Too Big to Survive
By
Could it be that one of the benefits to come out of the financial difficulties in which the country finds itself is the infectious thinking that big is better - for its own sake. There are many valid reasons for large corporations, houses, cars, etc. but somehow bragging rights shouldn’t be one of them.
The human appetite for praise and recognition is not something new, it has been around since Adam and Eve found themselves tossed out of the Garden of Eden. So the idea of a human being, voluntarily, putting aside the desire to receive the accolades of peers would seem a very risky proposition to rely upon at best. However, that is what the country has been asked to do for the past 25 years.
Voluntary regulation is the act of asking managers of companies to restrict their actions, on their own, for the benefit of others and, except for the saintly among us, who are usually poor, it hasn’t worked from the dawn of time. Bigger is better, keeping up with the Jones’, winning at all costs – that is what is clearly carved into the modern human psyche. Why our government leaders of late have chosen to completely ignore human nature, especially when it comes to the issues of money and business, is an interesting question? Former chairman of the Federal Reserve System, Allan Greenspan, answered the question by essentially stating that he was naïve and couldn’t believe that business leaders would do something that was self destructive. Well, the truth is that they probably wouldn’t if they truly knew what was going on and their egos didn’t get in the way.
Many financial analysts have questioned the ability of monster corporations to be managed. Over the years they have raised questions about the financial supermarket concept and its octopus approach to the financial landscape. If it involved money or financial transactions of some type, it was fair game to be acquired.
The managers of these organizations were believed to be management geniuses and they must have been to understand the enormously complex and diverse structures they managed. The truth is they put on a good show for years but when ENRON collapsed and the Sarbanes Oxley rules came into play, one of which required that the CEO personally attest to the accuracy and truthfulness of the financial statement their companies issued, a strange thing occurred – they suddenly didn’t seem quite so sure.
After ENRON, time and again, we experienced the re-statement of earnings and the delay in the release of statements, as the CEO started asking questions that were not pressed before. Questions again came to the forefront about management’s ability to really understand what they were managing. As the years went on, they convinced the public they knew what they were doing; they also convinced themselves as well. The result is called self delusion.
When you see a company’s board searching for, or has just hired, a new CEO with “star” power, the proper translation should be: we need someone who can figure out how to run this mess because no one here seems to be able to get a handle on things. The smart guys on Wall Street know this, which is why they attach so much value to the CEO of a monster corporation, financial or otherwise. General Electric is the poster child for this type of organization and the reason there was such concern when Jack Welch retired. The fact that his replacement was an insider, Jeffrey Immelt, soothed the fears of the Street and gave the impression, true or not, that “gee maybe they do know what’s going on.”
The problem that continues to evolve is that the business model for the financial community is broken and its leaders and regulators continue to be in denial.
Banks have moved away from “trust” and “quality” and “fiduciary responsibility” to “the bigger we are the more secure we are.” Since banks could not reap the earnings growth necessary to be competitive with industrial firms by simply being “banks,” they edged their way into related industries of insurance, investment banking, consumer finance, mutual funds, and anything else with a dollar sign attached to it. The traditional banking business was left behind.
The large banks were permitted to merge (in fact everything has been permitted merge). They believed they had achieved the enviable status of being “too big to fail” and were immune, because of their financial diversity - self delusion ruled.
Citigroup may appear to have seen the light in its announcement to break itself up but it would appear, based on what they want to hold on to, that they still haven’t bought into the demise of the financial supermarket model.
As for Congress and the financial regulation they will eventually legislate, the first rule should be to prohibit those institutions which have received any form of bail-out from influencing (lobbying) members of government (the idea of the crook writing the penal code shouldn’t be permitted this time).
The second, and possibly most important rule for re-regulation, should be the one taken from the State Department and a recent Republican Party standard: Trust but Verify.