincerely,

Gordon Rains
Debit Card Services Executive"

I omitted the detailed middle of the letter, wherein instructions were provided for using the new card, reporting fraudulent use of the old card, and assuring me that BofA will be liable for all fraudulent charges due to their ineptitude. Except, of course, they didn't use that word. I did.

And notice their use of the word 'compromise.' Sounds innocent, doesn't it? Not 'loss,' 'theft,' or 'error.'

This letter is why I like to use what I call "Danforth's Rule." Years ago, a colleague of mine at Chase Manhattan Bank by that name first enunciated the principle thusly,

'Find the smallest bank in your town and open a DDA account there. Chances are, because they are small, they will treat your account, financial information and business much more carefully than the local branch of the largest bank in the area.'

This is why I strode into my town's branch of BofA yesterday morning. Looking for a platform officer, I waited more than ten minutes for one to manage to notice me and offer to help me.

I thereupon showed her the letter and asked for details of BofA's latest 'compromise.' She had no clue. The officer, one Ms. Gonzalez, had no idea to what event the letter referred.

I pointed out that, while I was not angry with her, it didn't look good that some national Debit Card executive down in Charlotte had flooded the bank's customers with this missive without bothering to give the local branches a 'heads up.'

Or coordinated with the branches, so that the letter, or a phone call, or any communication, would come from a local branch officer, rather than some unreachable, unknown name in some unmentioned location.

I explained to Ms. Gonzalez that this 'compromise' seemed, to me, to be a fairly serious breach of one of the most basic functions a bank undertakes- safeguarding my money.

What the letter meant, I went on, was that BofA had effectively left the door to the vault open one day, and let strangers wander in to take money. They promise they'll make good on any losses, but, still, you probably wouldn't want your assets safekept in a bank that lets strangers raid the bank vaults, would you?

Ms. Gonzalez agreed that this is a serious matter. I further noted that one of the smallest local banks around, of which I happened to have been a very satisfied customer years ago, had recently opened a branch in town. Did she want me to transfer my business there, or would she like to arrange a meeting between me, her and her branch manager?

She agreed to take my contact information, a copy of the letter(!), and respond to me with a time and date to meet.

For what it's worth, as I write this on Wednesday afternoon, that has not occurred.

Meanwhile, I read that last line in Mr. Rains' letter, and shake my head when I note that, having already released my DDA account information to strangers, now Ken Lewis' crack troops promise to do a better job, 'working hard to keep (my) financial information secure.'

Why do you suppose they chose not to work so hard before? Wasn't it worthwhile? Was it too expensive? Or just a nuisance?

Ken Lewis, BofA's CEO, has had a lot of challenges in the past year- buying a failing Countrywide Finance at probably too-high a price, experiencing serious capital markets losses, and, now, presiding over a consumer bank and IT function that can't even manage to properly execute one of banking's most fundamental functions- safekeeping customer deposits.

Not too impressive a job Ken's doing, is it?

Peleton's Fall From Grace

Monday's Wall Street Journal carried an in-depth description of the rise and fall of Ron Beller's Peloton Fund. It's very revealing as yet another story of a can't-miss idea put forth by impeccably-credentialed alumni of a top-flight Wall Street firm. In this case, Goldman Sachs.

The article opens by noting,


"In its sheer speed, Peloton's demise offers an illustration of the delicate relationships upon which the financial industry is built, and the breakneck pace at which they have been unraveling.

There is a widespread weakness in the hedge-fund business: Highflying managers sometimes fail to fully factor in broader risks, such as what happens when troubled banks pull back the borrowed money many funds need to make their investments. Peloton was particularly susceptible because it borrowed heavily to boost returns. For every dollar of client money, Peloton had borrowed at least another nine dollars to buy some bonds.

"If you run out of money, you can't stay in the game," notes Chris Jones of Key Asset Management Ltd., a hedge-fund management firm and early Peloton investor.

Mr. Beller, who personally lost about $60 million in investments, believes Peloton failed not because it made the wrong investments but because his bankers didn't stick with him when the prices of those investments were temporarily out of whack, according to people familiar with the fund. Among investors that lost money are New York investment firm BlackRock Inc., Swiss private bank Lombard Odier Darier Hentsch & Cie. and United Kingdom asset-management firm Man Group PLC."

So in just these few paragraphs, we learn some important facts about Peloton that are probably key reasons for its failure.

First, it was highly leveraged. Second, it would appear that Beller and his colleagues failed to realize how crucial the risk management culture and functions were at Goldman that were now lacking at their startup. Third, Beller is still angry at others, not himself, over the failure.

