Holman Jenkins On Detroit's Federally-Mandated Failure

Holman Jenkins wrote an interesting piece in Wednesday's Wall Street Journal. In it, he contended that Washington's latest sop to the auto industry, in the form of $25B in loans, isn't the start of Federal intervention in the industry. It's more like nearing the end.

Among the more salient points Jenkins makes are,

"The talk is of synergies and cost-cutting, of tapping new lodes of cash to ride out the storm. Don't believe it. These negotiations are about one thing: creating a political last stand of American auto making that a Democratic Congress and president won't be able to resist bailing out.

All parties to the Chrysler talks have adopted Election Day as a deadline, the better to trap both presidential campaigns into committing to support a deal. But it also slipped out that iconic Ford had been GM's first choice of partner -- a prospect that could yet be resurrected now that superinvestor Kirk Kerkorian has withdrawn his vote of confidence in Ford's survival.

Congress has already agreed to provide the Big Three with $25 billion in loans to help with a shift to green cars -- likely to become plain survival cash in the event. And Congress's very nature requires throwing good money after bad, specifically financing a GM-Chrysler merger if Michigan Sen. Carl Levin has his way. Don't be surprised if President-elect Obama is dropping hints in two weeks that this also would be a good use of the $125 billion Washington just injected into J.P. Morgan, Citigroup and friends. The government could even end up owning a car company directly before it's over, as the U.K. government once owned British Leyland.

Banking in fact illustrates what might be called the GM Effect, for both industries have been around long enough to have accrued an almost incalculable baggage of government intervention, which explains why more intervention is demanded today.

Why don't the auto makers limit themselves to paying competitive wages and benefits in line with what workers could earn elsewhere? Because, in the 1930s, Congress passed the Wagner Act with the nearly explicit purpose of imposing a labor monopoly on Detroit to keep wages at higher-than-competitive levels.

Why doesn't Detroit rationalize its musty brand lineups and dealer networks? Because, in the 1950s, legislatures across the country imposed franchising laws, including the federal "dealer day-in-court clause," to make such rationalization prohibitively expensive.

Why don't the auto giants do as Whirlpool and other manufacturers have done, and move their production to cheaper offshore locales? Because, in the 1970s, Congress enacted fuel economy rules to penalize homegrown auto makers if they don't build the lion's share of their cars in high-wage, UAW-staffed domestic factories.

No, Detroit's troubles don't arise because its executives are morons. Look today at the desirable, fuel-efficient cars that GM and Ford sell in large numbers in Europe. Does anybody imagine the U.S. public derives any benefit from keeping these cars out of our country? Yet they are kept out to preserve the amour propre of the regulators who enforce our emissions and safety standards, however trivially different from Europe's standards.

Cerberus, stars in its eyes, perhaps didn't quite understand all this about the auto industry when it bought Chrysler thinking it would be free to make business-like decisions. Now it does.

Any rescue mounted today in Washington won't be so much a "rescue" as a final admission that the industry can no longer bear its regulatory burdens without direct subsidies. Any life supports GM, Ford and Chrysler are hooked up to now, for that reason, will have to be permanent."

Throughout my 3+ years of writing this blog, I have spared no sympathy for the US auto makers. My judgment has been that they've been incompetent.

Now, Jenkins offers a different view. And, to be truthful, I give him credit for making the points he has made.

Somehow, though, I don't think that means management is blameless. Rather, I view them as having decided to become willing accomplices, rather than vigorously fight and expose what was slowly done to them, law by law.

If anything, this demonstrates why real executive talent, rather than more of the usual bean-counting variety, e.g., Rick Wagoner, was required to give shareholders any chance at all of not being wiped out in bankruptcy, or, frozen into permanent government partnership.

In our mixed economy, sooner or later, every large employer has to either fend off Washington and/or unions, or proactively trudge to Washington and maneuver to set its own terms of competition before Congress and competitors, unions, or somebody else does it for them.

I just think the auto executives didn't work sufficiently hard to make it clear under what sort of restrictive regulatory burdens they have been forced to labor. If they had, either a governmental solution would have developed earlier, before so much shareholder value was destroyed, or perhaps they could have received dispensation from many of those ill-considered laws that so affected their ability to profitably operate in the US for these past decades.

Greenspan's Shocking Admission In Today's Congressional Testimony

This morning's business news featured live feeds of former Fed Chairman Alan Greenspan defending himself during testimony before a House Banking committee.


Although video of this historic moment is not yet on YouTube, I'd bet it is by tomorrow morning.


In a stunning series of remarks, Greenspan alleged surprise that individual, self-interested players in the financial markets did not have an explicit sense of, and desire to maintain, the overall health of those markets as they knowingly engaged in risky activities, e.g., securitizing subprime and Alt-A mortgages.


To cap off his inane comments, Greenspan defended his beliefs and inaction by claiming that his 40+ year "ideology" regarding capital markets turned out to be wrong.


According to Alan, his correctly-functioning model of how markets worked went wrong in the past few years, so it's not his fault.


Moreover, in earlier remarks this morning, he asserted that he believed the operating models of various financial markets competitors were correct, but they just used 'bad data,' and, when replaced with proper data, would result in appropriate decisions and actions regarding risks.


I will be the first one to say that anyone, especially a Fed Chairman, who believes that individual players in financial markets ever look out for the system, or the 'other guy,' is an idiot.


If any sector requires careful and effective regulation, it is our financial sector. My own recommendations for reforming the current financial mess, written on September 23rd of this year, featured three prescriptions for stiffer regulations concerning leverage, exchange-based trading, and retention of securities on an underwriter's balance sheet. Only one recommendation involved loosening a current regulation, and that was to reverse Congress' misguided mandate for all firms to strictly adhere to a narrow usage of 'mark-to-market' pricing of assets, while overlooking the real value inherent in a performing, if untraded security.

Nobody who has been involved with actual banking, securities or the markets can possibly believe they need no regulation, or that any player gives a hoot about systemic issues. That is always 'someone else's' problem.

Thus my posts regarding greed and stupidity, here and here.

Here's a good example.

Back in 1990, I ran a small internal consulting group at Chase Manhattan Bank. It was also given the task of commercializing the tools we used internally. With the forced retirement of my mentor and SVP of Corporate Planning & Development, I reported to the bank's CFO.

As such, I was included in a lunch for all the CFO's direct reports in late 1990 to discuss the brewing commercial real estate problems at the bank.

What I heard was shocking. The CFO wondered aloud if we could have afforded not to compete for all these soured loans, at the height of the lending frenzy. He was fixated on revenues and market share, and seemed genuinely ignorant of the looming large chargeoffs from the excessive lending.

Later, I learned from some colleagues working directly for the CFO that when a post-mortem on the Real Estate Finance division was conducted, many loan documentation folders were literally either empty, or contained a few mostly-blank pieces of paper.

