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Monday, November 9, 2009

A Too Big Too Fail Apology From Former Citi Chairman

History, it is said, is the greatest teacher. Yet many intelligent and knowledgeable people don’t seem to read history.

Corporate growth throughout the late 60’ the 70’s and into the 80’s flourished through Mergers and Acquisitions. Companies were gobbling up other companies in their own industries as well as other industries. The goal – to see how big they could get.

Paint companies were buying drug store companies, storage companies were buying hotel companies and companies were created just to buy up other companies like Great Western who bought Paramount Pictures and Associates Finance – a personal and auto loan company.

Throughout the 80’s Leveraged Buyouts was the rage. One company buying another company for virtually no money of their own, just using the assets of the target company to accomplish the purchase. The theory was that many of these companies who grew in previous years through Mergers and Acquisitions were worth more by selling off their pieces then they were keeping them whole. Contract to buy a company then sell off its subsidiaries to pay for the purchase.

What drove these Leveraged Buyouts in addition to the thirst for bigness, wealth and poser was the fact that many of them were “too big” and potential failure loomed. “Too Big” companies could not properly manage what they owned.

This fact drove many companies to sell off any subsidiaries that had that were not related to their “core” business. Bigger was not better.

With over 40 years of history, you would think that our highly paid corporate executives and especially our government would have learned the lesson as well. Instead, they embarked again on a known road to failure.

John Reed, former Chairman of Citi Bank was one who did not learn. He was obviously captured and captivated by the thought of GREATNESS. But now, out of the business world, looking at the crisis we are in which he helped to create, he humbly apologizes.

John Reed, Former Citigroup CEO, APOLOGIZES For Creating Monster Of A Bank The Huffington Post by Ryan McCarthy

Former Citigroup chairman and CEO, John Reed, has apologized to a Bloomberg reporter for his role in creating the ailing mega-bank, which has received $45 billion bailout funds and more than $300 billion in asset guarantees.
In other words, Reed, is essentially saying, sorry about that whole "too big to fail" thing.
Here's what Reed told Bloomberg:
"I'm sorry," Reed, 70, said in an interview yesterday. "These are people I love and care about. You could imagine emotionally it's not easy to see what's happened"...

He now proposes to curtail executive compensation and begin to break apart those “too big to fail” institutions. I think he read the history books too late.

Reed's apologia comes on the heels of his letter to the editor of the New York Times last week, in which he put forth his support for separating banks lending operations from their trading arms. In 1999 Congress repealed the 1933 Glass-Steagall Act, and opened the door for commercial banks to meld with trading houses.

When our economy was working well, we had usury laws that capped the interest rates that banks and finance companies could charge. At it height the maximum rate was 18%. Anything above that was considered “loan sharking”

When the economy was working well we had and enforced anti trust laws in effect limiting the ability of any one company to monopolize an industry and eliminate competition which in turn harmed the consumer = me and you.

When the economy was working well there were laws against price gouging. In fact, there still exist laws against price gouging, - the taking advantage of people by charging higher prices for needed commodities in times of trouble. Well, these are certainly times of trouble of most Americans yet we see price gouging almost everywhere – oil, food, insurance and most certainly in bank fees.

What is interesting to me however is that most of our current CEO’s and Congresspersons are old enough to remember “the way it was”. In other words, they are old enough to have witnessed first hand and participated in those earlier times I mention above. They didn’t’ even have to read any history books – THEY WERE THERE!

What we are actually experiencing is the need for greed, wealth and most of all power. These people know the history. Others in advisory positions to them know the history and certainly there are hundreds of business and economics professors in universities across this nation that knows.

They knew! They knew what the consequences of their actions would be but did not care. When you put billions of dollars into your pockets it is often difficult to determine right from wrong or even care.

We, the people, were also blinded by this. We were allowed a time of prosperity never before seen in our history. Everyone had virtually anything they wanted. Within the confines of your economic status and earnings, you could buy things you really couldn’t afford. Why, because those too big to fail guys knew if they diverted your attention you would not say or do anything about what they were doing.

They blinded us with the same form of greed they were using just a much lower level of it. They went for billions by allowing us to get thousands.

Break up the too big too fail

There are many who are in favor of breaking up those “too big to fail” institutions saying that if they are “too big to fail” they are simply just too big to exist. Two such proponents of breaking up the banks are former Fed Chairman Volker and current Chairwoman of the FDIC, Sheila Bair.

The banks would have you to believe that in order for them to be competitive globally they have to be as big – if not bigger then European and Asian banks. My question is competitive for whom? The large global institutions that are probably also “too big to fail?? This argument certainly does not apply to the American consumer.

I am one of those that believe that a mandated break up for anti-trust and monopoly reasons should occur. By concentrating almost half of our consumer banking in just four banks – Citi, JP Morgan, Bank of America and Wells Fargo – just does not work to the benefit of the consumer. It is only good for themselves and their enormous salaries and bonuses.

Competition, in basic economics, means that prices are held in check and also creates a more consumer conscious company. If you have no competition then why worry about good sound business practices and customer satisfaction? Two good examples of this would be your local or regional electric utility company. Have you tried to negotiate a better price with yours? Of course not – because there is no one else to go to.

Now, look at the cell phone industry. They are continually offering lower rate plans to gain more market share – a plus for the consumer. The consumer has a choice. But as I say that, the consolidations are occurring there as well. Verizon recently acquired Alltel, Sprint acquired Nextel, AT&T acquired Cingular and there are rumors out there that T Mobile and Sprint are working on joining forces.

Cable companies at one time also had no competition as each purchased the rights to an area in which no other cable company could operate. Remember those days before satellite? While single cable company operators still buy a franchise territory, the consumer does have the option of two other satellite companies. The result is a more cooperative, consumer friendly and lower cost services by all competitors.

The last case I will make for the breakup of “too big to fail” are the oil companies. If you are old enough – I am – to remember the old gas wars where the oil companies would lower gas prices almost on a daily basis to get more market share. Then they too realized that eliminating competition would work to their benefit and against the consumers. Oil companies began to merge. The Exxon merger with Mobil the biggest example of that. In addition, oil companies made agreements with each other as to territories. They agreed amongst themselves who would operate in what regions and gain the market share in that area. Competition was reduced greatly and we have all seen the results of that most recently.

There is a case for the breakup of the “too big to fail” banks.

One other item that should be considered in a break up argument is the idea of all banks limiting their business to consumer banking. They, as former Citi CEO, Reed, pointed out should not be in the insurance business nor should they be in the investment banking business. The latter having been recently reinvigorated when Congress agreed to giving investment banks such as Goldman Sachs, commercial banking status. Also, by the Fed’s prompting of allowing JP Morgan to purchase Bear Stearns and having Bank of America purchase Merrill Lynch.

It appears that whatever powers to be in our government are making a concentrated effort to limit competition to aid and abet “too big to fail” by aiding and abetting consumer destruction. I am not sure who and where those powers are but a look inside The Federal Reserve might give us an idea.

Mr. Reed, your apology comes somewhat too late. If you are sincere in your beliefs vocalized by your apology then you should use your power and influence to make the changes. What say you?

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