Failing to acknowledge what the term 'mark to market' means, he feels he should have been given more time and leeway to overcome the realities of borrowing short and holding complex, illiquid instruments long. Finally, some of the 'right' clients invested, which probably assured Beller and his partners that they were invincible.

Other elements in the article seem to point to Beller's lack of attention to detail, such as this one,

"His wife, fellow Goldman alumnus Jennifer Moses, is a policy adviser to U.K. Prime Minister Gordon Brown. In London, the Bellers were better known for the time a Goldman assistant stole more than £4 million, or $7.8 million at today's rates, from their account and that of another Goldman banker.

The episode became fodder for British media, which focused on the opulent lifestyle of expatriate U.S. bankers."

Would you feel comfortable letting someone who, himself, was bilked out of about $8MM by an underling, take responsibility for custody and management of your money?

Started in late 2005, Peloton used its Goldman connections to quickly attract seed investment from the lead partner's former employer, as well as necessary brokerage services. The Journal piece goes on to report,

"By that fall, Peloton's assets totaled $1 billion. Traders met weekly in what they called the "chill out" room, decorated in Moroccan-inspired red and orange colors and low-slung couches, at Peloton's London office. Mr. Grant joined by video link from Santa Barbara, Calif., where he had moved around the time of the fund's launch.

Mr. Beller's intense demeanor sometimes caused friction. He berated secretaries, and poor-performing traders kept quiet in meetings to avoid being humiliated by him, according to people familiar with the situation. Maxwell Trautman, a founding partner, quit in January 2006 after personality conflicts and differing views about strategy with Mr. Beller."

At this point, I briefly stopped reading and thought about some small company environments in which I've worked. The signs of brewing trouble seemed, to me, to be growing: one partner decamps to another country, now unavailable for in-person consultation; Beller's irritability and personality begin to cause problems among the staff; so much so that one of the founding partners quits only months after the launch.

By 2006, Peloton had moved into betting heavily on various mortgage-related securities. According to the article,

"Some investors weren't happy with the shift into mortgage securities. Several withdrew money, including Key Asset Management and Goldman's asset-management arm. In August, Goldman's prime-brokerage unit sharply increased the amount of collateral Peloton had to put up for short-term loans.

The move infuriated Mr. Beller, according to people familiar with the situation.

He berated some investors who decamped, questioning why they would forgo Peloton's gains, which by November 2007 had reached a stunning 87.6%, largely on the bearish housing bet. In late January, Peloton won two awards at a black-tie ceremony hosted by trade publication EuroHedge. Some attendees gasped when Peloton's returns were announced.

At the same time, the relationship between Messrs. Beller and Grant soured, according to people familiar with the situation. Mr. Beller increasingly took credit for the ABS Fund's success -- he accepted the January awards alone -- while the Multistrategy Fund was still struggling. The two discussed a potential split."

Now we have a portrait of the leading partner in denial as customers depart and yet another partner seeks to end his association with him. As the mortgage securities debacle deepened, the situation at Peloton also began to deteriorate,

"In mid-February, Messrs. Beller's and Grant's investments took a hit when Swiss bank UBS AG said it had marked down the value of highly rated mortgage securities similar to those that Peloton held.

Peloton had $750 million in cash and believed its funding from banks was secure. That provided a level of comfort to Messrs. Beller and Grant that Peloton could cover banker demands, known as margin calls, to put up more collateral as the value of its investments fell."

Shortly thereafter, another day's pressure on the instruments shrunk their value to levels that consumed the remaining cash Peloton had in margin calls, and still more collateral was required. The end of the fund came shortly thereafter.

The Journal piece concludes with Beller's rather glamorous version of how the fund finally died,

"The next day, lenders seized Peloton's assets, bringing a chaotic end to the fund. Mr. Beller later likened the situation to the final scene in Quentin Tarantino's movie "Reservoir Dogs," when several actors, guns trained on each other, simultaneously blow each other away."

It's as if Beller saw the entire Peloton enterprise as a gilded joyride in someone else's car, isn't it? He and his partners managed billions in assets, recklessly pyramided investors' capital with excessive amounts of borrowed money, and managed it all with inadequate risk controls.

In the end, it sounds like just another typical end to a too-young, too-brash, too-wealthy asset manager from a name investment bank.

Makes you wonder why firms like Blackrock and Goldman continue to trust these types of newly-minted hedge fund whiz kids, doesn't it?

