By Simon Johnson
Just a few short days ago, it looked like Citigroup was on the ropes. The company’s proposal for redistributing capital back to shareholders was rejected by the Board of Governors of the Federal Reserve System. Given the global bank’s repeated fiascos – including most recently the theft of around $400 million from its Mexican unit – it is hardly surprising that the Fed has said “no” (and for the second time in three years).
The idea that Citigroup might now or soon have a viable “living will” now seems preposterous. If top management cannot run sensible financial projections (that’s the Fed’s view; see p.7 of the full report), what is the chance that they can lay out a plausible plan to explain how the company, operating in more than 100 countries worldwide, could be wound down through bankruptcy – without any financial assistance from the government? According to the Dodd-Frank financial reform law, failure to submit a viable living will should result in remedial action by the authorities.
Such action has now been taken: CEO Michael Corbat has been named to a top White House job, with responsibility for helping to develop “financial capability for young Americans.”
Given that today is April 1st, this announcement may seem a fairly obvious canard (along the lines of some previous April Fools’ Posts on this website, including regarding the gold standard last year).
But the White House announcement is dated March 27, 2014 (just as the failed stress test news was breaking) – and it is their media team who use the term “top administration post”. Mr. Corbat’s new job has subsequently been confirmed by the Financial Services Roundtable (roundup email of 03/28/14), and no one knows more about the detailed relationship between Big Finance and government.
Presumably, Mr. Corbat’s appointment will help prepare the next generation of Americans for deep recession, job losses, and dismal prospects due to major miscalculations by Citigroup and other big banks – including what these firms have done, what they are doing now, and what they will do.
The agenda for discussion with current distinguished members of this policy council (full name: President’s Advisory Council on Financial Capability for Young Americans) could also usefully include:
- How to pay large bonuses, while also losing a lot of shareholder money (Citigroup has long been a market leader on this dimension, including with Mr. Corbat’s compensation for 2013; Barclays is moving up fast).
- How to build a global commercial-industrial company, while drawing on the backing of the Federal Reserve (here Goldman Sachs has a definite edge). Not for nothing, Lloyd Blankfein was named Time Man of the Year in 2010.
- How to pay out record fines while also receiving a pay raise. Mr. Dimon of JP Morgan holds the world record in this event, but Barclays’ own internal assessment suggests they are a contender.
The White House may be onto something. If only we could all behave like top Citigroup executives, as a nation we could become much wealthier – systematically expropriating from investors without any adverse consequences for our careers or even our immediate compensation. This is the kind of logic that won the Institute of International Finance two Nobel prizes in 2011 and that lies behind continued opposition to the Volcker Rule.
At the end of his detailed account of miscalculation and overconfidence among Citigroup executives, published in 1995, Phillip L. Zweig writes (Wriston: Walter Wriston, Citibank, and the Rise and Fall of American Financial Supremacy, p. 3) that,
“Citigroup had essentially lost a decade. But along the way, Reed [then-CEO] and his institution had lost much of their hubris. Because of that, there was finally reason to believe that their near-fatal mistakes would not soon be repeated.”
Executives at Citi and elsewhere definitely learned the lessons of the 1970s and 1980s, but not in the way Mr. Zweig envisaged.
Size is power in the modern American economy. If you are building a bank, executives reasoned in the 1990s and early 2000s, it’s better to make it as big as possible. From a personal point of view, they have been proved right again and again. (From a social point of view, this has proved an unmitigated disaster.)
The truth is Citigroup is now and has long been a badly run company. It should be euthanized by the market, but continues in existence because it is protected by regulation and regulators against being taken over and broken up into more efficient pieces (with some of the worst businesses simply being closed).
The Citigroup case is fascinating because it suggests the Federal Reserve may now be standing up to at least the weakest (from a management perspective) of the Too Big to Fail US banks.
From a political perspective, what matters is not so much the Fed as the White House.
As with everyone in Washington, watch what they do, not what they say.
And the most important question is: Who is admitted to top policy circles? What kind of experience makes someone into an expert who speaks directly to the president – and into a role model held out for young people to emulate?
Mr. Corbat’s new position confirms that, once again, it doesn’t matter how badly Citigroup did on your watch – the White House will hire you for your supposed expertise in any case.
The Baseline Scenario 
This would all be fine and well, if only education didn’t suck so bad.
Can I simply say what a comfort to find someone that truly knows what they are discussing on
the web. You definitely realize how to bring an issue to light and make it important.
A lot more people have to read this and understand this side of the story.
I can’t believe you aren’t more popular given that you definitely have the gift.
Professor Johnson – they already have the person with that job title picked – “a role model held out for young people to emulate”.
Zuckerwhoard.
They picked the person who CLEARLY does not want anyone to “emulate” him.
Wondering if Senator John McCain will be giving the eulogy. God knows McCain owed Keating enough after Keating bribed McCain for sweetheart legislation.
http://www.kansascity.com/2014/04/01/4930747/savings-and-loan-figure-charles.html#test_lstnews
You know, people say “You’re not supposed to say bad things about people when they pass away.” Or they say “We should be sensitive to grieving families” You know what I say??? Charles Keating, I hope you rot in MotherF*cking Hell, along with Bernie Madoff, Payday Loan outfits, and other of your ilk. ROT IN HELL KEATING.
