“Chuck Prince” Is Going To Run This Bank (Into The Ground)

By Simon Johnson

“Breaking up big banks would actually increase system risk” is a refrain heard from top administration officials, ever more vocal after they helped kill the Brown-Kaufman amendment (that would have limited the size and leverage of our largest banks) on the floor of the Senate.

But while Mr. Geithner and his colleagues are still taking their victory laps and congratulating themselves on retaining “business as usual” after the biggest crash-and-bailout in world financial history, educated opinion starts to feel increasingly uncomfortable.

People who worry seriously about system risk break the problem down into several distinct buckets, including the nature of shocks and the way these are propagated across the system.  In this typology, the “Chuck Prince problem” is in a class of its own.

It might be fairer to label this issue as the Royal Bank of Scotland problem – because RBS had a balance sheet that reached roughly 1.5 times the size of the British economy before it failed.  Or perhaps we should call it the Irish problem – three banks with combined assets around 200 percent of the Irish economy, and then they failed.  Or even the Iceland problem – three banks that were 11-13 times the size of the Icelandic economy before they went belly up.

But all of those overseas examples still seem rather esoteric to American audiences – at least, that’s my experience after presenting 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown over 50 times to audiences around the US over the past few months.  Recent European experience points to our likely future – huge banks that herd into bad mistakes and, when bailout time comes, further imperil states that have already weak fiscal positions.  But most Americans are not quite willing to say we are there yet.

So we will stick with the Chuck Prince label.  The point is that while many banks are run by good risk managers for a while, they all eventually end up in the hands of someone who does not really know what is going on.

Banks are bureaucratic power structures, after all, albeit ones that try to make money after some fashion.  The people who rise to the top are not always the most risk averse – more likely they get on with the boss or reflect someone’s glory in an appropriate manner or are just not that threatening to the people who matter.

Under our existing rules, good managers can build up banks and – with the continuing lack of effective cap on the size of big banks – these institutions can become huge relative to the economy.  And then Chuck Prince gets the job.

The interesting thing about Mr. Prince, of course, is that he does not claim to have known what was going on.  In fact, in his testimony to the Financial Crisis Inquiry Commission he rather emphasized that he was not fully informed or otherwise aware of the risks being taken by Citigroup – which he headed.

This “Chuck Prince” problem is exactly what would have been addressed by Senators Ted Kaufman and Sherrod Brown.  And it is exactly what this administration ducked.  Find me a systemic risk expert – and I’ve been talking to the very best – who thinks what the administration did was a good idea.

The next time a megabank fails, do not send to know for whom the bell tolls.  It tolls for Tim Geithner and Larry Summers (as well as probably 25 million or so people around the world who will lose their jobs in the ensuing recession).  Failing to break up the biggest banks was a policy mistake for the ages.  Senators Brown and Kaufman handed this opportunity to Treasury on a platter – but they knocked it over, trampled it into the ground, and now brag about their feat to the press.

This was pure hubris on the part of the administration, with perhaps some NIH (“not invented here”) thrown in – if they didn’t invent an idea, they can’t believe it’s worth pursuing.

The next time a big bank crashes and burns – causing vast economic damage – you can blame Chuck Prince (or his latest incarnation) if you wish.  Or you can blame the people who hired the Chuck Prince-equivalent.  But I would respectfully submit that most of the blame lies with the folk who thought it was OK to continue allowing the existence of megabanks that can be mismanaged into utter disaster.  

The “Chuck Prince” problem is a completely unnecessary source of system risk that could have been removed by this administration.

70 thoughts on ““Chuck Prince” Is Going To Run This Bank (Into The Ground)”

  3. the oligarchy is not going to change the structure that keeps them in power until forced to at violence.

    At least you are starting to see the “real” Obama and recognize it now.

  4. If I recall correctly, the claim has been made several times that there is no social (economic?) value to banks having assets above a certain level ($100 billion?). Is there a good, plain-English explanation of that number available online, with analysis that is intelligible to a non-economist?

  5. “The president should nominate Paul Krugman to replace Peter Orszag as director of the Office of Management and Budget (OMB).”

