Wednesday, 6 January 2010

The Role of Businessmen In Shaping Events

On Sunday, The New York Times had a long article on Sandy Weill. It was the vintage Times P.R. piece, including hyped style to give the story a Homeric or Shakespearean dimension. The man who rose from a humble childhood to build Citi to a powerhouse had it all, got humiliated, now is sad, hurt, lonely, unwanted; “There is no creature loves me” stuff. He is still “baronially wealthy” (of course); he wants to be remembered for his charity work.

Sandy Weill is an easy mark for mockery. But we should resist the temptation, first, because his vulnerability makes mocking him improper, almost obscene, like an intellectual equivalent of dwarf tossing. More importantly, jesting distracts us from the larger question of the role of businessmen in shaping the events which his story can help us explore. The issue is defined in the contrasting views expressed in the article:
Though he [Weill] was once viewed as a brilliant deal-maker, some critics now cast him as the architect of a shoddily constructed, unmanageable financial supermarket … “The dream, the mirage has always been the global supermarket, but the reality is that it was a shopping mall,” says [a critic]…

Mr. Weill vigorously defends his record, rebutting critics who say that Citi was an unstable creation. [A friend] who worked with Mr. Weill on his autobiography, said that Citi’s problem wasn’t that it was unmanageable, but that it lacked enough good managers… “Had he picked a different successor things could have turned out very differently,” [he said].
Is the friend right? Was it a matter of one mistake – choosing a wrong successor – which brought Citi to its knees? Or was the fall pre-ordained, the seeds of the failure planted by what had come before?

The premise that with a better person at the helm, things could have turned out differently is intuitively appealing because it is within the realm of possibilities. We could have won last month's lottery if we had chosen the winning numbers, you know.

But the analogy is false. The lottery example is from the inanimate world where relations are fixed and therefore, have no context; they are memoryless, in the jargon of mathematicians, meaning that what happened in the past has no bearing on the future.

The fate of Citi after Weill is in the realm of finance, which is the realm of social (because value is a social concept). In this realm, all actions have their roots in the past. Nothing exists out of context, including the character of personalities.

What was the context, the milieu, in which Sandy Weill chose his successor?

The article had all the clues for the looking:
“This is my final annual meeting as chairman,” says Sandy Weill, standing near the window of his office, peering at a grainy photograph of him and his wife on stage at Carnegie Hall more than three years ago. They are smiling broadly, and behind them is a packed house of cheering Citigroup shareholders. A huge banner dangling from the balcony reads “Thank You Sandy.” On that day, April 18, 2006, Citi’s share price was $48.48.
Like the witches in the opening scene of Macbeth, the stock price in the opening paragraph of the story sets the stage for what is to come. But unlike the witches, the stock price in the Sandy Weill story does not go away. It hovers over and drives the narrative.
Mr. Weill firmly contends that what he built at Citigroup created huge value for employees and shareholders.
Even after retirement:
Mr. Weill continued to track it [stock price] closely. “He was watching every movement of the stock; he was reading everything,” recalls Mike Masin, a longtime friend and a former chief operating officer of Citigroup. “We have had conversations about the fact that he has to make Citi less a part of his life.”
Mr. Masin does not know his longtime friend well enough. It was not Citi with which Sandy Weill was obsessed. It was money. The bank and its stock were mere proxies towards which the obsession was channeled. This, Sandy Weill tells us himself, though, without realizing:
He [Weill] has raised $950 million for Weill Cornell’s $1.3 billion fund-raising campaign and recently put together a $110 million bond offering for Carnegie Hall. “It was like being back in business again,” he says. “I get the same kind of kick by getting somebody to make a major charitable contribution. It’s the same kind of adrenaline rush.”
Functionally, fund raising on behalf of charities and running a financial conglomerate are two entirely different things. But they have one commonality, namely, money. It is money which gives Sandy Weill a “kick”, “an adrenaline rush”, just “like being back in the business again”. For Freud, money was “laughing gas”. For Sandy Weill, it is crack. The man is the embodiment, the personification, of the “rational man” of economic textbooks who always “prefers more to less”. When the subject of the desire is a commodity, as in the old economic textbooks, there is a limit to the desire. Hence, the “decreasing marginal utility” concept: the second Rolls Royce would be slightly less satisfactory than the first one. And there is a limit to the number of hamburgers one could eat. (Again, economics textbooks example).

In finance, the subject is money. Money has no decreasing marginal utility. The second dollar is as valuable as the first, perhaps more. So the pursuit of money does not – cannot – stop. In the narrative of Weill's life story, money has the same role that sex has in “120 Days of Sodom”.