On Pandit's New Plan at Citigroup

This past weekend's Wall Street Journal edition was full of information regarding Citigroup's CEO, Vikram Pandit, insistence that it will take years to fix the bank.


Sadly affirming the financial supermarket strategy first pioneered by James Robinson at American Express, then lifted by his capital markets hire, Sandy Weill, and ported to Travelers/Citibank, Pandit plans to take several years to get the overly-diverse financial conglomerate on the move in terms of shareholder returns.


Maybe Pandit's drinking whatever his chairman, Bob Rubin's been having, because it takes a lot of chutzpah for a CEO to tell shareholders,


"This will take time."

Apparently, rather than split the sprawling, hapless banking giant into reasonable pieces, such as institutional, consumer, and asset management, in its simplest description, Pandit intends to

"finally merge it all,"

to allegedly finish what Sandy Weill started back in 1998.

Do you know of any other sector in which the rationale for such a major merger is even still valid ten years later, without any changes?

It seems to me that Pandit is demanding, even challenging, his shareholders to stay put and wait a few years to see whether, untested as he is, the former finance professor can actually bring about profitable growth and consistently superior shareholder value at the financial utility.

If it were true that the bank were capable of being fixed to run, as is, intact, yielding consistently superior returns, but it would take some years, then I guess that's one alternative. But in the interim, shouldn't Pandit forgo any significant compensation, since he isn't planning on enriching his shareholders during the time period?

I'm thinking that he would be stripped of all deferred compensation, paid about $350K/year in cash, and, beginning in the year he forecasts improved, superior total returns, deferred stock grants could be paid to him.

If I were a shareholder, though, and heard Pandit's promise of years before a recovery of the bank, I'd just sell my shares and wait for some consistently superior total returns before plunging back in.

Heck, that's what my selection approach does anyway. I don't invest in 'turnarounds.' I only bet on superior operating businesses.

As I noted in this post, regarding GE, if shareholders dumped Citigroup stock now in droves, the price would plunge, actually making it easier for Pandit to earn superior returns in the near future. Provided he actually delivered the promised operating improvements.

Still, it's a pretty galling thing for Citigroup's shareholders to be told to just sit tight, as they have for, what, seven years? And maybe...maybe...this untried CEO will suddenly deliver some better returns than these poor souls could have been getting for the past seven years simply by selling Citi and buying the S&P500 Index.

Investing Options & The Folly of "Corporate Governance"

Thursday night's O'Reilly Factor featured a segment following up on matters at GE. Bill O'Reilly had, as a guest, an institutional investor who holds GE shares and attended the annual meeting in order to ask CEO Jeff Immelt some pointed questions.

During this segment, the audio of the investors was played as he finished asking questions of Immelt and received a reply, including Immelt's contention that the investor had now taken enough of everyone's time.

As I watched O'Reilly retrace some of the same ground he covered in his discussion with me last month, which can be seen in this post, I considered the irony of the situation.

Bill O'Reilly clearly wanted to cover the GE annual meeting and, if possible, capture an unhappy investor closely questioning Immelt, and then interview the investor. This makes sense.

But, then again, it sort of doesn't. Because, as I wrote in this recent post,

"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.

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."

It's one of those Holmesian cases of the dog that did not bark. Only, in this case, it's the investor who was absent.

The investor who was sanguine and realistic enough to have already sold and moved onto better investment opportunities.

So, while I appreciate Bill O'Reilly's desire to deliver good television by interviewing a disgruntled institutional shareholder, I also see that it is very much beside the point.

Further, the institutional fund manager then mumbled something about hoping that the board or shareholders would eventually move Immelt and GE to act in some way that would improve the value of the stock.

I like Bill O'Reilly and I fully understand his reason for covering the GE story on his new program. As I mentioned in this earlier post, he had a trifecta on this topic,

"However, from reading my blog, one of the program's producers, and O'Reilly, further realized that Immelt has continued GE's involvement in Iranian projects while shareholders have lost money, due to GE's dismal total return performance. Meanwhile, as I noted in yesterday's post, and prior, linked posts, Immelt has been wildly overpaid for destroying so many hundreds of millions of dollars of GE shareholder value since he took over the CEO spot from Jack Welch in September, 2001."

How much better can a news story be? A well-known US company, GE, continues to do business which supports the building of the infrastructure of a country, Iran, which is actively engaged in killing American servicemen in Iraq, while the company's total returns languish and the CEO is paid over $120MM since assuming the job in 2001.