Truly amazing. President Obama continues to disappoint those who voted for him hoping for a fighter and for change away from the Wall Street-Washington club and towards the working person club.
It wasn’t so amazing, and we knew long before the election that the military runs the country. Once a president is sworn in, the military briefs him on certain things which make it impossible for him/them, to keep their campaign promises. Once things change for a president, all they want to do is not piss off to many rich people, and at any cost I might add. It’s a failure of a link in the constitution and will be addressed at the up and coming constitutional convention. Just look at how much of our economy is based off the MIC.
For those of you who don’t know Who Charles was (and even I thought he was a current politician) here is a short history, sort of a mini Madoff today.
The Federal Home Loan Bank Board, fearing wide collapses in a shaky industry, finally imposed a 10 percent limit on risky S. & L. investments. By 1987, its investigators found that Lincoln had $135 million in unreported losses and was more than $600 million over the risky-investment ceiling. Soon, the F.B.I., the Securities and Exchange Commission and other agencies were homing in.
The CCAR results do raise significant issues, but Corbat’s appointment is no anointment to a “top White House post.” These councils are purely honorific. It would be great if they weren’t and issues like financial capabilities and literacy were taken seriously. But, they aren’t — at least not for real in this White House or Treasury Department or any others of which I know in recent years.
Yea, it’s hit or miss, smile or a frown, forward or backwards, one of them is right —, and one of them is wrong, because it’s the merry go round of life and death. You spin to speedy and fall off like a domino, or too slow and get bored and simply get off. The ride does end and now what? Just bust a move!*
So it was the MILITARY that said “we don’t need no stinkin’ regulations” especially COSMIC SANITY “regulations” like having a “Just War” discussion….?!
Not even keeping that NECESSARY discussion (a higher level of ETHICS than “regulations”) focused on the “economy”? Left it to Zuckerwhoard geniuses to take care of the numbers with their hand held gizmos? (should have kept it a two-handed gizmo, now they can hold both joy sticks together – enter fetishism)
Well for some good news, at least they got all “hey! whoa! wait a minute – what do you mean “rigged”? on Wall Street when Michael Lewis used that word to promote his book. Good to know they still have some standards.
You know what is scary? I seem to be the only one who can connect the people dots when it comes to the evolution of “dark pools” of derivatives – AKA TOXIC ASSETS.
“You wanna do this? Let’s do this.”
If you were the actual “devil”, the Paradise Being sent to Earth to raise human beings as “children of god” who can build Paradise on earth,
and instead end up planting a “technology” layer in the economy that displaces the real economy (double entry bookkeeping, for instance) in favor of a insect-like “efficiency” of rent extraction via an algorithm, where would you hide to manage this?
In the “religions of authority”, like duh.
The “economy” deserves all the attention of man. Every day. Look at everything material around you. How did all this get here?
Yeah, you still gotta stop all the hilarious noisy bullsh-tting to take care of your health. Bummer. No money to get rid of the crabs embedded in the pubis? That’s intellectual savagery on the part of your religion and god, no?
Instead of educating people to study diseases as a scientist, they collected us, put us in a room doing piecework on a clock and had us hand write letters in boxes to send that medical data over to Puerto Rico or somewhere to have the cheap data entry person correctly enter that medical data into a database that NO ONE will end up being allowed to analyze. “It’s inconclusive.” Are you seeking data that can be “conclusive”?!
Compound what happened at GM regarding deaths caused by business decisions into the tens of thousands of people who died, or worse, thanks to medical business decisions. What “psychology” is employed to enforce bad decisions? Privatize the profits, SOCIALIZE the losses.
Manufacturing licenses can be yanked on a dime. Especially if the computers there are being used ONLY for “high frequency trading”. That’s what happened. Pharma is not pharma anymore. Glad people are running in horror in the other direction from “biotech” inventions in virtual “dark pools”.
Ask me if I care which “rich person” doesn’t like having their face pinned down into the “unintended consequences”.
Unless USA gets off the MORAL soap box, it’s gonna lose the 21st century. Not where we’re exceptional, is it? Unless you got an algorithm that takes out the mathematical noise created by exceptional hypocrisy so that it doesn’t crash the economy that builds Paradise, don’t get all “moral” about your military cause.
The truth is bat-shit crazy because bat-shit crazy people always operate with INIQUITY. So, okay, not “rigged” in the classic sense, but definitely “rigged” like a sail is rigged on a sailboat. Whose hand is on the keel?
Reblogged this on Keane's Rules .
Nice to point these things out but i would not lose sleep over it. As I expect you know better than most, here are numerous examples that are as bad or worse. And, arguably he will do less harm to the economy if he devotes more time to this position rather than spending time on Citicorp matters. More policy as theater.
All the world is a stage, and most of us, are desperately under rehearsed.
“policy” that rests on “no prosecution” is simply the deal made by Holder et al to “get me some”.
Tick tock, we hear the clock.
Move on, Anonymouse – here’s the last penny from my account – shove it up real deep….it’s all you get and eternity has shut the door on you – once you croak, sooner than you think judging from how much venom you have in your veins for humans, it will be as if you never were. My “currency” has already watered eternity, I have no problem with giving to Caesar what is Caesars….all made up crap and to crap it will return…
Crabs in the pubis – those “flash boyz”….worst religion, yet, invented by monkey brains and their hand held fetishes….
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