And now, we turn to the news from Wall Street.
“It was getting to be pretty obvious, but I appreciate the candor,” says colleague Byron King.
He was referring to a report in the New York Times, in which John Reed, who put together the landmark 1998 merger between Citicorp and Travelers Insurance, called his big deal a “mistake.”
At the time, it looked like a mistake to us too. It’s hard enough to run a small business. Trying to run a finance company on that scale was asking for trouble.
Still, the press was impressed. The NYT:
“At the time of its creation, Citigroup – which combined Citicorp, Mr Reed’s bank, with Mr [Sandy] Weill’s Travelers insurance and brokerage business – was hailed as ushering in a new era in finance by creating a one-stop shop for consumer and corporate customers.
“In a rare interview, Mr Reed said it was unclear whether the company’s model or its management deserved the greater share of blame for its problems. But he said Citigroup turned out to be a “sad story”.
“The specific merger transaction clearly has to be seen to have been a mistake,” Mr Reed said.
“The stockholders have not benefited, the employees certainly have not benefited and I don’t think the customers have benefited because our franchises are weaker than they have been.”
The company’s shares have been cut in half over the last year. And it had to raise another $30 billion of share capital, further diluting existing owners.
Who’s to blame? Everything was fine when Mr. Reed left in 2000, he says. Mr. Weill thinks the deal was a great success…noting that the share rose more than Berkshire Hathaway from ’98 to ’02. The business was in better shape than ever when he left in 2003. What went wrong, then, must have happened after that – when Chuck Prince was running things. Mr. Prince, who no longer holds the post, (but still seems to be holding the bag) was replaced by Vikram Pankit in December.
Normally, these old geezers keep their mouths shut. No one would care what they had to say anyway. But these are not normal times. Something is happening on Wall Street and in the City that hasn’t been seen for a long, long time. The finance sector is being de-leveraged. Soon it will be dismembered too.
Finance, as a percentage of total business earnings, went from 10% at the beginning of the boom in ’80 to 40% last year. Whole legions of bright eyed, bushy tailed young people have entered the trade – usually with spiffy degrees from Wharton or Oxbridge or HEC. They are the cogs of this great, globalized polyglot machine. On a recent tour of private banks, we were greeted by a young man of Indian origin who had trained in Canada and now works for Barclays. Another meeting, at HSBC, featured two young women – one of English, the other of African, origin. Over at Pictet, our interlocutor was a Frenchman who has worked in the City for more than 10 years. They all speak the same language, though – a kind of financial Desperanto. Ask them about the Black Scholes Option Pricing model or about rebalancing portfolios to take more advantage of decoupling…or about alpha; you will get roughly the same answer.
During the boom years, putting together these interchangeable parts must have been too tempting to resist. But it has produced some rather ungainly monsters.
UBS, for example. Former CFO Luqman Arnold was forced out of UBS in 2001. Under Marcel Ospel, the bank became one of the biggest employers in the industry, adding a whole range of products and services. But now, Arnold is on the attack, saying the whole thing needs to be reassembled.
The shareholders are up in arms too. In Basel, 6,000 shareholders got together…mostly to complain about what they see as gross negligence on the part of the people running UBS. News reports say they also had it in for the United States of America, whose loose financial mores they think have infected the Swiss financial industry.
“The American El Dorado has become a scene from a Western,” declared one middle-aged shareholder, Therese Klemenz. “UBS was the figurehead of Swiss business. As a good housewife, I know you shouldn’t put all your eggs in one basket. A bank is not a casino.”
Thomas Minder, a local shareholder activist, was even more outraged. “What happened here is a scandal,” he thundered. “You’re responsible for the biggest loss in the history of the Swiss economy. Put an end to the Americanization of the Swiss economy!”
Mr. Minder wasn’t going to leave it at that. He took a run at the podium, perhaps with liquor on his breath and certainly with vengeance on his mind, but was restrained by security guards.
UBS bet $80 billion of shareholders’ money on US mortgage securities. So far, it has lost $37 billion.
UBS shareholders seemed to think that what happened to them should have been illegal. So do a lot of people. And here comes David Komansky, former CEO of Merrill Lynch, with the kind of eye witness testimony we were looking for. Asked what his successor, Stanley O’Neal, had contributed to Merrill’s problems, Komansky said: “What he did to Merrill Lynch was absolutely criminal… The thing I resent about Stan’s tenure is his attempted destruction of the value system and culture that existed at Merrill Lynch.”
Markets and Money