The minimum necessary paperwork for review and approval by loan committees and internal credit audit functions was nonexistent.

Nobody could explain this violation and failure of basic internal bank lending practices. But we all knew why it had happened. Bonuses for the senior management and loan officers of the unit were huge for the last two years of the lending boom.

Nobody gave them back. The bank bore the losses, while the former employees walked off with millions of dollars of 'performance' bonuses.

It's simply human behavior. Salespeople and managers will maximize that behavior which pays them the most money. They will short-circuit, corrupt or remove any checks and balances they can which interfere with that profit-maximizing behavior.

To assume otherwise, either at the business-unit level, corporation level, or among players in banking and financial markets, is to be naive and stupid.

Celebrity Investors: Kerkorian vs. Buffett

Kirk Kerkorian made major headlines yesterday and today by announcing the reduction of his stake in Ford Motor Company.

According to most stories, the seasoned investor has lost about 70% of the value of his Ford position, or roughly $690 million on a $1B investment earlier this year.

Kerkorian's Tracinda Corporation, his investment vehicle, is privately held, so we can't really know his, or its performance over the decades during which he has been a prominent investor. He's been at it for quite some time, though. I vividly recall a problem in a graduate accounting course which featured an article detailing Kerkorian's transformation of MGM into his personal money machine. He ended up controlling the company's voting shares in such a way that he could use it as an ATM, declaring a dividend payable largely to himself, at will.

The other celebrity investor who comes to mind, of course, is Warren Buffett. Buffett works through the publicly-held Berkshire Hathaway, and maintains a high profile. He has made himself the darling of the CNBC set, publicly jumping on the Obama bandwagon, and no doubt enjoyed being mentioned by both candidates in a debate earlier this fall.

Nearby is a 5-year price chart for Berkshire and the S&P500 Index. It's easy to see that, despite all Buffett's publicity, you'd have been better off, on a risk-adjusted basis, owning the S&P for most of the past five years. Since 2003 market the onset of the most recent period of an up market for equities, this chart tells you that Buffett, no matter what he might have once done, is no longer a serious outperformer in healthy equity markets.

The accompanying 2-year view of the same series gives a closer look at the split, whereupon Berkshire parted company with the index and began to outperform it.

When the very beginning of the current financial crisis began to be noticeable, in August of last year, Berkshire rose, while the S&P flattened, then, of course, began to significantly slide in the spring of this year.

Looking at just the past six months, in this chart, we see that, even recently, Berkshire tracked the index almost perfectly until the carnage in September. In fact, in the brief period of a 'false positive' in May, Berkshire actually underperformed the index.

My point is that, on evidence of the past five years, Buffett's Berkshire is hardly the paragon of investing prowess that so many believe when referring to him as the "Oracle of Omaha."

Even in recent months, his bets have been focused on lending money, at very high interest rates, to better-quality US firms, e.g., Goldman Sachs and GE. It's a bit galling to hear Buffett mentioned in Congressional hearings by our elected representatives as if he's some sort of investment deity, when, in fact, his record is actually so inconsistent, or, at best, usually mediocre.

Because Tracinda leaves no long term footprints, it's impossible to show a comparative chart of Buffett's and Kerkorian's performance. But I can't help suspecting that Kerkorian has a better, more consistent track record over time.

Call it my innate scepticism, but I'm leery of Buffett's obvious use of his own public image as the best investor on the planet to draw attention away from his firm's actual performance, versus the market, over time.

Ironically, I'm more impressed with the entire Kerkorian saga of investing in the auto sector. I wrote about it, and Buffett's Mars-Wrigley investment, in this post, back in May of this year.

While Kerkorian didn't realize his objectives with his Ford stake, you cannot criticize him for a lack of appetite for risk. A Wall Street Journal article attributed some of Kerkorian's motivation for selling his Ford stake to the recent departures of the CFO and a board member, raising the specter of increased control by the Ford family.

Whatever the reasons, I sense, in Kerkorian's shunning of the public spotlight, a more hard-nosed, focused approach to finding opportunities for investing. I wish we all knew more about his investment performance over the years.

It would be a fascinating comparison.

Bernanke On Yet Another Pointless Congressional "Stimulus" Package

Did you see Fed Chairman Ben Bernanke's testimony on Capitol Hill yesterday?

An editorial in today's Wall Street Journal characterized it as Ben's application for another term as Fed Chair.

I'm referring, of course, to his fawning and eager agreement that Congress should pass another multi-hundred billion dollar 'stimulus' package.

Surely Bernanke doesn't think we saw any lasting effects of the last stimulus, does he? Other than increasing a deficit with which Congressional Democrats have tarred President Bush for years, it didn't make any difference.

Am I the only person left who believes that only permanent tax rate cuts have a quick and lasting effect on economic behavior?

Or, having passed a $700B 'urgent' TARP bill that has been dwarfed by the Treasury buying equity in our nation's banks, has Congress simply decided it no longer matters what deficits we create by paying citizens to spend now?

This just makes no sense whatsoever. It seems that any sense of self-reliance in our country has vanished.

Must Bankers Always Be Stupid and Overly Opportunistic?

I wrote a post about a month focusing on how regulation won't ever prevent stupidity and excessive opportunism, from running amok in business- even financial services.

This came to mind because of a discussion I had with my business partner and several acquaintances on Saturday morning. We are all involved in some facet of the financial sector, and were discussing the origins of the current crisis, and what would eventually resolve it.

One salient topic was the 'too big to fail' nature of US commercial banks. My acquaintances felt that had to somehow be remedied by the spread of banking assets among other organizations. I, to the contrary, felt that technology has made banking concentration inevitable, as I wrote here, recently,

"With technology and market concentration of banking, we have probably crossed an important Rubicon years ago. Ben Bernanke's answer to a question at yesterday's lunch at the Economic Club of New York, where he spoke, did not, to me, seem to acknowledge the obvious.

At this point, I think Bernanke would do well to accept that the speed with which financial markets can process data and trade, and, thus, the degree to which they have relied on large investments in information technology systems and software have been a significant factor in the concentration of financial assets in just a handful of large US banks.

This will not change now. So, yes, I believe, contrary to Bernanke's assertion, that each of those banks into which Treasury has invested some of its initial $250B is, indeed, 'too big to fail.'"

Perhaps the scariest moment of the conversation on Saturday, however, was when we discussed bank lending officer stupidity in making mortgage loans based on marginal borrower capacities to repay or, worse, no data.

How, I asked, are we to prevent future systemic problems like we are now experiencing, if bankers are too stupid to know what kind of loan to deny?

My colleagues alleged that, if a given banker said "no," another one at the next bank would simply say "yes."

Thus, my argument, which I then voiced, for Federal regulation of core bank lending so heavy as to put the sector on the equivalent of thorazine. They laughed, but then they actually agreed.