    Pros: Brilliant (with a big heart); possesses sound judgment and discipline; respects the office of the presidency; respects the POTUS; (wouldn’t be caught accusing some (though privately, perhaps deservingly) of being a “clown”); his economics and demeanor almost flawless, but he also knows when to defer to better minds.
    –
    Cons: his national policy positions run counter to Lawrence Summers; Timothy Geithner; President Obama; and maybe, a soon-to-be an ex-four star general.

  6. “But I would respectfully submit that most of the blame lies with the folk who thought it was OK to continue allowing the existence of megabanks that can be mismanaged into utter disaster.”

    The best we can do is take names of each member of Congress that allows this to continue. And then, when the banks cause the next melt down hold the members of Congress accountable. Take their names and make sure the country is aware of how they voted.

  7. Your comments about Chuck Prince not knowing what’s going on are dead on the money. Same for Tony Hayward of BP and most of the other leaders of major corporations. Paychecks and job security are almost completely unrelated to competence or performance.

    Having been CEO of a smaller corporation for many years, and having been in upper middle management of large ones, I’m aware of how dysfunctional the boards of directors and executive selection processes are for large, older corporations. I have posted several essays on how the selection process and executive compensation practices generate marginal and selfish executives. Two of them are:

    Lightweight Oil Executives produce worthless disaster response plans
    (http://www.dismountingourtiger.com/business-health/oil-executives-produce-vacuous-disaster-response-plans/)

    Executive Compensation and Other Parasitic Loads (http://www.dismountingourtiger.com/economics/executive-compensation-and-other-parasitic-loads)

  9. What happens when the market hits zero? I think I really want to find out. Maybe we will realize we need each other again?

  10. Con: is as partisan as economists get (see his “An Upward Trend” post of 05/16/2010).

    Con: loves globalization and outsourcing. At least he doesn’t make campaign promises to reduce outsourcing and then do nothing, as Obama has done.

  11. “At least you are starting to see the “real” Obama and recognize it now.”

    I’m still trying to decide which of the below is true:
    1) Obama is truly clueless, especially with respect to the economy.
    2) Obama is a typical lying sack of manure politician.
    3) Obama is just like ‘W’ in that he will back his underlings no matter what they do as long as they demonstrate fealty.

  12. I gotta stop reading this blog. I’ve gone from never having written the president, to doing so almost every time I read maddening post… like this one. Maybe if we all write-in for Paul Krugman in 2012 we CAN get some change!

  13. I thought the Chuck Prince problem was somewhat more esoteric: about guessing when the ‘music’ would stop.

  14. I read something about how Barclays had a major takedown (in analysis) of Goldman’s future. Over at zerohedge, I might put the link here later, when you go there now they just have a semi-sexy picture of Helena Bonham Carter there. I have said before I have a lot of respect for John Hempton, and I for the life of me cannot figure out the lunacy of putting money into institutions that can’t even keep an honest balance sheet. The same goes for Berkowitz. Someone of Berkowitz stock should know the importance of keeping honest books. With the exception of a few regional banks that keep their balance sheets clean (if they exist) I wouldn’t touch a bank stock with a 30 foot pole right now.

  16. I seem to remember Krugman himself admitting that he was not invited to Obama’s table because Krugman supported Clinton in the primary.

    I’m beginning to think that a failure of a megabank is our only path to salvation. The DC gang will not fix the problem, so maybe we need another Black Weekday to force the issue. Of course, it might trigger a civil war and there are not enough mercenaries to protect all of the lobbyists and their ilk.

  17. Give Chucky a break. Maybe he needs to play some bridge games in Nashville. Or other such crucial things to develop shareholder value. Maybe call the CFO to create more Repo 105 lies or label derivatives as “hedge operations” on the financial sheets. You need at least an 8 figure salary to shirk responsibility like that.

    Nevermind lying to Congress and getting taxpayers to give you corporate welfare (spelled TARP) while those same taxpayers get thrown out of their homes, that takes at least a 9 figure salary.

    Maybe one day Chuck Prince will become Treasury Secretary and give Goldman Sachs 100cents on the dollar while he tells taxpayers having their houses foreclosed on to F_ck-off, then you won’t need to check which country’s borders you’re in.

