By Eric Jackson
01/27/10 - 09:12 AM ESTNEW YORK (TheStreet) -- The proposed "Volcker Rule" isn't about being anti-business, it's about letting market actors do what they're best at.
Let banks bank, and let hedge funds trade. When either one does a poor job, let it go under and not pull the rest of the system with it. That's capitalism.If bankers want to throw their own profits down a rat-hole with poor risk management, that's their right. Just don't do it with depositors' money
Last week, President Obama announced a series of planned reforms for the financial industry to prevent "too-big-to-fail" bank failures.
The centerpiece of these reforms was the so-called Volcker Rule, which restricts banks from getting into proprietary trading and owning, investing or sponsoring hedge funds or private-equity funds.
There has been much concern and hand-wringing about the long-term impact of these proposed changes since the announcement. The market -- and especially large bank stocks -- took a major hit following the announcement. The fears expressed were that Obama is anti-business and his misguided policies were going to kill off a nascent recovery just as it is starting to gain strength.
Hang on. First, we blame Obama that he, Treasury Secretary Tim Geithner, and Fed Chairman Ben Bernanke are too cozy with Wall Street, and no rules have been changed since the economic crisis began. Now, he's anti-business and his moves to reform the system to prevent systemwide risks are going too far.
Obama, generally regarded as a master communicator, did a horrendous job announcing the Volcker Rule. He came out, made an eight-minute speech, had no documentation to back it up and left after taking no questions.
Worse, his language was imprecise. The vacuum of information has directly led to the gnashing of teeth we've heard since then. Even now, a week later, we don't have further clarification. It's allowed pundits to surmise that the announcement was a knee-jerk reaction to last Tuesday's Massachusetts Senate loss. According to them, he's trying to be the left's populist version of Glenn Beck.
[This post is an excerpt of the full article, which available on TheStreet.com by clicking here.]08/26/09 - 09:07 AM EDT
Yet, the government, with all the best intentions, will never turn around these companies. It's the companies themselves and their employees who must turn things around. AIG and its new CEO Robert Benmosche get that, while Citigroup and its CEO Vikram Pandit don't. Both companies are extreme corporate basket-cases now controlled by the government on behalf of taxpayers. Yet, the styles of Benmosche and Pandit couldn't be more different.
Pandit's been the quintessential invisible CEO: quiet, passive, and immediately forgettable when he does speak. Benmosche is on the other end of the spectrum: straight-talking, aggressive, asking challenging questions, and lots of slaps on the back. Benmosche doesn't suffer fools gladly; Pandit appears to suffer fools for years without saying boo.
As horrible as AIG has been as an investment since last fall, Citigroup has been worse. AIG's stock price is 15% higher than Citigroup's since the government took over the company. When the market learned of Benmosche's hiring and digested some of his positive comments on the company, it responded positively, sending up AIG's stock by 35% last week (and still higher this week).
Although I've yet to meet with a Pandit apologist (maybe the only ones are Citigroup's directors who hired him), if I did, they'd likely say he is just one man and certainly didn't cause Citigroup to be the unmitigated disaster it is today. They'd also say one person -- even the CEO -- isn't responsible for a company's stock price.Recall that back in early October last year Citigroup was trading at $23.50 after the Federal Deposit Insurance Corp. backed it to buy Wachovia over a competing offer from Wells Fargo(WFC Quote). Five months later, Citigroup's shares touched 97 cents. It's been a breathtaking evisceration of the former king of the American financial world. Pandit has done little to inspire investor confidence.
Pandit's response to being owned by the government since taking TARP money has been to shrink back even further from public scrutiny and contact with staff. The introverted, bookish professor has become even more bookish.
When he has spoken up, it's irked regulators and peers alike. Jamie Dimon of JPMorgan Chase(JPM Quote) called Pandit a "jerk" under his breath on a conference call with Treasury last fall. Lloyd Blankfein has joked that Citigroup was crazy. One business journalist summed it up to me this way: "I've never seen a Wall Street CEO who gets punked that often."