You have to ask yourself, how can we ever design and operate a 'safe' banking system if we have to constantly worry that misguided, stupid bank CEOs will push for growth in a sector in which that always means taking excessive risks?

I think it is by clamping down on core, insured and quasi-government-owned banks with inflexible guidelines for loan qualifications.

More Debate On Glass-Steagall

This past weekend's Wall Street Journal published an editorial by Charles W. Calomiris, a Columbia Business School professor, entitled, "Most Pundits Are Wrong About the Bubble."

In his piece, Calomiris contends,

"As for the evils of deregulation, exactly which measures are they referring to? Financial deregulation for the past three decades consisted of the removal of deposit interest-rate ceilings, the relaxation of branching powers, and allowing commercial banks to enter underwriting and insurance and other financial activities. Wasn't the ability for commercial and investment banks to merge (the result of the 1999 Gramm-Leach-Bliley Act, which repealed part of the 1933 Glass-Steagall Act) a major stabilizer to the financial system this past year? Indeed, it allowed Bear Stearns and Merrill Lynch to be acquired by J.P. Morgan Chase and Bank of America, and allowed Goldman Sachs and Morgan Stanley to convert to bank holding companies to help shore up their positions during the mid-September bear runs on their stocks."

I disagree. Calomiris' retroactive judgment of the repeal of Glass-Steagall suggests that, even if it was a mistake, its absence let the mess which developed in its absence be cleaned up in a manner which would not have been quite so neat without its absence.

Sound like circular reasoning to you? Me, too.

No, as I wrote here in March of this year, the true effects of Glass-Steagall's repeal were slower to observe. But Gerry Weiss, my boss and one-time SVP and Chief Planning Officer of Chase Manhattan Bank for David Rockefeller, noted this in the 1980s. As I wrote in that post,

"My long-ago mentor at Chase Manhattan Bank, then-SVP of Corporate Planning & Development, Gerry Weiss, was fond of saying, when asked about working to remove Glass-Steagall, something like,

'Are you kidding? We'll just find some new ways to lose a lot of money on badly risk-managed positions. Not to mention that, being commercial bankers, once we get into these businesses- M&A, underwriting, equity trading- we'll cut prices to gain share and ruin the business' profitability for all concerned.'

Judging by the behavior of Citigroup and BofA in last summer's CDO, SIV and other fixed income messes, I'd say he was right on the money, as it were, as usual.

Commercial banks appear to be no better off in terms of profitability, risk management or total return after the repeal of Glass-Steagall."

It was this effect of the repeal of Glass-Steagall on the commercial banks, not the investment banks, which began the slide into our current mess.

In fact, to illustrate that investment and commercial banks were misbehaving, and losing money, with respect to mortgages long before our current financial crisis, consider what happened with Norwest Bank's large mortgage business, in conjunction with Salomon Brothers, back in the 1980s.

Norwest ran a huge mortgage lending and securitization pipeline, or 'conduit.' The latter was known as "RFC," for Residential Funding Corporation. Norwest owned RFC, but Salomon distributed the resulting securities because, at the time, it was illegal for Norwest to do the securities underwriting itself.

As such, Salomon enjoyed a sweet margin on the securitization, with no asset risk on the pipeline. But it was largely understood throughout the industry that RFC was structured and operated with guidance from Salomon.

At some point, RFC mishedged its enormous inventory of mortgages, and doubled up on an interest rate bet, rather than hedged it. Subsequent losses sank Norwest as an independent bank, while Salomon managed to scoop up RFC for a pittance.

Calomiris goes on to contend,

"Even more to the point, subprime lending, securitization and dealing in swaps were all activities that banks and other financial institutions have had the ability to engage in all along. There is no connection between any of these and deregulation. On the contrary, it was the ever-growing Basel Committee rules for measuring bank risk and allocating capital to absorb that risk (just try reading the Basel standards if you don't believe me) that failed miserably. The Basel rules outsourced the measurement of risk to ratings agencies or to the modelers within the banks themselves. Incentives were not properly aligned, as those that measured risk profited from underestimating it and earned large fees for doing so."

Once again, I disagree with his contention regarding the effect of deregulation on various activities.

Why do you suppose, prior to the repeal of Glass-Steagall, no investment banks engaged in buying and operating mortgage underwriting banks? Or creating large, highly-leveraged mutual funds investing in mortgage-backed securities?

Again, I point to Weiss' prescience on the consequences of removing that regulatory barrier. The subsequent thinning of investment bank profit margins led to these non-deposit funded companies boosting leverage to previously-unheard-of levels, in an attempt to maintain profit margins and growth.

Ironically, the lenders of this highly-leveraged money were.....commercial bank broker-dealer desks!

So Calomiris is wrong to suggest that all of what has transpired since the repeal could or would have happened anyway.

Structurally, investment banks could always do what commercial banks did, except for having access to the Fed window and offering DDA accounts. The repeal of Glass-Steagall drove the weaker-capitalized players, i.e., investment banks, to take more risks.

Calomiris ends with the contention,

"The single most important reform that is needed is the restoration of discipline in the measurement of risk within the banking system."

He's probably correct in this sentiment. The problem, of course, is how to define, measure and calibrate 'risk' in such a broad context.

Particularly when so much of the time, 'risk' can morph from, say, instrument to counterparty risk in the blink of an eye.

We're a long, long way from being able to rely on risk measurement on the panacea to solve our financial market problems.

Anna Schwartz' Thoughts On The Current Financial Crisis

The weekend Wall Street Journal carried two interesting editorials regarding economics and banking.

The first was a thought-provoking interview with Anna Schwartz, co-author of "A Monetary History of the United States," with the late Milton Friedman.

In the half-page piece, Schwartz, now 92 years old, maintained that current Fed chairman Bernanke is 'fighting the last war,' against illiquidity, when today's problem is counterparty risk and market valuation uncertainty.

What's troubling to me is these passages,

"Ms. Schwartz won't say so, but this is the dirty little secret that led Secretary Paulson to shift from buying bank assets to recapitalizing them directly, as the Treasury did this week. But in doing so, he's shifted from trying to save the banking system to trying to save banks. These are not, Ms. Schwartz argues, the same thing. In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. "They should not be recapitalizing firms that should be shut down."

Rather, "firms that made wrong decisions should fail," she says bluntly. "You shouldn't rescue them. And once that's established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich." The trouble is, "that's not the way the world has been going in recent years."
Instead, we've been hearing for most of the past year about "systemic risk" -- the notion that allowing one firm to fail will cause a cascade that will take down otherwise healthy companies in its wake.

Ms. Schwartz doesn't buy it. "It's very easy when you're a market participant," she notes with a smile, "to claim that you shouldn't shut down a firm that's in really bad straits because everybody else who has lent to it will be injured. Well, if they lent to a firm that they knew was pretty rocky, that's their responsibility. And if they have to be denied repayment of their loans, well, they wished it on themselves. The [government] doesn't have to save them, just as it didn't save the stockholders and the employees of Bear Stearns. Why should they be worried about the creditors? Creditors are no more worthy of being rescued than ordinary people, who are really innocent of what's been going on."

