Posts Tagged ‘Citi’
Phibro and the Citi Hall Mess
The Wall Street Journal has an excellent editorial in today’s edition: The $100 Million Banker.
Why do we say the editorial is “excellent?” For the usual reason; it is nearly identical to what we’ve written in the past: give Mr. Hall his money and ban prop trading at regulated banks.
If you missed those posts, see these two recent ones: Prop Trading and Pay at Banks and The Children Who Have Eaten Their Cake… Those two provide links to many related ones, too. The latter one promises an additional new post about the dispute, but we’ve not had time to finish it, and it won’t happen today.
Yes, regular readers will notice that this is a very short post for us. While we’re nearly surrounded by a temperate rain forest, if the lawn is not mowed today, the forest will be that much closer tomorrow. That what happens when it rains and shine nearly every day for several weeks in the middle of the summer. (And, yes, dear reader, like Tolstoy, we enjoy toiling in the field with the (other) peasants.)
The Children Who Have Eaten Their Cake…
We hate it when one of our favorite quotes is used against us, but that is the nature of our queen and chairman. (Although she does it in a good-natured, light-hearted, and humorous way, there is steely resolve in her teasing words.)
Actually, she didn’t use the exact quote; instead, she updated it and made it more relevant to the situation at hand. That made it all the more painful. Her version with reference to today’s lunch, or shall we say the absence of lunch was: “The children who have eaten their Paninis are the natural enemies of the children who have their (left-over) pizza.”
That’s not very different than Jeremy Bentham’s original quote from 1844. “The children who have eaten their cake are the natural enemies of the children who have theirs.” In some sense, she just Italicized it.
By the way, we think Bentham’s one-line quote, and the surrounding text, which we show below, perfectly describes the pettiness and envy that is exemplified by the Congress’s behavior regarding the AIG bonuses in the Spring, the creation of the Obama administration’s silly “pay czar” position, and the recent publicity regarding Andrew Hall’s $100 million pay dispute with Citigroup. Envy and power – much like in the Russian Revolution and many other similar settings – are a terrible combination.
Very shortly we hope to publish our say on ways to resolve the dispute between Mr. Hall and Citigroup. It is a very interesting problem: like a three-person game of chicken. In fact, we were gathering our thoughts by the pool, when we decided to venture into the house for her left-over pizza. Unlike our government or the Bolsheviks, we had no chance to behave opportunistically.
However, rather than discussing Mr. Hall’s particularly problem, which involves the government’s (and possibly Citi’s) ex post opportunistic behavior, we’d prefer to mention a quite general and viable solution. It is so viable, that it is possible that trading firms have already implemented similar schemes, but we doubt it.
We have in mind very formal and objective sharing rules for daily trading gains and losses combined with other objective, long-term performance (and risk) measures. We think it would be worthwhile to have create individual trust accounts, administered by an independent third party, which settle each trading day to accumulate a trader’s share of his proprietary gains and losses. A simple linear contract that pays a percentage of gains and the same percentage of losses could work, but anything calculable and understandable would work, also. Each day, the account would settle – like any other daily settlement or clearinghouse agreement.
Note that nothing in the previous paragraph precludes such a contract from being long-term in nature, nor does such an arrangement necessarily permit the trader to withdraw the funds at will (although like many 401K plans, firms could permit traders to borrow against the accrued balances at some margin or haircut). Moreover, nothing mentioned above would preclude the use of clawbacks or other long-term features – as long as they are objective, and contractible in nature, and (therefore) administer-able by a third party.
The non-opportunistic administration of the trust by a third party is the key. It eliminates the possibly subjective, capricious, and arbitrary types of arrangements that we discussed in Clawbacks: the Good, the Bad, and the Ugly. (We also mentioned them in Incentives at UBS and in General and Risk Concentration, Concentrated Losses and Incentives and a host of other posts.)
We’ll likely write more in the future on this type of arrangement. In our mind, if senior managers of trading groups can’t specify the major provisions of such contracts, then they probably don’t understand what their traders are doing and probably shouldn’t be senior managers. So, if directors forced such arrangements into trading areas, there is a chance that overall management and control would be improved. (After writing that, we realize how hopelessly naïve it reads.)
