According to the June 22 letter, the review identified â€œvaluation concernsâ€ where â€œappraisal documentation is missing or incomplete,â€ or where property-assessment methods were â€œinsufficient/lacking.â€
Other missing information included employment confirmations, phone numbers, credit reports and rent verification, the letter said. The review also found â€œincome calculation errors.â€
Another fine example of six sigma in banking. Imagine if Dow and Dupont ran their chemical plants like this. Holy crap. Or Boeing built planes this way. Yikes. But then again, in those industries lives are at stake. Banking. [shrug] Just money. Ok a few billion hundred billion. But still, it’s not like anyone died. Sheesh.
Hmmm. In 2002 – yes 2002, seven years ago(!) – I wrote:
In a recent speech, Jack Welch, the former chairman of General Electric, made exactly this point: â€œ…[if] you put six sigma in an investment bank, they would all gag!â€ In case you think he was just engaging in some gratuitous banker bashing, consider this: six sigma quality means havingfewer than 3.4 defects or errors per million operations in a service process. That is 99.99966% perfection.
Contrast this benchmark with the assurance once made to me â€” by a senior syndicate manager of one of the largest and most respected global bond underwriters â€” that it was perfectly normal and necessary to expect and reserve for 5%-10% errors in the allocation of a jumbo multi-tranche bond deal! Assuming an average of 200 individual orders (including splits) on a typical new issue, to reach six sigma quality levels you would need to have fewer than four errors over 5000 issues!
…And therein lies the next major opportunity for capital markets bankers over the next decade: to use technology not only as an enabler of innovation (as has been the case over the past 15 years) but as a driver of industrial efficiencies.
The guys in IT thought it was an interesting take on things (with $ signs in their eyes) but the ‘business’ side, well, let’s just say it didn’t strike a chord. Banks were special. Bankers were (even more) special. All that re-engineering and total quality management and painful restructuring and shifting centres of power…all good for manufacturing and you know, “other” industries. The ones they advised and financed and funded LBOs of… but not banking. Banking is “different.” You wouldn’t understand…What. A load. Of. Crap.
Well now they are paying for it. We all are paying for it. Rivers didn’t catch on fire but the financial system was well and truly polluted. But there is a bright side. The bright side is that there has never been a better time to come in and build businesses in banking and financial services that have an engineering DNA, businesses that are natively adapted to an industrialized and digital way of doing business. Indeed some of the pioneers in this mold have already enjoyed tremendous success (Markit Group comes to mind.) Others are emerging. And the incumbents have never looked less frightening (even if, especially because, they are now too big to fail.)
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?) Â 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. Â So why, I asked myself, so many posts about Citi? Â
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…
(on the reasons why the Citigroup Board was finding it hard to find a replacement for Chuck Prince) But the number 1 reason is thatâ€¦(drum roll please)â€¦ it is an impossible job. Citigroup (and they are not alone here, itâ€™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. Letâ€™s just say that I would guess Mr. Coase would find Citigroup â€œunoptimalâ€. They have too many variables and not enough equations. For anyone to claim that they could â€œdo itâ€ 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.
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… 😉
Citigroup (NYSE:C) will begin a new bonus plan aimed at getting its senior executives to work for common earnings improvement across the entire company instead of only driving profits within their departments. According to the FT, the new system is “an effort to increase co-operation and minimize in-fighting among the disparate parts of the sprawling financial services conglomerate.”
Readers won’t be surprised to see me rolling my eyes in disbelief… This is what passes for the leadership for which Citigroup shareholders are paying (hundreds of millions of dollars)?? Did Mr. Pandit expect the stock to bounce on the back of this latest additional coat of shiny eggshell-finish complexity?
However it’s nice to see Mr. Pandit despite living in a house entirely made up of glass (opaque of course) panels, finding the time to wax lyrical about the need for transparency in regulated financial markets. A little bird told me he may have actually just dusted off an old (c. 2005) executive committee strategy document and made a few adjustments to bring it more ‘in line with the prevailing environment’:
Yet transparency is difficult to avoid achieve. It requires continual vigilance to resist standardized products whenever possible appropriate, keeping them away from introducing them to exchanges, resisting creating counterparty clearinghouses and settlement systems and, finally, amassing accurate data on prices and transaction volumes for our proprietary use. Transparency must also include public disclosures to investors about pertinent risk and financial information that give the market the impression it has a chance to make informed judgments.
If I were a Citigroup employee and I read this op-ed, all my fears about my bank being taken over by robots and consultants would have been confirmed at a stroke. Pandit simply doesn’t come across as human in this op-ed: instead he’s some kind of jargon-generation device, talking about “systemic risk umbrellas” and “alternative accounting approaches”.
I stand by my earlier views that – in it’s current configuration – Citgroup is too complex to be efficiently managed, at least using the prevailing standard corporate management paradigm.
Iâ€™m not suggesting that no economies of scale make sense in banking or financial services more generally, only that they are subsumed by complexity within these â€˜integratedâ€™ financial behemoths. I even have some sympathy for the seductive logic underlying integrated business models, however in my view the theoretical benefits of an integrated model – while possibly intellectually robust on paper – are impossible to exploit in reality. It ignores what I describe as corporate entropy: ie in any corporate process there exists an inherent tendency towards the dissipation of useful energy.
Indeed – sticking with the chemical analogy and without writing a book about it – it would be fair to say that giant bank mergers are at best an (intrinsically unstable) intermediate product in the reaction coordinate and to make any sense need to be followed by a subsequent division into multiple new end products (which individually release the benefits of economies of scale and synergy without the instability engendered by excessive complexity.) So Citigroup (or UBS or HSBC or RBS/ABN Amro, etcâ€¦) should naturally â€œdecayâ€ to form multiple specialist firms that are more focused and efficient than the multiple firms that had been combined first to form these giants.
I’m sure Mr. Pandit is an extremely intelligent and hard working person, my suspicion however is that will not be sufficient to ensure his success. I certainly don’t envy him, however I wonder if he could be more bold. And I forgive any Citi shareholders for hoping I am sadly misinformed. And I’ll admit that we are now (at 16 and change) closer to the bottom than the top, but I’ll abstain from considering a buy order until I see a material sign of reducing complexity…
I don’t know these gentlemen, and obviously I am not privy to the internal workings of the financial behemoths that they were charged with piloting, but I wonder if the problem isn’t so much who is at the helm but the ship they were trying to steer. As Mr. Prince said, taking personal responsibility was the “honorable thing to do” as a leader (I’m reminded of the immortal words of Hopper – “The first rule of leadership: everything is your fault”) and I would tend to agree. And there is no reason to cry for these men – they were amply rewarded for their efforts and will – I’m sure – land on their feet so to speak, so don’t misunderstand what is to follow as sentimental apologia for their failings (real or perceived.) However I wonder if these giant firms are manageable at all – at least under the current constructs of managerial science – and ask honestly if any one individual however smart, charismatic or experienced (Mr. Rubin would seem to have all these qualities in excess) can realistically succeed in steering the turn-of-the-21st-century financial megafirm through the oceans of Extremistan (Mr. Taleb‘s metaphorical “province where the total can be conceivably impacted by a single observation.”)
For some years now, I have been interested in trying to understand how the corporate ecosystem would change under the effects of the onslaught of accelerating social and economic change driven by the revolution in information and communication technologies. Applying Coase’s Theory of the Firm to a world where communication and transaction costs move unrelentingly towards zero (at least in many contexts) must in my mind lead to a fundamental – quantum – shift in the optimal organizational dynamics of companies and the economy more broadly speaking. The vision I seem to be ineluctably drawn towards is one that looks like the classic map of a network, containing millions (or billions) of nodes and interconnections, with a fractal geometry. So yes I do think that ‘super-nodes’ (read mega-corporations) will continue to exist and even grow, but I think that complexity will migrate away from any particular node to the network. So in my mind, bigger is only sustainable if ‘simpler’. Today’s financial behemoths are anything but ‘simpler’.
If we look back from a vantage point twenty years hence, I suspect that the period between 2002 and 2012 (or so, I’m not hung up on exact dates…) will be seen as a transitionary period – when the one wave (of linear giganticism) crested, and another of specialization and the migration of organizational complexity to the network (the “edge”) emerges. Will the takeover of ABN Amro be the last of the mega-mergers (although and perhaps fittingly the 3-way break-up involved added an element of deconstruction to the transaction…)? If I had to guess, probably not but it will more likely be ‘one of’ the last of its kind. Of course, I am far from alone in wondering if these giants have passed the point of diminishing returns on scale (from the BBC article on Mr. Prince’s resignation:)
“The actual structure of Citigroup is broken – it’s too big, it’s too bloated and we think it should be broken up into three of four pieces,” added Bill Smith from Smith Asset Management in New York.
Ronald Coase, the economist, famously observed that private companies are different, because they are not the only place to do business. An alternative to costly and complex banks is an atomised market, where individuals and institutions do business without a large financial intermediary. Banks may merge to survive this inevitable transition; but in the long run many of their functions will disappearâ€¦the core functions of any Wall Street Bank cannot remain inside the same complex and costly shell forever.
Given this is probably a topic worthy of a doctoral dissertation (and if done well perhaps a Nobel prize in 25 years), there is no way I can even start to do it justice in a short blog post, but I hope I have been able to give at least a taste of how I think this might play out and why it is likely to be a core consideration in any investment thesis for financial services over the coming two or three decades.