Bankers: Still No Cure for Hypocrisy

Banking is a funny industry.

During the boom, when profits are flowing, bank executives are rock stars -- geniuses of finance taking command over the plumbing of global economies with skill and precision, soaked in adulation and paid accordingly.

But when the tide goes out, the same excuse pops up over and over again. They throw up their hands, claim ignorance, and say they had no idea what was going on. Not only was someone else doing the dirty work, but at times they claim to have no idea how their businesses even worked.

Take Robert Rubin, former chairman of the executive committee at Citigroup (NYSE: C  ) . Paid $126 million to keep an eye on the bank, Rubin was one of the highest paid bankers in the country during the early 2000s. Yet when Citigroup began choking on pools of toxic CDOs, he admitted sheer ignorance. "Myself, at that point, I had no familiarity at all with CDOs," he told CNNMoney in 2007.

When Citi faced devastating losses on a type of derivative called liquidity puts, Rubin shrugged again. "Rubin says he had never heard of liquidity puts until they started harassing Citi last summer," wrote CNNMoney.

I can't think of another industry where a company can be sunk by a product its highly paid chairman has never heard of. Imagine Apple nearing bankruptcy after reporting losses on a device Tim Cook had never heard of. It is literally unthinkable.

Next, Tom Maheras, a former Citigroup's executive in charge of what became the bank's most toxic assets, was asked by a Congressional committee three years ago what led him to take such enormous risks. "Based in part on a careful study from outside consultants ..." he explained, "I continued to believe, based upon what I understood from the experts in the business, that the bank's [CDO] holdings were safe."

Now, Maheras was paid nearly $100 million in the three years before Citigroup's downfall. You'd think such compensation would require a sense of responsibility. Yet when the tide went out, Maheras's excuse was effectively that he was just following orders from the experts. (Makes you wonder how much money those experts made.)

It's nearly five years after the Wall Street crash. So, why I am still talking about this? Because there's no evidence that the attitude of "Heads I'm paid a fortune, tails it was someone else's fault" has changed one bit.

Former Barclays CEO Robert Diamond lost his job last summer after the bank was caught in a ring to rig global interest rates known as LIBOR. Asked about the incident, here's what Diamond told Andrew Ross Sorkin this week:

"Do you want the truth?" he said. "Up until all of this, I didn't even know the mechanics of how LIBOR was set. If you asked me who at Barclays submitted the rate every day, I wouldn't be able to tell you. I bet you if you asked any chief executive of any bank on the street, they would give you the same answer."

Diamond was paid roughly $1 million per month during his tenure at Barclays. And his explanation for the crisis that cost him his job was not only that he didn't know what was going on with LIBOR, but that he didn't even know how LIBOR -- an underpin of the banking system -- worked.

That is fascinating to me.

It is true that no CEO can keep a watch on all its employees, and that there will always be bad apples.

But with banking, we see something much different: Executives proclaiming that they really had no idea how their businesses worked in the first place.

To me, that raises one big question: If they are too complex to manage, why are megabanks so weary of breaking themselves up into simpler and more manageable units?

There's actually an easy answer to the question. As Sorkin writes, Diamond "still has more money than his grandchildren's grandchildren will ever need."

Heads, I win, get rich, and take the credit. Tails, I win, get rich, and proclaim ignorance. What a game! 


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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.

  • Report this Comment On May 02, 2013, at 4:02 PM, slpmn wrote:

    As far as I can tell, the only real argument for keeping the megabanks intact is that their is a high correlation between asset size and executive compensation in the financial services industry. Basically, the executives in charge get paid X because they run a megabank, and if it gets split in in pieces, they will get less.

    It's not about better shareholder returns for megabanks, it's not about providing better customer service or being able to handle big customers (consortiums of smaller banks serve big customers all the time), and please, it's not about maintaining a competitive advantage in the global banking arena. We're the only major nation with struggling giants that isn't seriously taking a hard look at breaking them up. If we were on board, Europe would probably already have done it.

    It all boils down to getting paid.

  • Report this Comment On May 02, 2013, at 4:27 PM, XXF wrote:

    Mega banks are broken down into manageable units internally. This argument to me is the exact same as saying that if Warren Buffet can't answer questions about Pampered Chef products developed by his company then Berkshire is poorly run and must be split up. The bailout wasn't necessary because banks ran huge piles of red ink (they did but with a few exceptions just about any bank could have recovered) the bailout was necessary because we have a fractional reserve banking system in which banks do not hold all of their depositors money in cash at branches.

    I think you know this, Morgan, and that this story of "bankers are evil" fits your personal narrative better than banks are generally well run institutions which facilitate the rapid and efficient deployment of capital in a global economy.

    I am, by the way, totally in favor of shareholders taking an active role in deciding executive compensation, the goal of which should be to align the executive's goals with the organization to facilitate the maximum perpetual investment return for shareholders and minimization of principal/agent conflict. I however recognize that when an executive has restricted stock or options which vest after a period of time that that compensation does not make him evil.

  • Report this Comment On May 03, 2013, at 10:19 AM, jpanspac wrote:

    I think you meant "wary", not "weary".

  • Report this Comment On May 04, 2013, at 5:06 PM, gtymascpa wrote:

    to XXF, you must be a banker, as you seem to always want to defend the existing banking system . . .

    Your analogy is all wrong! Come on, . . a banker not knowing the mechanics of LIBOR ! ? ?

    let alone managing a large Bank ! !

    How do these people get these jobs ? ? ?

    That is unacceptable !

    And with all the watchdogs/regulators "watching" the financial industry who did not catch the "gaming of LIBOR", . . well that alone says that the banks are just way to big.

    Buffet may not know all the details of P Chef, but he sure knows how to say, . run a stockholder meeting, or a Board of D meeting, things critical to him doing his job.

    Does your auto mechanic understand the basics of internal combustion engines ? I hope so.

  • Report this Comment On May 05, 2013, at 12:30 AM, SkepikI wrote:

    Most of the time I started at the bottom, made sure I understood the inner workings of my job and became an expert at its execution...not without mistakes, but with serious embarrassment at not knowing some key fact regarding executing the work and how the basics functioned. I see now that I was doing it all wrong and it was a good thing I never tried to work in a bank....

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