Of course, the above suggestions apply only to proprietary trading, not for hedging or trading with customers. Also, because we – as a tax-payer – have absolutely no desire to subsidize prop traders – we get none of their gains – we think prop trading at insured institutions should be banned. Moreover, we certainly believe that the government has the right to limit pay at insured institutions, but those limitations should be known and specified before the contracts are signed, not afterwards as in the AIG executives’ cases or possibly in Mr. Hall’s case.
Finally, if you found this interesting, you may like these related analyses: Incentives and the Financial Crisis and Business Schools, Incentives, Uncertainty, and the Financial Crisis.
Prop Trading and Pay at Banks
There is an article in today’s edition of The Wall Street Journal that attempts to frame Citi’s pay “dilemma” with trader Andrew Hall of its Phibro unit as some type of Gordian Knot: Citi in $100 Million Pay Clash. It’s not.
It seems that Citicorp will legally owe Mr. Hall about $100 million for his compensation in 2009, but Citi’s senior managers are concerned about the political ramifications of paying such a large amount. The last time we checked, Citi had taken about $45,000,000,000 – yes, $45 billion – from wealthy, middle-class, and poor taxpayers, and those taxpayers had guaranteed losses of a few hundred billion more.
We suppose that folks at Citi are concerned that the Obama administration and the populists in Congress will attempt to penalize the firm – or possible incriminate the management – for making such large compensation payments. (Note: since at least the founding of the FDIC in 1933, Congress has had the legislative power to have ban such contracts, but has chosen not to do so.)
We’ve written a few times about the importance of the rule of law, and it’s quite shameful that many of our elected officials and representatives place such little value on it. (These are exactly the individuals that our Founding Fathers tried to protect against.) It’s almost as shameful as Mr. Obama stupidly inserting himself into the Gates/Cambridge Police mess; he does need to learn to shut-up.
We wrote about the AIG pay controversy in It Truly Is Disgraceful! and Confiscatory, Abusive Taxation: It’s Alimentary (and Dangerous), and we don’t see this emerging controversy as being any different.
That being said, we do believe that prop trading should be eliminated at insured institutions, including Citicorp, because we see no reason that taxpayers, including ourselves, should subsidize their risk-taking. We first recommended it in October in the aptly titled, Eliminate Proprietary Trading at Insured Institutions, and mentioned it many time since then, including our recent post, Paul Volcker Has It Right.
It seems that Mr. Hall earned his huge compensation award because he and his trading group gambled and won big. However, it was quite possible for him to have lost (and lost big). That would have increased the size of Citi’s losses and required additional taxpayer subsidization.
We don’t know Mr. Hall, but we do wish him every success in the world. We just have absolutely no desire to backstop him (and it’s not just his penchant for modern art).
We prefer that he work for a trading unit of a non-insured institution or run a hedge fund so that we don’t have to support him if he fails. In fact, a very short article in the Journal’s Heard on the Street section, Hedge Funds’ Proprietary Advantage, describes how many hedge funds are currently doing quite well (after many recent disasters last year). That’s the nature of the business. Let those willing to take the risks, reap the rewards AND bear the consequences of failure. (Is it too really much to ask?)
Perhaps Mr. Hall would like to purchase the Phibro unit from Citi and accept those same risks and rewards that other fund operators face. It seems that closing the sale before the end of the calendar year would (or could) be a grand outcome for both Mr. Hall and Citi. We think that banning prop trading at insured institutions as of January 1, 2010, would go a long way towards slicing through similar knotty situations at other banks.
One final note: in the tradition of horrendously-arranged government web sites, see the above-mentioned FDIC site. It’s ugly and busy and has no focus, and it’s just what we expect from our bureaucracy. Does the reader have any higher expectations? Be honest.
What Is Citigroup Worth?
The Wall Street Journal has an editorial in today’s paper – January 14 – that seems to be ripped from our headlines: it calls for the dismemberment of Citigroup, and it implies that Citi has lost its right to exist. (See When Is Enough Enough?, for example, or any of our calls to nationalize it.)