It takes real guts to let a large, powerful institution go down. But the alternative -- the current credit freeze -- is worse, Ms. Schwartz argues.

"I think if you have some principles and know what you're doing, the market responds. They see that you have some structure to your actions, that it isn't just ad hoc -- you'll do this today but you'll do something different tomorrow. And the market respects people in supervisory positions who seem to be on top of what's going on. So I think if you're tough about firms that have invested unwisely, the market won't blame you. They'll say, 'Well, yeah, it's your fault. You did this. Nobody else told you to do it. Why should we be saving you at this point if you're stuck with assets you can't sell and liabilities you can't pay off?'" But when the authorities finally got around to letting Lehman Brothers fail, it had saved so many others already that the markets didn't know how to react. Instead of looking principled, the authorities looked erratic and inconstant."

Ms. Schwartz provides a clear counterpoint to the effective message given to investors and banking executives in the past year. That is, rather than consistent, understandable, principled action, Bernanke, Paulson & Bair have seemingly lurched from crisis to crisis.

Viewing the past 15 months in the financial markets from Schwartz's perspective, we should have seen, beginning with the failure of the two Bear Stearns highly-leveraged mutual funds, a concerted, consistent philosophy in action by the Fed, Treasury, FDIC and SEC.

If that philosophy were to let imprudent institutions fail, and this were clearly articulated in advance, maybe counterparty would have remained at levels of early last year. Or, maybe the explicit promise to let institutions fail would have sparked the recent credit freeze-up 15 months ago.

While I personally share Ms. Schwartz's belief that moral hazard has to remain a credible force in financial markets, our current, consolidated banking sector, with its 3-4 super-sized institutions, might not sustain a strict expression of her preferred philosophy.

I do believe, however, that, back in July of last year, the modification- and I stress that word, rather than 'suspension'- of 'mark-to-market' valuation rules would have avoided at least $150B of asset evaporation among securities which were not all non-performing.

But that wasn't done. And Ms. Schwartz's conjecture about Paulson not realizing that buying distressed CDOs at market values would destroy bank capital is truly frightening. Surely this was not a mystery. I even wrote about it in this post, nearly a month ago.

The interview ends with this passage,

"But perhaps this is actually Mr. Bernanke's biggest problem. Today's crisis isn't a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war. The result, she argues, has been failure. "I don't see that they've achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job." "

It leaves me thinking that Schwartz is right, even if we don't know precisely how her recommendations would have had an impact on the financial markets.

If mark-to-market were modified, but regulators warned of forced closures of insolvent institutions, would this not have provided for the avoidance of needless destruction of value in performing, but untradeable, securities, while also providing a less-capricious process for treating troubled institutions?

Perhaps there would have been a quicker consolidation of overly-leveraged investment banks with commercial banks, while weaker commercial banks would have merged before the regulators closed them.

As Schwartz theorizes, the remaining fewer, stronger institutions might have resulted in the avoidance of a credit freeze, as only healthy institutions remained, with performing assets so valued.

Further, her approach would have required no draconian actions last summer or fall, when the lack of drastic market behaviors would have failed to support a public understanding of a need for radical action.

On this basis, her judgment of the Fed's performance might, indeed, be correct.

Immelt's GE Continues To Struggle

Having recently talked with some friends who read this blog, I am now aware that there are readers who consider some of my posts to be 'rants.' Such as this recent one about Jamie Dimon's wrong-headedness regarding the current, strict application of a narrowly-specified 'mark-to-market' accounting rule.

It's safe to say that my attitude toward CEOs and other grandees tends to be, well, sceptical.

Perhaps because I've met enough of them in my career to know that the bulk of them did not rise due to merit. Or maybe it was due to my boss at Chase Manhattan Bank, Gerry Weiss, making sure that colleagues of mine, and I, had lots of exposure to senior bank executives, the better to learn just how mediocre most of them were.

In any case, I'm not especially reverent to just anyone who heads a large company, but a CEO who can consistently outperform the market's total return usually gets positive remarks from me. In contrast, a CEO who can't usually gets negative remarks.

Thus, I'm not particularly impressed with the current CEOs of Chase or Citigroup. Both Dimon and Pandit seem to have lucked into their positions, rather than earned them via long and consistently superior management of some other business or company. Neither is the sort of CEO I'd prefer to be at the helm of one of the largest US commercial banks during this time of extreme stress in that sector.

Today, I touch, again, upon a similar, frequent topic on my blog: GE's hapless, inept CEO, Jeff Immelt.

This time, following on my last post about him and his company less than a month ago, once again, GE's financial business exposure has cost its shareholders plenty.

As I wrote last month,

"Suffice to say, though, that if GE didn't have its huge financial unit, it would not have experienced such a severe recent decline in its stock price and, its total return."


Sadly, judging by the nearby, 5-day price chart for GE and the S&P500 Index, it's true all over again.

In only five days, GE's stock price dropped almost 10%, while the index held steady. It seems that continuing troubles in the financial services sector have exposed all of GE, due to its needlessly-diversified structure, directly to the consequences of the current credit market woes.

Looking at the last 12 months of price performance, as depicted by the second chart, GE has lost about half of its value, while the S&P managed to drop by a lesser amount, 40%.

As I've written frequently in prior posts, if Immelt had broken up GE sometime during his futile, value-destroying 6+ year reign, most of GE's businesses would not have been tarred so heavily with the financial sector brush.

Good job, Jeff.

Once again, your stodgy, 'play it safe' mentality has seriously hurt your shareholders.

How much more of this will it take before GE shareholders push the company's board to oust this underperforming CEO?

Cramer On US Sovereign Investing

Leave it to Jim Cramer to accuse the US of sovereign investing, but get it wrong. And further claim it was his idea first. Then nearly break his arm patting himself on the back about it.


All yesterday morning, CNBC played clips of the grinning, bald former hedge fund maven claiming that he had personally first come up with the idea of the US Treasury investing in several commercial banks, so to restore investor, depositor and borrower confidence in them.

Cramer then pronounced this concept 'US sovereign fund investing.'

Sorry, Jim. You evidently don't understand the concept of sovereign investing.

The idea is typically for a wealthy country to organize a fund, by which they invest in businesses of another country. Hopefully, for long term profits.

Treasury's mandatory investment in nine large US commercial banks, and, subsequently, many smaller ones, is to provide stabilizing capital, against which the banks are supposed to write off or sell questionably-valued CDOs or loans.

The primary object of the investments is to provide capital which nobody else stands ready to invest. Whether taxpayers will profit, beyond the rate of interest paid on the preferred, is anybody's guess.

But conventional sovereign investing, it isn't.

