How Prince lost the plot — and why the next episode may be Sachs and the Citi
ROBERT COTTRELL IN NEW YORK 1 hazarded here in February that it would probably be a good idea if the world's largest bank were to be run, every now and again, by a banker. At last the board of Citigroup has come round to my point of view, though it might have saved shareholders a few billion dollars by doing so sooner. Charles Prince has gone as chairman and chief executive after announcing a loss of perhaps $11 billion on mortgage-backed securities that turned out to be neither backed nor secure. Robert Rubin has been left holding the fort as chairman and Sir Win Bischoff as chief executive, pending the arrival of somebody new with a head for figures. The early gossip was that this would be John Thain, a former Goldman Sachs executive with a safe pair of hands, who went to run the New York Stock Exchange in 2004. But Thain has decided to take another big job on offer, running Merrill Lynch. There he replaces Stan O'Neal, a Wall Street bruiser ousted a few days before Prince for dropping $7.9 billion in much the same way that Citi did. Thain explains his choice by saying Merrill is a good business that took a wrong turn, and he's sure it can be fixed. What that implies about Citigroup is anybody's guess.
My own guess goes something like this. Citi is a grab-bag of good but disparate businesses thrown together in pursuit of a grand global strategy that turned out to be — literally — unmanageable. If you're going to run a bank on the basis that a position here hedges a position there, then you need somebody in the middle who knows what all the positions are. In a conglomerate the size of Citi, the centre loses the plot. Whoever comes next at Citi is going to be a seller of businesses, not a buyer of them.
I said a year ago that Goldman Sachs should engineer a merger with Citi just for the fun of breaking it up and seeing what the Goldman guys could get for it. Goldman, of course, was smarter than me. It knew that the terms of such a trade were going to tilt even further in its favour. Now, as Citi whimpers, Goldman alone is laughing on Wall Street after another robust quarter. Goldman's partners could buy a decentsized rival house — Bear Stearns, say — with this year's bonuses alone. So, will it be Sachs and the Citi? At some point, surely, the price must be right.
peter Singer, a Princeton philosopher known for his arguments in favour of animal rights, is a friendly man with a willingness to indulge in elementary discussions of his work which must remind him of a thousand first-year undergraduate classes. Over lunch, we talk about altruism. His arguments are, for the most part, commonsensical: if you're in a position to help others, then help them; and direct your help where it will have the most effect. He said he had been talking the previous day to officers of the Boys' Club of New York, a charity popular with hedgefund types, which tries to help disadvantaged youths in the city. He told them that they would do better to spend their money and efforts in Africa, where they could do a lot of good cheaply, rather than in New York, where they were doing a bit of good expensively. I wonder what they thought of that.
The televised debates now underway among would-be presidential candidates show that they could all ace a Turing test. You cannot tell from what they say if these are humans or machines. I can't think of a memorable one-liner from a presidential debate since Lloyd Bentsen told Dan Quayle he was `no John Kennedy' almost 20 years ago. This is part of a general problem: Americans, especially public figures, have become far too polite in public conversation. They know that any slip will come back to haunt them on YouTube. So I'm delighted to see organised argy-bargy making a comeback, in New York at least. Intelligence Squared has exported its 'Oxford-style' debates here with help from Robert Rosenkranz, boss of the Delphi financial group. Last week the Economist launched its own programme of debates in a posh hall on Broadway. The events are jam-packed with paying customers. But having attended three 'Oxford-style' debates in the past two weeks and digested the measured arguments, I fear Americans have a rather exalted idea of what goes on at the Oxford Union. Intelligence Squared says that it wants to keep 'toxicity' out of its debates. I hope that leaves room for vitriol.
Much excitement in policy circles over a paper called 'Is the "Surge" Working? Some New Facts' by Michael Greenstone, an economics professor at MIT. Greenstone has tracked the performance of bonds issued last year by the Iraqi government, and found that they fell sharply when the Bush administration sent in more troops. In effect, Greenstone has drawn attention to the fact that investors are all but writing off the Iraqi government. Lately the bonds have been pricing in an 80 per cent probability of default. In an interview with the New York Times, he reached for a grim medical analogy to explain the bond market's reaction to the surge: 'It might be a heart surgery that failed so the patient is dying, or a heart surgery that succeeded, but during the operation they found a deadly liver cancer so the patient is dying. Either way, the guy is dying.' I shudder to think what he might say about Citigroup.
Iblinked a bit when I read in the Wall Street Journal last week that Daniel Och, the founder of Och-Ziff Capital Management, had received $1.1 billion from a sale of his company's shares: investors were apparently dazzled that his firm's main fund had returned an average of 13.9 per cent a year for the past five years. All well and good, except that the S&P 500-share index returned 15.5 per cent. No doubt Och-Ziff has much else to recommend it. But give me that sort of money and I promise to underperform the market by as much as you like, for as many years as you care to specify.
Robert Cottrell is deputy editor of Economist.com.
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