As we’ve seen in various news reports, Citigroup has lost about $30,000,000,000 or so in the last five quarters and has received about $45,000,000,000 in TARP funds, and the federal government has guaranteed another $250,000,000,000 or so of its debts.
And yet, and yet, Citigroup’s stock price is about $5, which gives it a market value, according to Google Finance of about $32 billion. That’s less than 10% of its share price two years ago and about 20% of its share price this time last year.
As a point of comparison, if the federal government gave us $45 billion, we would be worth $45 billion. (Well, almost $45 billion, but a lot closer to $45 billion than $32 billion. And, yes, we know there is a difference between the government’s preferred investment and market value of the common shares.)
Hmmm, without bothering to check the tax implications, let’s gross-up the loss of about $30,000,000,000 to the $45 billion. That means that the government has subsidized all of the recognized losses to date.
So, despite the guarantee of debt, which could be valued the same way that banks estimate values of their insured deposits, and despite the additional deposit insurance coverage, etc., society and the world economy think that Citigroup isn’t worth a whole lot.1
Diligent, and younger readers with good memories, may recall that as far back as September we separated the mortgage fiasco from the larger, and far more serious, liquidity crisis in confidence. (Here’s an entry from early October: Even A Perfect Bailout Will Fail.)
We cite Citigroup as prima facie evidence of that distinction. Based upon equity values – despite the government’s massive injection of funds and its guarantees – we’d say that the mortgage fiasco has informed investors throughout this country and across the world that’s Citi’s management excels at value destruction, and that’s the consensus prospective estimation. That is, of course, unless investors estimate that recognized losses, which appear on financial statements, are only a fraction of Citigroup’s true losses so far.
This wouldn’t be the first time that Citigroup under-estimated its losses. As the Journal editorial notes, in October, 2007, Citi officials claimed that it had only “$70 million in indirect exposure to subprime assets.” Now, how many orders of magnitude is that from the truth? So whether clueless or duplicitous, “why trust them?” the market seems to be saying.
In this case, it seems hard to argue with that logic.
By the way, the front page headline of today’s paper is “Citigroup Ready to Shrink Itself by a Third.” We wondered – in jest – why the second line didn’t read, “In Small Attempt to Align Assets with Equity Values.”
Like always, we may edit this post in the future, in case our early-morning, frostbitten fingers have erred.
Copyright © 2009 Spero Consulting.
Footnote:
- Banks believe that liabilities have value if they fund operations less expensively than alternative sources. In non-volatile times, banks discount – in a present value sense – the difference between their interest cost of deposits with guarantees (and service) and their cost without those guarantees – of borrowing on the open market – and that difference is the “value” of the deposits. Normally, they use the LIBOR as their discount rates. Lower long-term rates and flatter yield curves make those deposits less valuable, but using LIBOR for long-term borrowing for Citi just doesn’t seem correct to us, i.e., given that it must rely on government funding, Citi’s rates should be substantially higher. By the way, the difference isn’t due to just guarantees, but customer behavior, too. For example, ignoring the cost to service the accounts, customers who keep money for long periods of time in checking accounts that pay no interest are deemed to have value. ↩
When Is Enough Enough?
Last Monday, The Wall Street Journal published a small survey of mostly academic economists in Experts’ Rx on How to Get Out of This Mess. (Perhaps “academic economist” is redundant.)
We couldn’t tell whether a few of the replies were poorly edited or were inherently trite, e.g., to paraphrase we need long-term solutions, new risk measures, and the ability to separate the good and bad firms. You don’t say!
Anyway, we did like Douglas Diamond’s response: “You have lots of carrots and no sticks right now.”
The reporter, Justin Lahart, must have paraphrased the rest of Mr. Diamond’s reply because there were no other quotation marks. He wrote: “One alternative would be legislative changes that would allow regulators to quickly wipe out existing shareholders at problem banks without invoking bankruptcy, and convert long-term debt issued after the legislation went into effect to equity. That would effectively recapitalize the bank without the need for government money. And it would give big incentives to investors to buy banks’ debt, and to banks to raise capital in order to keep their shareholders from being wiped out.”
