Counterparties: Catch and release, board of directors edition

By Ben Walsh
April 20, 2012

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In 1996, Richard Parsons joined the board of directors of Citicorp. Two years later, in 1998, Citicorp’s board approved its merger with Travelers – a merger that was illegal at the time, since it violated the Glass-Steagall Act. But no matter, in 1999, the Glass-Steagall Act was repealed, allowing the creation of Citigroup to go through unimpeded. There was no indication at the time that Parsons objected at all to the way that the law was changed to allow the creation of a financial services behemoth.

Parsons remained on the Citigroup board until three days ago, when he stepped down as chairman. And now he is publicly casting doubt on the wisdom of repealing Glass-Steagall:

“To some extent what we saw in the 2007, 2008 crash was the result of the throwing off of Glass-Steagall,” Parsons, 64, said during a question-and-answer session. “Have we gotten our arms around it yet? I don’t think so because the financial-services sector moves so fast.”

Parsons’s role as a passive director – even as his institution oversaw the evaporation of hundreds of billions of dollar in value during the financial crisis – is hardly unique: Citi is far from the only financial firm with a captured board and weak oversight. Earlier this week the re-election of Goldman Sachs Director James Johnson was opposed by Ruane, Cunniff & Goldfarb, the managers of the Sequoia Fund.

Parsons’s 2012 pay of $75,000 in cash and $150,000 in stock isn’t close to Johnson’s outrageous $523,000. Still, it’s hard not to wonder how much earlier Parsons might have come to his regulatory epiphany had Citi paid him $50,000 to $80,000 a year or had he not already been wealthy on arrival, as Felix suggested:

If board members get rich, it should be from the appreciation of the shares they buy, rather than from money they’re paid to turn up to board meetings. Management has a strong incentive to put already very rich people on its board: they’re inured to large sums of money, and are therefore much less likely to blink at compensation packages which can reach well into the eight-figure range. So let’s hire directors for whom an extra $50,000 will actually make a noticeable difference to their annual income.

As galling as Parsons’s about-face is, it’s weirdly heartening to know that even after almost two decades of being captured, once released, Parsons changed his tune. Maybe, if we change directors’ incentives, they might start speaking their mind when doing so can make a difference. – Ben Walsh

On to today’s links.

#OWS
Sometimes, when “all the facts are in,” it’s worse: the UC-Davis pepper-spray report – Brad Hicks

TBTF
The fuzzy math behind claims of bailout profits – Bloomberg

Old Men and the Sea
Steve Jobs’s unfinished custom yacht – PSFK

Banks
The decline of cross-border banking – The Economist
Despite a strong quarter, potential Moody’s downgrade hangs over Morgan Stanley – DealBook

Regulations
Federal Reserve gives banks two years to comply with the Volcker Rule – WSJ

Cephalopods
Fourth Goldman insider under investigation in Gupta case – WSJ

Economy
As debt falls, data shows the American consumer may be ramping up spending – NYT

Regulations
Nine banks investigated for overdraft fees by CFPB – Bloomberg

Adding Value
A good central banker could be worth $1 trillion a year to the U.S. – The Atlantic

Taxmageddon
“Revenue neutral” tax reform: an illusion political candidates have no incentive to dispel – Project Syndicate

Spending by Any Other Name
People like tax cuts and charity, but we should abolish the charitable tax deduction – Economonitor

Crime and Punishment
Price of stolen taco 100.33 times greater than non-stolen taco – ESPN

Goldbuggery
Utah passes bill to allow gold and silver to be used as currency – CivSource

EU Mess
Italian museum burns art in protest against budget cuts – BBC

7 comments

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Did Bloomberg fire everone with an IQ of over 5?

Posted by Danny_Black | Report as abusive

everyone

Posted by Danny_Black | Report as abusive

Poor Danny – he has to answer his own questions now. Seems nobody else will give him the answers he craves.

Posted by MrRFox | Report as abusive

@MrRFox, he was correcting a typo. :) Presumably not just adding emphasis!

From my perspective, both sides have a point. Counting the Fed remission to the Treasury as “profit” from the bailout is justified on one level, but neglects the broader implications of QE. Moreover, rose-colored glasses are required to see Fannie/Freddie as anything less than a royal disaster!

That said, the direct bailout of the BANKS didn’t turn out to be costly at all. Which is typically Danny_Black’s point.

Personally? I would have gladly forgone the crisis and the “profits” claimed by the Treasury. I’m glad that the bailouts weren’t as (directly) costly as initially thought they might be, but suggesting it is a profit?!?

Posted by TFF | Report as abusive

TFF, there is an argument to be made about whether it was the best use of the money or whether it represented a decent risk-adjusted return or whether it should have been more onerous to the financial institutions but the fact remains that anyone who claims that losses at banks were socialised either lives in Iceland or the UK or if he/she lives in the US is a bare-faced liar.

Frannie had to be bailed out and one of the reasons it had to be bailed out the way it was that the major holders of its commercial paper were also major holders of US govviesand a default would have caused them to dump those holdings. The Chinese were explicit in making this threat. So maybe in that context, 150bn for the privilege of borrowing at the low rates is cheap, no?

Posted by Danny_Black | Report as abusive

Just to be clear, I think Geithner, Bernanke and, in particular, Paulson did a superb job under extreme pressure. One only has to look at the results of the brain trust at the BoE, FSA and Brown/Darling to see how badly it could have gone if these group of f*ckwits had been in charge in the US. It is not a surprise to me that given the cold hard facts that people attacking Paulson have to resort to lying about some mythical backhander to GS.

Posted by Danny_Black | Report as abusive

Danny_Black, the losses at Frannie were socialized (once the shareholders were wiped out). I understand why it needed to be done, of course, but that doesn’t change the facts.

Admittedly they aren’t really banks.

Posted by TFF | Report as abusive