  18. What’s this, pique from Johnson over the arrogance of the maggots that manage our government’s financial policy? Extraordinary! Yet Johnson would have been molified by their “breaking up” the largest banks? Just wait a little while, Simon, and after the people have succeeded in recovering their democracy, these kinds of half-measures just might be set aside in favor of others decidedly more just: Banks run by workers councils, perhaps?

  19. Why does everyone in this country automatically swing to either the left (workers’ councils) or right (oligarchs)? Why can’t we merely return to 1980?

  21. Or:

    4) Obama is getting exactly what he wants.

    That’s about the only thing that explains his human rights record since election.

  23. I wish it would help, but half of Congress is filled with people who voted for the Iraq war authorization and there have been no consequences there.

    We’ve lost control of this beast and I’m not sure we can ever tame it again…

  24. Yeah – just because you believe the government has a role doesn’t mean you want communism or socialism. These sort of dogmatic pronouncements are a sign of weakness of argument and meant to end civil discourse with blind stereotype.

    Unfortunately they work.

    Damn fascists! ;-)

  26. You are correct. I was going to include that possibility, but I fear appearing as an ardent Palinite. I believe #1 is true. I predict Obama will go down in history in the Carter/Hoover mold, someone who actually wants to do better but who has no idea how to do that.

  27. Not to mention the many people who still believe that we found WMDs in Iraq.

    Back to ella’s point: depending on elections to fix the problem is almost hopeless. To beat the Republican/Democratic oligarchy, one would need lots of spending loot, but those people tend to be corrupt and/or believers in the current system.

  28. 1980? Egad, man. You’d prefer a return to a period of incipient, reactionary oligopoly to a full throated expression of democracy? Think of it, no more Fulds or Blankfeins, just banks run by the employees that work in them. An end to ruinous derivative speculation and mortgage lending and justice for the swine that destroyed our economy and poisoned our political life. You want filth like Blankfein and the kind of politicians his money buys? You’ll have them forever without root and branch change. 1980 was how we got here, wasn’t it?

  29. In the pockets of the execs at the bigs. Did you expect to see it somewhere else??

  30. Here is a list of the Democrats who voted against Brown-Kaufman (27 of them) – as well as the 3 Republicans who voted for KB.

    I’m in CA. I see that Boxer voted for but Feinstein voted against. Get out your pens. Make noise and let them know that we know. And one can write to either or both of Brown and Kaufman expressing support for their work and disappointment with the vote.

    http://www.huffingtonpost.com/2010/05/06/senate-votes-for-wall-str_n_567063.html

  31. I am not part of “everyone.”

    There needs to be a balance, and roles need to be created based on a paradigm that serves society as a whole. First we need to “agree” on that paradigm.

    I define Capitalism’s goal as this: To create VALUE – the best, and best variety, of goods and services at the best price.

    An essential element to reaching this goal is COMPETITION in the marketplace.

    Concentrated influence, whether political or economic or by force, whether public or private, is an anathema to Capitalism.

    Under my scenario, the primary economic role of government is to ensure competition remains in the marketplace – and does this through a variety of tools, such as having and enforcing strong anti-trust laws (M&As of large corps is unthinkable, rather than applauded), making sure there are funds for R&D, having an educated populace.

    Anything that serves “the greater good” through large economies of scale (think: utilities) would be highly regulated to prevent the benefits of monopolistic competition or pure monopoly.

    In the end:

    We need COMPETITIVE MARKETS, not “Free Markets” and their monopolistic tendencies.

    We need the middle-way.

    We need a balance between individual responsibility and social responsibility.

    —————

    “Liberty without Socialism is privilege and injustice. Socialism without Liberty is slavery and brutality.” – Bakunin

  34. Okay, add a 1% of GDP cap on banks. On second thought, make that 0.1% of GDP.

    My point was that 1980 was when banking was dull and average-paying. We still had investment/commercial bank firewalls, so the potential for harm was less.

    Actually I’d be okay with eliminating just about every derivative.

    I’m also assuming that every commercial bank could be intervened by the FDIC. Every other business can enter Chapter 11.