Now, we’re noting his remark a week after that article was published because, today, we saw on the same web site that it’s estimated that Citi lost another $10,000,000,000 in the fourth quarter of 2008. That means that it’s lost about $30,000,000,000 since Halloween, 2007, and that seems like a lot of money to us. We haven’t bothered to check it, but that $30 billion would be after-tax, which means gross losses were even larger.
Of course, Citi was one of the firms that “rescued” by the government, and of that much has been written about that by many people, including at our site.
Sadly, today we also saw Mr. Bush request the “other” $350,000,000,000. (When the Feds decide to urinate our tax dollars away they do it on a scale rarely seen outside of Niagara Falls.)
These recent losses and the government’s willingness to subsidize make us ask: when is enough, enough?
To be clear with our readers, we don’t do this out of vengeance or spite or envy nor, unfortunately, even a sense of amusement. In fact, we write in the spirit of the following excerpt from Leviticus 19:17 — 18, which we saw in our Magnificat last week:
You shall not bear hatred for your brother in your heart. Though you may have to reprove your fellow man, do not incur sin because of him.
Take no revenge and cherish no grudge against your fellow countrymen. You shall love your neighbor as yourself. I am the LORD.
In that spirit, and consistent with Mr. Diamond’s recommendation, we ask, when do we get to see the official reproof? When do these folks lose their right to control assets, and when do these corporations – legal entities – forfeit their existence and charters?
If you’re familiar with our writings, then you know that we think they are far past that point of no return for many corporations. Exactly how less trustworthy must they become before the government intervenes per ours or Mr. Diamond’s recommendations?
The Seventy-Year-Old Teenager
The Curious Case of Robert Rubin
The weekend edition of The Wall Street Journal has a front page interview with Robert Rubin: Rubin, Under Fire, Defends His Role at Citi.
We’ve criticized Citi’s board in the (recent) past, and we’re still particularly fixated on the fact that few directors had financial industry experience. That seems neither wise nor even prudent for a financial institution with over $3,000,000,000,000 of assets. (That’s $3 trillion, but we like to write it out for effect, because it seems like a lot of money.)
As the article mentions, Mr. Rubin was “the only board member with experience as a trader or risk manager.”
Since 1999, Mr. Rubin has made about $119 million from Citigroup while having no operating responsibilities. We have absolutely no problem with that, and, in fact, are looking for similar “work” ourselves. (Interested parties may use our contact form.)
Where we do have a problem is his insistence that none of Citi’s problems is his responsibility. As the inside headline reads: “Rubin Blames Citigroup’s Woes on the Broader Financial Crisis.” He almost seems to imply that Citigroup is a hapless, unwitting victim of something bigger than itself – something it couldn’t be expected to consider, manage, of fathom: “Nobody was prepared for this…”
In that case, exactly what type of stewardship, guidance, and profundities did he provide?
Suppose it is true that Citi and its board were faultless. Shouldn’t they have been able to consider how they might be damaged by a general downturn or a financial crisis that was no fault of its (their) own. Thus, our little proof-by-contradiction shows the silliness of the argument.
Moreover, we doubt that even the gullible buys the story that Citi was simple a victim of exogenous factors, which were unpredictable and beyond its control.
There is a crisis of confidence, but that crisis erupted and survives because markets and investors realized the large financial institutions, including Citigroup, were far less competent investing and trading than they previously believed, i.e., that in retrospect, previous reported profits were unreal and unsustainable.
Citigroup’s share price of $8.29, which is about double where it was last weekend, has lost about 85% of its value in two years. (In the first three years of the Great Depression – 1929 — 1932 – the Dow Jones Industrial Average lost the same percentage without a backstop by government.) That is an indictment against Citigroup’s way of doing business far beyond the general condemnation of the financial services industry in general and with all of the subsidies provided by tax payers through the various recent government guarantees and bailout measures.
Clearly, investors find fault with Citi’s strategic and operating decisions. So, if Mr. Rubin wasn’t making operating decisions, what type was he making? If they weren’t strategic, what remains? As other critics note, Mr. Rubin is “trying to have it both ways.”