Maybe you should read up on how foreign governments actually operate their sovereign wealth funds, Jim. I don't think they use them to avoid the dissolution of their own banking systems.

Oil Price Drop Is But A Footnote In The News

Who would have thought that when oil finally dropped below $70/bbl, it wouldn't be headline news?

It's a testament to the suddenness and depth of the current financial market crisis, and its wider economic effects, that plunging commodity prices have become a footnote in today's business news.

As we listen to the usual stream of economists and economist-wannabes forecasting a US recession for the umpteenth time in twelve months, it's worth noting something I heard on CNBC this morning.

One guest observed that $150/bbl oil didn't actually bring on a US recession last year. We may be in a recession by year's end, but, on current data, we are not.

With oil now below half the price of that which had most economists screaming that recession was 'already here,' etc., should we continue to expect a looming, deep US recession?

It takes little imagination to understand that when most Americans have seen a 30% drop in the value of their net worth which is invested in equities, and some have also seen the value of their home drop significantly, they will feel poorer. And as such, they will likely spend less until they don't feel they are getting even poorer, still.

Nobody actually knows how long or deep a recession into which we may have finally just entered will be.

There are still differences of opinion as to whether inflation will now be muted. Some say it will, due to commodity price declines and the rapid evaporation of trillions of dollars of asset values. Who would have guessed that a tonic for recent commodity price spikes would be the sudden loss of global dollars by the simple fact of equity values dropping like a stone last month and so far in this one?

It's a strange new world, indeed, with such rapidly-moving and overwhelming economic and financial forces at work.

With all the comparisons of our current economic situation to that of the US in 1929-1940, especially by one novice Presidential candidate, you might be tempted to expect a "lost decade" of economic growth in the US.

However, that's unlikely. In fact, I could, and would, argue that the same forces of technology and information which propagated such a sudden, huge impact on financial markets and worldwide economies will also work in reverse.

It's not 1929 anymore. Governments operate with more financial and economic information. So, too, do investors. Flows of capital, trade, etc., all move at the speed of electrons. The linkages of data, expectations and consequential actions are all much tighter and faster 80 years on.

If anything, any coming recession is likely to be milder and shorter than the average expectations of both economists and US citizens.

Current Market Volatility

Among the readers of my blog, I found that yesterday someone had come from this blog post, written in February of this year. Nevermind the novice level of the author's investing. What caught my eye was his view of my partner's and my development of a market volatility measure for use with options. He wrote, in part,

"I find C Neul’s description of how they found a new indicator of the market direction kind of suspect, in the way that one retrofits and backtests ideas against a particular sample to use as a new indicator of future direction. Then again, I’m not a fan of any kind of technical analysis, which this clearly is. But the surety of how he describes this measure (”standard deviation of daily total returns of the index”) as a way to make predictions about future moves is what I find least appealing — for a “skeptic”, he sure seems pleased with the new measure, that happens to fit his specific sample. Still kind of amazed that professionals do this, but I suppose if everyone took my stance the shell game would fall apart."

I learned quite a few years ago that any successful equity portfolio management process has to have some link to the market. If portfolio management is done in isolation, it inevitably leads to buying and holding equities when there is simply no way to earn positive total returns. Sometimes for periods as long as two or more years.

To avoid emotionally-based decisions, some sort of 'technical' indicator is a good idea.

In our case, we determined that our equity risk management tools were insufficiently sensitive for use with equity options.

Thus, we chose to develop new tools.

The nearby chart displays the recent levels of the trailing standard deviation of daily S&P returns, which we have found to be extremely powerful in predicting certain market conditions of interest to us, as we manage equity derivatives portfolios.

The measure aptly captures the meteoric rise in S&P volatility just since Labor Day. Note, if you will, that we developed the measure in February. Since then, it has continued to capture volatility and work in conjunction with our other risk measure.

So, contrary to the other blogger's contentions, it has worked ex poste, as well as ex ante.

Seeking historical context, I applied our measure to the S&P500 from 1950 to the present in additional research conducted just last month. That nearby chart shows that the crash of 1987 was even more volatile than our current market situation- so far.

Extending the analysis back to 1928, via the Dow Jones Industrial Average, I found that the market volatility for that crash exceeded even that of 1987.

All of which is to state that the current equity market volatility is the third-highest in 80 years.

For our equity derivatives portfolios, that means a change in allocation. Having the historical perspective of this measure since 1928, we were able to calibrate absolute levels of the measure which correspond to allocation decisions for our derivatives strategy.

Further, we have historically-based expectations of how long the current period of extreme volatility is likely to last.

Buckle up for an extended ride.

Designing Banking & Finance Systems for Real Human Behavior

With this week's nationalization of US commercial banks, via Treasury's purchase of $250B of preferred equity in a collection of the country's largest publicly-held financial institutions, we have the occasion of a radical redesign in our banking and finance sector.

Rather than do this willy-nilly, would it not be more sensible to articulate a blueprint for how banking and finance will, going forward, be organized and regulated so as not to allow a repetition of the last few years' harmful practices?

I outlined some thoughts on this topic in this recent post. In that post, my remarks were geared toward the design of a safe, nationalized core banking sector in the US.

There is a concept that I have only heard John Bogle, founder of the Vanguard Group, espouse. Within it are the seeds of both the recent financial markets crisis and its solution.

Bogle has observed that, to use my words, because I don't have his exact quote,

'Banking and finance cannot, in aggregate, over time, grow faster than the economy of which they are a part. Banking doesn't provide sustained, increasing added value over time beyond the growth rate of the economy.'

When (dumb) banking executives, and/or politicians, attempt to grow parts of the financial sector too fast, risk is typically assumed out of prior or reasonable proportions.

Further, that risk is almost always underpriced. Especially because when the risk begins to rise, it rises so far and so fast that almost no prior pricing could have anticipated it, and, if it had, it would have been prohibitively expensive.

Why not redesign the core banking sector to be that part of our nation's finance which is to remain ultra-safe, with little or no risk taken, and no excess profitability, due to risk, allowed.

With technology and market concentration of banking, we have probably crossed an important Rubicon years ago. Ben Bernanke's answer to a question at yesterday's lunch at the Economic Club of New York, where he spoke, did not, to me, seem to acknowledge the obvious.

Last November, I wrote this post upon seeing a CNBC interview with perpetual doomsayer and former Salomon Brothers economist, Henry Kaufman, on his 80th birthday. In that post, I referenced this post, written two weeks earlier. In it, I contended,

"As recently as 1996, when I was Research Director for then-independent financial services consultant Oliver, Wyman & Co., which is now the financial consulting division of Mercer Management Consulting, there were five independent credit card issuers (First Card, MBNA, Advanta, and two others whose names now elude me), a number of mutual fund companies, and several mortgage banks (Countrywide & Golden West, to name two), and retail discount brokers (Schwab, Quick & Reilly).