  35. But what about justice for these maggots? Are we simply to allow them their depredations and to walk scot free? What kind of example might that set? Once the strikes and demonstrations have done their work, expect their arrest, interrogation and public trial together with their political hirelings in some outdoor sports stadium environment. Imagine if you will a pig like Hoyer blubbering out a tearful confession prior to sentencing. A marvelous cathartic to be sure.

  36. Probably the same day large bankers start providing appropriate capital for their jack_ss derivative bets they ask taxpayers to fund.

  38. “We need competitive markets, not “Free Markets” and their monopolistic tendencies”

    Very good.

  39. Unfortunately, you are correct. The financial mafia give too much money to the dc stooges for them to do anything but do what they are told.

    The current system is bringing the banana republic to its knees.

  40. re “the best we can do is take the names of each member of congress…and hold (them) accountable.”

    If were the answer, we already would have had a clean sweep after the S & L crisis that cost the taxpayers billions–a problem caused by deregulation legislated by Congress. Many of these people are still hanging around the halls of Congress. I always wondered why citizens were not more upset then, and I have been waiting for their anger to bubble up. Perhaps it is finally happening. I would hope this anger would not get highjacked by the far right wing.

  41. Hang in there Jeremy! We are all frustrated to death, knowing what can solve the problems–yet goes undone. It’s like watching an accident happen.

  42. It’s too bad, but it could come to that (civil war). The oligarchs might kill the goose that laid the (their) golden egg. They, and the government, have certainly increased inequality and diminished the middle class.

    And yes, it is very unfortunate that a brilliant guy like Krugman took such a definitive stand before the primary season ended, and may have limited his ability to help us now.

  44. What’s so special about 1980–other than it began the rise of the oligarchs with the massive deregulation and massive systemic budget deficits put into place by Reagan. In my view, 1980 marked a definitive turning point in demise of the middle class–hence all that remains is left and right.

  45. I don’t believe Obama is that stupid not to know that Summers and Geithner and, by association, Obama himself are shills for the banks.

  46. You can take the politician out of Sidley & Austin (the huge corporate management-driven law firm Obama once worked for), but you can’t take Sidley & Austin out of the politician. That’s why he was proudly snapping his suspenders when he said, “I know those guys” (the big bank CEOs with their massive compensation packages Obama said he didn’t “begrudge”). Man of the people my ass.

    Yes, they own the place, as Durbin said, except it’s hardly limited to the executive branch.

  47. Bruce, I think you should be careful what you wish for. If the economic rules, most of the world plays by, completely fail anarchy will be probably occur.

    People without laws will soon be subject to new ones — created by those with the biggest guns, and least regard to the notion of justice and their fellow man.

  48. The House dropped the $150 Billion dollar industry-paid fund of winding down large banks if necessary. What I don’t get is how the Republican criticism of this could gain any traction as a “bailout”. The logic is quite simple. A taxpayer bailout we do NOT want, but an industry-paid bailout is what we DO want if necessary. The FDIC is funded by industry assessments, not unlike the proposed winding-down fund. Although the $150 billion dollar industry winding-down fund is certainly not sufficient, it is a step in the right direction, if TBTF banks are to remain as is. This is sheer nonsense. I know the repubs and DINOs are doing the bidding of the TBTF banks, but how can they not recognize that an industry-paid fund is NOT the same as a taxpayer bailout. The first requirement is that we not have another taxpayer bailout, so given the continuation of TBTF the $150 billion fund was spot on!

  49. We’ve all witnessed the hew and cry from every corner of the media, elected and electorate: Make BP pay every penny of the cost of the spill, including the cost of business lost, cleanup, wages lost, etc. I say, amen, you all are exactly right. And yet, after we bailed out the transgressors in the financing industry (by the way, like lending BP enough money so they could clean up their mess with a hope that they might repay it), we have yet to ask them to pay the cost of cleaning up the toxic asset spill. In fact, the FED continues to launder their toxic assets, and continues to fuel their profits with the best possible rates on every penny they borrow (not a penny of which is going to Main Street, not one red cent), so that they can develop new lines of derivatives, afford to lobby Congress endlessly and direct their handmaidens in the “reform” currently in progress. We haven’t asked them to contribute any of their new massive profits to heal the economy (like paying back the trillions of losses experienced by institutions, pension funds and individual investors, like the massive and continuing unemployment problem, like all of the various state and county bond funds they have raped and left to die, like the huge deficit problem we have and will have because of the tax base loss that their actions caused). We have not asked for anything except to repay the money they were lent, with interest, which many have, but we now know that the TARP will lose about $100 billion, and we won’t get the money from AIG to pay back what they were given. This is the ultimate travesty, and proof of the most evil plutocracy on the planet historically with the possible exception of Russia under Stalin (Russia liberalized a bit afterwards, and were even reasonable in the lead up to the 1991 Revolution.

