Well, here we are again, at
the beginning of a new year—and I must say, after the bizarre mess that
was 2011, almost anything will be an improvement. After all, why should I
miss a year that saw not one, but two multi-day power losses here in New
Jersey; that saw a downgrade of America’s debt rating after a massive
Congressional game of chicken with raising the debt ceiling; that saw my bank
stock holdings continue to go nowhere and the rest of my portfolio go on a
massive roller-coaster ride; and ended with a Republican primary season that
has rapidly devolved into a race to the bottom. So—what was there to
like about 2011?
If there was one
development that marked the strange climate that continues to exist in the
financial markets after the crisis years of 2007-2009, it was the failure of MF
Global in the final months of last year. I mean—wasn’t this stuff
supposed to stop in the wake of Dodd-Frank and the supposed tighter regulatory
regime that now exists? Isn’t there some law somewhere that says a
financial firm—one that naturally has a fiduciary duty to its
clients—would have to keep client funds segregated from the firm’s
capital? If not—then why not a rule on something so basic to the proper
functioning of capital markets?
If you really want to get
upset (and borderline nauseous) about all of this, be sure to read this
month’s Vanity Fair piece—titled “Jon Corzine’s Riskiest
Business”—that details the long and now ignominious career of MF
Global’s CEO, Jon Corzine. Yes, he of Goldman Sachs, U.S. Senate and
New Jersey governorship glory—all of which has now gone down the tubes
with his dithering declarations that he just doesn’t know what happened to
the $1.2 billion in client money that disappeared down the rabbit hole
and apparently now cannot be found. Sorry, but I have a few problems with
that—how does a long-time Goldman Sachs trader, who would of necessity
know his positions at the end of every trading day, suddenly so lose track of
billions of dollars of his firm’s money? And how does a trader—one
who should be finely attuned to the risks of over-concentration in any one
security—become so sure that a huge bet on European sovereign debt is
bullet-proof? Perhaps it’s because, as detailed in the Vanity Fair
piece, Mr. Corzine had only $3 million of his own hundreds of millions in MF
Global, and may have not found it necessary to be so careful—after all, in
the parlance of Wall Street, it was only OPM (Other People’s Money) to
lose.
If there was one useful
thing that came out of 2011, it’s that the reputations of the Masters of
the Universe—especially those with that golden Goldman pedigree--continued
to take a real beating. Robert Rubin has already been shown to have been
just about clueless during his tenure as a Vice-Chairman of Citigroup, and Hank
Paulson’s legacy at the Treasury is still being hotly debated. (His
“just sign this blank piece of paper or your bank is out of business”
strategy will likely not be replicated in future crises.) And lest Mr.
Corzine be all alone in his standing as the worst Goldman alumnus of 2011, let
us not forget the doings of Eddie Lampert, hedge fund manager extraordinaire
turned worst retailer of the 21st century.
How can you take an iconic
American brand like Sears—one where almost every member of the Baby Boom
generation has warm feelings engendered by years of gazing yearningly at the
Sears Christmas catalog—and run it into the ground in just a few short
years? Here’s how you do it—by caring not one whit about your
customers (do you detect a common thread here?), by thinking that you can
cost-cut your way to retailing success, and by valuing real estate above the
revenue-generating capabilities of any store.
Mr. Lampert’s union of
Sears and Kmart—another American retailing name that once stood for
something besides just cheap and tacky—has been a spectacular failure,
but his reaction remains the same: we’ll close stores and cut costs, even
as he fails to grasp that fewer stores means a lower public profile and a
further diminution of the brand, as well as severe hits to employees and
communities. Eddie Lampert has proven pretty definitively (to me, anyway)
that—contrary to his own opinion—he is not the smartest guy in the
room, and he has finally hired an experienced retail executive to try to fix
his mess.
I hope that those other
MoU’s—the CEO’s of the largest banks—have learned something
from the drubbings that their reputations have taken over the last few years
and are heeding the signs that Americans have little patience for large paydays
that are not accompanied by similarly large returns to investors. While I
may fault the “Occupy Wall Street” crowd for their lack of financial
literacy and the general fuzzy-headedness of their movement, I will acknowledge
that they managed to tap into the American zeitgeist with exactly the right
sentiment at exactly the right time. For some reason, many in the cadre of
large-bank CEO’s have failed to understand the optics of their large
paydays, and my suggestion is that their boards of directors get a bit more in
touch with Main Street before they make this year’s payouts. (And if
these lowered payouts result in declines in sales of second homes in the
Hamptons—gee, too bad.)
The demise of the Masters
of the Universe will be an unreservedly good thing, in my opinion. The
travails of the ex-Goldman Sachs crowd have proven unequivocally that in many
cases, the aura conferred by their status as Goldman Sachs alumni was just
that—an illusion—and did not signify some greater level of talent or
ability. While the “vampire sucking squid on the face of
humanity” characterization on the part of the press does not do justice to
the many folks who work long hours and deliver great client service at GS and
other Wall Street banks, it does define the arrogance and lack of humility
on the part of some prominent Wall Street players. It’s time to
start differentiating between the delivery of great shareholder returns and the
good fortune to be in the right place at the right time. Yep, there are
plenty of Masters of Nothing out there, and I expect that we will see more of
these guys (and a few women, BTW) have their true colors revealed as this
inexorable financial de-leveraging—which is only yet in the early
innings—proceeds in the years to come. As Warren Buffett famously said,
when the tide goes out, we can see who’s swimming naked, and I have a
feeling that many more asses will be revealed as the tide continues to slip
away.