Where is the leadership going to come from? Sheila Bair is not going to turn this company around. Neither is Tim Geithner or Ben Bernanke. Did Citigroup also sign an addendum to receiving its TARP funding that it had to manage its affairs as if no one were really in charge?
Contrast Pandit's style with Benmosche's, the former head of MetLife(MET Quote) and new head of AIG. If any company is a ward of the state more than Citigroup, it's AIG -- it's actually a $182.5 billion ward.
Yet, here was Benmosche coming out swinging last week. He said in an internal town hall meeting that he sees the government as only one of several critical stakeholders -- the others being clients in the U.S., Asia, and Europe; employees, and then "the people we owe money to" (otherwise known as the government).
Benmosche said undoubtedly AIG would have to sell some of its businesses to pay back the government but ruled out an imminent sale for its investment advisory business and said other asset sales could wait until the company received full value. "I don't liquidate things; I build things," he said. "If the government wanted this money back quick, they shouldn't have come in in the first place."
Benmosche even had the nerve to suggest his management team should have the flexibility to pay its employees more if they've just "shot the lights out" in a given year.
Financial blogger Barry Ritholtz called him "totally absurd" to think he's going to pay back the government "in our lifetime." Maybe. But, if you worked for AIG (or were a stockholder), you cheered last week. It's clear who's in charge at this company. It's not the regulators but actually the AIG and its employees. This is quite a contrast in styles from his caretaker predecessor, Ed Liddy, and of course Pandit.
Benmosche finished an employee town hall meeting recently, warning: "My fear is that you'll say, 'I don't know if Treasury wants it, I don't know if the Fed wants it, I don't know if the lawyers want it, I don't know whatever.' If you sit there every day not making the right decisions to take us to the next level, we'll miss an opportunity."
And, he's exactly right. I'm for leaders who see the facts clearly and don't lead their organizations off a cliff. Both Citigroup and AIG went over the cliff a long time ago. They're down in the valley -- but they're still going concerns and they still need leaders. They're not going to be shut down and shouldn't be led by CEOs who would be suited for winding down companies -- like Pandit.
Ask yourself, if you were working in the bowels of one of these companies, who would your dig deeper for: Benmosche or Pandit? That hidden effort will start to show itself in the operating results and stock price in the coming quarters.
The government would be wise to get out of the way of these companies as quick as it can -- assuming there are competent management and directors. The government and taxpayers deserve the best long-term return on their investment, but they aren't suited to micromanage the businesses. They should get the right managers, get the right risk management and get out of the way.
The CEOs of Citigroup and AIG should push back on government requests when they are unreasonable or at odds with the long-term interests of the business. Benmosche appears well-suited to do that; Pandit doesn't.
We got into the current mess by too many people at AIG, Citigroup, and other firms playing fast and loose with other people's money with poor or no risk management. To fix that, we've needed government intervention.
We've got to get back to a true free market system. To heal these firms and our economy, leaders and employees at AIG and Citigroup need to treat assets they oversee as if it's their own money and -- with proper risk oversight -- start making free choices again on how to grow those assets.
-- Written by Eric Jackson in Naples, Fla.
At the time of publication, Jackson had no positions in stocks mentioned.
Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.
07/09/09 - 08:59 AM EDT
BAC , MS , GS , AIG , PEP , C , GE
Eric Jackson
We were all riveted last fall by the economic meltdown, which pulled down Lehman (now absorbed into Barclays (BCS Quote)) and Merrill (now part of Bank of America (BAC Quote) and forced many of us to consider the previously inconceivable outcome of a total collapse of the capital markets.
Through it all, then-Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and then-head of the New York Fed Tiimothy Geithner, tried to orchestrate an acceptable soft landing for all market participants. Many of the most pivotal planning sessions during that dark time happened at the offices of the New York Fed.
Yet, who was watching over the New York Fed at the time? As it turns out, many of the market actors were central in the drama playing out, including Lehman head Dick Fuld, who was a New York Fed director then.
