Tag Archives: Financial Meltdown

A Not-So-Simple Question: How Many Countries Is Citigroup "In"?

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Many, many people spent a busy weekend hammering out the details of the government rescue of Citigroup that was announced last night. The rescue clearly is a Portentous Event, so I went searching this morning for insights about what the portents are portending.

I got as far as the third paragraph of the Wall Street Journal story, where it says Citigroup is “in 106 countries.”

“Oh yeah?” I thought. “Name them.”

Several years ago, around 2001, I was, briefly, among the world’s foremost experts on How Many Countries Citigroup Is In. I was part of the company’s employee communications team at the time, and someone higher on the food chain had gotten impatient with seeing vague references to Citigroup as being in “more than 100 countries” (which is how other news organizations are describing Citi today). I was tasked to track down the precise, official number of how many countries Citigroup is “in.”

Oh my goodness.

Let’s start with public sources. As of today (the numbers back then were probably slightly different), Citigroup.com lists precisely 100 countries. The 2007 Annual Report lists 97. Hmm…

OK, let’s look at internal websites. I’m no longer an employee, so I can’t view these sites now, let alone post links. But suffice it to say there were conflicting numbers and lists of countries on various intranet sites. The most popular numbers were something like 101 and 103.

I reported back to my betters that there appeared to be a good reason to cite “more than 100” countries. Now, if you’ve ever been a corporate gumby in a huge organization, you know how that was received: not good enough. “It’s a simple question, you ought to be able to track down a simple answer.”

There were at least two different keepers of what was described as the “official” number. I think one was the Corporate Secretary’s office (since they had to know where the company was incorporated), and the other was the global real estate department. So I got the two lists and compared them, expecting to find two additional countries on the larger list. Well, no… each list had a handful of countries not on the other list. I don’t remember which countries were on the bubble, but I came up with half a dozen questionable countries, and started trying to verify them one by one. It turns out that whether or not Citigroup is “in” a particular country is sometimes a matter of opinion.

Do you go by whether we have a subsidiary incorporated there, or whether there is a physical office vs. a mail drop, or whether we have employees domiciled there full-time? What if there are no longer any employees, but we’re still incorporated there? Does a joint venture count? When I talked to the various regional headquarters offices, sometimes they were unwilling to talk about whether we were actually “in” such and such a country, because of local political considerations. There were differences of opinion about when or whether the Country X office had closed.

Also, how do you define a “country”? Each list broke out Puerto Rico, for example, as a separate country. There is a logic to that, even though Puerto Rico is part of the United States, because there are important jurisdictional differences that affect companies doing business in Puerto Rico. Also, if you toss out Puerto Rico, Guam, US Virgin Islands, Macao, Hong Kong, Isle of Man and Jersey, all of a sudden you may no longer be able to say “more than 100 countries.” Heaven forfend.

Eventually, to get the poobahs off my back, I abandoned the search for Truth, picked one of the “official” numbers, and prepared to start defending it. I envisioned saying to anyone who challenged my number, “oh yeah? Here’s my list, let’s see your list. What’s that? You don’t even HAVE a list?” But I left the company before I had an actual opportunity to have that conversation.

The moral of the story: If you know how many countries your company is in, you’re not truly a global company.

All you gumbies and ex-gumbies out there — what’s the stupidest thing you’ve ever spent far too much time tracking down in corporate America?

Quote of the Day

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The internets are a-twitter with news that the Detroit automakers flew on private corporate jets to argue for bailouts in front of Congressional committees in Washington.

“There’s a delicious irony in seeing private luxury jets flying into Washington, D.C., and people coming off of them with tin cups in their hands,” Rep. Gary L. Ackerman (D-N.Y.) advised the pampered executives at a hearing yesterday. “It’s almost like seeing a guy show up at the soup kitchen in high-hat and tuxedo. . . . I mean, couldn’t you all have downgraded to first class or jet-pooled or something to get here?”

Bankruptcy is the Right Medicine for Automakers

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Look at the bright side – GM stock
only has $3 farther to fall. (From Yahoo Finance)

The more I read and think about a potential further bailout of the auto industry, the nuttier the idea sounds.