    How did things ever get this out of control?

  50. Because our political life is a fetid sewer, Bayard, made that way steadily over the last several decades by the whoring filth that employs elected office solely as a means of enriching themselves. These people are legion in Washington; one doubts if there is a single exception in the lot. When you have the Vice President of the United States so in the pocket of the Israel Lobby that he applauds when Israeli pirates kill American citizens in international waters, you can be sure you’re downwind of that sewer. And sadly we can do nothing at all to change the situation short of strikes and demonstrations. The mechanisms of our democracy have been so corrupted by these maggots that one’s holding the mere title of “Senator” or “Congressman” ought to be an indictable offense. And it will be when the people – as they inevitably must – choose to address this problem. Then, perhaps, we’ll have a wholly new definition of the epithet, “terrorist”, eh?

  51. I am replying to Kliment’s post (no Reply link).

    “But what about justice for these maggots?”

    I would love to see the entire management of Wall Street receive the Bernie Madoff treatment. I would love to see every politician thrown out of office and replaced by people who lost their jobs due to Enron/Lehman/Goldman/outsourcing/etc. But the majority of voters in this country are simply too cow-like to understand what is going on. It seems like the vast majority of Americans are either Obamatrons or Faux News devotees, unable to see the world as it really is.

  52. Yes. The problem of the Führer not knowing what is going on is a point neatly made in the excellent Ellsberg film “The most dangerous man in America” and even more clearly stated in his equally fine book “Secrets”.

  54. Really? The human capacity for self-delusion (my own included) has always seemed to me to be limitless.

  55. “How did things ever get this out of control?”

    Nihilism.

    Saving what is “toxic” to LIFE MAINTENANCE by calling it a different name….?

  58. True that. But I don’t think he is (self) delusional; I think he knows exactly what he is doing. What makes you think otherwise???

  59. Obama depended on people like me to get elected the first time. We thought there would be change. Fool me once, shame on you, fool me twice, shame on me. It will not happen twice.

  60. it’s gonna happen- the failure of Brown-Kaufman notwithstanding. when the sum of the parts is once again greater than the whole, we will see breakups.

  61. saucy,

    “But the majority of voters in this country are simply too cow-like to understand what is going on.”

    Right now they are. That will change, I feel confident, not that voting will do them any good.

  62. ” would love to see the entire management of Wall Street receive the Bernie Madoff treatment. I would love to see every politician thrown out of office and replaced by people who lost their jobs due to Enron/Lehman/Goldman/outsourcing/etc. But the majority of voters in this country are simply too cow-like to understand what is going on. It seems like the vast majority of Americans are either Obamatrons or Faux News devotees, unable to see the world as it really is.”

    No credibility to your viewpoint because everyone keeps witnessing the massive censorship SILENCING the real TRUTH from real people.

  63. I do so enjoy this blog.

    #1 ineptitude at the top: recall the book, “The Peter Principle”

    #2 The general public’s “inability to effect change through the political process secondary to lack of understanding”: when many, many Americans work two jobs, still do all household chores, and stay involved in their families’ lives, just when do they have TIME to try to piece together the incredibly fragmented and incomplete information presented; predominantly in specialized terminology or almost indeciferable “sound bites” of a few minutes?

    It appears to me those with power much prefer a strategically designed underinformed electorate; simply MUCH easier to manipulate, you see. If the average American can be made so fearful about the future, their financial security and welfare of their family, the electorate will be “thrilled” to take whatever is handed out and forget about accountability at the top.

    Personally, I believe every American would do well to read the history of our independence and particulary the year 1776. Gives one very great “pause”.

