Throw The Bums Out

by hilzoy

In a sign that the End Times are upon us, I actually agree with a WSJ Opinion column:

"Another Sunday night, another ad hoc bank rescue rooted in no discernible principle. U.S. taxpayers, who invested $25 billion in Citigroup last month, will now pour in another $20 billion in exchange for preferred shares paying an 8% dividend. (...)

What is missing is a statement that at least some American bankers still have the freedom to fail, an essential ingredient if we hope to restore functioning capital markets. Not a single one of Citigroup's senior managers and directors will be let go as a condition of taxpayer assistance that now totals close to $350 billion. (...)

"Citi never sleeps," says the bank's advertising slogan. But its directors apparently do. While CEO Vikram Pandit can argue that many of Citi's problems were created before he arrived in 2007, most board members have no such excuse. Former Treasury Secretary Robert Rubin has served on the Citi board for a decade. For much of that time he was chairman of the executive committee, collecting tens of millions to massage the Beltway crowd, though apparently not for asking tough questions about risk management.

The writers at the Deal Journal blog remind us of one particularly egregious massaging, when Mr. Rubin tried to use political muscle to prop up Enron, a valued Citi client. Mr. Rubin asked a Treasury official to lean on credit-rating agencies to maintain a more positive rating than Enron deserved. What signal will President-elect Barack Obama send if his Administration, populated with Mr. Rubin's protégés, allows this uberfixer to continue flying hither and yon on the corporate jet while taxpayers foot the bill?

Chairman Sir Win Bischoff has held senior positions at Citi since 2000. Six other directors have served for more than 10 years -- including former CIA Director John Deutch, Time Warner Chairman Richard Parsons, foundation executive Franklin Thomas, former AT&T CEO C. Michael Armstrong, Alcoa Chairman Alain Belda, and former Chevron Chairman Kenneth Derr.

When taxpayers are being asked to provide the equivalent of $1,000 each in guarantees on Citi's dubious investments, how can these men possibly say they deserve to remain on the board?"

I have no idea. The same goes for a lot of senior management. If some particular division of Citi has done well over the past few years, I can see letting the management of that division stay on. But the people who either ran Citi into the ground or were asleep at the wheel need to go. That should be the condition of a bailout: if you turn out to need public assistance, you lose your job. No golden parachutes either.

As I've said before: we absolutely need to make sure that the people who run these banks do not conclude from our unwillingness to let them take down the entire financial system that it's OK to run these risks. The best way I can think of to do that is to make sure that they, personally, pay.

I don't think I'm saying this out of vengeance. At least, I'm trying not to. I just do not want a system in which private individuals get the rewards of excessive risk-taking and taxpayers pay the price when it all goes wrong; and I do not know how else to avoid one.

Comments

[Daniel Merritt]

Agreed. We can at least mitigate the moral hazard of providing bailouts if we force the personnel, particularly management, and stockholders to pay some sort of consequence for the failure. You can't just let them keep the benefits private while socializing the risks via government bailouts.

[mtraven]

And what's wrong with vengeance? Really, these people deserve to be hung from the lampposts of Wall Street.

The actuarial value of a life is what, 2 million dollars tops? So the penalty for losing a billion dollars of other people's money should be to get killed 500 times over.

[ThatLeftTurnInABQ]

This is the tip of an iceberg. Corporate governance is a scandal and not just in finance but all over. To a considerable extent large publicly traded companies are no longer run for the benefit of shareholders - they are run almost entirely for the benefit of upper management and an interlocking web of mutual interests represented by board members.

This is possible because there is little in the way of shareholder oversight over the decisions made by management and boards. In many cases the "owners" of these companies have no way to engage in oversight even if they had the time and inclination to do so, because they own shares thru mutual funds or other indirect vehicles which obscure exactly which companies the investor is part owner of.

Cloaked behind this veil of ignorance, C-level officers and compliant boards are free to do as they wish, up to and including looting the company for their own personal benefit. It is no accident that the origin of many of the things which have gone wrong on Wall St. can be traced back to the era when the big firms first went public.

