News & Views from 465 California Street

Fall of the Mandarins

Clint Reilly
Feb
3
2009

These times have not been kind to the mandarins who run American financial institutions. One after another, their larger than life images have dissolved into puddles of red ink.

Alan Greenspan – “The Maestro” – was roundly hailed as the greatest Federal Reserve Chairman in history. The obsequious bows from politicians and the press are embarrassing in retrospect.

During his presidential campaign, John McCain said he would appoint Greenspan to lead a review of the nation’s tax code: “If he’s alive or dead it doesn’t matter. If he’s dead, just prop him up and put some dark glasses on him.”

Asked during a Presidential debate with Al Gore in the 2000 campaign what he would do first in an economic emergency, George W. Bush couldn’t say fast enough, “Get in touch with Alan Greenspan.”

Even as it became obvious that the real estate bubble presented a growing danger in 2006, BusinessWeek magazine heaped on the praise: “Concise when it suited him and artfully opaque when it didn’t, his prescience, record and stewardship of the Federal Reserve make him a hard act to follow.”

But that was all before it became apparent that Greenspan’s easy credit policies were only sustaining artificial growth fueled by second mortgages and credit cards rather than higher wages and better jobs.

History sometimes shreds the proudest of reputations.

Take Sanford Weill and Robert Rubin. Weill created Citigroup – the financial services conglomerate that became the world’s largest bank. Rubin was the former Clinton administration Treasury Secretary who joined Citigroup after retiring from government. Hailed as geniuses, Weill retired a billionaire and Rubin earned over $115 million from the bank – even though few knew what his actual job was.

Today, Citigroup is being dismantled by Vikram Pandit – the present CEO. Consumed by losses of $18.72 billion in 2008 and billions more on the horizon, Citibank has been forced to accept a $45 billion government bailout and a $306 billion taxpayer guarantee of its toxic assets.

That’s $351 billion.

Citi’s stock value has declined more than 90 percent since 2006. Last month, Rubin resigned. Weill – who is worth about $1.3 billion – magnanimously stepped forward last week to renounce his $3 million per-year severance package, which comes on top of other severance perks like his office in New York’s most expensive tower, use of the bank’s plane, free health insurance and more.

Alas, the reputations of Citigroup, Weill and Rubin are slowly crumbling under an avalanche of catastrophic losses.

Mandarins can be counted on to protect their own. Greenspan once memorably lauded Rubin as “one of the most effective Secretaries of the Treasury in our nation’s history.”

Remember the bull that stood for Merrill Lynch? Maybe it really stood for the quality of their financial advice.

Stan O’Neal, Merrill’s star CEO, was sacked after announcing an unexpected write-down of $8.4 billion in October 2007. He was replaced in December by John Thain, former head of the New York Stock Exchange. Thain, reared at the legendary Goldman Sachs, was also characterized as a brilliant strategist.

Under Thain’s stewardship, Merrill posted $27.15 billion in losses during 2008.

Nevertheless, Thain was hailed as a savior after engineering Merrill’s September 2008 fire sale to Bank of America for nearly $50 billion. Only months later, mounting losses at Merrill forced Bank of America to seek $20 billion more from the taxpayers.

Thain was summarily fired.

Now he faces a subpoena from the Attorney General of New York for authorizing huge bonuses to Merrill executives. In a humiliating postscript, CNBC revealed that Thain had spent more than $1.2 million to decorate his office. Another Wall Street icon has crashed along with the stock market.

Sifting through the shards of so many shattered reputations, we must wonder about the other Mandarins whose reputations are still intact.

What other wise men await the harsh verdict of history?

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