Of course, his posturing is silly, as it was he, himself, who pushed senior management to bear more risk in 2004 — 2005. If that’s not a strategic, board-level, decision, what is? From our reading, it seems that he may now be trying to blame a consultant for suggesting the board instruct managers to take additional risk.
He also blames senior management for not executing the strategic plans properly and risk management for, well, weak risk management.
“I wouldn’t run a financial institution based upon someone’s view about what markets would do.”
Of course, as the article explains that is exactly what he did in 2004 — 2005. (We wouldn’t doubt that he did it at other times, too, but don’t have the time or energy to search for quotes or stories.) Well, he didn’t do it based upon someone else’s view; instead, Citi’s strategy seemed to be based upon his own views. (We could well imagine boardroom discussions where inexperienced directors immediately defer to the former Treasury Secretary and Goldman Sachs Co-Chair.
Now, Mr. Rubin should know that developing and acknowledging such a world-view is exactly how financial institutions are run, whether that view is explicitly stated or not. (If it is not explicit, then not providing such a view and or considering its implications seems negligent at worst and immature at best, ergo, our title.) What else could strategic and operating plans be based upon? How else could risks be measured, uncertainties be considered, and contingencies be planned? Or are those considerations too much like work? If so, it is not difficult to see why Citi is where it is at this November, and that is completely consistent with both a specific and the more general crisis in confidence.
As we see it, Mr. Rubin is seventy-years-old. He should grow-up and accept the responsibilities that come with his position and rewards, and stop behaving like a petulant teenager.
Bill’s and Bill’s*
Bill’s and Bill’s, Bill’s and Bill’s
It’s bailout time, for the Citi
Plead-a-ling, hear them sing
To-day, it is our bail-out day!
Citi sideways, Wall Street sideways
Dressed in bank hol-i-day style
In the air there’s a feeling of Christmas
Bankers laughing, taxes passing
Wasting pile after pile
And on every street corner you’ll hear…
Trill’s and Trill’s, Trill’s and Trill’s
It’s Christmas time for the Citi
Plead-a-ling, hear them all sing
“We want our own bail-out day!”
*With all due respect and apologies to Ray Evans and Jay Livingston and their classic, Silver Bells, and for the truly clueless, note that we’re abbreviating billions and trillions to fit the tune.
Should Citi Be Nationalized as a Warning to Others?
Note: We’ll likely expand and edit this post in the morning, but wanted to circulate the idea before bedtime.
We’re rather diligent – but not obsessed– about keeping up with financial new.1 We’ve heard many financial firms announce lay-offs and have read how at a few, like Goldman, senior managers have decided to forgo bonuses.
As we recall, most banks have announced withdrawals from subprime mortgage origination and loans, which seems like a wise move, but given the magnitude of their errors and mistakes, we’re very surprised that we haven’t read more about banks taking dramatic and drastic actions to limit risks and exposures.
We don’t mean hoarding cash and the knee-jerk reactions not to lend. We’re thinking more about their investing, trading, and structuring operations.
Maybe the banks are eliminating desks and floors, but they just aren’t talking about it, or maybe they have mentioned it, but we’ve missed it.
We’d certainly encourage financial firms to change their ways. In fact, while we’re close to Libertarian on many economic issues, we wrote on October 11, to Eliminate Proprietary Trading at Insured Institutions as a way to mitigate moral hazard and protect tax-payer interests. (Once they’re insured, it is no longer a free market, and there should be quid pro quo, not just subsidization.)
On September 24, in our post Could a “Bailout” Prolong the Financial Crisis?, we wrote:
So, if the government’s purchase of these thingies is approved, we would expect to see a continuation of the panicky behavior until the securities are actually transferred to the government because it is unlikely that anyone will know who has the worse ones so (means that) all remain suspect. (Also note that the most panicky firms might be ones who are projecting their portfolios onto others, and so might be the ones that other firms would like to avoid.)
Now that the TA is out of TARP, it seems that this week’s equity market performance, particularly among financial firms, supports our September 24th prediction above, i.e., the continuation of panicky behavior until actual transfers occur. We discussed related issues on October 7, in Even A Perfect Bailout Will Fail.
