New Geography

Author: Henry Ehrlich

  • The Slippery Slope of Corporate Culture

    Greg Smith’s resignation lament in the New York Times, Why I Am Leaving Goldman Sachs, has rightly caused an uproar. He writes, “I can honestly say that the environment now is as toxic and destructive as I have ever seen it,” implying that it has been toxic and destructive all along. Tell us something we don’t know.

    Twenty years ago when I worked at JP Morgan, the public bond underwriters and pension managers complained that they were at a disadvantage when competing for business with Goldman because they weren’t allowed to “pay to play”, i.e. make political contributions in exchange for business.

    Those two banks had long been at opposite ends of the spectrum. A century ago, the original J. Pierpont Morgan told counsel for a Congressional committee investigating the money trust that the most important criterion for supplying commercial credit was character, “Because a man I do not trust could not get money from me for all the bonds in Christendom.” Language, I must add, that distinguished him in ways large and small from moneylenders like Mr. Goldman and Mr. Sachs. Fifteen years ago an unnamed executive summed up the difference in business practices between the two banks to a Times reporter: “Morgan will show up with 20 people for a three-hour presentation to a client. Goldman Sachs will just send two people to sketch out a deal on a napkin at the golf club bar.”

    With Robert Rubin, Henry Paulson, and Jon Corzine among the ranks of Goldman’s recent former CEOs who have distinguished themselves in government and finance, you learn almost everything you need to know about the contemporary Goldman ethic, good and bad. Current honcho Lloyd Blankfein has said they are doing “God’s work.” For a Goldman investment banker to evoke the almighty as justification, he has to feel real heat.

    Mr. Smith feels let down by corruption in Goldman’s corporate culture:

    “It might sound surprising to a skeptical public, but culture … revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients…. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years.”

    A closer look at that culture would reveal something besides always doing right by the client. Corporate culture is really a nice way of moving people with a variety of motives in lockstep. One man’s client service is another man’s rapacious self-interest. Given the profitability of modern finance, rapacious self-interest has had an inexorable pull. The habits ingrained through a strong corporate culture are merely instruments for moving the herd along. Call it conformism, and in this, as in so many other areas, there’s no question that Goldman is a leader.

    Upon reading Smith’s op-ed, I opened an excellent reference volume, The Wiley Book of Business Quotations, to the Goldman Sachs entry for corporate culture. (Okay, maybe that isn’t quite accurate—I compiled the book myself and knew what was there.) I found Theresa M. Potter’s New York Metropolitan Diary column of November 13, 1996:

    Dear Diary:
    Overheard on the elevator at Goldman Sachs on a recent “dress-down Friday,” a conversation between a long-time partner and a smartly attired young analyst.
    Partner (sternly): It’s Friday. You’re not supposed to be wearing a tie.”
    Analyst (crestfallen): “But it’s not silk.”

    It’s a slippery slope.

  • Citibank, Citizen Wriston, And The Age of Greed

    Robert Sarnoff , the CEO of RCA before it was absorbed by GE, once said, “Finance is the passing of money from hand to hand until it disappears.” That process is very clearly defined in The Age of Greed by Jeffrey Madrick. It recounts, in concise terms, how a few dozen individuals—some in the private sector, some in government–brought us to our current economic pass, in which finance seems to have been completely detached from life. Names from the past come back, and their crimes are explained. Ivan Boesky, Michael Milken, and Dennis Levine look guiltier in the retelling than they did in the newspapers at the time. And in this telling, the philosopher king of the new finance was Walter Wriston, CEO of Citicorp.

    I wrote for Wriston and other senior managers of Citibank from 1980 through his retirement in 1984, and for his successors through 1991. My colleagues and I were charged with helping Wriston make the case that the financial regulatory regime that was put in place during the Depression was obsolete. Let me make it clear: I was a footnote, although I occasionally run into old acquaintances who still shake their fingers at me.

    Madrick’s Wriston is by far the book’s most compelling character. As with all the other subjects, there’s a smattering of armchair Freud, although most of the political figures who make appearances here escape their two minutes on the shrink’s couch. Wriston’s psyche was more interesting than the insecurities of Ivan Boesky and Sandy Weill, to name just two; his university-president father Henry Wriston despised the New Deal as it was happening, and imparted that attitude to the son. Henry then remarried too quickly after Walter’s mother died for the son’s taste, and they became estranged.

    But there’s more to Wriston than you read in Madrick. He was a restless intellect, impatient with field of diplomacy he had studied for before World War II, and after taking a job in banking, which he once wrote seemed like, “the embodiment of everything dull,” found a vehicle for exerting his imagination, and then for fulfilling his ambitions. The First National City Bank, later to become Citibank and Citicorp, and then Citibank again, had inspired imperial dreams before. Through a series of mergers it became the biggest bank in the biggest city in the country. When trade followed the flag around the world, Citibank’s precursors were right there with it. During the Roaring Twenties, Charles Mitchell dreamed of a “bank for all”, the forerunner of Wriston’s vision of one-stop banking, although Mitchell’s stewardship ended with a trial (and an acquittal) after the stock market crash and the Pecora hearings in the early ‘30s. While the bank had social register threads running through its history—when Wriston started the president was James Stillman Rockefeller, descended both from the Stillmans and the Rockefellers, married to a Carnegie—the patrician elements always had hungry outsiders around to push the envelop of banking practice. When Rockefeller was chairman, he had a president named George Moore, and Wriston was his protégé. However, Moore was too frisky for Rockefeller, and when a successor was chosen, it was Wriston.

