When I look at this year’s Fortune 500 list to focus blame on the companies most responsible for my permanently diminished retirement accounts and my higher cost of living, there is no shortage of suspects.
I could be mad at the most profitable company, Exxon, but I am not. They sell real products and, like most Americans, I was hardly surprised that as oil went beyond $100 a barrel, the oil companies would make as much as possible. They did only what I expected of them; they did not violate my trust—or as far as I know—fail to disclose what they were doing.
So, as I line up those most responsible for unfathomable and indefensible losses, a theme appears, driven largely by the financial firms. And it is simple. What plagues AIG, Citibank, Fannie Mae, Freddie Mac, and a host of other companies most is their failure to disclose to shareholders what they are doing. And it is that failure to reveal real risk-taking that prevented the market from disciplining them sooner by forcing share prices lower earlier.
Fortune notes that a retirement account invested in the top 500 companies' shares would have dropped 37 percent during the last 12 months.
What we have leading us to a depression is a confluence of several long-term events. The first is the idea foisted onto Washington that self-regulation works: that the foxes on Wall Street are somehow a different breed of furry creatures and therefore should watch the henhouse. The second big idea—popularized over the last two decades—is that pension funds that guaranteed hard-working Americans retirement income should be passé. What could be better for unencumbering hard-working stiffs of their money than the notion that in, a 401(k) retirement account, savings could only go up and so would the stock market. Shepherding us are those nice fellows at the banks and brokerages, who assured us they were looking out for us.
Well, take a look at the AIG situation for a minute. No. 1 on the Fortune 500 list of losers—at $99.3 billion and counting—the company says it is still unwinding its problems with derivatives or collateralized-debt obligations. The last time I talked to people at the company was about a month ago, while it was defending retention bonuses for many of the same guys in the financial-products division who made all the bad bets. The company then said it had unwound about $1 trillion of those complicated, exotic, and often illiquid investments, and still had $1.6 trillion to go. Now I ask you a common sense question: Do you think those guys started by unraveling the hardest situations first or the easiest ones?
Citibank, No. 5 on the Fortune loser's list at $27.7 billion for the year, is another favorite. As The New York Times so correctly reported, Citi just declared a profit for the latest quarter, thanks to accounting legerdemain. Who is kidding whom? First, Citi and all sorts of other banks are jacking up everybody’s credit card and interest rates to try to cover losses in many other business lines. No doubt, if we ever discover the truth, it will be years from now when some former executive says the lack of disclosure was to avoid a run on the bank, to make sure Citi passed its Tim Geithner “stress test.” A lack of knowledge is never good for the people.
I still believe Congress should hold a hearing or three on why it was legal—or OK—for Citibank, for instance, to have $50 billion or more off the books in 2007 tied up in what it called special investment vehicles—and decide there was no risk involved. Who in the Citigroup general counsel’s office or on the CEO’s staff made those decisions? Who told them short-term commercial paper was risk-free? Why should any of this behavior that involves keeping shareholders in the dark be legal?
Apply the same questions to Lehman Brothers, No. 37 on the Fortune 2008 list in terms of revenue and nowhere to be seen this year. Does anyone who worked at Lehman Brothers think that leveraging investment bets on mortgage-backed securities at more than 35 to 1—the ratio of wins found at a roulette table—was sane, smart, or had anything to do with the trust customers put in the firm?
We are in a depression, or darned close to it. Fortune notes that a retirement account invested in the top 500 companies shares would have dropped 37 percent during the last 12 months. More alarmingly, the combined earnings of the 500 dropped 85 percent, from more than $645.2 billion to $98.9 billion. Think about that profit number again: One company, AIG, lost more than the combined profits of the other 499 companies in the Fortune 500.
Consumer confidence—as measured by profits on this year’s Fortune list—is reflected in companies that provide inexpensive products that people need to have as they swing into economic-survival mode.
So what to think about the Fortune 500 list this year? Well, I am not a stock picker, nor a Wall Street wizard of any sort. But if I had to make a show bet at the $2 window, I would say read the Fortune 500 sidebar on top women executives. Together, the top 10 women made less than the $124.7 million in total compensation that Angelo Mozilo of Countrywide Financial collected for 2007. My bet for the next year is that if you create a portfolio of the companies run by these top testosterone-free executives, that stock index will outperform the Fortune 500 next year.
The only way I change my thinking on that is if, by some miracle, the banks and other companies see that only by mandatory full disclosure of risk to shareholders will that risk-taking be held to acceptable levels.
Allan Dodds Frank is a business investigative correspondent who specializes in white-collar crime.