Michael E. Levine is a former airline executive, so he knows about bankruptcy. He puts it this way in today’s Wall Street Journal:

General Motors is a once-great company caught in a web of relationships designed for another era. It should not be fed while still caught, because that will leave it trapped until we get tired of feeding it. Then it will die. The only possibility of saving it is to take the risk of cutting it free. In other words, GM should be allowed to go bankrupt.

Even one of the auto industry’s hometown papers, the Detroit News, said in an editorial Friday that bankruptcy might be preferable to the appointment of an automotive “czar,” an idea that has been floated by the Obama transition team.

It’s also been suggested that the government will take an equity stake in the companies and demand seats on their boards. That would almost certainly restrict the ability of the automakers to shut plants and lay off workers.

For all practical purposes, these moves would nationalize the auto industry and make its return to profitable, independent operation even more of a long shot. Presumably, an automotive “czar” could manage all of this meddling.

If that’s the case, Detroit’s automakers might want to rethink whether it’s safer for them to be in the bankruptcy courts than beneath the oppressive wing of a federal overseer.

Bankruptcy doesn’t mean GM goes out of business, and it certainly doesn’t mean the entire American car industry goes out of business. Bankruptcy protection would allow GM to reorganize, shrink substantially, and renegotiate its ruinous contracts with unions and dealers.

Levine describes the problem:

Foreign-owned manufacturers who build cars with American workers pay wages similar to GM’s. But their expenses for benefits are a fraction of GM’s. GM is contractually required to support thousands of workers in the UAW’s “Jobs Bank” program, which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure. It supports more retirees than current workers. It owns or leases enormous amounts of property for facilities it’s not using and probably will never use again, and is obliged to support revenue bonds for municipalities that issued them to build these facilities. It has other contractual obligations such as health coverage for union retirees. All of these commitments drain its cash every month. Moreover, GM supports myriad suppliers and supports a huge infrastructure of firms and localities that depend on it. Many of them have contractual claims; they all have moral claims. They all want GM to be more or less what it is.

But GM can’t continue to be what it is. The beauty of the bankruptcy system is that it would give GM leverage to pursue cost-cutting more aggressively than would otherwise be possible. The longer that corrective action is delayed, the more traumatic the eventual restructuring will be.

Yes, there’s a perception issue involved in bailing out the “Wall Street fat cats” while refusing to help manufacturing industries and their blue-collar workers. That’s why it’s a bad idea for government to get involved in picking winners and losers in the first place. But the financial industry is special a special case, because of its critical role in making the entire economy function. The purpose of the rescue plan was not to bail out financial firms, but to unfreeze the credit markets, the lifeblood of the entire economy. Any proposed bailouts of other industries have to be held to a much higher standard

Bailouts: Further Down the Slippery Slope

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David Brooks makes the case against an auto industry bailout more eloquently than I did:

A Detroit bailout would set a precedent for every single politically connected corporation in America. There already is a long line of lobbyists bidding for federal money. If Detroit gets money, then everyone would have a case. After all, are the employees of Circuit City or the newspaper industry inferior to the employees of Chrysler? …

But the larger principle is over the nature of America’s political system. Is this country going to slide into progressive corporatism, a merger of corporate and federal power that will inevitably stifle competition, empower corporate and federal bureaucrats and protect entrenched interests? Or is the U.S. going to stick with its historic model: Helping workers weather the storms of a dynamic economy, but preserving the dynamism that is the core of the country’s success.

Now the states are getting into the act in seeking a federal bailout:

The idea is getting a strong bipartisan push from governors across the country, with California Republican Gov. Arnold Schwarzenegger and New York Democratic Gov. David Paterson among the chief proponents. Both are blaming Washington for their states’ mounting troubles. …

California Assembly Speaker Karen Bass said Congress should view states “as deserving of help as much as banks and automakers and everyone else in line for funds.” If Congress can give $700 billion to financial institutions, she asked: “Can we have $5 (billion) or $6 (billion)?”