    Wriston hung a portrait of Friederich Hayek on the wall of his office. He was a reader. When Adam Smith became the Holy Ghost of the Church of Deregulation, Wriston’s top writer (and later my boss) was the man who actually edited The Wealth of Nations for the Great Books. When I was new there, I asked one of the bigshot corporate bankers which great thinkers he liked to quote in his speeches. He answered, “The only person who can get away with that is Walt Wriston, and I’m not sure he can.” Wriston’s ambition may have been shaped by philosophy, but he achieved it with tactics and strategy that sprang from a contrary nature as much as by the force of his ideas, and Madrick recounts that. He wanted his bank to be valued like a growth stock, and promised analysts 15% a year return on equity—not a recipe for safety and soundness.

    Whether it was inventing financial instruments to get around interest rate restrictions, making outsize bets on railroad bonds and New York City bonds, creating the Eurodollar market, blitzing the country with credit cards, or wholesale lending to developing countries to recycle petrodollars, Wriston had a knack for making money when the economy was right and then challenging the government to deregulate in time to accommodate his losses. Personally, I think that before the bank was too big to fail, it was too big to succeed.

    Looked at now, there’s something quaint about these investments. At least they had to do with real things, like trains, oil, municipal governance, and the ostensible aspirations of people in emerging markets, although they were mostly oligarchs and autocrats. In Madrick’s account, Wriston was dismissive of the government’s capacity to efficiently recycle petro-dollars, among many other things, and contended that his loan officers knew more about their corporate customers than anyone else did, which would enable them to safely make riskier loans than capital standards would permit. We all know how that turned out.

    Wriston was a real visionary. To underscore his then-revolutionary idea that information about money was as important as money itself, he bought a transponder on a satellite to carry the bank’s data stream, and then put a satellite on the cover of the annual report. Theoretically, all that proprietary information made it hard to hide bad news about a company’s finances or a country’s; executives and prime ministers beware of poor management! He was undoubtedly the first bank CEO to anticipate what Moore’s Law—quantifying the exponential growth of computing power—would mean to business and society. Unfortunately, that power is exactly what enables the hollow finance we have today.

    Reading Madrick’s book was like watching my life pass before my eyes, including the parts I slept through, and it certainly brought me up to date on events that happened long after my eyes glazed over.

    It reminded me that when Wriston ran it, Citibank was fun to work for, as jobs in tall buildings went. My closest colleagues were well-educated and witty refugees from college faculties. The bank’s historian worked closely with us, and we learned the secrets that never made it into the deadly official history, such as the fact that one of Wriston’s predecessors kept a house in Paris, where he was known among the haute couturiers as le bonbon, or that when the Titanic went down, some hard-money banker had written to customers that there was good news—the loss of all the paper currency aboard would strengthen the dollar. Wriston set the tone: History counted, an attitude that wouldn’t survive the cost-cutting that came later. Wriston was renown for his sharp needle, but when I found myself in his office with the portrait of Hayek staring down, he seemed to enjoy the relief from the routine pressures of his job. I always had some kind of bleeding heart question based on current events, and he always had a sharp, witty retort.

    He was also a citizen. When the City of New York had its own financial collapse in 1975 (“Ford to City: Drop Dead”), Wriston represented the commercial banks on the committee charged with rescuing the city’s finances. One of the bank’s economists assigned to work with him saw the beating Wriston took every day at the hands of the municipal unions and asked why he carried on. He answered, “Because I live here.” I wish some of the new financiers who have benefited from the work Wriston did would exhibit some evidence that they felt that way about the city. About the country. About the world.

    Photo: Bigstockphotos.com; the old Citibank and newer Citicorp buildings.

    Henry Ehrlich no longer writes for bankers, although he still likes money. He is editor of
    www.asthmaallergieschildren.com, and co-author of Asthma Allergies Children: a parent’s guide.

  • Ethics, Banking And The Coin of the Realm

    Many years ago, I wrote for a New York investment bank whose name has been semi-obscured by the epidemic of shotgun marriages on Wall Street in the intervening decades. Thus, the news that Goldman Sachs enabled the miserable financial accounting habits of Greece did not surprise me, nor, I feel sure, anyone who ever worked for one of the banks. As many characters on “The Wire” put it over five years of exquisite television, “All in the game, yo.” Or, in the words of a previous era’s television icon — JR Ewing, Texas oilman on “Dallas” — “Once you give up your ethics, the rest is a piece of cake.”