Or maybe they’re just taking a wait-and-see approach. That’s what we predicted in early October when we described the very high probability of failure of TARP.
Today’s Wall Street Journal reports that Citi Weighs Its Options, Including Firm’s Sale, and we wonder if it will survive the weekend.
As we argued in Bigger Is Not Necessarily Better way back in September, we see no reason to encourage mega-mergers and we based that argument on both moral hazard and systematization of idiosyncratic risk considerations.
So, as we argued in around October 10, we believe that It’s Time! to nationalize the worst offenders leaving no shareholders, except non-executive employees, with any ownership interests. We reiterated much of the same argument in a very long post from Wednesday: OMG, Mr. Paulson Agreed with Us Twice in One Week! (Yeah, we have a teenager.)
It seems that given its size of around $2,000,000,000,000, we taxpayers will be on the hook for Citi, anyways, so why not eliminate the middleman and provide any upside benefit to the true residual claimants?
In two recent posts, The Failure of Boards to Direct and When the Going Gets Tough…Quit, we’ve criticized the composition of Citigroup’s board because of their general lack of financial industry experience. (We’re sorry, but that seems unconscionable to us.)
We won’t repeat all of our arguments for nationalization, but the expropriation of Citigroup would certainly motivate other banks to act quickly and largely to mitigate risks and stabilize cash flows. (It would likely stop insurance companies and others from buying small banks or S&Ls in their beggarly attempts to become bank holding companies.)
By the way, for new readers, we’re not just for the nationalization of a few banks, we actually have a private solution for the mortgage crisis that involves providing the right tax incentives – like investment tax credits – to individuals, firms, and fund managers. (Read about it here: A Better Solution (than a government takeover).)
That solution to the mortgage crisis stills leaves the larger liquidity or confidence crisis for banks. That has arisen because the mortgage crisis has informed us (and others) that despite their pseudo-sophistication and the veneer of objectivity and science (almost), there is a very good chance that they don’t understand their environment or have reliable ways to value many of their products – despite their massive investments and activities for those purposes. In terms of an adverse selection problem, they’ve reveal themselves to be low types. (See last week’s Global Warming and the Mortgage Crisis for a discussion on that topic.)
So, as a nation, we should want (and attempt to motivate) the banks to act quickly and decisively (and with their private information) to get their accounts in order.
The benefits of TARP don’t seem to have provided the correct motivation to the banking firms to act to maintain their own liquidity and capital positions. We’d argue that this is an incentive problem and that if the benefit of the TARP “carrots” have been insufficient motivate socially-optimal behavior. So, perhaps a “stick,” like the threat of expropriation, induce clean-up. Moreover, it is seems that Citi will be ours anyway, so, why not give it a try on taxpayers’ terms rather than taxpayers’ backs?
- “Not obsessed” means we haven’t performed a thorough web search. ↩
The Failure of Boards to Direct
Analogously: The Gangs That Can’t Shoot Straight
Last week in The Understatement of the Year! we wrote, “The problem, dear reader, is that few senior managers (and almost no board members) understand the valuation and risk models used for securitizations…”
Today, there is an article in The Wall Street Journal, Citi Directors Mull Replacing Chairman, that provides additional evidence to support our claim.
To be frank, unless it is we, we don’t really care who Citi selects as a chairman, and we doubt that you do, also.
We’re more interested in the way that the article’s writers describe board member Richard Parsons as “one of the few Citigroup directors with experience in financial services.”
One of the largest financial service firms in the world, and only a few directors with (any type of) financial service experience. How could they lose? we ask sarcastically. There is a multitude of types of experience with financial services firms; so, we’d argue that while such experience is necessary, it is by no means sufficient to understand and evaluate complicated products, hedges, strategies, and risks.
To be faced with such inexperience, it must be the case that either senior managers are particularly poor judges of talent or those inexperienced directors were nominated specifically because they lacked experience or despite their lack of experience.
The former reason for purposely selecting the inexperienced is clearly cynical and involves senior management attempting to nominate members who are much more likely to be weak and unable to provide the requisite level of oversight.