But the investment angle of the story, as represented by Mr. O'Reilly's institutional manager/guest last night, now focuses on the wrong point.

The wonderful thing about our American economic system and environment is that you don't have to own GE! Or any other underperforming asset!

There are thousands of investing options available to both institutional and retail investors alike.

Rather than wait, like those poor souls anticipating Godot's arrival, for the seemingly-always-coming 'corporate governance' solution, investors are better off to just sell what they don't like and buy something else.

Look at Ed Lampert. He got fed up with Sears and decided to improve it. When Lampert surfaced last week, he was full of excuses about how Sears' continuing dismal performance is the economy's fault, and he was sure, in time, when that was doing better, so, too, would his newest headache.

Do you think Ed Lampert now wishes he'd avoided the Sears mess and just stuck with conventional hedge fund investing, instead of crossing the line into operating management of his holdings?

Honestly, the more I watch and listen to people hectoring company CEOs and their boards to 'improve governance,' the more I am convinced you should just vote your shares in the market by selling them.

After all, modern American corporations were devised mainly for the companies to attract capital, not in order to provide investors with additional instruments which would also allow them maximal voices in the operation of the firms seeking capital from the investing public.

If our modern publicly-held corporate model were so highly-evolved and optimal, why would private equity firms exist?

Isn't this the non-barking dog? Private equity?

Obviously some investors are sufficiently trusting of private equity managers such that they hand over large sums of money with less apparent influence on management than they would have in a publicly-listed firm.

Doesn't this suggest that there are more good investment opportunities than there are good CEOs and boards? That it's easier to sell your shares in a company which has potentially good positions, but bad management, and find a better pairing of business opportunity and management?

I thought about this on Friday, when I read a piece in the Wall Street Journal concerning Vikram Pandit's impending moves, or lack thereof, with the bloated, overly-complex and -diversified Citigroup. Rather than hope the inexperienced and untested CEO manages to pull a rabbit out of his hat at Citigroup, why not just sell the stock and buy equity in a company that is better-positioned in its sector, with better, proven management?

There are so many opportunities for investment in the American economy that there's simply no reason to hold onto a problematic equity and either hope, yet again, that this year will bring change for the better, or, worse, lobby for 'management change' or 'board action.'

It probably makes more sense to trust the senior management and board of the firm in which you invest to do a great job with the assets under their control than to invest in a company which you think could, or wish would, do better than it has with the company's assets, and then try to change the management and/or board's behavior.

I'm not Bill O'Reilly, nor one of his producers. So I don't know as much about what makes good television as he and his record-audience-producing staff do. But if it were me? The guest I'd have had on his GE-related segment Thursday night would have been someone who sold GE on or before last month's disappointing announcement of the firm's quarterly profits.

Why did he sell? How long had he waited? What did he buy with the proceeds of his GE equity sale?

That's an investor I'd find interesting and credible.

Some Remarks From A Longtime GE Employee

Last weekend I received an email from a reader who is also a longtime GE employee. The email landed in my spam folder and went unread for a few days.

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.

Reader Email Regarding GE & O'Reilly

A few days ago, I received this email from a viewer of the segment on Bill O'Reilly's Fox News program on which I appeared last month.

It Seems Many Do Not Agree with You-see Times Article
From: Art Effron (email withheld for privacy reasons)
To: CNeul@aol.com
Date:Sun, 4 May 2008 9:47 pm

THIS E-MAIL WAS SENT TO BILL O'REILLY TODAY
Bill-
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
accomplishments).

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.

-CN

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.

Microsoft Drops Its Pursuit of Yahoo

By now, you've probably read an armload of articles about Steve Ballmer's retraction of Microsoft's offer to buy Yahoo.

As I wrote in this post,

"Not that I'm a Microsoft shareholder. It hasn't been in my equity portfolio for nearly a decade.

But Ballmer made some sense in that he has acknowledged his own firm's risk in integrating Yahoo. Citing internal reasons for not increasing Microsoft's bid for Yahoo, the CEO gave shareholders some reason for sanity in the looming hostile phase of the firm's quest for the ailing internet portal player.

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."

How ironic, as I told my partner, that Jerry Yang wasn't paid for the value he saved Microsoft's shareholders with his obstinacy. Who knows how much Microsoft shareholder value would have been destroyed as Ballmer and his team tried to integrate Yahoo's mediocre platforms and organizations with its own?

Instead, Yang is now justifiably in hot water with his own shareholders for screwing them out of a nice exit premium, as portrayed in the nearby Yahoo-sourced price chart for the firm, Microsoft and the S&P500 Index over the past six months.

