DOWNTIME Part 7 – Things to Do With a Failed Bank
I was still feeling kind of swishy in my belly this week as I read about various CEOs who brought down fat bonuses by bringing down their banks. And I was thinking, what is it that a top-of-the-line CEO does to bring down one of the world’s largest banks that makes him or her worth a seven-quadrillion-dollar bonus? I mean what particular niche of genius makes these barely-street-legal CEOs better at bringing down their banks than those stock CEOs who only get profit-sharing plans because their little institutions keep humming right along in perfect health?
Naturally, I wondered why the woman who runs a mom-and-pop hardware company for thirty years and stays in business against the likes of Home Depot and Lowe’s is worth less than a man in Giorgio Armani who can crush a colossus bank is six months. That question set in motion certain sparks along my darker synaptic pathways that yielded a bright realization. The real question churning in my belly, as it turned out, needed to be reworded: “What is it that makes a failed bank so valuable that it’s worth paying someone a hefty bonus to get it there?”
With the right question crystalized in front of me, I realized that I was onto something really BIG. It occurred to me that there are some hidden things you can do with a failed major bank that you cannot do with anything else (except maybe a failing major brokerage firm), which make it particularly desirable for a board of directors to hire the man with enough heft to capsize their bank quickly. The core value is this: You can use a failed bank to apply for a $20,000,000,000 interest-free government loan. If you don’t have a failed major bank, you’re not even qualified to be an applicant to this kind of government program. Thus, the faster you can roll your bank over like a porpoise, the faster you can scoop twenty-Bil. off the government pavement.
That, right there, is an eye-opener that would tell any board of directors, we need to to put this institution on the rocks and get it there NOW before these government loans run out because they’re going fast. (A trillion dollar fund doesn’t last long these days.) I mean, where else can a bank get twenty-billion dollars on a weekend without even filling out a formal application? To pull off a maneuver of that size that quickly takes a CEO who can boldly turn an ocean liner on a dime (or a cork or whatever it is that an ocean liner turns on) and steer it straight into the cliffs of disaster before anyone sees what’s happening.
Let’s look at some of these amazing turn-arounds:
As mentioned last time, Bank of America scooped up Merrill Lynch at a fire sale with the government’s help one day to become the largest thrift bank in the world. Only weeks later, Bank of America, itself, qualified for a twenty-BILLION-dollar free government loan, which it, then, topped with twenty-some-odd billion shortly thereafter in more free money.
Likewise, Wells Fargo nearly choked to death when it tried to swallow Wachovia with the bones still in it, so it received 25,000,000,000 U.S. government dollars — meaning yours and mine.
Do you see the pattern here? I sure do: If you are one of the unlucky few major bankers who is not failing, you can use all your available cash to buy other another failed major bank at great discounts with the government’s help. Then, after you absorb all their losses, you, too, will become a failing bank so you can qualify almost overnight to scoop up yet another ten or twenty billion extra bucks, maybe more if you’re failing big enough. So, the genius behind a CEO whose major bank is not failing is to find the biggest failure can and buy it! Buy it blind if possible. The more hidden problems that you did not know about, the better your position to argue for free government money. Thus, you don’t even need to spend time evaluating the risk, except to hope it is as big as possible.
You say, “Why do you have to have be or buy a failed bank to do that?” Well, I told you this was hidden knowledge, but it’s not hard to sift out: just read between the lines of the record:
Morgan Stanley just paid Citigroup $2.7 Billion to buy its brokerage firm, Smith Barney. “We need a merger partner, or we’re not going to make it,” said John Mack, as he stood at the helm of Stanley and swung his ship for the rocks. On the face of it, you would say that Stanley (and Mack) clearly ate some bad sushi, or they wouldn’t be yelling like Scotty that “she’s not gonna make it.” Thus, you might conclude Mack talked plenty o’ smack, but wasn’t to smart. But that is where you’re not looking to the hidden benefits of eating bad fish: It was only a year ago that these guys received five-billion U.S. dollars in cash from the Chinese government. Of course, the Chinese government had a lot of extra U.S. dollars to get rid of, since everything bought in America is made in China. Where better to burn through that kind of paper than in failing American institutions? Then Mack picked up another $10 Billion from the U.S.
So, how did he swallow up $15,000,000,000 of U.S. and Chinese government money and still wind up in such bad shape that he needed a merger or he wouldn’t make it? Sheer genius. Last time I asked the Chinese government for money, they wouldn’t even respond to my email. So, clearly one has to be a major failing financial/investment institution to catch the Chinese eye — the kind that even after an influx of $15,000,000,000 can proclaim its foundering and everyone will believe it. I wouldn’t have cost the Chinese a fraction of what they were willing to give to Mr. BIG Mack. So, they weren’t interested. So, herein lies the genius: to get the attention of the Chinese, you have to yell things like “we’re not going to make it!” Nobody expects that from a CEO, so it’s a bold move that grabs attention. And attention — on the order of the Titanic hitting an iceberg — gets governments to rush to indecision. The more they rush, the stupider they act; so, make ’em rush hard and fast.
In fact, Morgan Stanley’s magnitude of failure was so attention-grabbing that the government of Singapore clamored for the opportunity to give it billions, too. They had to settle for giving their money ($7.5 Billion) to Citigroup.
The biggest money only goes to the biggest losers:
All of that, thrill that it was, was chump change, compared to what the CEO of Citigroup was capable of. Citi’s CEO, Vikram Pandit (with a name like that, you have to be a fighter), made Big Mack’s attack look like fast food. Citigroup, in just one quarter, managed to milk the U.S. government for $45 Billion. That is some serious banking-failure leverage. How did Pandit land it? Here’s a hint: people are speculating that, within a year, Citigroup will no longer exist! You see, it is only if you have a major bank that is least likely to exist within a year that you can attract $45 Billion of free taxpayer money.
I mean, who wants to invest that kind of taxpayer’s wealth into a bank that shows every sign of staying alive? Why make healthy banks healthier when you can sink forty-five billion into something and literally sink it altogether? I say the man who can accomplish all of that in one quarter and stay alive with a name like Vikram Pandit is deserving of any bonus he gets. But it gets even better: all Citigroup had to shell out for this return was $1.77 Million in lobbying fees last quarter all directed at the government’s bailout program. Where else can you find that kind of return on investment if you don’t have a major failed bank and the kind of blustery CEO who knows how to wield that power?
So, now, you can see why it’s worth paying those big bonuses to get a CEO who can turn an institution the size of an ocean liner around from a course of success to an uncharted path of failure in less time than it takes to appoint a senator in the State of Illinois. The buy-word in banking today is that you have to, first, be too big to fail, and then you have to do what you’re too big to do … spectacularly. Failure is its own reward. Any CEO with a notch like that on his belt will find he’s qualified … well, to become Treasurer of the entire United States of America.
Are you seeing how this works? Neither am I, really, but it sure looks like fun!