Never mind $5 billion — a mere $5 million would have a profoundly positive effect on another deserving recipient. What I envision here is not exactly a bailout, but rather an innovative “pay-for-work” program…

It’s a Bad Idea to Ridicule Others (They May Be Right)

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Via Andrew Sullivan, a video showing how Peter Schiff, a.k.a. “permabear” and “Dr. Doom,” was subjected to an extraordinary level of derision on cable business programs last year as he correctly forecast the coming economic crisis.

It’s longish (10 minutes) but offers a powerful statement about why it’s generally a bad idea to ridicule people with whom you disagree. Two snippets jump out at me, the first starting at about 3:15, where multiple panelists cackle in the rudest way imaginable throughout this statement by Peter Schiff:

“Most of the profits in real estate are going to vanish, just like the profits in the dot-coms in 1999-2000. It’s a fantasy, people can’t sell their homes, the inventory is exploding all over the country, houses are on the market for six months and there are no bidders — the prices are going to go through the floor.”

Advantage: Schiff. Another point that struck me begins at 6:30, in an August 2007 broadcast, where Ben Stein offers his best pick for an undervalued stock: “I particularly like Merrill Lynch, an astonishingly well-run company … they might as well be putting it in cereal boxes and giving it away, that’s how cheap it is.” As he speaks, data on the screen show that MER closed at $76.04 that day, down from a high of $98.68 earlier in the year.

Ouch. At least I didn’t buy more Merrill stock that day, but as I’ve written before, I sure do wish I had sold the modest cache of shares in my Merrill pension account. Today’s price is about $13.

The Slippery Slope of Government Bailouts

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Stephen Bainbridge has done the best job I’ve seen of describing why bailing out the U.S. automobile industry — as proposed by Congressional Democratic leaders — would be a terrible mistake. Point by point he shows why the public interest would be better served by letting the big automakers go bankrupt, because bankruptcy reorganization would give them the leverage they need to modify ruinous contracts with unions and dealers.

Using GM as an example, he summarizes:

Letting GM avoid bankruptcy by giving it a federal bailout ought to be unthinkable, because of the very real risk that a federal bailout will come with conditions that preclude GM from fixing its core problems. It’s likely to preserve the gold plated union contracts, the excess payroll numbers, the excess plant capacity, and the excess number of dealers.

This helps illustrate why it was conservative Republicans, rather than Democrats, who led the initial opposition to the Wall Street rescue plan, and succeeded in voting down the first proposal. Stereotypes would lead a person to believe that Republicans would be more sympathetic to Wall Street than Democrats. But the conservatives were not opposing Wall Street — they were opposing creeping socialism. They knew that other troubled industries would soon be jockeying for position at the government trough.

If belief in capitalism and free markets means anything, it means the markets must be able to reallocate capital to more productive uses. It means reckless or uncompetitive companies have to be allowed to fail. Viewed through this filter, any financial calamity caused by allowing the giant Wall Street firms to fail could be considered a necessary side effect of adhering to capitalist principles.

I’m an ardent capitalist, but I quickly became persuaded that a Wall Street bailout was a necessary evil. (I’m sure Hank Paulson would have been relieved to learn that I was on board.) The financial services industry is a special case, because the flow of capital affects virtually every business, government and individual in the world.

The credit markets effectively were frozen, and 15 years as a Wall Street gumby has helped me understand what a potentially devastating problem that is. The short-term credit markets are like oxygen for banks and big companies. They have to be able to breathe capital in and out on a daily basis to meet their daily needs. It was only a matter of time — and not very much time — before even healthy blue-chip companies would be unable to issue paychecks on schedule, to pick just one example of the potential for panic.

The analogy that comes to mind for the Wall Street bailout is, let’s say your child misbehaves and you tell her she’s grounded for a week. On principal, you should not then allow her to go see a movie two days later, no matter how much she pleads. However, if the house catches fire, you need to set principle aside and let her escape.

The automakers are a completely different story. Bankruptcy reorganization would be a severe financial blow to huge numbers of individuals and communities — but it would not bring the entire economy to a halt.

Krauthammer Explains the Election

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I’ve argued before that it is deeply ironic that the financial crisis benefited the Democrats this year, since the Democrats drove the reckless expansion of access to mortgages that led to the crisis, while Republicans — specifically, McCain and the Bush Administration — were sounding alarms.

As usual, Charles Krauthammer has the explanation:

This was not just a meltdown but a panic. For an agonizing few days, there was a collapse of faith in the entire financial system — a run on banks, panicky money-market withdrawals, flights to safety, the impulse to hide one’s savings under a mattress.

This did not just have the obvious effect of turning people against the incumbent party, however great or tenuous its responsibility for the crisis. It had the more profound effect of making people seek shelter in government.

After all, if even Goldman Sachs was getting government protection, why not you? And offering the comfort and safety of government is the Democratic Party’s vocation. With a Republican White House having partially nationalized the banks and just about everything else, McCain’s final anti-Obama maneuver — Joe the Plumber spread-the-wealth charges of socialism — became almost comical.

In my next life, I want to be Charles Krauthammer, ideally without the whole paralysis thing. My path from liberal to neocon has paralleled his, and he has an uncanny ability to state, with perfect clarity, insights on current events that are only beginning to rattle around in my head.

Wall Street Compensation in the Bailout Era

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As bonus time approaches, Wall Street firms are trying to balance the need to retain key executives against concern about the “optics” of giving boatloads of bailout money to the people who arguably created the need for the bailout.

It’s easy to sneer at what passes for frugality on Wall Street when it comes to compensation… so let’s indulge for a moment. From today’s Wall Street Journal (I think it’s a free link, but if not you can get the gist from the excerpt below):

In a sign that Wall Street is waking up to the political tempest over billions of dollars in year-end bonuses likely to be paid out at securities firms lining up for government infusions, top executives are in discussions to possibly cap their own compensation, according to people familiar with the situation….

“There are going to be some people in the financial-services industry who will show real leadership here and recognize the reality of the situation,” one senior Wall Street official said.

At least one major firm has looked at former PepsiCo Inc. Chairman and Chief Executive Roger Enrico’s move in 1998 to give up his $900,000 salary. Instead, Mr. Enrico asked PepsiCo directors to fund scholarships for children of “frontline employees.” Mr. Enrico still got a $1.8 million bonus that year.

Yes indeedy, “real leadership” — give up the high six-figure salary but keep the seven-figure bonus. And of course, the 1998 bonus of a soda-pop CEO is one or even two orders of magnitude lower than what is available on Wall Street in a good year.

I have mixed feelings about this. I’m a fervent capitalist and I lean libertarian, so I believe salaries and other prices should be set primarily by markets, not by government decree. I toiled in the Wall Street vineyards for many years, mostly at Merrill Lynch, and I believe my old firm and its competitors play a crucial role in the economy. I was support staff, not a revenue producer, which meant my annual bonus was a fraction of my salary, not a multiple. But I never complained about executive comp, because when the poobahs got more money, so did the gumbies.

Vermont Senator Bernie Sanders, a self-described democratic socialist, has renewed calls for capping compensation for executives of bailed-out companies at the $400,000 salary of the U.S. President. The idea has a lot of populist appeal — even John McCain expressed support for it during the height of the turmoil last month. (I could probably scrape by on $400K a year. I’d like to give it a shot, anyway.)

But I suspect the best financial minds on Wall Street will continue to find ways to reward themselves handsomely. If such a limit could even be enforced realistically, it would simply drive the top talent into less-regulated pursuits. Do we really want to move the center of gravity of global finance out of the public securities firms and into hedge funds?

So, what should be done about the admittedly scandalous prospect of paying zillions of dollars in bonuses with money ponied up by taxpayers? I dunno… that’s above my pay scale.

The Allure of Going Nuclear in the Late Innings

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Losing the Presidential race has to be even worse than losing the World Series.

If you lose the World Series, you at least get to put up a banner proclaiming that you were the League Champion for the year. Your hometown throws you a consolation rally, and you start talking about the future (“hey, we’re tied for 1st place” in the coming season). There may be regrets about missed opportunities that could have produced World Series rings, but your own fans probably will not vilify you.

