Obviously, Citigroup has continued to be much in the news of late, first becoming a penny stock and then enjoying a nice bounce this week because, well…(short covering?) For better or worse, I try to focus mainly on the tremendous opportunities that exist in the context of inventing the future of such a vital yet stale industry that is finance. So why, I asked myself, so many posts about Citi?
I guess it is impossible to write a blog like the Park Paradigm without posting relatively frequently about Citigroup; every hero need a nemesis right? So I guess in this context they’re the Joker (and I’m, um…Batman???)
Clearly much of the price appreciation is due to a vicious short-covering rally that Messrs. Pandit and Lewis kicked off. But the fact is, what do they have to lose? If they can fool us long enough, credit spreads will come in and recovery will become a self-fulfilling prophecy. Otherwise, Congress (read: the US taxpayer) will bail them out once again. Citi, B of A and AIG have each had multiple bites of the bailout apple, so what’s another bite among friends? They are inclined to do this because their reputations are already severly damaged; in essence, short of outright fraud, they can’t get any worse. Therefore, they are motivated to throw caution to the wind, be super-positive and hope for the best. If new management with fresh reputations were on the scene, the would be much less inclined to release bullish statements without empirical data to back it up. This is a major flaw of TARP: letting incumbent managements stay around. It has created perverse motives that serve neither the troubled institutions nor its shareholders very well.
So with this in mind, I’ve been curious to see how the whole (non-executive) Boardroom shake-up that has been hinted at would play out. Well today Reuters reported that Citi would be adding (at least) three new outside directors, and confirming that – due to mandatory retirement at age 72 (not gross negligence and/or insanity) – 2 current directors would be leaving. Speculation was that the new directors would be:
Wow. That will really shake things up. I mean these new guys, they bring a completely new perspective to the existing Board, right? A real diversity of experience and knowledge. Two plus two equals five stuff…
I don’t know much/anything about Messrs. Grundhofer, O’Neill or Thompson, but I’m pretty sure they are all very talented, experienced managers with great track records; and there is no reason to believe they won’t be an improvement on whomever they replace (admittedly a fairly low hurdle…) But c’mon! Where are the new Board members who will challenge the industry (not just the corporate) status quo? Who have a vision of what finance might/should be in the 21st century? Where is the new Board member with a firm grasp of the latest trends (and implications thereof) in information and communications technology and how they will shift the societal and cultural framework in which Citi operates over the coming years? Where is the independent Director who isn’t a paid-up member of the Fortune500 great-and-good (and so will be more likely to bring a different perspective to the table, and less baggage)? Where are the Board members that manage their own email inbox (or at least read and respond directly themselves), that have a Facebook or a Twitter account, that write and/or read blogs? That have bought at least one iPhone app and feel more panic when they don’t have access to broadband/the web than when they don’t have a mobile/voice signal?
Every successful team I’ve ever seen or been a part of has one common denominator: diversity. Diversity of experience. Culture. Expertise. Seniority. Temperament. Gender. And even better if there were one or more ‘independent thinkers’ amongst the group. And just to be clear, I’m not talking about box-ticking compliance driven ‘diversity’ (although by accident rather than by design, this can sometimes help at the margins, by at least avoiding the ten 60-something white guys out of central casting…) but diversity that creates intersections. Of ideas, world views and aspirations. Because that’s where interesting things happen. (You can bet that my bank‘s Board will have this principal as its foundation.)
I’d be curious to know which headhunter(s) worked/are working on this mandate and what was their brief (and who wrote it?) I would have hoped (on behalf of US taxpayers) that the Obama administration had much input into the search criteria and that they would be looking for Directors that would focus primarily on ensuring the future success of Citigroup without regard to worrying about legacies and sunk costs (real and psychological.)
As an aside, take a couple minutes and wade through the mangroves of Citi’s corporate governance. No wonder it’s gone so horribly wrong! (I wish I had looked at this a couple of years ago, even without hindsight, it just screams sell…) They have 49 people on their Senior Leadership Committee. FORTY-NINE!!! I assume they at least have a wiki to manage committee business…
As you know, one of the key fundamental foundation pillars of our investment thesis here at Nauiokas Park is the migration of value in many (most?) markets from transactions (matching, broking) to data. Quick and dirty: technology is driving the marginal cost of matching buyers and sellers to zero, and is driving the ability to collect, store and analyze previously unimaginable amounts of data and metadata to a different dimension. The value (and creativity and innovation from a business model point of view) now lies in thinking up ways to harness this new ability to good effect. The possibilities seem vast to us and we love discovering clever entrepreneurs and technologists who identify opportunities along this vector.
