The most notable and highly publicized example of Wall Street excess to grab headlines as of late is the $1.2M office remodeling of former Merril Lynch CEO John Thain whose firm was bought by Bank of America just a few months ago. Thain went on CNBC to indicate that the interior design effort was approved in a "different economic environment" over 1 year ago. The environment may not have been so dire 12 months ago, but the office remodeling occurred just before Thain laid off thousands as profitability on Wall Street eroded. The office flap is the least offensive thing Thain has likely done in the recent past. Approving $4 billion in bonuses just prior to his firm's acquisition by Bank of America and essentially blackmailing both the government and B of A into a hasty marriage are probably more egregious and worthy of review. The office flap just is media juicy but ultimately not as important as the less than honorable actions of the past few weeks. Thain's credibility is shot, and he's likely to be finished on the Street. The real story here is the pure slime of Thain’s actions that make officegate look like submitting one too many taxi receipts in your expense report. His more monumental transgressions include:
1. thinking he deserved a massive $83M bonus in light of his firms horrible performance,
2. misrepresenting or just plain not knowing what was going on when he did due diligence with Bank of America CEO Kenneth Lewis,
3. giving himself and his boys massive bonuses on the way out on the government’s dime, and
4. potentially, screwing us all by being an important economic advisor in John McCain’s administration had the GOP contender won.
Now blaming Thain for all of Merril Lynch’s woes is intellectually dishonest. Thain, after all, became CEO only about a year ago. Much of the firms problems were already in play by then. But again, the real transgressions are a lot more shocking than his office remodeling.
Other headline grabbing issues are equally misleading. Citibank’s purchase of a new $50M corporate jet should be the least of the public’s worries. Within a few months, New York went from being the center of global high finance to being a relative backwater. In fact, Washington is likely now the center of finance in the US so New York is not even relevant on a national level. The real action is taking place in Dubai, Abu Dhabi, Mumbai, and Shanghai. Citibank executives will likely be shuttling with begging bowls in hand to these various places who are struggling with their own issues. The real story with Citibank is not what fancy gadgetry its executives are buying. The real story with Citi is that it is a perfect reflection of what’s happening in America. Citi used to be the biggest bank in the world – top of the heap, king of the hill. But Citi made the poor decision of over investing in us…the US. Citi is heavily involved in the US consumer credit and housing market. As our inability to pay our obligations grows, so do Citi’s woes. It’s an ugly and uncomfortable truth that isn’t sexy and isn’t as enraging as crazy executives spending money on drunken sprees. The plane is probably the one tool that Citi executives will need to stay afloat and avoid taking on more tax payer dollars. They’ll be out panhandling in the Middle East…but that well has likely run dry.
Finally, Huffington (among others) mentions Wells Fargo’s increased lobbying efforts after having taken $25 billion from the government. This flap is another example of incomplete information fueling misplaced outrage. Wells Fargo, turns out, didn’t want the government’s money. In fact, the chairman of Wells Faro has said to have thrown a fit when Treasury forced him to take the money as part of a broad based capital infusion effort to partially nationalize all of the major “too-big-to-fail” banks. So, it’s not surprising that Wells would like to convince people in Congress to leave it alone. As one of the better managed banks that avoided a lot of the problems, Wells actually has some right to be indignant that it’s less well managed competitors are getting a lifeline and it’s not able to more effectively reap the rewards of its prudent management by way of weakened competitors. In fact, the big story here is the bait-and-switch of the TARP (troubled asset relief program) funds. Those funds were originally supposed to be used to buy up all the difficult to price (read - toxic) assets from the various banks and bundle them up to be resold by the government. This action was analogous to the successful efforts of Sweden in a similar situation and to our very own Resolution Trust Corporation (RTC) of the late 1980s during the Savings and Loan crisis. But we abandoned this approach.
If there is one thing the market hates above all others it is uncertainty. This proven model of asset bubble resolution was abandoned as former Treasury secretary Hank Paulson somewhat understandably tried to coordinate his actions with his fellow central bank brethren in the UK when Gordon Brown started to infuse capital directly into the banks. This “change in plan” injected further uncertainty into the market and didn’t resolve the preexisting uncertainty created by the toxic assets themselves. As such, the implications of this action or “change in plans” are the real story as it has had significant implications in resolving the current financial crisis.
Diving into these real issues takes a bit of investment. I’m sure the media and blogosphere are up for it. Sphere: Related Content
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