Top 5 Phony Scapegoats

Angry Americans want people to blame for the financial mess—but c’mon. Are AIG and John Thain really the reason for your retirement losses? William D. Cohan on the phenomenon of misplaced rage.

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Angry Americans want people to blame for the financial mess—but c’mon. Are AIG, Tim Geithner, and John Thain really to blame for your retirement losses? William D. Cohan, author of House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, on the phenomenon of misplaced rage.

My, but there is a lot of anger out there directed at the various and sundry financial wizards that had a hand in bringing us to our current state of financial distress. But does any of this outrage qualify as Misplaced Outrage? Is any of it a little, how shall we say, even the littlest bit unwarranted? For instance, the viral phenomenon that is Rick Santelli of CNBC posited yesterday on MSNBC that the time has come to “get over” the AIG bonuses because they are mere gnats on the back of an elephant. In an effort to examine that possibility and in order to try to take the spotlight—even briefly—off those unworthy of so much of it, herewith is a completely unscientific survey of those individuals or institutions that have been miscast in their roles as pure villains:

1. Timothy Geithner, the Treasury secretary. Once and, maybe, for all, Geithner is part of the solution, not part of the problem. Yes, he was the president of the New York Federal Reserve Bank of New York for the five or so years prior to his recent Cabinet appointment, and yes he had an important seat at the table during the various efforts in the last year to prevent the financial system from total collapse. And it is true that he was one of the architects of the seemingly haphazard prescription of saving Bear Stearns one minute, letting Lehman Brothers go the next, and then pumping the gross national product of Turkey into AIG. He could have been more forceful with Hank Paulson, his predecessor, in trying to fashion a solution for Lehman Brothers similar to what was done for AIG just days later. But he is one of the few people now in Washington who truly understands what happened here and why and what must be done to restore confidence to the capital markets. The true regulatory villain? Christopher Cox, the former chairman of the Securities and Exchange Commission. Guess who the regulator of securities firms was once upon a time? Cox, and as far as I can tell, he thoroughly abdicated his role.

2. Edward Liddy, the CEO of AIG. Liddy became the leader of the beleaguered and much-maligned insurance giant in June 2008, years after the now infamous Financial Products business, based in London, was given free rein to launch weapons of mass destruction on our financial system. Liddy, who gets $1 a year for his service to AIG, can be chastised properly for defending a $440,000 AIG executive retreat at the luxurious St. Regis Resort in Monarch Beach, Calif. (including $200,000 for rooms, $150,000 for meals, and $23,000 for the spa), shortly after the US government rescued AIG from insolvency with $84 billion in loans. Now taxpayers have $170 billion invested in AIG, which then had the audacity to direct $450 million in bonuses to the wünderkinds in the Financial Products group. Liddy claimed to be just following the letter of the contracts these individuals signed with AIG long before his arrival. A cooler head would have sensed the political ramifications of paying all this money to these people, no matter how much they were needed to diffuse the bombs they created. But the real blame for the mess at AIG goes to its patriarch, Maurice “Hank” Greenberg, who was the embodiment of that firm for 37 years. For kicks, Martin Sullivan, who succeeded Greenberg as CEO in 2005, can share in some of the blame, too.

3. Vikram Pandit, the CEO of Citigroup, is another one of those $1-a-year-guys, but he is no more responsible for the mess he inherited at Citigroup in December 2007, when he took over, than Barack Obama is responsible for the mess he inherited from former President George W. Bush. Pandit has been vilified for Citigroup having become essentially a ward of the state, but let’s be honest here, the music really stopped on his predecessor, Chuck Prince, who just kept right on dancing and having a ball. Prince, with the help and support of Robert Rubin, the former deity of Wall Street, decided to ratchet up the financial risks Citigroup was taking year after year by manufacturing, trading, and selling all sorts of toxic mortgage-backed securities. Pandit had the good fortune of having Citigroup buy his hedge fund for $800 million—Pandit’s personal take: $165 million—and then the misfortune, depending on how you look at it, of being asked to clean up Prince’s mess. Honorable mention: How could we ignore Sandy Weill, the architect of the sprawling global colossus that once was Citigroup, the most valuable financial-services company in the world at one point?

4. John Thain, the former CEO of Merrill Lynch. I can hear the fingernails on the chalkboard already. Yes, Thain is nearly impossible to defend even in a column that attempts to do so. He is the evil genius behind the tone-deaf $1.2 million office renovation, the hiring of his former Goldman Sachs buddies, Peter Kraus and Thomas Montag, for $29.4 million and $39.4 million, respectively, and the man who, incredibly, convinced the board of Merrill Lynch and Bank of America to pay out $3.6 billion in bonuses at the end of 2008, even though Merrill lost an astounding $27 billion for the year. So Thain has set the bar pretty high for himself. Still, I am going to attempt to jump over it. Thain is also the guy who takes credit for raising billions of dollars in fresh capital for Merrill Lynch in the year he was at the helm and the man who takes credit for selling Merrill’s 25 percent stake in Bloomberg LP back to Bloomberg for a reported $4.43 billion. He was also the man who takes credit for unloading $30.6 billion of Merrill toxic waste to Lone Star Funds for 22 cents on the dollar. At least he got some of the stuff off the books. And he is also the smoothie who convinced that bonehead Ken Lewis, the CEO of Bank of America, to pay $29 a share in stock for Merrill last September, a deal that once was worth $50 billion, when Merrill was days away from a bankruptcy filing. He was also not the man who led Merrill into the mortgage-backed security abyss. That distinction belongs to Stan O’Neal, the former Merrill CEO who retired in October 2007 with $160 million in his pocket.

5. CNBC. I will admit up front that when it comes to CNBC, on whose airwaves I have made a few appearances, including as recently as March 6, I tend to wish—as does, famously, Jon Stewart—that the cable network would use its bully pulpit to do more investigative reporting and educating, a la David Faber, of Wall Street and corporate America than the often blatant booster-ism that has become the hallmark of Jim Cramer. But the truth is that CNBC has often been right and first with some of the most important pieces of the financial-meltdown puzzle. Faber’s House of Cards—no relation—documentary was first rate, as was his interview, a scoop, with Alan Schwartz, the Bear Stearns CEO, on the Wednesday of Bear’s final week. His commentary around the rapid deterioration of the confidence in Bear was measured and accurate, it turns out. We also have Charlie Gasparino to thank for ferreting out the story of Thain’s $1.2 million office renovation, which will forever give Thain his place in the pantheon of Wall Street’s rogues.

Sadly, there is a tremendous amount of blame to go around as the archeologists dig into the foundations of our current financial crisis. And it is getting harder and harder to tell one player from another as scary revelation after scary revelation hits the airwaves. But it is important to apportion blame where it really due, with a rifle rather than a shotgun, if we are ever truly to come to grips with what happened and why, and then to make sure it never, ever happens again.

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, was published by Doubleday on March 10.