    The New York Times account of a team of Goldman bankers parachuting into Athens last November was unusual in one way: the fact that the assault was led by the bank’s president. That indicates the priority attached to the possibility that a sovereign nation’s economy might go the way of Lehman Brothers, with Goldman’s DNA on the corpse. What financial resources did he have in his briefcase? I wonder. It can’t have been US taxpayer money — Goldman had already paid that back.

    No, Goldman offered the same kind of solution, ultimately refused, that had worked many times in the past, which the Times described as “a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.”

    Legal? Probably. Ethical? Well…

    You remember “Ethics.” It’s defined in the Oxford English Dictionary as the “science of morals; moral principles or code.” Some science. I once had to go from office to office at the bank for a CEO speech on the topic, to be delivered at the Harvard Business School. I heard story after story about how the bank’s morals were routinely tested, ranging from the ridiculous to the sublimely ridiculous, to the frontiers of illegality.

    To be fair, some bankers still felt bound by institutional standards, in part because they still operated under a commercial bank charter, which meant they were more tightly regulated than pure investment banks. For example, the bankers were precluded by bank policy from making political contributions to state and municipal politicians to underwrite bond issues — so-called pay-to-play — which put them at a big disadvantage in competition to Wall Street’s classic buccaneers. The separation of commercial and investment banking, embodied in the Depression-era Glass-Steagall Act, is something many in government and the financial industry would like to restore.

    But generally speaking, rules were meant to be bent, if not broken. In finance, doing things you might have trouble explaining to your own mother is business as usual. The ethical line that defines what’s right is often very close to the line that defines what’s legal. The bigger problems are posed by the line that separates what’s right from what’s profitable. Bankers always have their feet firmly planted on a slippery slope.

    At times, the distinctions are trivial. For example, among the people I met at work, there was the old Middle Eastern hand who kept a bottle of Scotch in his desk in Riyadh for clients who dropped by to talk business on evenings during Ramadan. Islam and Saudi law forbid locals to drink, but, hey, at least they only indulged after they were done praying for the day.

    My acquaintance’s day job consisted of arranging deals that circumvented the Islamic strictures against charging interest. This is achieved by transmuting loans into discrete purchases and sales at precise intervals and prices that happen to track market interest rates during the elapsed time. It had been common practice when doing business with oil-rich Muslims for decades, but you could see a degree of moral fudging that could easily snowball.

    Today’s headlines on the crisis in Greece — and its ethical dimensions — echo the ethical quandaries faced by bankers in days gone by. There was the time that a world-renowned hedge fund operator wanted to speculate against the currency of another European country that today has massive credit problems of its own, and he wanted our bank to take some of his positions. The bank was big enough so that these positions could be disbursed throughout its book, and thereby escape notice prematurely. You do your client’s bidding, right? But what do you do when the central bank of the target country is also your client? Do you warn them? Do you refuse to act on behalf of one client when its interests are opposed to those of another? This is where the “science of morals” becomes the “art of morals,” and it is abstract art: you can see anything you want to see on the canvas. Besides, the speculator wouldn’t be attacking the currency if the country were better run.

    In a case which probably came close in mechanics to the transactions in the current crises in Greece, a huge economy’s huge bank, or maybe it was a too-big-to-fail industrial company, or maybe it was the Treasury of the nation itself (the distinctions have been blurred by the mists of time) wanted to move its regulatory obligations forward and thereby delay embarrassment or financial catastrophe until the future. Sound familiar? No? Then you haven’t been reading the papers.

    In this instance, explicit reporting deadlines had to be bridged, and the true health of a nation’s finances was at risk, at least insofar as accounting rules can be counted upon to define fiscal risk. The upright bankers did what any ethical beings would do. They insisted that the nation’s Finance Minister give an explicit nudge and wink, so that the bank’s complicity would have legal cover if the transaction ever came to light.

    This month’s Greek situation follows this template. Loans become swaps or other transactions that escape rules on lending, and circumvent deadlines. The problem is always pushed off into the future. This is an established tradition. Speaking about sovereign debt, Walter Wriston at Citibank used to say that you pay off a Treasury bill by selling another Treasury bill. Today you pay off a Treasury bill by calling it something else and selling that, if that’s what your customer wants. Rules, credit limits, due diligence, regulations, laws…these are just words. A rose may be a rose, but if you don’t want the wrong people to notice the smell, call it something else.

    At the dawn of the contemporary banking culture (the mid-1990s – so last century) a trader at Bankers Trust, another one of those institutions whose name has disappeared, was caught on tape saying, “What Bankers Trust can do for Sony and IBM is to get in the middle and rip them off, make a little money. Funny business, you know? Lure people into that calm and then just totally f— ‘em.”

    F— ‘em? He says that as if it’s a bad thing. American banking has now tracked the full trajectory from Nicholas Biddle, president of the Second Bank of the United States, and thorn in the side of Andrew Jackson, to his descendant Sydney Biddle Barrows, known as the Mayflower Madam, who ran a New York City call-girl ring in the 1980s. She famously said, “Clients don’t pay you to be with them, they pay you to go away”. Well, yes. Banks are there to serve your needs, and then they leave. But when the urge returns, they are just a phone call away.