McCain, however, can already hear the long knives being sharpened on his own side of the aisle. (Oops, wrong metaphor.) McCain knows the throw is going to beat him to the bag, but he has to be seen running it out just as hard as he can. This is the big leagues.

Set aside ideology and partisanship for a moment and reflect on the momentous achievements of these two men, McCain and Obama. Think about how much they had to go through to get to where they are today. Neither one was given much of a chance coming out of Spring Training. From the Nov. 7, 2007 WSJ:

Democrats enter the 2008 presidential race with powerful political advantages, but face a tough and unpredictable battle because of the vulnerabilities of front-runner Hillary Clinton. … She’s locked in a dead heat against leading Republican candidate Rudolph Giuliani.

(Wow… remember Rudy Giuliani? But I digress.)

Flash-forward to October 2008. Now it’s getting late in the World Series, and McCain is badly behind. Real Clear Politics shows eight states as tossups (CO, FL, IN, MO, NC, NV, OH, WV). Even if McCain wins every single one of them, he comes up short of the 270 electoral votes he needs, unless he also can turn a blue state red. In baseball terms, McCain has made it to Game Seven of the World Series, but he’s down by five runs and he’s got nobody on base. It’s not the 9th inning yet, but it’s getting late in the game.

So he tries to hit a five-run homer. “Hey, let’s pick that hot Alaska governess for VP.” (Note to the beautiful blonde I’m proud to call my wife: This isn’t me talking, Sweetie — I’m channeling McCain.) “That’ll shake things up and energize the base.” He knew Palin’s national credentials were thin (to put it charitably), but there was no way to predict she would become such a target-rich environment for Tina Fey.

That move didn’t work out, and now it really is late in the game. He’s got his ace starter warming up in the bullpen on two days rest. He tries to bunt for a base hit with two outs, desperate to do something to get a base runner. Et cetera, et cetera — I don’t want to get overly tedious about matching baseball moves with specific McCain tactics, but I’m talking here about things like “suspending” the campaign, and announcing a half-baked, buy-individual-mortgages proposal in the second debate.

What do you do now, Mr. World Class Athlete who has come so far? This ain’t no basketball game, where the last few minutes turn into garbage time when the game is out of reach. It’s still theoretically possible to win until the final out.

“I know! Let’s go nuclear with Ayers, Rezko and Wright! Maybe that will take voters’ minds off of their 201Ks. It’s a long shot, but it’s all we’ve got.”

Now, let me be clear. I think Obama has made some appalling choices in associates over the years, and calling attention to those choices is a very legitimate campaign issue. As the indispensable Charles Krauthammer puts it, the most disturbing thing…

… is the window these associations give on Obama’s core beliefs. He doesn’t share Rev. Wright’s poisonous views of race nor Ayers’ views, past and present, about the evil that is American society. But Obama clearly did not consider these views beyond the pale. For many years he swam easily and without protest in that fetid pond.

“Fetid pond” is a nice touch. But while this is a legitimate issue, it’s not a five-run homer — and meanwhile, McCain has his Keating Five baggage.

I fear that McCain and the Republicans, in their understandable desperation, are going to ratchet up the negativity at the very time that people like me, who favor McCain despite his flaws, are trying to reconcile ourselves to Obama, despite his flaws.

I’m trying to reconcile myself because it’s clear to me that McCain is toast. Yes, it’s theoretically possible to come back when you’re down by five runs with two outs and nobody on in the bottom of the ninth. And monkeys might fly out of my butt. (Crude perhaps, but I gotta come up with something to compete with “fetid pond”.)

The economic crisis is driving votes to the Democrats. That may not be fair or logical, but it’s a fact. And the only thing that could possibly knock the financial crisis off the front page between now and Election Day would be an Unspeakable Event that I most fervently do not want, and that no loyal American wants. If such an event were to occur, it is not clear to me which way the votes would shift.