If you are a data geek, (or just a wannabe/groupie like me) you need to add Joshua Reich’s i2pi blog to your RSS feed. Not only does he know alot about data and technology, but he can leverage that knowledge through his excellent and lucid understanding of markets and business:
The premise that led us to this mess was that with only a modicum of data and some threadbare models trading would be the final arbiter of value and the collective intelligence of efficient markets would result in fundamentally sound pricing. Now that liquidity has gone from the markets, traders of these illiquid instruments are bulking up their data and models to try and better their understanding of fundamental value. And so it is that when markets are liquid the market relies on trading to assimilate the information of individual agents. Without this method of price discovery these agents need to gather their own data as the market no longer performs the role of grand aggregator. Data trades inversely to liquidity.
And he gives great math lessons too (which is great for those of us having mid-life worries about having forgotten more than they’ve remembered…) He’s just (re)started his consulting business i2pi, but I’ve got my eye on him for my new bank so if you are interested in his services, you better move quickly!
Just a quick post to welcome Mike Chadney to the conversation. For those of you who have not yet had the good fortune of meeting Mike, he is the founder/CEO of CityOdds, an expert (and expert commentator) on all things derivatives, and a kindred spirit in terms of having identified something “rotten in the state of Denmark” and better yet, via his new venture, seeking to do something about it.
He starts his blog with a comment on venture finance for musicians (and kindly highlights some of my thinking over the years on the topic…)
In any event, for anyone interested in the future of (financial) markets, one to add to the feed reader I think.
I suspect that there may be more than a few talented (financial markets) developers who have now found themselves with more free time on their hands than they would like. Some of that time might even be spent reading this blog, and so with that in mind, I thought it was worthwhile to pass on this exciting opportunity at Mark Davies’ BusyLab in Ghana (who are behind the fantastic Esoko/TradeNet initiative, on which I have commented several times in the past:)
BusyLab is a software company engaged in building innovative mobile web solutions for the African market and beyond. Our main project, Esoko , is a web and mobile based market information system that includes an SMS gateway component, a J2ME mobile application, and an ajax-driven, open API web application. We were recently featured on CNN and in the Economist, and are currently in 12 countries throughout Africa and Asia. Our mission is to improve livelihoods by building healthier and more efficient markets. We believe agriculture in developing countries is one of the final frontiers to benefit from the technology revolution of the last two decades.
We’re looking for an experienced software developer interested in trying something different and sharing knowledge in Africa.
You should be able to teach the processes and best practices of software development with our bright young team, and contribute to a world-class innovative web and mobile application product.
You should know:
- html, javascript, ajax
- php or java (J2SE/J2ME)
- sql databases (postgres or other)
- software development process
- software testing and quality assurance practices
The position would be for a minimum of six months.
I’m sure for whoever takes up this challenge it will be rewarding in many ways. Good luck!
(on the reasons why the Citigroup Board was finding it hard to find a replacement for Chuck Prince) But the number 1 reason is that…(drum roll please)… it is an impossible job. Citigroup (and they are not alone here, it’s just more obvious sans CEO) is too big. And more importantly too complex for any one individual to manage efficiently in its current form. Like many mega-financial services firms, it is a jumble of heterogeneous businesses, risks and activities some of which gain greatly from economies of scale, but others that equally have significant dis-economies of scale. And the combination of all these businesses injects massive complexity. Let’s just say that I would guess Mr. Coase would find Citigroup “unoptimal”. They have too many variables and not enough equations. For anyone to claim that they could “do it” would just be hubris.
My concerns really grew out of my thinking on size vs. complexity in the context of the networked economy of the 21st century. This thinking probably really started to take shape as a result of the consequences of my AmazonBay story of 2005 which unintentionally (as a by-product of the main storyline) predicted a never-ending sequence of mergers and was rightly criticized as a result. Through the Looking Glass (2005)
In addressing this criticism I was led to think of how if Coase’s theory on the Nature of the Firm was correct, how the optimal business ecosystem of the 21st century would differ from that of the 20th century as the external transaction costs dropped to and then below the cost of internal transactions within (sufficiently large and complex) corporations. And the rest, as they say, is history as I decided to try to put my money where my mouth/blog is!