    Henry Ehrlich is co-author of the forthcoming Asthma Allergies Children: A Parent’s Guide, and editor of the upcoming companion website AsthmaAllergiesChildren.com. Bankers Trust and “Dallas” quotations fromThe Wiley Book of Business Quotations, edited by Henry Ehrlich.

  • Credit Cards Flash At The White House

    Back in the 1980s, Citibank CEO John S. Reed looked at the bank’s earnings and said, more or less: This is really a credit card company with six other lines of business. That is, the card portfolio was making lots of dough, and carrying the rest. Commercial lending, real estate lending, clearing, foreign exchange, branch banking — all of them were flat or losing money, while the card business was cooking.

    Membership has its privileges indeed. I am reminded of this today because this past week President Obama has been meeting with the CEOs of the big credit card companies and trying to jawbone them into giving up some of the power they enjoy to goose their earnings by opportunistic manipulation of terms of service to their customers. It’s as if Mobil or BP had the power to come back in the dark of night and siphon off some of the gas they sold you in the afternoon.

    I wish the president well. He made it clear during his session with the card executives that he was familiar with their machinations from personal experience. We have come a long way since the first President Bush marveled at a bar code reader. But I have my doubts. Right now, the whole banking portfolio looks a good deal like Citibank did in those days. Commercial lending, mortgages, trading… all underwater.

    Credit cards may or may not be making money—that shoe doesn’t drop all at once—but when you can squeeze your customers the way all that fine print allows, you don’t give up the franchise lightly. Let’s not forget, the credit card business already had its bailout, in the form of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which functions according to the Law of Goodfellas: Drowning in medical bills? “F* you, pay me.” Swamped by alimony and child support? “F* you, pay me.”

    To that, add: Lost your job, house, and health insurance? “F* you!”

    When I arrived at Citibank in 1980, one of the first speeches I wrote was for the opening of Citibank, South Dakota, which was created expressly for the purpose of lodging the credit card business. Citibank had transplanted this business from New York State because New York still had usury laws, which capped retail interest rates at 12%.

    The bank was in big trouble. In the preceding years, Mr. Reed had flooded the nation with credit cards, a bold move in an era when people did their banking locally. A credit card was generally an extension of an existing banking relationship, replete with a credit history and some suasion of banker over customer. Reed’s folly, as it was occasionally called, entailed giving cards to total strangers by mass mailing—unlike retail banks, the U.S. Post Office could branch across state lines—many of whom were of dubious creditworthiness, or dubious character for that matter. With interest rates capped at 12% by New York law, and overnight money, borrowed as needed from other banks, floating north of that—this was when Paul Volcker was Fed chairman—something had to give. As Walter Wriston put it, “When you borrow money at 14% and lend it at 12%, you can’t make it up on volume.” When I was recruited as a Citibank speechwriter, among the perks my boss mentioned was that I could take out a loan at a low employee rate and buy a CD that paid a higher one.

    New York State legislators never imagined that one of the most venerable of banking institutions would relocate the business to a more favorable venue, a practice called jurisdiction shopping. But armed with some combination of the Bank Holding Company Act and other legislation, and something called the Commerce Clause of the U.S. Constitution, they found their way to South Dakota and its accommodating four-term Governor William Janklow. Governor Janklow’s signature legislative accomplishments were the reinstatement of capital punishment, and lifting the State’s usury limits. (He was later convicted of running a stop sign and hitting a motorcyclist, killing him. The family was precluded from collecting damages because Janklow was heading home from a speech at a country fair, and thus on official business. He is now a practicing lawyer.)

    But enough local color. Suffice it to say that the bank got what it wanted, and so did the State. The bank instantly became South Dakota’s largest employer, and, as we pointed out in our speeches, its college graduates found an employer where they could put their degrees to work without leaving home.

    This was so soon after I started working at Citibank that I was denied my first credit card because I hadn’t been at my job long enough. “I’m writing speeches for the chairman of the bank and for your boss, Rick Braddock,” I told the phone rep. “That may be,” she said, “but you haven’t been employed long enough to qualify.” When I told Rick, he laughed and said, “At least they’re doing their jobs. What do you want, plain vanilla or preferred?”

    Freed from the constraints of New York State law, Citibank survived its catastrophic loan losses and pioneered many now-standard innovations, including risk-based pricing, affinity cards, and a portfolio of cards targeted to different categories and classes of users.

    Even then, the promiscuous marketing of cards and the potential resulting horrors were manifest. Like pornographers’ lawyers, we found the germ of redeeming social importance. We were providing consumers with a tool for managing their personal and family finances. We were freeing working people from the necessity of relying on loan sharks from payday to payday. We were dealing with consenting adults.

    The bankers were fully aware, of course, that in spite of talk about sensible use of credit and managing the household budget, they were really selling liquor to the natives. Behind the scenes was a laboratory where young people with degrees in psychology were kicking the consumer behavior of millions around like a soccer ball, finding ways to hype the impulse to buy, buy, buy, and mining data to place “choices” in front of people based on their previous purchases. We take it all for granted now, with Amazon.com and a thousand other websites, but this took place in the years of the mid-1980s, one of which was 1984.