But how do you constantly get more money? How could you make the stock price constantly go up – deliver “value to the shareholder”? A medium size financial company's normal return would not do the trick. The only way to go is through acquisition.

Enter Sandy Weill as a “brilliant deal maker”. The P.R. angle aside, the Times description is accurate. The man created a financial behemoth with 200,000 workers and almost $2 trillion in assets. That required buying, appending, acquiring with a religious zeal. Such deals are complicated, time-consuming, exhausting. Imagine the amount time of money spent on lobbying for the repeal of a major piece of legislation such as Glass-Steagall, which made the merger of Travelers and Citibank possible.
On another wall [in Weill’s office] hangs a hunk of wood — at least 4 feet wide — etched with his portrait and the words “The Shatterer of Glass-Steagall.” The memento is a reference to the repeal in 1999 of Depression-era legislation; the repeal overturned core financial regulations, allowed for the creation of Citi and helped feed the Wall Street boom.
Weill had to be good at what he did. He could easily be the best deal-maker alive – second best, if you counted the dead.

How does a man like Weill choose a successor?

The successor had to continue the legacy, he had to keep the flame alive. That was the requirement which trumped all other considerations. The successor could not let the shareholders, Weill himself the most prominent among them, down.
He no longer had any official position at Citigroup, having retired as chief executive in 2003 and as chairman in 2006. But he was still hugely invested in the company. He owned more than 16 million shares in 2006.
Look. Sandy has just retired. The stock closed at $48.48. There are these structured finance instruments – lawyers call them special purpose vehicles -- through which you could borrow at under 3% and lend through the CDOs to mortgage holders at 6%. It is an incredibly profitable business, guaranteed to boost the stock price. What do you say to that Mr. New CEO?

No successor to Weill could ignore or oppose that pitch, not with the constant pressure to boost the stock price. The choice had to be a Chuck Prince.

And so it was. Prince’s much ridiculed comments about the CDO market that, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing” was the accurate description of his mission statement. Citi stock went from $48.48 to $55 and change before the crash came.

What about a good “manager”, a good “executive”, of the kind who could manage the disparate business lines that Weill had accumulated under the Citi umbrella? That was impossible. Weill could not know such person. He would not know a good manager if one kicked him in the teeth. A good manager would not get past Weill's first secretary. He would not get pass Weill’s doorman.

That is because such “manager” would be a relic of the past, an organizational man from the 50's. The idealized manager, of the kind wished for in the Times article belongs a more serene time, when the business tempo was “calm” because it was set by the predictable turnover of the industrial capital. So the GM’s five disparate car divisions – Pontiac, Buick, Cadillac, Chevrolet, Oldsmobile – plus its military wings and other divisions – far more diverse than anything Sandy Weill could put together – could be successfully managed.

At the age of speculative capital, which generates profit not from production but from price volatility, there can be no managers in the old mold. They have to be replaced by the deal-makers of Weill’s stripes. Witness how fast John Reed was gotten rid of. I am not sure what his managerial credentials were, but as an M.I.T. trained engineer, he was not a deal maker. And that was sufficient for his undoing:
In November, Mr. Weill’s former co-C.E.O. at Citi, John Reed, told Bloomberg News that he was sorry for his role in helping to end Glass-Steagall. When asked about Mr. Reed’s apology, Mr. Weill says: “I don’t agree at all.” Such differences, he says, were “part of our problem.”
Sandy Weill no doubt wonders what this fool Reed could be thinking, regretting the repeal of a law that stood in the way of making more money.

Could Sandy Weill have picked another person, a more “competent” manager?

The answer is No, he could not have. He could have, only under conditions that Rumi, as usual having the last word, said an impossible would be possible:

If it were to be possible for the life to go on without you, then the world had to be upside down.

For Sandy Weill to have picked a different successor, the deregulation must not have happened, Glass-Steagall must have remained intact, Citi must have not have become a behemoth, the CDO market must not have been created which means, ultimately, that Sandy Weill himself must not have existed.

So, you see, Mr. Weill, everything was, in a sense, pre-ordained. For the cause of what you see around yourself, may I suggest consulting a mirror?

But that in no way means that I blame you for what happened. I know that like Oedipus, your deeds were inflicted upon you rather than committed by you. And unlike Oedipus, you managed to put away a nice little something from which you could enrich New York’s cultural institutions. That’s the stuff philanthropies are made of!

Is that the fate of all men, then, ultimately being crushed by events, hoping at best to be remembered by their charitable givings, like a society lady?

The answer is, no. Historical personalities fare better because they know the direction of the movement of history and align themselves with it. At times, they even move ahead of the events. The awareness and the will to act on it distinguish the historical figures from the businessmen.

The subject of this blog is precisely the march of history as it manifests itself in the realm of finance.