Did Dick Fuld really deserve to have a say on whether BofA should buy Merrill, or on the fates of AIG(AIG Quote), Morgan Stanley (MS Quote) and Goldman Sachs (GS Quote)?
The board of directors of the New York Fed was poorly composed then, and it remains highly problematic today. Changes need to be made.
The New York Fed is basically the on-the-ground interface between Wall Street's biggest banks and the Federal Reserve. It plays part policy adviser, part diplomat and part message-runner between the two sometimes very different worlds. The bank plays a critical role in how policy is set and implemented.
During several critical moments last year (with the downfall of Bear and Lehman, the shotgun marriage between Merrill and BofA and later the pressuring of BofA to follow through with the merger) and no doubt in the future, the New York Fed has and will play a critical role in real-time decisions that can have ramifications on our markets and the broader economy for years.
It's reasonable to better understand who ultimately was responsible for directing and judging if Geithner was doing his job effectively last year. That responsibility falls on the New York Fed's board of directors.
That group is divided into three classes of directors three Class A directors who are from member banks and who are elected by member banks; three Class B directors who are elected by member banks to represent the interests of the public, and three Class C directors who are elected by the New York Fed's board of governors (who are all appointed by the president) to represent the interests of the public.
The Class A directors have been problematic in the last eight months. First, Fuld was one of them last fall when his firm became the focal point of concern for the entire U.S. financial system. Later, Stephen Freidman, then-chairman of the New York Fed and formerly with Goldman Sachs(GS Quote), was forced to resign amid revelations that he had purchased stock in his old firm -- raising questions about his impartiality overseeing the entire financial system.
There's no evidence that either Fuld or Friedman took any actions that benefitted either of those firms in their New York Fed roles, but, in matters of corporate governance, appearances count.
Currently, three of the nine seats on the New York Fed's board are vacant. It's not clear when they will be filled. Of the current directors, all three Class A directors are in place representing the interests of the member banks.
Jeff Immelt of General Electric(GE Quote) is the only Class B director. His job is to represent the public in that role. However, it's clear that his day job of overseeing GE Finance also makes him sympathetic to the needs of the member banks. Only two of the three Class C seats are filled (Lee Bollinger, the president of Columbia University, and Denis Hughes, the president of the New York State AFL-CIO).
Based on this composition, you could fairly make the case that the current board of the New York Fed is more weighted to look out for the interests of the bankers than the interests of the taxpayers and the broader economy. That needs to be immediately corrected. That means getting more experienced business executives like Pepsi(PEP Quote) CEO Indra Nooyi back on the board as Class B directors and replacing Jeff Immelt with another business executive who runs a company not as financially dependent as GE Finance.
Additionally, the open Class C position should be quickly filled with a director who is business savvy but will represent taxpayers first and foremost. Ideally, the Class C director should be someone who knows something about corporate governance and can bring that perspective to the New York Fed's board. Ira Millstein of the law firm Weil Gotshal & Manges would be fit the bill nicely.
There have been other bothersome governance issues cropping up at the New York Fed recently. It was recently reported that former New York Fed President Geithner advised the current board members to select his former lieutenant, William Dudley, as his replacement.
Although this happens a lot in companies (think Citigroup's(C Quote), Sandy Weill telling his board to replace him with then general counsel Chuck Prince), it is always a bad idea. Former CEOs and presidents can have cloudy judgment on these kinds of issues, affected by legacy or loyalty.
It's also been reported that it was due to Geithner's strong advice about hiring Dudley that former Class B director Nooyi recently stepped down from the board entirely. Take all these incidents together and you can't blame her.
The New York Fed plays a critical role in the healthy functioning of our capital markets. In my view, member danks deserve to have a seat at the table of the board of directors, but the majority of views should be separate from Wall Street and ensure that Wall Street's actions are serving the interests of the entire economy. The Federal Reserve and the U.S. government should immediately take steps to ensure that this organization's governance matches the standards they wish to see implemented in the big Wall Street banks they oversee.