    By the end of last week, the biggest story out of the credit card summit was that Larry Summers fell asleep, a serendipity that is almost a reenactment of regulatory behavior over the past eight years or more (I am aware of the role Summers played under Clinton). The New York Times reported, “One executive told the president that although her assignment had been to try to persuade the president not to support new restrictions, ‘it was pretty clear I won’t succeed.’” The biggest underlying argument is that with the banks’ other businesses so weak, they don’t want to give up the one cash cow.

    My fear is that whatever new restriction is placed on this weasel industry, whether we have to wait for new Federal Reserve regulations in 2010 or they are expedited, the evil minions at the banks will find a way around it. This is the game they have long played. I have seen their tricks in my own accounts, including that first one that Mr. Braddock granted me. Lower the interest rate? They accelerate the repayment schedule, which means the customer has to pay just as much each month, resulting in lower repayment of interest as a share of the payment.

    It reminds me of the way cigarette companies lower the tar content of cigarettes by perforating the paper. The poor addict drags more often and harder, just to maintain the accustomed nicotine levels. Or the time I paid my balance in full—thousands of dollars worth—when my interest rate was low, then used the card in an emergency, only to find that my rate had shot up to Tony Soprano levels. Why? Because when I had paid my bill in full, they hadn’t yet posted $6 in new interest charges, which went unpaid, and therefore I was now being charged at deadbeat levels.

    Or, as Michael Corleone would put it, just when I thought I was out, they pulled me back in.

    Henry Ehrlich has written speeches as a freelancer for both the new, white-knight CEO of Fannie Mae and the former, disgraced CEO of Freddie Mac. He is author of Writing Effective Speeches and The Wiley Book of Business Quotations.

  • Chrysler: Detroit Loses Its Muscle

    With the clock finally running out for Chrysler, I was reminded of a theme that has run through most of my corporate work, namely that corporate culture is the element of any organization most resistant to change. As I have read (and written) many times, senior management and new management schemes come and go, but the prevalent attitude among the permanent work force is “this too shall pass.” The senior managers move on, and the culture reverts. It takes a “burning platform” to effect real change.

    When the corporate culture is aided and abetted by the national culture, as with the auto industry, the day of reckoning can be staved off indefinitely. Every time a structural threat to business as usual has arisen, the fix was in: Gas crisis? Whatever you do, don’t impose new fuel economy standards, and keep gas taxes low while you wait for oil prices to come back down again. Foreign competition? Import quotas. The political culture of Washington, regardless of who controlled the White House or Congress, was inseparable from the corporate culture of Detroit.

    This is unsurprising, since the car is so much a part of American culture. The romance of the car never dies, it just morphs into something else. What saved Chrysler when Lee Iacocca ran it? The minivan. Iacocca put a box on top of a passenger car frame just as baby boomers started their families. The ‘sixties VW bus, the counterculture’s vehicle of choice for magical mystery tours, was reincarnated for family life as the Dodge Caravan. New wealth in the ‘90s brought back the production muscle car, like a recessive gene that suddenly becomes manifest. Of course it never really went away.

    Woodstock has come and gone, but each summer suburban Detroit plays host to its own gathering of the tribes in a rite called American Iron. Loving owners and keepers of vintage GTOs, 442s (I confess, I talked my father into buying one of these when I was in high school, and he promptly sold it when he had to refill the gas tank about as often as Richard Nixon had to shave), and Corvettes park their cars on specific streets throughout the city, assigned according to make and model, where they throw open their hoods to reveal to their automotive kin lovingly restored and chromed vintage 7 liter engines. On schedule, the gentlemen will start their engines, shaking windows and rattling walls for miles around.

    I had one brief brush with Chrysler and Big 3 culture in the early 1990s when a PR firm hired me to fly to Detroit and write up a case study for its client, the consulting arm of accountants KPMG. KPMG was marketing a discipline it called Business Process Reengineering. Chrysler had applied this rigorous methodology to something they called the Wire-Housing Case. A wire housing is one of those brightly colored plastic sleeves with holes through which are threaded an assortment of wires, themselves wrapped in brightly colored plastic for easy color-coded connection to the appropriate circuitry.

    As I recall the numbers, each Chrysler vehicle contained seven wire housings, each of which was customized to particular electrical components of each model. Some would be used for only a couple of wires, and some many more. Each model had its own set of housings with its own specs written by dedicated teams of engineers, and produced by an extended family of suppliers.

    The KPMG BPR team had re-jiggered the design process to reduce the number of housings required for each vehicle from seven to only five, and in doing so realize savings to the company in the millions of dollars. Very impressive. The morning’s discussion was filled with the enormous gains that could accrue to the company if only it attacked each engineering problem with comparable rigor-for-hire courtesy of the firm’s consultants. When I asked the obvious questions, how long did it take to implement the change and how much money did they save in practice, the consultant and the accountant exchanged a look.