Going negative can be effective at the margins, but it will backfire if the Republicans take it too far. Ayers is an unrepentant terrorist, but Obama is not. Rezko is a criminal, but Obama is not. Wright is an anti-American racist, but Obama is not. Obama also is not a Muslim or a Marxist or a Manchurian Candidate, and however fervently some people may believe those things about him, the umpires are not going to be convinced.

Out of all the people who have any conceivable chance of winning the election next month, Obama to my mind is the second-best choice. I have serious qualms about him, but there is an upside as well, and I have no doubt the Republic will survive an Obama Presidency.

To paraphrase the best thing Al Gore ever said, during extra innings in December 2000, “if at the end of the day, [Obama] is sworn in as President, then he’ll be my President. He’ll be America’s President.” To which I would add, let’s treat the man with the respect the office deserves.

In Defense of "Wall Street Greed"

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The titans of Wall Street gathered this morning at the NYSE to discuss the ongoing crisis. The writeup of the gathering in the WSJ Deal Journal blog is well worth reading, once you get past the inexplicable opening links to poetry and “Error 404”. (Blogging famously involves publishing without an editor, and here we see the downside.)

I liked this bit from the Q&A:

The first question is a great one: the questioner notes that the four candidates for president and vice president rarely say “Wall Street” without also saying “greed and corruption.” Which is funny because, you know, it’s Washington.

Now, I’m as opposed to Wall Street corruption as the next fella, but Wall Street greed has gotten a bad rap. Whenever I hear the word greed, my mind substitutes “self-actualization.” “Greed” is too often conflated with simply acting in one’s own self-interest — the wonderfully relentless force of nature that underpins capitalism and makes it possible. (I’m a big fan of capitalism — one of God’s greatest gifts to humanity, and the only truly moral economic system — but more about that another time.)

The present unpleasantness is the result of a bursting bubble of housing prices. The prices were driven up because over the years, more and more capital was allocated to housing stock. If society is going to build more housing, it needs people to live in that housing, so the joys of homeownership were extended well beyond the pool of people who could actually, you know, afford to own a home.

The mechanism for this was the securitization of mortgages, through which Wall Street took risky loans off the books of banks and sold them to investors around the world — thereby seemingly making the risk disappear by distributing it widely. The housing bubble would not have been possible without the existence of mortgage-backed securities, an invention that served as a cash cow for Wall Street for many years.

So greedy Wall Street is at fault, right? Well, no. Wall Street did what Wall Street does, which is to find a way to distribute risk, while raking a little off the top of each transaction, thank you very much. But Wall Street didn’t create the risk. The gummint did — with the best of intentions. Roger Kimball describes the process as well as I’ve seen it described. An excerpt:

* The original Community Reinvestment Act was signed into law in 1977 by Jimmy Carter. Its purpose, in a nutshell, was to require banks to provide credit to “under-served populations,” i.e., those with poor credit.

The buzz word was “affordable mortgages,” e.g., mortgages with low teaser-rates, which required the borrower to put no money down, which required the borrower to pay only the interest for a set number of years, etc.

* In 1995, Bill Clinton’s administration made various changes to the CRA, increasing “access to mortgage credit for inner city and distressed rural communities,” i.e., it provided for the securitization, i.e. public underwriting, of what everyone now calls “sub-prime mortgages.”

Bottom line? It forced banks to issue $1 trillion in sub-prime mortgages. $1 trillion, i.e., a thousand billion dollars in sub-prime, i.e., risky, mortgages, in order to push this latest example of social engineering.

But wait: how did it force banks to do this? Easy. Introduce a federal requirement that banks make the loans or face penalties.

Emphasis added.

All of this explains why it’s deeply ironic that the crisis apparently is benefiting the Democrats. Maybe it’s only natural to blame the incumbent party for any economic debacle. But in this case, as Kimball documents, the Bush administration and John McCain are on record as having raised alarm bells years ago about the gathering mortgage crisis, while Democrats in Congress stifled attempts to do anything that would cut off the flow of capital to provide home ownership for people who could not afford it.

Good luck, President Obama. And I mean that sincerely. For all of our sakes.