Now usually I am rational enough to understand that someone else’s gain is not my loss, but it does strike me as strange that it’s pretty clear that I would have a bloody good chance of being a more effective board member in many ways than the legendary Bob Rubin…and a lot cheaper. Then again, even if by some strange turn of events I had been offered and accepted such an appointment it’s not sure I would have been listened to (ie I’d have been the strange energetic, entertaining eccentric at the table ticking the mental diversity box…been there done that, no thank you…) or worse I would have been seduced and corrupted to go along blindly with the thinking of all these very smart, powerful and rich people and look just as dumb if not more.
So I’ll stick to blogging and venture investing (for now) and continue to follow this matinee from the cheap seats. Pass the popcorn.
Yesterday – in response to an earlier article – Gillian Wilmot makes a claim on the FT’s editorial page for more women in senior executive and Board positions in the UK: “Men have messed up. Let women sort it out.”
The more worthy the task the more women, and the more financially rewarding the task the more men. So the public sector and charities, where work is pro bono or modestly paid, have far more women directors than private equity houses, banks, city firms and hedge funds, which are dominated by the “white, male accountant”.
“So what? Why should I care?” Because it is in the financial institutions where the big decisions and risks are taken and where all our pensions and savings are invested. The testosterone-packed “winner takes all” approach does not sit easily with looking after the interests of all stakeholders (shareholders, employees and customers) and managing the downside risk. A lethal combination of testosterone, complexity and greed has brought UK plc to its knees.
The City knew by 2006 that their seven times debt-to-profit deals were unsustainable. They did the deals to win the game and get their bonuses – the individuals cash out, the rest of us lose out.
Would it have happened with more women on these boards? Not if those women had been in the powerful roles of executives, chief executives and chairmen at big financial institutions.
Well, she’s right. Although I can’t say I agree with her claim that quotas are the only way to redress the ridiculous situation of having a homogeneous group of old white guys running everything. I think that generational change, the enormously compelling arbitrage which exists (pound for pound hire women rather than men and you’ll beat the competition hands down – more talent for the price, what’s not to like), and the blindingly obvious fact that heterogeneous groups of people are smarter, more creative and robust than brittle monocultures will ultimately lead us to a more balanced executive suite rather sooner than most people think. I especially think ubiquitous broadband and mobile computing and communications technologies will allow us (as a society) to keep the interest of bright women who heretofore were pushed out by the need to choose between work and family. (By the way, it will also allow men to maintain a more intelligent balance and in so doing not only result in happier families and children, but smarter, better adjusted men in the Boardroom.)
But ultimately the only way real change will be effected in the boardroom is quotas, as in Norway. These can be done in a staged way but there must be targets for executives, chairmen and non-executive directors.
All female shortlists can work well and it is highly successful companies that have led the way. Admiral, the FTSE 100 insurance company, ran an all-female shortlist in 2005 when I joined the board.
Men created the current financial mess; they need women to help them clear it up and restore everyone’s faith in the system.
I’m not against quotas per se, just that they shouldn’t be imposed by the government from above – if companies are too stupid to see the competitive advantage inherent in a balanced executive team, let them suffer the consequences. Except perhaps for the banks (or any other industry that the State cannot allow to fail catastrophically…) But now that the government owns 60% of RBS they don’ need to pass a law to get more women on the Board, just a shareholder’s resolution, or a quick call to Mr. Hester.
It’s pretty obvious that banks and others in the financial markets have taken many risks they either did not understand or – more likely – that they managed poorly. Unfortunately – and at the risk of being accused of a broad generalization – they suppressed a different kind of risk taking – aka creativity. Creativity in terms of new ways of thinking about their business, their customers, their way of looking at the world. Tim Brown of IDEO reminds us in this great talk that ‘adult behaviors’ get in the way of new ideas; adults worry too much about what everyone else will think. Financial services firms are perhaps the most ‘adult’ of all institutions. All work, no play. And so questions are not asked. And group-think dominates. And the cliff beckons…
Taking yourself too seriously has to be one of the best ways to end up looking ridiculous. I wonder if the lesson will be learned. Pass me the toys.
Power corrupts. Absolute power corrupts absolutely.