    In fact, they said, the change had never been implemented. Further questions elicited an impression that the automotive industry functioned internally with its own version of interest-group politics. Each system had its own web of constituencies—design teams, suppliers, brand managers, and so forth—and each thread needed to be appeased. There was no such thing as the greater good, any more than there is with health care reform, the F-22 fighter plane or, to use an example local to me, congestion pricing of traffic in New York City.

    The same tendency was on display more recently, and on a grander scale, after Chrysler was acquired by Daimler-Benz. The sages of Stuttgart had the bright idea that the company could save billions by mounting the American models on the frames and chassis of the Mercedes, and thus cut out redundant designers, engineers, and suppliers.

    This time, the Daimler engineers went into open revolt. Put those American pigs’ ears on our silk purses? Not on your life. And so another grand effort to rationalize the auto industry went by the boards. Daimler essentially sold the company to Cerberus Capital for parts.

    In the years since that visit to Detroit—I can easily place it in time because I also stopped in on an aunt in a nearby suburb who was glued to the O.J. Simpson trial—I have encountered a number of other consultants and their schemes to bring the automotive supply chain to heel. The companies would consolidate their supplier networks, sourcing more parts from fewer suppliers who would achieve economies of scale and provide lower unit costs in return for bigger orders. The suppliers, who simultaneously worked with the competition as well, would take over more of the basic engineering and design, usually with talent offloaded from the Big 3. Personnel and systems for both would be integrated into one another. Unlike the wire harness case, these changes were implemented. It’s not as though the Big Three have been doing nothing all these years, and still it’s not enough.

    Now Chrysler is being run by Bob Nardelli, once an also-ran at GE in the race to succeed Jack Welch, and then the overpaid, underachieving CEO of Home Depot. The New York Times March 16th profile of him is an oddly touching piece. Like Donald Rumsfeld and Ernest Hemingway, Nardelli works at his desk all day on his feet. He is pictured as a man on a mission, comparable to Iaccoca, who wants to rescue the whole cow, albeit a leaner version, not chops and steaks as had been expected when he took over. “It’s not about Bob… If I didn’t believe in [the rescue plan] I wouldn’t have put my name on it,” he told the Times. He has already cut 32,000 jobs, but even if it were possible to fix the wire harnesses or improve the fleet average all at once, he couldn’t sell the product, not in this market. On Monday, the Administration voted no confidence. Barring an 11th hour reprieve from Fiat, this is a death sentence.

    My aunt lives on the street that briefly each summer becomes known as Mustang Alley. She is anguished by the fate of her community, her immediate family, her friends and her business, all of which are suffering. Watching what is happening to New York as the banking crisis unfolds, I am just beginning to understand know how she feels. Her son-in-law is an engineer who worked for a supplier to the auto industry. On Sunday, he moved south to work for a company that builds windmills.

    Henry Ehrlich has written speeches as a freelancer for both the new, white-knight CEO of Fannie Mae and the former, disgraced CEO of Freddie Mac. He is author of Writing Effective Speeches and The Wiley Book of Business Quotations.

  • Compensation Confidential

    The salary of the chief executive of a large corporation is not
    a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.
    John Kenneth Galbraith

    What would Galbraith have said about the AIG bonuses?

    When AIG CEO Edward Liddy said the bonus payouts helped retain “the best and the brightest,” he revived a theme that has been common throughout the modern era of executive compensation: an arithmetic correlation between money and talent. Lost on Mr. Liddy, and indeed on much of Wall Street, was the fact that the term was used by David Halberstam to characterize the intellectuals who led us to war and failure in Vietnam. Sweet irony.

    I have been silent witness to the growth of executive compensation entitlement syndrome for the last ten years as a sometime ghostwriter for a prominent company in the field, which shall remain nameless (they pay infinitely more than newgeography.com, and may want to hire me again). This week seems the appropriate moment to share the lessons I learned about the behavioral underpinnings of today’s financial industry bonus crisis.

    1) The seeds of each new scandal in executive pay are sown in the wake of the last one. Remember stock options? They came into vogue in the early 1990s when executives awarded themselves bonuses for laying off vast numbers of workers, rationalizing that they had raised profit margins and deserved a payoff. Congress decided that compensation in excess of $1 million would not be tax deductible to the corporation unless it was geared to performance. As we have learned over and over, performance can be cut to order conveniently when options or other incentives vest. This is what one economist called “the invisible hand of Alexander Portnoy, not that of Adam Smith.” When I began working in executive compensation, CEOs chose which options to cash based on which vintages from a multiyear portfolio were in the money at a particular time.

    And if the resulting tax bill was too high? The stockholders would pick up the tab. Even Apple was caught backdating options for Steve Jobs. Regulators were — and are — perpetually one barn door behind the horses. Who knows what well-intended remedies will be born of the current crisis?

