So why are our largest money-center banks—you know, the ones that are supposed to be the survivors of the financial crisis, like JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo—in the process of a further, and possibly fatal, meltdown? Last week alone, Citigroup’s stock fell by one-third, JPMorgan’s fell 13 percent, and the shares of Bank of America and Wells Fargo each fell 25 percent.
With apologies to economist Nouriel Roubini, the “Dr. Doom” of the financial crisis, the reason for the continuing collapse in the financial sector is not that the prospect of nationalization looms large for these money-center banks, although if that were to happen, shareholders would be wiped out in much the same fashion as those of AIG. Rather, the reason for the downward spiral is that, incredibly, some 20 months into the crisis, credibility is still the most acute problem facing the banks. We still don’t know the extent of the toxicity of the assets on their books and, in many cases but not all, we no longer trust the people who run these institutions to tell us the truth about the danger lurking therein. Until the trust is restored, and soon, there can be no equity or franchise value, regardless of whether the government or shareholders own the equity.
It shameful that Bank of America Chairman and CEO Ken Lewis has no capacity to admit that his decision to buy both Countrywide Financial and Merrill Lynch was beyond irresponsible.
And frankly, at the moment, why should we trust these erstwhile leaders? Some of these are the very men—would that a few women were in charge!—who got us into this mess in the first place. Not only should many of them have been dismissed months ago, but they also seem unable to ’fess up to their collective roles in the disaster.
A sampling of the myths still being perpetrated by these Wall Street executives reveals the extent of the ongoing problem. From Dick Fuld, the longtime CEO of Lehman Brothers, during his congressional testimony from last October: “I wake up every single night thinking, ‘What could I have done differently?…What could I have said? What should I have done?’… I made those decisions with the information that I had. Having said all that, I can look right at you and say this is a pain that will stay with me for the rest of my life...”
And then in January, from one of Fuld’s several apologists, Harvey Miller, a partner at Weil, Gotshal, the law firm that represents the Lehman carcass: “Lehman was a victim of a financial tsunami that was beyond its control.”
Miller wrote in a January 5 letter in response to a court motion made by New York State Comptroller Thomas DiNapoli: “…[T]he Comptroller is oblivious to the critical facts that caused the financial meltdown that engulfed Lehman and, generally, the financial markets, including inter alia, the failure of the government authorities to appropriately regulate and oversee financial markets and the deficiencies of the rating agencies….[T]he Chairman of the Federal Reserve System and the United States Treasury Department, as well as others, failed to foresee the oncoming financial tsunami, as did most of the economists and the financial analysts.”
So Fuld, by his own admission and that of his high-priced attorney, simply bears no responsibility for what happened? Please.
But wait, there’s more, much more. Alan Schwartz, CEO of Bear Stearns at the end, was similarly at a loss to explain what he or his firm could have done differently to prevent its fate when he testified before Congress last April: “I can guarantee you it’s a subject I’ve thought about a lot…saying [to myself], ‘If I’d have known exactly the forces that were coming, what actions could we have taken beforehand to have avoided this situation?’ And I just simply have not been able to come up with anything, even with the benefit of hindsight, that would have made a difference to the situation that we faced.”
Robert Rubin, former CEO of Goldman Sachs, former secretary of the Treasury, and the former power behind the throne at Citigroup, told an enthralled audience at the 92nd Street Y a few weeks back that there was a confluence of the most extraordinary events that caused the problems, from high oil prices to high housing prices to unscrupulous mortgage lenders and less-than-vigilant rating agencies.
“You put that all together and then add one more item to that—which is global interconnectivity, that it is to say all of this very quickly spread around the world, so the problems developed here, they broke and they occurred elsewhere—all of that started to have more effect on the real economy, and it all came together in what some people have referred to as a perfect storm,” said Rubin. “And maybe the term is trite, but I think the idea, which is that a kind of a coming together that was a low probability event that then gave rise to a set of conditions as the most extreme since the 1930s is I think sort of what happened. Not sort of—that is what happened.”
During his nine years at Citigroup, Rubin was paid around $115 million. But he could not admit in a public forum to any personal responsibility for what happened or to the role Citigroup played in it. This is shameful.
It also shameful that Ken Lewis, chairman and CEO of Bank of America, has no capacity to admit that his decision to buy both Countrywide Financial and Merrill Lynch was beyond irresponsible. These two deals, for which Bank of America badly overpaid, have put his company and his various stakeholders—employees, shareholders, and debt holders—on the brink of financial disaster. Lewis is blind to it. On Friday, he lamely defended these deals, claiming that business was picking up at both firms and that their wisdom would soon be apparent.
“I met with a group of about a hundred of our top leaders to discuss what’s going on in the businesses and listen to their thoughts and concerns,” he wrote in a memo to all employees. “We talked about the great challenges we’re all facing in the marketplace. But we also talked about how encouraging it is to work with such strong teammates, to have the trust and support of our customers and clients, and to have the position in our markets that we do. As we concluded the meeting, I told them that we have a clear challenge in front of us: to prove the cynics and the critics wrong. I know we can do that—in fact, I think we’re doing it now, in the work each of you is doing every day, and the business results you’re putting up on the board.” Pure pabulum.
Until Wall Street CEOs admit that their blind ambition and ravenous greed resulted in decision after decision, year after year that put their firms, and now our financial system and way of life, at perilous risk, there can be no healing, no redemption, and no recovery. The sooner we squeeze the life out of the pathetic myths that Wall Street continues to perpetrate as if we were all idiots, and the sooner we face the truth of what happened and why, the sooner we will be able to put this dreadful chapter in our history behind us. Let’s get on with it already.
William D. Cohan, a former senior-level M&A banker on Wall Street, is the author of The Last Tycoons: The Secret History of Lazard Freres & Co.
Cohan's House of Cards: A Tale of Hubris and Wretched Excess on Wall Street,
will be published by Doubleday on March 10.