    #3 BP Oil being made financially accountable for widespread effects of the oil spill. One may wish to tread carefully here. Yes, they are culpable. However, forcing BP into a precarious financial position in the short term will easily have massive, worldwide ramifications as they are the “lender” to many, many up & down stream oil related companies all over the world whose ability to function would be significantly impaired with a significantly weakened BP. Do I hear, TBTF? perhaps- but this is some thing to ponder.

  64. A wise investor once said that you should only invest in companies simple enough to be run by idiots because sooner or later an idiot will run the company(Warren Buffet I think). I guess we should also write regulations for these companies that are simple and strict enough that an idiot can regulate them because sooner or later idiots will regulate them.

  65. The problem with “throwing the bums out” is you always have to look at the alternative.

    In the general election you’re going to elect a republican who is less representative of the views of the district, and perhaps even more anti-regulation?

    The only solution would be a primary challenge but the incumbent will usually crush the challenger, or just run as an independent.

    Maybe you can start another party, but then you run the risk of becoming the next Ralph Nader.

  66. I would like to see a discussion contrasting the (capitalism)points of view of Henry Ford, when questioned about paying his labor the astounding amount of $5.00/day; I need them to buy my cars. and J.P. Morgan when questioned about labor strikes; I’ll hire half to kill the other half.

  67. “It appears to me those with power much prefer a strategically designed underinformed electorate; simply MUCH easier to manipulate, you see. If the average American can be made so fearful about the future, their financial security and welfare of their family, the electorate will be “thrilled” to take whatever is handed out and forget about accountability at the top.”

    Pertinent information about the inmates from the asylum to share since they always find someone who really believes their own creative PR solutions…

    “Fasting” your way to spiritual power over others by becoming like “jesus” is the way to deal with the increasing numbers of people suffering from hunger and starvation in the USA.

    And the new health care world is emerging, taking it’s cue from the successful insertion of virtual reality control over reality that the unemployed are trapped in – internet applications with “gatekeepers” programmed to keep the unemployed unemployed…

    “Fill out this DETAILED health care request on the internet and call me in the morning”. Yup, the new investments by the plutoRATS is all into software – you won’t NEED to see a doctor or a nurse – just fill out the form and you’re done getting the new type of “health care”….

    Truth will always be a lot stranger than fiction especially with virtual reality “managing” reality.

    Fast your way to Jesus you lazy unemployed citizens who don’t DESERVE to own a house…

    Remember, “economics” is a RELIGION complete with Old Testament god-like requirements for “sacrifice” of innocent BLOOD.

  68. One is too many – one thousand not enough – is so appropriate for this brief narration. Sir Sanford I. Weill Chairman/CEO Citicorp completed his personal coup d`etat of the fecklessly forlorn Glass Steagall Act {Oct.8,1998 (*Billy Boy?)}. Citicorp had merged this very day with Travelers Group Ins.,Co. triumphantly with little fanfare from the (pathetic) press. The behemoth now called “Citigroup” had single-handedly emasculated the near century old cornerstone of financial regulation under Weill’s leadership – this falstaff wassailing a delusional,and twist-o-flex partrimony!

  69. No, the fault lies with all these lazy bank experts, Simon Johnson included, who believe they can understand what has happened without analyzing the regulations in depth… without realizing how over 12.5 to 1 leverages not only serve as growth-hormones for the too big to fail but also discriminate effectively against all who cannot obtain the full blessings from the credit rating agencies.

    The capital requirements for the banks are effectively set by the Basel Committee and Simon Johnson knows it, and in all the 3000 pages in Congress there is not one single mention of the Basel Committee and Simon Johnson knows it… and Simon Johnson keeps mum on it. I wonder why?

    Those responsible for Baseline, after almost two years of writings have not once mentioned the fact that no financial or bank crisis has ever occurred from lending to risky clients but that they have all resulted from lending to who were perceived as being low-risk client… and that therefore the current regulatory risk-weight paradigm and that pushes the banks to go after low risks is as stupid as can be. Don’t you wonder why “experts” are silent?

    http://subprimeregulations.blogspot.com/2010/06/all-bank-crisis-have-started-in-what.html

  70. rdoug wrote:

    “A wise investor once said… sooner or later idiots will regulate them….”

    Hmm… make that, rich idiots.

Comments are closed.