    2) CEOs are as peer conscious as any high school clique, but better paid. Executive comp consultants refer to the Lake Woebegone Effect. To wit, if your pay isn’t above average, or well above average, the board is admitting to the world that you are sub-par…and we wouldn’t want that, would we? So comp committees and their consultants have to find schemes whereby CEO pay keeps rising, perks keep rising, and the water level in Lake Woebegone goes up accordingly until it overflows its banks. If a CEO at a competitor in your industry category is in the 75th percentile, you have to be in the 80th or 90th. World-class management, like a designer accessory, is a function of the price tag.

    3) CEOs are risk averse. They want their money upfront, to justify the risk of taking the new job and the headaches that go with it. Once seated, management finds ways of locking in wealth. The turnover in these jobs is massive. Five years after the Mergers & Acquisitions boom of 1989-91, fewer than half of CEOs who had received sizable recruitment bonuses were still in place (figures courtesy of The Wiley Book of Business Quotations).

    Earlier in this decade, I interviewed a dozen or so CEOs for a Wall Street publication, which deemed them exemplars for a new economic age. Two years later almost all of them were on a list of CEOs who had been indicted or were otherwise disgraced. Of course, the pay levels that justify the risk of failure look a lot like the rewards for success to the rest of us. The bigger scandal comes when the initial contract ink is dry, and they start to manage the company in a way that makes the shareholders feel like they deserve to earn their enormous compensation. That’s when they take risks, as AIG did when the bosses saw the company’s Triple-A credit rating sitting on a shelf and decided to put it on the street in the form of Structured Products.

    What they failed to do was something the barbershop down the street from me, in its capacity as a “number hole”, always remembered to do. If the action was too heavy on a number, they’d lay it off on another bookie…er, banker. Who will hedge the hedgers now that AIG is circling the bowl?

    4) CEOs hate their jobs, mostly. That’s why you have to pay them extra for doing the jobs they are already paid to do, only better. Look, I wouldn’t want to do it either. Corporate jobs are good when business is good and soul-destroying the rest of the time. That was true at my level and I’m sure it’s true at the top, too.

    Come to think of it, even when things were apparently going well, I saw the body language; I heard the mental gymnastics, the ethical contradictions, and the hairsplitting. When you have what comp consultants call “line of sight” for the whole company, you see that it’s a rare event when everything is going well. You make your numbers by selling assets and hope that the problems stay out of the newspapers. But when things are rotten, and they have been rotten for a long time, it’s no wonder that CEOs take everything they can: apartments, jets, club dues, sports tickets, million-dollar furnishings, a piece of the M&A action, stock buybacks, and $440,000 spa weekends complete with manicures and hair styling. They’re like hookers going through a john’s wallet while he’s in the shower. And successful or not, they feel they’ve earned it.

    To be sure, they buy back their humanity with good works, a form of plenary indulgence, as I learned first hand the last time my mother was sent to the emergency room. En route, on the car radio I had listened to the Senate Banking Committee questioning Lehman Brothers chairman Richard S. Fuld. When I arrived, I noticed a plaque on the wall of my mother’s ER cubicle. The space had been donated by Mr. and Mrs. Richard S. Fuld.

    This is the curse of the managerial class, particularly the financial managerial class, and one of the sorry phenomena of our current situation is that everything is financial. Everything is worth what the financial chieftains say it’s worth for as long as they can get away with it. They don’t love the product, the process, or the people. They love the pay package, the perks, and the power. They love the action. When Bear Stearns was melting down, its CEO was incommunicado at a bridge tournament. Isn’t that a bit like a busman’s holiday? What happened to their brains? They hold their breath and search for the greater fool. The best and the brightest, indeed.

    Henry Ehrlich is author of Writing Effective Speeches and The Wiley Book of Business Quotations. He is currently working primarily with companies that are trying to fix the health care mess. Piece of cake.

    Photo by David Shankbone

  • The Leveling of Citigroup

    The idea that Citigroup could support the family by gambling didn’t begin with Robert Rubin. It’s part of a long tradition. What was different in the most recent go-round is that, this time, Citi didn’t invent the game. Of course, once it got to the casino it characteristically placed larger bets than anyone else.

    Word that Citigroup is teetering on the brink of break up brings a certain wistfulness to this former Citibank speechwriter. Not because intensive care is something new for the old bank — it isn’t — but because it ended up on life support by following the crowd instead of leading it. For well over a century, Citigroup and its precursors — First National, the City Bank of New York, First National City, Citibank, and Citicorp — were innovators. They didn’t just overdo the fad of the moment, as they have done with mortgage-backed securities of one sort or another: they created it. They led the Charge of the Light Brigade.

    New York was America’s imperial city, and Citibank was a vehicle for imperial vision by people who lacked imperial lineage.

    When trade followed the flag to Latin America and the Philippines, Citi was there to count the cash. The vision of the bank as a financial supermarket didn’t begin when Sandy Weill stepped into the picture; it had its antecedents in the 1920s when Charles Mitchell, chairman of the National City Bank, merged commercial and consumer banking with his “bank for all”. His vision that was still ruffling feathers six decades later, when senior vice-president Eben Pyne bitterly told me, “Charles Mitchell ruined my grandfather’s bank [Farmers Loan and Trust], and they’re doing the same thing now with these credit cards.” After acquiring Grandpa Percy’s FL&T for its retail customer base, National City stuffed customers accounts with speculative paper from Latin America. Think Bernard Madoff with widows and orphans.