Put another way:
In this country, you gotta make the money first. Then when you get the money, you get the power. Then when you get the power, then you get the women. - T. Montana, 1983
Clearly this operates in all walks of life, including business. Including banking. But I agree with this excellent post from Overcoming Bias, that it is not inevitable. The corrupting nature of power can be resisted:
The moral of this story, and the reason for going into the evolutionary explanation, is that you shouldn’t reason as if people who are corrupted by power are evil mutants, whose mutations you do not share.
Evolution is not an infinitely powerful deceiving demon, and our ancestors evolved under conditions of not knowing about evolutionary psychology. The tendency to be corrupted by power can be beaten, I think. The “warp” doesn’t seem on the same level of deeply woven insidiousness as, say, confirmation bias.
In particular, given the many opportunities for making money and building businesses in banking, resisting should be that much easier: you can have your cake and eat it too. Perhaps just not the biggest cake in the world. And whether or not you choose to believe me (I’ll admit to the potential that I may be biased), many good people in the industry did resist. But hewing to the “Law of High School” (that life is a fractal of high school and a few immature jerks can and will ruin it for everyone), those that didn’t were over-represented at the top. And so it is not surprising that ultimately in ended in tears.
So be ambitious. Strive to succeed. But resist. You know you can.
You see it was those nasty short-sellers and journalists and well we’re not entirely sure who else was in on the conspiracy but a lot of bad people. A lot.
Now I know it is hard to believe but… true. True! It seems they snuck in at night – after New York closed and before Tokyo opened – and stuffed more and more assets on to our books. Mostly illiquid stuff – they knew what they were doing! The scoundrels… Night after night. Like clockwork. And at least to start, the income and mark-to-market gains from this stuff juiced our profits. Since we’re very good at what we do, we didn’t notice – didn’t think the doubling of our profits suspicious – and just adjusted our comp accordingly.
And then POW. They set off their nefarious trap. Told the world we were levered 60 to 1. Hell even I know on a bad day you can wipe yourself out trading 2-year notes with that kind of leverage… sheesh. Like, whatever dude. But you know what??? It was true… We dug deeper and found the leak – they’d hacked in from a little pension fund in New Zealand or something and bunged us so full of assets that we were like a turkey the day before Christmas. Bastards. I blame it on IT. Or operations. But mainly I blame it on these evil speculators who pushed our leverage through the stratosphere just to make a quick easy buck. But I feel horrible about it.
I’ve heard a lot of things about him over the years. How could you not – he’s an extremely successful and high-profile financial executive. But not just from the press, also from people I know well and respect and who have or do work for him. And these people have always painted a universally positive picture of the man: as a banker, a manager, a leader and a person. Is it an indictment of modern corporate governance and organizational politics, that the pillars upon which his has built his success and reputation: transparency, truth, forthrightness, conviction, humility, passion, empathy…are seemingly the exception and not the rule? Perhaps I am too forgiving and too harsh at once. Hmmm. Perhaps you would be justified in calling out my hubris, but from what others had told me of him, I suspected we might get on famously; in particular he seems to share a similar intellectual curiosity and thirst for knowledge, which to be frank was – in its all too frequent absence – probably my single biggest source of disappointment in an otherwise very rewarding and enjoyable 16 year career in investment banking.
In any event, when I heard a couple days ago that he’d done an interview with Charlie Rose, despite being flat out on 16+ hour days, I made sure I carved out an hour to watch it, which I did while eating my lunch today. I had never heard him speak before. He didn’t disappoint. Take a look:
It certainly made me smile when he said the first thing he did after being fired from Citigroup was to go buy 10 or 20 books. And his comment about one of the sources of disagreement with Mr. Weill:
…remember I had been fighting with them for years…we set up an organization at Citi…now don’t ever do this ok? And if I ever do this at the job I’m in, just shoot me… we had tri-heads and co-heads reporting to co-heads. Globally. I told them early on it’s crazy…
(Ahem)..yes, well, moving on…
I’m sure the shareholders and his colleagues at JPMorgan would be annoyed, and I’m sure there are a million reasons why it would never happen, but watching him gave me an idea for what just might be the ticket to beat all tickets: Obama/Dimon ’08. Talk about shoring up your weak flanks. Wow. If this ever came to pass I might even go long dollars. Well, at least close my shorts…
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