Yahoo's price, depicted by the blue curve, soared on Microsoft's offer, but has now declined from its post-offer high.

Microsoft has steadily declined over the period, except for a brief pop a few weeks ago, when the rumors swirled that it might not pursue the deal. But even that rise has since evaporated.

So we are left where we started- two internet also-rans unable to prosper alone, or together. And Google having sagely played a gambit to poison the acquisition, without actually spending any significant money to do so, as it courted Yahoo with potential liason.

The Wall Street Journal published an editorial this week by Andy Kessler concerning the aborted acquisition. In the piece, Kessler argued that the internet is still wide open, and Microsoft has plenty of smart people and money with which it can push into new areas of success.

As I've written in prior posts about Microsoft, I think this is both unlikely and wrong. Microsoft's era as a firm which earn consistently superior total returns for its shareholders is over. It's time to split the company into several pieces- probably online, operating systems, desktop applications, and gaming. Each piece will likely have very disparate futures after being cast off from the smothering influence of the corporate umbrella.

It's not only unlikely that a Microsoft which remains substantially what it is today will return to consistently superior total return performance. Retaining its cash hoard to spend on new initiatives, in my opinion, is unfair and constitutes improper fiduciary behavior on the part of Microsoft's board and senior management.

Its time in the sun is past. Better to dividend the cash to shareholders, split the firm up into its logical pieces, and toast a once-great software technology icon.

Distrust, Hedge Funds & Citigroup

It's been a rough month for Citigroup's asset management groups.


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.

Buffett's Undeserved Adulation

This past weekend provided Warren Buffett with his usual platform to expound to tens of thousands of investors and the business media. CNBC now sends Becky Quick, Buffett's personal favorite media representative, out to Omaha for the entire weekend and her unparalleled access to the billionaire.

Call me jaded, but I've finally had enough of Buffett. The accompanying Yahoo-sourced charts demonstrate part of the reason.

The first chart illustrates how, for the five years ending last May, Berkshire barely outperformed the S&P, but had been about even only six months prior, and was dead even in early 2006. As the chart shows, Berkshire effectively performed no better than the S&P from January 2005 until mid-2006.

Berkshire only exceeded the index by as much as 20 percentage points of return briefly during the entire five year period.

Updating the chart for the latest year, it looks even more, well, mediocre. Berkshire only rose to significant outperformance of the index in the last six months, and even that ebbed a bit by early this year.

By the way, since Berkshire pays no dividends, the slope of the curve, and differences of returns between dates for Berkshire are total returns.

For all of the adulation over Buffett's performance, I just don't see it for the past six years.

Then this quote from Buffett on Saturday appeared in the Wall Street Journal,

"Anyone who expects us to come close to replicating the past should sell their stock. It's not gonna happen," he said, "You may have something better to do with your money than buy Berkshire."

Now, that sure is an interesting statement coming from Buffett. A guy who is lauded on CNBC as some sort of modern-day Midas. The "Oracle of Omaha."

What's he saying, that his shareholders should just settle for even less than the usually-average total returns he's been giving them for the past six years? Because unless you are a market timer of extraordinary skill, you've mostly gotten a return from Buffett's management that is very close, for most of the years, to the S&P.

Berkshire had $44.3B in cash on its balance sheet as of its latest quarterly filing. The yearly cash thrown off by the businesses in its portfolio is $12-13B.

Should Buffett be dividending that cash hoard to shareholders? Maybe he's unable to deliver consistently superior returns to his shareholders going forward because he's keeping too many assets under management.

I never have completely understood the manner in which the business media and investors view Buffett and/or Berkshire, a sentiment which I expressed in this post from last December.

For example, if he's an investor, then Buffett's investments aren't coming through to shareholders as total returns that handily beat the market. However, if he's a corporate CEO, then Buffett's management results are, again, nothing to write home about on a consistent basis as one of many potential commercial enterprises in which people can invest.

My business partner joked when I articulated this conundrum, saying,

"Buffett...he's a wave, no, now he's a particle."

Funny, but actually on point. Is Buffett the portfolio manager of a very large, actively-managed, closed-end portfolio? Rather like, well, GE?

Or is Buffett just another conglomerate CEO?

Either way, I still just don't see the evidence that Buffett has rewarded his investors for most of this decade with superior total returns.

Bob Rubin Gives "Chutzpah" A New Meaning

My partner sent me an article from the NY Times on April 27th, entitled "Where Was The Wise Man?"


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.'