Our system of corporate ownership is far too opaque, and this problem will not go away easily.

[Hartmut]

Capital punishment for the management! Let's call it the bailoff! ;-)
Or draft them and let them defend the capitals of Afghanistan.

[BDWB]

It's been amazing to see publications like the Economist turn backflips to avoid just this conclusion over the past few months. Apparently, if any limits are placed on executive pay or anyone is terminated over this, everyone in these companies with neurological function above the "breathing unaided" level will quit in a huff to work for hedge funds.

Leaving aside the improbability of that, the question is usually not even brought up for the sake of dismissing it as to whether or not that would be a good thing.

[TJ]

I just do not want a system in which private individuals get the rewards of excessive risk-taking and taxpayers pay the price when it all goes wrong; and I do not know how else to avoid one.

Historically, the remedy would seem to involve guillotines and firing squads. Or at a minimum, pitchforks and torches.

[russell]

The requirement for getting federal money should be no bonuses, followed by review of management performance and firings where appropriate.

This has nothing to do with revenge. It's a matter of getting good value for dollar invested. Any private firm injecting the kind of money we're being asked to inject would make exactly the same kinds of requirements.

As always, I'm with TLTIABQ. Professional corporate managers have been treating publicly traded companies like their personal piggy bank for years.

The companies do not belong to them, and the money generated by the companies does not belong to them. Every million dollars they grant themselves is a million bucks sucked out of the productive economy.

The C-level folks have become a parasitic class. Many of them are lovely people, and I'm not calling for their heads on a pike. But they take far, far more than they give.

They do not create enough value to, remotely, justify the amount of money they take out of the economy. Not even close.

That has to end. We can't afford it. We can't afford them.

Thanks -

[hairshirthedonist]

Has there been any criticism of Robert Rubin's being on Obama's transition team on ObWi? I don't read every comment on every post, so I may have missed it, and, if so, I'd appreciate being pointed in the right direction. It seems like something I should have seen already. Not to copy russell (not that that would be a bad thing), but "Thanks."

[hairshirthedonist]

And am I the only one who reflexively wants to call him Rick Rubin?

[Mr Duncan]

Actually, Rubin is somewhat responsible for leading Citi into a world of heavy risk-taking. To say he was asleep at the switch implies that there was a switch, and that he had any plan to flip it. In fact, he was making sure that switch never flipped.

[hilzoy]

hsh: I don't think I've criticized it, but only because I keep being distracted by other posts that want to get written. Consider him criticized.

[radish]

I don't think I'm saying this out of vengeance.

May I just note and admire the fact that you're being much kinder than the author(s) of the piece. I believe that if the article you quote were not itself intended primarily as an act of vengeance it wouldn't name names or try to rile up the mythical american taxpayer.

Presumably the author bought Citigroup at $50 or something...

[Fledermaus]

The requirement for getting federal money should be no bonuses, followed by review of management performance and firings where appropriate.

But we can't to this or else the banks won't want all our free money!!!!! (/paulson)

It is amazing, but not surprizing, to see how little these Masters of the Universe understand the problem. paulson is acting like there's a bunch of low debt, good credit people just waiting out there to buy, buy, buy if only someone would give them credit.

Now he's gonna buy up student loans and credit card securities - and he points to the fact that they are all rated AAA? Well at least he's providing some good chuckles on our way to perdition.

[russell]

But we can't to this or else the banks won't want all our free money!!!!!

Well, there are always other cards to play.

For instance, there's always "We're taking your damned bank, and if you don't like it we'll sue your sorry @ss for malfeasance".

To be honest, I don't see anyone in this government, or any likely US government, playing that ace. But I could be wrong.

The way we're going about things right now gives the folks running the investment banks quite a bit of slack. If they have half a brain in their head, they'll work with that.

At some point, it's going to occur to someone in a position to do something about it that "too big to fail" means "too big".

Thanks -