    Walter Wriston was CEO when I arrived at Citi in 1980. Walt used to say that when he entered banking soon after World War II, it seemed like the embodiment of everything dull. Over his next years as Citicorp Chairman, he would certainly turn up the excitement. He pioneered the negotiable certificate of deposit, shepherded the career of consumer banking king John Reed, and above all attacked the regulatory and legal regime that had been erected during the Depression, all under the watchful eye of a portrait of Austrian economist Frederich Hayek on his office wall. The strategy that emerged late in his tenure was known as the “Five I’s”: institutions, individuals, investments, insurance, and information. They wanted to do it all. And to do it, Citi needed to create a level playing field. Other institutions not regulated as banks could perform bank-like functions, while banks couldn’t reciprocate. Merrill Lynch’s money market accounts, which offered interest along with checking privileges, were a case in point.

    The deregulation campaign provided plenty of work for the speechwriting team. Ronald Reagan’s first term, when Adam Smith neckties were all the rage, was a propitious time to turn up the heat. The anti-regulatory fever that we were doing our utmost to spread was more reasonable then than many people now credit. At the time, we liked to remind everyone that the prohibition against interstate banking dated from an era when people traveled by horse. Under unitary banking laws then current in Texas, for example, each standalone ATM required incorporation as a bank. The commercial market allowed corporations with excess cash to lend to other corporations by way of Wall Street, bypassing the banks. It seemed as though any financial company that didn’t have a bank charter was free to poach on bank territory, while we had our hands tied.

    Citibank was constantly challenging these constraints, legally, operationally, and, happily for me, rhetorically. Some of the ideas were just plain dumb. One was a travelers-checks-by-mail scheme that would allow consumer deposits to be collected across state lines. What was missing was any sense that consumers could actually be induced to do business this way; one thing I did learn at Citibank was that consumer behavior often failed to keep up with the brilliance of these innovators.

    There was a pervasive feeling that Wall Street’s profits were unjustifiably high, and that we should be allowed to compete. We needed the regulatory freedom to enter each new line of business that just wasn’t there for banks. If Merrill Lynch could offer interest-bearing checking accounts and Sears could issue credit cards and sell insurance, why shouldn’t we sell mutual funds and insurance policies in our branches? We had machines to do mindless tasks like taking deposits and dispensing cash; why shouldn’t we use our people to do things that only people can do?

    But as we achieved some of our legal and regulatory goals, the true prize only receded. The head of our private banking division once confided in me, for no good reason, “Do you know how hard it is to beat the S&P 500 day after day?” Citibank was discovering, yet again, that it’s hard to make a whole lot of money in banking all the time unless you’re smart and nimble enough to adjust to changing economic circumstances.

    Citibank was nimble of mind but slow of foot. Profitability depended on finding an occasional niche and driving a truck through it, whether it was lending to Latin America, commercial real estate, or credit cards. At some point, John Reed told us that Citibank was a credit card company with six or seven [unprofitable] lines of business. At other times the investment didn’t pay off at all. Remember Quotron, the dominant player in desktop information for brokers around the world? Even the bank’s own due diligence showed that it wasn’t worth the $1.5 billion price tag. But we wanted to buy market share in that fifth “I”, the financial information business. This transaction made Daimler’s acquisition of Chrysler look like the Louisiana Purchase. At the time, there was a former trader named Bloomberg just entering the picture. Within a couple of years, it was his name, not Quotron’s, that sat on every trading desk in the world.

    In the early 1990s, as its stock fell below $10, necessitating a Saudi bailout, Citibank abandoned one of its most cherished traditions, the continuous payment of dividends for more than 100 years. A tradition sustained for many years, as it turns out, by borrowed money, not earnings.

    Fast forward to this week: a lead headline in the New York Times business section reads, “Citigroup Plans to Split Itself Up, Taking Apart the Financial Supermarket”. The playing field is now level. Bear Sterns, Lehman Brothers, Merrill Lynch, and Citi have all been leveled by their gambles in the same lousy securities.

    Citibank was always a bi-polar kind of place. It alternated eras of rash and brash with periods of sober and staid, sometimes with new senior management and sometimes with the same team that created the mess to begin with. For now, the mania is over. Current CEO Vikram Pandit, described in the press as a technocrat, has put Smith Barney up for sale. It’s back to basics. Both Grandpa Percy Pyne, and now Grandson Eben, can take time out from turning over in their graves for a little schadenfreude. If we’re lucky, Citigroup will be just a bank… until the next time.

    Henry Ehrlich is a footnote to the financial history of our time. He was a senior speechwriter for Citibank for 11 years, where he served the great, the near great, and the not so great. Among other things, he wrote every speech for the senior bank negotiator during the early years of the 1980s LDC debt crisis. He is author of Writing Effective Speeches and The Wiley Book of Business Quotations.

  • Henry Ehrlich