In the decade since, commercial banks, contrary to accepted financial theory that an investor can diversify his/her own holdings better than a company can do it for him/her, sought these types of businesses to attenuate variation in their reported earnings, as well as pursue the mythical 'cross sell' opportunity amongst various retail businesses.

The results have not been impressive, as I noted in this post two months ago.

The price that US consumers have paid for financial services innovation and cost reductions over the past five decades has been the concentration of many financial services into fewer, larger entities, which concentration has increased risks to the banking and credit system.

Failures such as First Pennsylvania Bank, Continental Bank, SeaFirst, and numerous banks weakened by loan losses, which were acquired during the 1980s and '90s, such as BofA, Shawmut, First Interstate, and a clutch of Texas energy-lending dependent banks, provide examples.

So, in conclusion, I'm not at all certain that Kaufman's warnings are even correct. Most of our financial system's largest failures have been committed by non-diversified banks or financial services companies.

In fact, one of the few benefits, besides technological innovation, that recent consolidation affords is larger capital bases with which to absorb the effects of mistakes.

Looking back over nearly 50 years of US financial system innovation and evolution, I think one could fairly say that the benefits we have enjoyed have far outweighed the realized risks that have accompanied such changes."

At this point, I think Bernanke would do well to accept that the speed with which financial markets can process data and trade, and, thus, the degree to which they have relied on large investments in information technology systems and software have been a significant factor in the concentration of financial assets in just a handful of large US banks.

This will not change now. So, yes, I believe, contrary to Bernanke's assertion, that each of those banks into which Treasury has invested some of its initial $250B is, indeed, 'too big to fail.'

Thus, the point of the title of this post, by combining historical trends in banking with John Bogle's observation.

Real human behavior is for CEOs of publicly-held companies to seek growth. Growth in revenues, profits, assets, market value and total returns to shareholders.

When banking and finance companies do this, they tend, in the aggregate, to increase systemic risk, if they succeed in growing faster than the long run growth rate of our economy.

What happens next is what has occurred in our financial system since Congress passed the CRA and pushed Fannie and Freddie to pass through subprime mortgages lent to low-income homeowners.

One way to remedy this is to take the largest portion of the sector, i.e., core banking functions, and nationalize the heck out of it with both choking regulation and government (societal) ownership.

These are the key elements of our money and banking system which, in aggregate, are, indeed, 'too important- and big- to fail.'

The remainder of the finance sector- loan companies, investment banks, hedge and mutual fund companies, etc., may still exist. And will, on balance, be too small to have their failures threaten the entire US banking and financial system.

But our current financial situation begs us to observe and acknowledge the obvious. Banking behavior as usual will only return us, eventually, to this same point.

So let's reimpose Glass-Steagall, de facto. And nationalize the ownership of our large, core banks and banking functions. Finally, regulate those nationalized banking functions to not lose money, but to provide strictly-followed lending guidelines to provide credit to the credit worthy.

Anything less only invites further abuse of risk-taking in banking and finance sometime down the road. It happened in 1929, but was avoided by decent, if not perfect, regulation, until the late 1990s, when it happened again.

Without meaningful, serious separation of core banking from risk-taking finance, we'll get there again- eventually.

The US Banking System: Flawed Past, Nationalized Perfect Future?

John Steele Gordon wrote a wonderful little historical piece, entitled "A Short Banking History of the United States," in last Friday's edition of the Wall Street Journal. It's subtitle was, "Why our system is prone to panics."

Among his observations on the post-Civil War financial sector are these,

"Unfortunately state banks did not disappear, but proliferated as never before. By 1920, there were almost 30,000 banks in the U.S., more than the rest of the world put together. Overwhelmingly they were small, "unitary" banks with capital under $1 million. As each of these unitary banks was tied to a local economy, if that economy went south, the bank often failed. As depression began to spread through American agriculture in the 1920s, bank failures averaged over 550 a year. With the Great Depression, a tsunami of bank failures threatened the collapse of the system.

The reorganization of the Federal Reserve and the creation of the Federal Deposit Insurance Corporation hugely reduced the number of bank failures and mostly ended bank runs. But there remained thousands of banks, along with thousands of savings and loan associations, mutual savings banks, and trust companies. While these were all banks, taking deposits and making loans, they were regulated, often at cross purposes, by different authorities. The Comptroller of the Currency, the Federal Reserve, the FDIC, the FSLIC, the SEC, the banking regulators of the states, and numerous other agencies all had jurisdiction over aspects of the American banking system.

The system was stable in the prosperous postwar years, but when inflation took off in the late 1960s, it began to break down. S&Ls, small and local but with disproportionate political influence, should have been forced to merge or liquidate when they could not compete in the new financial environment. Instead Congress made a series of quick fixes that made disaster inevitable.

In the 1990s interstate banking was finally allowed, creating nationwide banks of unprecedented size.

While it will be painful, the present crisis will at least provide another opportunity to give this country, finally, a unified banking system of large, diversified, well-capitalized banking institutions that are under the control of a unified and coherent regulatory system free of undue political influence."

Steele makes two very important points about the US banking system that many people fail to grasp.

First, he notes its historically-rooted structure of many small banks, in contrast to the rest of the world.

As recently as last night, I was discussing the evolving current nationalization of the US banking sector with friends at my fitness club. In one conversation, with an erstwhile 20-year Merrill Lynch veteran, I contended that a rapid, near-total consolidation of core US banking functions- deposit-taking, credit card and mortgage lending, trust, transactions processing and DDA accounts- would be the best thing for this nation's long-term financial health and stability.

Why? Because, as my brilliant former boss, and SVP of Corporate Planning & Development at Chase Manhattan Bank, used to explain,

'Few executives are prepared and equipped to run an entire company, let alone the diverse types of businesses which are part and parcel of a money center bank. We (at Chase) are stuck with, for the most part, ex-lending officers and accounting functionaries, promoted beyond their level of expertise.'

He was right, as I explained in this recent post. And this one, from October of last year.

So we see, courtesy of Mr. Steele's concise historical lesson, that the US relied on the existence of thousands of capable, experienced, seasoned bank CEOs to operate our core banking system.

Unfortunately, we haven't even managed to get those qualities in our average money center bank CEO. How in hell would you have expected, in the past, or expect in the future, this situation to radically change?

It won't.

As long as most of our country's banking assets and business volumes are scattered among even hundreds of banks, with private, risk-taking management, our country will be susceptible to the same financial panics as befell us in 1929 and, again, this year.

Simply put, you cannot have a system dependent upon an illusive, nearly non-existent resource: the well-informed, experienced, competent bank CEO. There simply are not sufficient, qualified business people available to staff each of hundreds of US banks. So allowing that many banks to exist is to invite the next financial panic, courtesy of thousands of bad credit and investment decisions on the part of hundreds of inept, boneheaded, mediocre small- and medium-sized bank CEOs.