The latter reason may or may not be cynical. For example, an unknowledgeable director may have been chosen because he or she is particularly savvy and a fast learner (not cynical) or because he or she has a membership at Augusta or Oakmont or some other exclusive golf club where senior managers might like to play (very cynical).
Now, we’re willing to stipulate that in many market and economic settings, it may not seem to matter. In fact, it is possible in the overwhelming majority of the cases that it doesn’t seem to matter, but that doesn’t mean that such nominations are indeed consequence-free.
For such cases, we like the analogy of a cop who is a particularly bad shot. That fact is almost never directly relevant as law enforcement officers rarely draw their weapons and fire. So, it may seem that it doesn’t matter.
Unfortunately, the self-aware officer realizes that he or she is a poor shot and acknowledges his or her inability to respond effectively to extreme situations. This knowledge likely colors or influences his or her behavior in all settings, including incidents where only a very small probability of escalation exists.
Such behavior is usually correctly interpreted by the other relevant parties as weakness. However, in some cases the officer’s may over-react or behave in an extremely risk-averse manner due to his or her personal insecurity. Regardless, in both cases, the officer’s and society’s well-being has been compromised.
It is much the same with governance and risk management within firms. Those directors lacking adequate firepower are unlikely to deter anti-social behavior; thus, weak boards are more likely to induce excessive risk-taking and increased odds of a disaster (although that realization may not occur). Is that increased probability of disaster worth 18 holes at a world-famous course? Don’t answer that!
TARP? Garp? Is There a Difference?
We must admit, this is our first post that is truly in bad taste, but it seems so appropriate that we just could not help ourselves. TARP. TARP.
We’re trying to write seriously about the government’s – the Treasury Department’s – latest expediencies and tactics to … well, we’re not sure of the objective… presumably, to make it all go away so that Mr. Bush and his appointees can enjoy their last Autumn and Christmas in D.C. (Why would anyone want to ruin Mr. Bush’s last Christmas in the White House by causing the possible financial ruin of much of the world. People can be so mean and selfish sometimes! Can’t we just use the taxpayers’ money to pay them to go away!)
So here is our personal problem. Every time we think of TARP we are reminded of Garp as in John Irving’s The World According to Garp. It has been a long time since we’ve read it; so, the details are slightly hazy, but we think we’ve remembered enough to draw the correct analogy.
We’re not actually reminded of Garp himself, so much, but more of his father T.S. Garp, the critically-wounded, WWII soldier, who spends his last days bedridden and senseless in a stateside army hospital. As we recall, he had been a ball-turret gunner on perhaps the underside of a B17 or B24, who took shrapnel to the head during a bombing raid over Germany.
“T.S.” were not his first two initials, but represented his rank, Technical Sergeant, which is about all of the background his mother, an attending hospital nurse in the same ward, knew of his father.
As we recall, despite his diminished state, T.S. Garp had one compulsion, which he seemed to be able to do unconsciously and definitely not self-consciously. During these compulsive episodes, he would repeat his name, “Garp, Garp.…” As his condition worsened, his mantra changed to “Arp, Arp…” and finally, just before his death to “Ar, Ar…”
In our mind, many of the Treasury’s recent tactics don’t seem that different than T.S. Garp’s last efforts. However, within a shorter period of time – less than two weeks – they seemed to have gone from “TARP, TARP…” to “RP, RP.…”
The injection of capital to “save the banks” seems to be nothing more than a Relief Program. Corporate welfare and cronyism at its self-indulgent best.
So did yesterday’s tough talk go like this? “We’re forcing you to take this money, which no one else will lend to you, and you won’t lend to each other. Furthermore, to show you we mean business, we’re going to guarantee your debt for a fraction of the true, underlying, insurance premium, and finally, before you say anything, know that we’re going to insure your deposits, too. That should teach you to get into a mess like this, again.” Maybe Mr. Paulson should read John Rosemond, rather than contacting his former employees and his friends for advice on how to save themselves.
Once again, shame on them.
As they spend our money–all of our money–the cruelty of those two near-homonyms, sense and cents – all 70 trillion of the latter – becomes brutally clear.
