It was hard, yet almost ironically comical, observing failed Lehman CEO Richard Fuld in front of congress yesterday. Between attempts at fake tears, he corrected them about only earning “closer to $350 million” since 2000, while driving his firm into the ground. At the same time, he says it was “outside forces” that destroyed Lehman, not lack of internal controls or leadership.
I was in corporate life for nearly twenty years, including several executive roles, before founding MadeinUSAForever.com, so I have seen a lot. There is always a struggle inside a company between multiple factions. Through that lens, the ship has to be sailed the right direction. The question always comes up about whether to do the right thing or politically expedient. Though I was effective and liked, I personally got in trouble many times for doing the right thing instead of going along with the crowd. In some cases, what rises to the top is not the most competent person, but the best politician. If that executive politician is also competent, the company is probably OK, but clearly that is not always the case, as when an executive like Mr. Fuld and his clique can destroy an 160 year old company in just a few short years.
Most disturbing is the lack of ownership these “men” take for the issues they create. Any entrepreneur could never get beyond the first stage with this attitude, but these men are not creators. They simply seized control of an existing company (purse strings). They reward themselves as if they are gods, and are yet are unable to take ownership for their own failures. With examples like this it is little wonder we are seeing many people refuse to take responsibility for their own mortgages or other issues, expecting someone else to bail them out.
There is no easy fix, but one thing is clear – we need a serious shakeup of the corporate board of directors system. The board of directors is supposed to be the ones overseeing the company for the shareholders and must be completely independent of the President/CEO of all public companies. It is always tempting for the CEO to stuff the board full of his loyalists, like Michael Eisner did with Disney. Nominees to the board should never come from the senior leadership of the company. Senior executives and board members should also share a real personal liability for fiascos like Mr. Fuld’s Lehman management in order to encourage real oversight. Also, compensation advice from consulting services like Marsh to boards advising on packages like Mr. Fuld’s hundreds of millions of dollars needs criminal investigation. Finally, Boards should always consider Presidents/CEO’s of public companies to fully removable without a golden parachute if they fail.
Wachovia was more than just a bank. It was grown through the unification of dozens of excellent regional banks. It was a premium, professional operation with 120,000 employees. The big merger that put them at risk, their bridge too far so to speak, was the purchase of Golden West at a huge premium price of $25 billion. Golden West was known in California for their very easy, lax loan requirements, even compared to competitors that were already among the most lax in the nation.
Even with that extremely serious management error by then-CEO of Wachovia Kennedy Thompson, the vast majority of Wachovia is solid and profitable. Wachovia did not face failure, like Lehman or potentially Washington Mutual, but was about to have it credit rating downgraded by the credit agencies S&P, etc. They did have billions in debt that would be rolling over in the near future, but with a bank of the magnitude, that was normal. The question apparently became could those bonds be refinanced at a reasonable interest rate, or under the present market circumstances at all?
Rather than simply getting them through that issue with a simple bridge loan, Paulson and crew decided to take a much more extreme approach. A shotgun marriage or else.
According to this morning’s Wall Street Journal, Wells Fargo another excellent bank, was very seriously looking to potentially buy Wachovia for $20 billon, which is about $10 a share, and NO GOVERNMENT LOAN guarantees. Somehow, that did not happen, but an already shaky Citibank bought them for $2 billion, under $1 per share, AND GOVERNMENT GUARANTEES to cover all loan losses on mortgage loans beyond $42 billion for the total Wachovia $312 billion mortgage loan portfolio. Meaning if the mortgage loan loss on the Wachovia portfolio is beyond 13.5% of the total (42/312 = 13.5), the government will kick in tens of billions of dollars. Given the loss rate on Golden West mortgages, etc. that is highly likely. This is an extraordinary deal for Citibank, and a terrible deal for the citizens of the USA.
What will Citibank do now? What is the fate of Wachovia’s 120,000 employees? Almost certainly over the next few years, they will close hundreds of former Wachovia local bank branches and lay-off tens of thousands of employees. What they will not do is be motivated to make sure they collect everything they can on that giant mortgage portfolio because the government will cover the losses beyond 13.5% anyway.
Instead of merely making a brief loan to Wachovia or allowing a fair merger, the choice was made to destroy billions in shareholder value (I am not a shareholder), put tens of thousands of Wachovia employees at risk, and cost the taxpayers likely tens of billions of dollars anyway.
How does this make sense? History will judge the many errors in handling this financial situation. The mishandling of Wachovia will be a sad chapter. This rescue looks a lot more like theft.
Todd Lipscomb
Founder of MadeinUSAForever.com (http://madeinusaforever.com/) a source for USA made products.
One of the world’s largest candy producers found that chocolate products produced at its China facility are laced with the dangerous industrial chemical melamine.
Melamine is the same chemical which was recently found in 22 Chinese baby formula producer’s products sickening over 50,000 babies at last known count, as well as the chemical which poisoned thousands of American pets last year in pet food ingredients imported from China.
Why is this chemical used in industrial plastics being broadly found in Chinese dairy products? It makes dairy products test higher for protein content, so it is intentionally being added by distributors and potentially dairy companies.