Far better to so rigorously nationalize core banking via draconian regulation of allowable businesses, lending standards, etc., and government ownership of preferred shares, as to reduce this sector to a barely-disguised government-guaranteed conduit for safekeeping savings and making consumer mortgage and revolver loans.

Steele's second point involves his articulation of a hoped-for future US banking sector that is well-capitalized, with diversified, large money center banks under coherent, apolitical regulation.

I agree with him on all but the diversification issue. Yes, there is the broad range of businesses inherent in a Glass-Steagall era money center bank- deposits, credit cards, mortgages, installment loans, trust, cash management and transaction processing. But not: brokerage, securities underwriting, proprietary trading, corporate financial advisory.

Further, each of the classical Glass-Steagall era bank functions can be largely reduced to automated, pre-determined, quantitative standards with little or no room for subjective judgment.

To achieve a truly safe, well-regulated US core banking system, I believe you need the following:

-Most US banking assets in a few ultra-large financial utilities: Chase, Wells Fargo, BofA, perhaps Citigroup.

-Heavy regulation which removes any and all risk-sourced profits from the core banking sector.

-Federal government guarantee of all core banking businesses, i.e., deposits, credit card balances, mortgage balances, trust accounts. In short, by forcible, draconian regulation of lending and deposit-investment practices, the government will be able to insure all banking activity, because it will all be reduced to ultra-safe, near-riskless levels.

-All financial instruments which are allowed to be traded will be mandated to be done so via regulated exchanges. As such, counterparty risk, collateral and settlement will be explicitly and transparently managed, to reduce risk of ripple-effects from one counterparty's failure.

-Certain financial instruments would be prohibited, such as the securitization of any collection of underlying assets. Exchange-traded assets of all types would obviate the need for such 'asset backed' securities, when any investor could freely shop an exchange to buy credit card or mortgage assets for diversification purposes.

What's left will be the traditional province of private finance companies, investment banks, private equity shops and fund management companies.

Credit-risk expertise, asset management skill and other uniquely-held financial-service-related skills will be freely marketed in the private sector, either with 100% equity capitalization, or leveraged with private capital.

That's a financial sector in which you could place trust. Core banking functions would be safe, heavily-regulated and totally guaranteed by society, i.e., our government. Riskier financial functions would be totally firewalled from core banking and well-capitalized. Trading of financial instruments would be safely confined to exchanges.

Some Observations On The Current Financial Market Crisis

There is so much one could write about the events of the last week in our financial markets. And, no doubt, in weeks to come, I'll touch on many of them, in retrospect.

This morning, however, I have a collection of reflections I'd like to convey.

The first is my reaction to an article discussing the MUFJ rescue of Morgan Stanley. In this morning's Wall Street Journal, there is a long piece purporting to describe how, now that it has linked itself to MUFJ, Morgan Stanley and it's embattled CEO, John Mack, can go about 'repairing' its financials and 'righting' itself.

C'mon, who are they kidding?

Mack mismanaged the one-time investment bank, now newly-minted commercial bank, into near-oblivion. If Morgan Stanley had been perceived by regulators as the same sort of buccaneers as Lehman, with an equally-dislike able CEO as Fuld, and as narrow a range of businesses, it, too, might already be out of business.

Is it too much to ask people to realize that, despite the fresh capital, the same boneheads are in place at Morgan Stanley? The gang that brought them to the brink of insolvency are now recharged with more billions to squander.

No, I'm not arguing that we tank the international financial system to punish Mack and his mismanagement team.

Rather, let's not all lose perspective with respect to the firm. A large, slow-moving, capital heavy foreign bank has rescued the brand franchise of a once-storied American investment bank. It would be surprising if Morgan Stanley doesn't meet the same fate as its erstwhile competitor, First Boston Corporation, now merely a fragment of CSFB.

The fact is, what were, some twenty years ago, fast-moving, lightly-capitalized underwriters, M&A advisers and corporate financial advisers, with smallish, client-oriented trading operations, became unsustainably-leveraged, thinly-veiled publicly-owned hedge funds.

Don't expect what is left of Morgan Stanley to be anything to write home about when it comes to future performance.

Now to my other thought for this morning.

Roughly 90 minutes ago, President Bush announced the expected headline measures that the US government will take, via the Fed, Treasury and FDIC, to join its European G8 and G20 allies in insuring inter-bank lending, business DDA balances, and forcibly taking non-voting, temporary equity positions in major banks.

Both Bush and his Treasury Secretary, Hank Paulson, emphasized how distasteful it is to them, personally, and, they believe, to most Americans for the government to be owning shares of otherwise-publicly-held companies.

It ostensibly flies in the face of our brand of free enterprise capitalism and free market ideology.

But, before we all visit a Jesuit retreat, self-flagellate, and wear hair shirts, let's remember how we got to this point.

Our financial markets are in the shape they are in because of government intervention and mandates on the free market.

We began nationalizing the financial sector when we created Fannie Mae and Freddie Mac. These institutions implemented Congress' force-feeding of capital markets with low-income borrower, low-quality residential mortgages. As time passed, Congress continually set the goal for securitized low-quality mortgages ever higher. As high as 50% of the GSE's pass-through volumes!

Then we have the CRA. Government mandated commercial banks to lend to poor credit risks for low-income housing. Again, we, through our government, already screwed around with our financial system.

We allowed our government to override private credit risk controls.

This isn't Act One of the nationalization of our financial system.

In reality, it's Act Two: The Cleanup.

What will Act Three be? Exit? Or 'fascism?' And I mean fascism, technically defined.

In any case, before we all moan and groan about this new nationalization of banking by a Republican administration, let's be honest.

Congress and two Presidents- Clinton and Bush- pushed our financial sector to make badly-considered loans for homes to people who were too poor to afford them.

That was the nationalization of our financial system.

Despite what many believe, 'Wall Street greed' simply fed into the system that the government had already set in motion.

Past Time To Close GM and/or Ford, Chrysler

The current financial markets panic has hit America's two remaining publicly-held auto makers hard.

Seen nearby are Yahoo-sourced price charts for Ford, GM and the S&P500 Index. The first chart covers 1977-present, while the second chart displays the last three months' performances.

My first predictions of a major sale/failure in the automobile sector were in this post and this post, exactly three years ago this month.

In the first post, I wrote,

"Judging from where GM and Ford appear to be putting much of their energies these days, I’d say we’re going to be shy at least one major US-based car manufacturer before the decade is out. It may involve a merger among onshore rivals, if Congress is afraid to let so many UAW workers lose their jobs at once through a total financial failure of GM or Ford. But I'm willing to bet there will be one less automotive CEO in Detroit when 2010 dawns."

I took credit for calling the Chrysler private equity acquisition with that post.

