Banking Lessons Learned

Dear Jimmy, and Chuck's and Stan's replacements,

You hardly need me to remind you how tough the year has been, what with share prices of Citigroup (NYSE: C  ) , Merrill Lynch (NYSE: MER  ) , and Bear Stearns (Nasdaq: BSC  ) down 30%-40% year to date. So I thought you all might benefit from a bit of an online review -- we can go over some of the more salient issues involved in running a multibillion-dollar bank.

Fads
There's a saying: He who lives by the fad dies by the fad. Remember how envious we were when we talked about Drexel Burnham and the gobs of money it made in junk bonds in the 80s? Boy, are we glad we avoided that ticking time bomb when Drexel went bankrupt.

Remembering that, I was surprised at your head-first jump into exotic subprime mortgage loans, CDOs, CLOs, and SIVs. Perhaps it's too late for the blame game, but who the heck authorized those "if we can't sell them, we'll eat them" leveraged buyout loan commitments? I mean, take another look at the great quarters at  Wells Fargo (NYSE: WFC  ) and US Bancorp (NYSE: USB  ) . If they can make money sticking to boring old meat-and-potatoes banking services, so can we. Can't we?

Risk is risque
Jimmy, I'm also surprised by how poor the risk management was on those hedge funds that blew up. I mean, 10 to 1 odds are great -- on the San Antonio Spurs winning the 2008 NBA championship. They're not so great as leverage to run a billion-dollar hedge fund investing in securitized mortgage loans. So in the future, you really should remember to keep the leverage at a minimum.

Chuck, what's with the $80 billion in sponsored SIVs? I understand the premise of a SIV, and if Citigroup manages it, it "technically" doesn't take on any credit risk; but who knew the commercial papers would freeze up?

I could understand how, at the time, managing a SIV seemed like free money. But $80 billion seems a bit excessive. That's potential SIV exposure larger than Puerto Rico's 2006 GDP!

One hopes that the super-SIV thing will work out, but you know, those events those smart academics keep telling us happen once in ten thousand years really happen once every ten years. That's what that guy from Long-Term Capital Management tried to tell us.

Incentive-caused bias
You gentlemen are busy, so I'll wrap it up. Question: Why did we go back to rewarding people with bonuses for short-term profits? Didn't we agree we'd try to emulate Goldman's (NYSE: GS  ) "Be long-term greedy" motto? You know, Goldman did post a pretty great third quarter.

Ralph Cioffi, the former Bear hedge fund manager, and Dow Kim, the former Merrill president of investment banking, and all the others who got fat bonuses that we had to fire. Talk about money down the drain. Even worse, those short-term incentives are gifts that keep on taking, as now we're saddled with all those crappy CDO and leveraged loan commitments.

Maybe if you structured bonuses so the rewards were better aligned with the risks, companies wouldn't have to endure what they're going through right now.

I know the credit markets are tough, but one day they'll be accommodating again, and all will be well. There's a saying: If we don't learn from the mistakes of history, we're doomed to repeat them.

Yours sincerely,

A Concerned Banking Industry Fool

Related Foolishness:


Read/Post Comments (0) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 539807, ~/Articles/ArticleHandler.aspx, 12/18/2014 11:29:01 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement