Being Chief Executive Officer (“CEO”) of a Fortune 50 company is not an easy job. CEOs get paid a lot of money. How do they earn that money? To assert that outsized CEO compensation bears any relationship to the position, the person must demonstrate extraordinary leadership skills, in depth business knowledge and foresight. Thursday, Charles Prince, former CEO of Citigroup testified before the Financial Crisis Inquiry Commission. He fell far short of these measures of excellence.
A Prince’s Testimony
Peggy Noonan, in the Weekend Wall Street Journal dismissed Mr. Prince’s testimony as bland. See After the Crash, A Crashing Bore. I found the testimony fascinating for what he said and did NOT say:
- The financial crisis occurred because interest rates remained too low for too long and “investors were reaching for yield.”
- To satisfy demand for higher yielding instruments investors turned to securitized mortgage investments.
- We were also satisfying the political agenda of encouraging home ownership.
- We relied on statistical models and rating agencies.
- Too many subprime mortgages were written and securitized
- We had to announce an estimated $8-$11 billion write off
- I resigned
- The biggest problems were in the “super senior” mortgage tranches which my senior traders held in Citigroup’s portfolio. These caused some of the largest losses.
- I was not aware of decisions made at our trading desk. I cannot fault our traders.
- When I became CEO, I named a sophisticated chief risk officer who also missed the problem with the senior tranches.
- We became aware of these problems in the fall of 2007 and held many high level management and special Board meetings. We were not able to avert this problem.
- I am sorry for the damage Citigroup caused to homeowners, investors and others.
- Citigroup is not “Too Big to Manage.” See Prince Testimony.
According to Mr. Prince, Citigroup “still had to keep dancing” as the subprime crisis worsened or it would lose business and employees to competitors.
The Banality of a Prince
Hannah Arendt, author of books on the Holocaust, coined the phrase the “banality of evil.” The phrase referred to great evil perpetrated by ordinary people who accepted rules of the system, no matter how wrong or ill advised Whether Mr. Prince is evil is for moral philosophers and historians to decide, but he is surely banal. He looked like he was scripted for the hearings to be as bland and apologetic as possible. What was missing from this performance was any personal responsibility.
Four themes pervaded Prince’s testimony:
- I had very smart traders and a sophisticated risk officer surrounding me, so how could you expect me to anticipate the problem when those on the front line were unaware of the problem?
- We were passive and ineffectual observers of external events such as low interest rates, greedy investors, federal housing policy, ineffective rating agencies and others.
- These actors conspired (woe is me!) to cause this problem and
- Everybody was in the same securitization business so it would have been unfair to our shareholders and our employees to exit the business; hence we had “to keep dancing.”
The Role of the CEO
In exchange for hefty pay a CEO needs to “see around corners.” By his own admission, Mr. Prince saw nothing. While the extremely well paid Mr. Prince received a $40 million severance package, he obviously did not fulfill his part of the contract.
In conjunction with attorneys, speech writers and public relations specialists we can now identify the “confluence” of factors that caused the crisis. Where was Mr. Prince’s foresight to analyze these factors in advance and avoid the pitfalls?
Mr. Prince argues that the bank is not too big to manage. I would differ. Mr. Prince either lacked the time, interest or acuity to grill his chief risk officer and senior traders on what could go wrong in subprime securitizations. I was a senior executive of a corporation and an attorney by training. The first question I would always ask was: what could go wrong? What events and circumstances could close down the business?
Was Mr. Prince asking these questions?
Everyone Was Doing It
Finally, Mr. Prince brings us the classic defense used by generations of teenagers: “Mom, everyone is doing it, so why can’t I?” His unarticulated motivation is apparent anyway: “if I had the moral and intellectual courage to exit the subprime business, my competitors would remain in, might make a lot of money and I would lose face before my senior management, Board and shareholders. I might even lose my job!”
In the end Mr. Prince lacked the intellectual honesty, moral courage and leadership skills to be a CEO. A Prince turned his shareholders and the American taxpayer into paupers.
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