Cadbury sells these products in China, and exports it to counties including Australia, Taiwan, and Hong Kong. Though Cadbury states the United States was not affected, everyone in international business knows products are often re-exported by distributors to the rest of the world. Poisoned chocolate being shipped to Australia is incredibly terrible, but as it would have been labeled in English, it could have been reshipped to any other English speaking nation.
No word yet on how long this contamination has been going on.
Be safe and check the labels for origin, particularly on food products.
The reason typically given for why companies have moved factories offshore is labor cost, but I can tell you from 20 years in international business, including extensively in China, that there are other factors that are just as important.
Rather than actually move a factory, it is much more likely to subcontract to a manufacturing in another countries, particularly China, to make the product.
Yes, the hourly cost of labor is less, but also the subcontractor can bid low on offering to build products because they have very low standards for safety and environmental protection. They are also often in with local officials and know the ropes on getting around what laws do exist in countries like China. Local official corruption may sound like an added cost for those contractors, but actually it helps them reduce cost on many fronts, like avoiding import tariffs on raw materials and even getting subsidized prices for the electricity or oil they use, etc.
These advantages do come back to haunt companies that use such services, as the toy makers found out with the lead contamination and pet food makers with the melamine contamination that poisoned thousands of pets here in the USA and has been the cause of the baby formula disaster in China, where 50,000 babies were recently sickened after consuming melamine laced dairy (melamine makes products appear to have higher amounts of protein).
Having more recently can also be an advantage in many manufacturing areas, for example, if an American factory to build a product was started 20 years ago, it could still be using dated manufacturing equipment today. The subcontactor’s new factory is using newer tooling and assembly equipment. This is not always the case, or an advantage, but it can be significant in some industries, like reducing steps involved, lower energy costs, potentially needing fewer skilled workers. However, as the American factory updates (if it does and if it stays open), this edge will be regained here in the USA, as we start using even newer equipment.
The US does have key advantages – we are by far the biggest market in the world, so producing here means less transit time and cost, and better flexibility. I can literally call my jeans supplier, and they can literally make and ship product within a couple days. Ordering from China would typically mean filling cargo containers, putting them on a boat, and hoping what was really ordered shows up in a few months.
Another advantage is our workers are highly skilled, hard working, and flexible. Theirs are often willing to do 12 hours a day, six days a week, have no real unions, weak labor laws, and a police state to deal with any opposition. Nevertheless, if it were just labor hourly wage cost, many more factories here in the USA would still be open. Forced to go to extreme low prices by retail customers, like Wal-Mart, many manufacturers end up finally going to China in spite of the many issues. The ability of subcontractors to take advantage of local Chinese workers and practically ignore safety and pollution standards is the cost tipping point, and in my opinion unfair advantages that should be considered before imports are allowed.
The final factor we are too often lacking is executive loyalty. Labor costs are extremely high in Japan, yet Toyota invests over twice as much in their home country than they do in their biggest market – the US. They could close Japanese factories and move them to China for export to America and it would probably save several thousand dollars per vehicle, but they don’t. Why? In spite of being international, they know they are Japanese and loyal to their own country. Compare that to Wal-Mart, who imports over $50 billion in cheap goods from China alone. Our American executives are sometimes that loyal, but all too often ready to run to the exit at a moment’s notice. When did becoming an international company equate to no loyalty of many American companies to the USA? I can add with my extensive international experience that no other country’s executives take the extreme view that their country does not matter. We could have never come together to fight and win World War II with that kind of shortsighted, ignorant view. The lack of loyalty is not only wrong, it’s embarrassing. As American business people, we must consider the effect of decisions on America.
In the recent, unexpected move to nationalize mortgage giants Fannie Mae and Freddie Mac, Treasury Secretary Paulson made an unexpected extra effort to protect several billion dollars in lower level debt that would not normally be protected under such circumstances. This debt was held by foreign, largely Chinese investors. Meanwhile hundreds of small community banks, some already battered by the real estate crisis, lost $10 to $15 billion in preferred stock of the two, according to The Wall Street Journal.
Banks must legally keep a certain percent of their assets in “safe” reserve to protect themselves from loan loss. Many small, community banks invested in Fannie Mae and Freddie Mac preferred shares in order to meet this requirement. These are not Wall Street bigwigs, but smaller banks that are the backbone of local communities across the nation. It was a generally accepted, even encouraged, policy to have them invest in these supposedly government guaranteed entities.
The fact is Paulson personally stepped in to include the government safety net over bonds owned by Chinese investors, while causing a heavy blow to hundreds of small banks. If the takeover had been structured like the AIG bailout, the preferred shareholders like these small banks would have been protected, but inexplicably Paulson basically wiped out the value of these assets while personally protecting foreign bondholders.
Most of these banks will survive, but the best case scenario is they will reduce local lending just when the economy needs it most. The worst case, probably for dozens, is that they will not be able to survive this blow on top of other recent losses, like the real estate crisis. For instance, if a bank loaned to several local home building companies that have since gone out of business, they would already be in a weakened state.
I can only guess why Paulson would value protecting Chinese investors over our own small banks, but no scenario imaginable is positive. He must go.