In the second post, I wrote,

"Lest you think that Lee Iacocca’s Chrysler experience demonstrates that a Big 3 automaker can save itself, let me remind you that it ultimately was acquired by Daimler-Benz. Iacocca didn’t save Chrysler, he merely delayed its day of reckoning by a decade or so.

I continue to believe that GM cannot save itself because its current leaders, beginning with Rick Waggoner, are products of the existing culture of 40+ years. It is not capable of creating lasting, profitable change for the long term, within two years, in how it designs, builds and markets vehicles. It may be acquired, or “merge,” to avoid an actual bankruptcy. But I still maintain that it will not be independent within two to three years from now."

This time, however, with the Wall Street Journal and CNBC reporting on hush-hush merger talks between GM and Ford, then Chrysler, my fuller vision is quite likely to be realized.

As the accompanying chart of some 30 years of performance illustrates, Ford and GM, the only two US car makers for which we have uninterrupted equity price series, both began a long, slow slide around 1999.

With this financial crisis nearly cutting off all auto purchase financing, it's quite likely curtains for at least one of these firms. Over the period, GM has actually lost net value, while Ford has managed maybe a doubling of share price, unadjusted for considerable inflation. The S&P has returned in excess of 1000%.

S&P has put both companies on credit watch, suggesting they are in danger of bankruptcy. Since they are consuming $1B in cash per month, and financing of even good credits is expensive and more difficult now than only a few months ago, investors should understandably wonder if both Ford and GM can survive as independent, solvent firms.

In a discussion with a friend and former senior executive of AT&T and other firms, as well as a former board member of at least one large technology firm, we agreed that both companies probably cannot, and should not, survive.

We both saw the horrific excess capacity in the sector. When I suggested that what should occur is that the profitable, growing models in both companies' product lines should be sold to healthier auto firms, and the remainder of the companies liquidated, he concurred.

We both felt that economic aid should be given to displaced workers, but not the companies themselves.

Let's face it. For at least three years, all three firms- GM, Ford and the once-independent Chrysler- have been living on borrowed time.

How much better for their shareholders would it have been for each of them to pursue a sale of profitable operations, and the closure of ailing ones, at least three years ago?

As it is, Ford and GM have lost half their value since June. How much more would investors have been spared if reality were to have been faced much earlier?

At what point is a board at least civilly liable for continuing to operate a publicly-held company that simply has no reasonable hope of consistently-profitable operations in the future? Especially when it was so obvious that the sector had- and has- excess capacity, and that Ford and GM were the high-cost producers with the worst designs of the lot?

It's high time that the salvageable parts of Ford and GM were sold to an auto company which can afford to run them, while the rest of the operations are closed while there is a small amount of shareholder value remaining. Or, if none is, they won't be so large a drain on American taxpayers and the firms' creditors.

Jamie Dimon's Stupid Remarks on "Mark to Market"

I worked for the Chase Manhattan Bank in the late 1980s. During that time, while reporting to the company's chief planning officer, I was fortunate to be exposed to all the Vice-Chairmen, COOs, CEOs and Chairmen of the firm.

Thus, I had close contact with then-Chairman Bill Butcher and President Tom Labrecque. Particularly the latter, as a long-running project necessitated periodic contact with him over several years.

Between my personal interactions with the senior managers of the bank, and its performance during the period, I would say that these were not particularly effective managers. Nor, outside of their original respective areas of competence, did they give any evidence of being smart about managing a large company, let alone a bank.

Butcher had been a corporate lending officer. A salesman. He had no particular expertise in management.

Labrecque had been an accountant at the bank. Apparently judged unsuitable for credit training, he was never a line lending officer, but, rather, a bean counter in a then-obscure funding unit engaged in trading Treasuries. His rise had much to do with some accidents which left positions above him unexpectedly open. And the rise of importance of his unit, as Fed Chairman Paul Volcker took the lid off of interest rates during the Carter era.

My point is, just because a person is the CEO or Chairman of Chase (Manhattan) Bank, or its successor banks, is absolutely no reason, alone, to accord him credibility beyond his actual, original area of business training or practice. Neither Butcher, nor Labrecque were, in the event, smart men when it came to operating one of the nation's largest money center banks.

The nearby chart shows the equity prices of Chase, Citigroup, from where Dimon and his mentor, Sandy Weill, hailed, and the S&P500 Index since 1977.

In that time, neither bank has managed to outperform the index. So much for vaunted wisdom from the CEOs of these two financial giants. Why would you expect brilliance from CEOs of companies that can't manage to outperform the broad index over 30 years?

Especially Chase, which has never outperformed the index?

After many mergers and acquisitions involving more than half of the major banks which existed on the island of Manhattan in 1990, and several in the Midwest, we come to Chase's current CEO, Jamie Dimon. The latest in a line of undistinguished CEOs of the large US money center bank.

There's nothing to indicate he's any smarter than his predecessors, Butcher and Labrecque, or even the undistinguished, though workmanlike head of the Chemical Bank which took over Chase, Walter Shipley.

On Friday, I heard a news story on CNBC alleging that Jamie had come out explicitly in favor of 'mark to market' as a valuation methodology.

Many have claimed this approach, mandated, in its simplest sense, by the Sarbanes-Oxley bill, in a fit of post-Enron pique, is largely responsible for the rapid evaporation of value from the balance sheets of US financial institutions in the past 15 months. In various posts on this blog, I have argued as much, too.

Let's recall from whence Jamie hails, professionally. As I wrote in this post, nearly a year ago,

"If you are familiar with Dimon's mentor, Sandy Weill's origins, then none of this should surprise you. Weill was the original low-cost consolidator of the brokerage industry wire houses in the 1970s and '80s. He was never an investment banker. Rather, his specialty was combining commodity-like retail brokers, combining back offices, sometimes improving technology, and reaping the improved margins. Eventually, he ran out of wire houses to buy and consolidate, so he sold out to American Express.

By the time he was ousted from Citigroup, Weill had demonstrated that he had learned no new tricks since he lost control of ShearsonLehmanBrothers to Amex. Citi's topsy-turvy growth and increased complexity resulted in serious lapses in risk management and attention to business details. Significant growth was not something Citi achieved, sans acquisition, under Weill.

Personally, I doubt that Dimon knows much that he did not learn from Weill. His signal achievement since being tossed out of Citigroup consisted of giving BancOne the "Weill treatment." It is not yet clear he's done anything more at Chase, nor that he is capable of more, either."

Lofty current title notwithstanding, Dimon is, in reality, little more than a fixer's fixer. Sandy Weill's erstwhile young bagman/apprentice.

I believe no credibility whatsoever should be accorded Dimon's pronouncements about anything beyond Chase's next quarter's performance, if that.

He's no leading light of finance, much less business in general. There is absolutely nothing in Dimon's background to suggest or give evidence that he is capable of uttering any sensible words on the concept of valuation and 'mark to market' rules thereof.