Politics and Profits: The Meltdown

I’ve been thinking about what to do with this blog in the aftermath of the election.  As October rolled into November, it didn’t seem like there was much to say anymore.  It felt like talking about the air.  “Politics and profits” was all around us.  The original point of the blog was to write about business and the election, as if business and the election were two separate concepts that needed me to link them.  Ha!

Perhaps I was prescient. When TV news started showing the Dow Jones Industrial Average live while the president and president-elect hold press conferences, tracking market movements up or down as a verdict on whether what was being said was wise or foolish, it became pretty obvious that once again, as Calvin Coolidge once said, “the business of America is business.” And our portfolio is getting fatter:  Citibank and soon, perhaps, the Big Three automakers. But we hardly feel like Captains of Industry, do we?

So, after taking a vow of blogging silence for a few weeks while I pondered whether this little venture should continue, it hit me that, more than ever, we are residents of Marshall McLuhan’s global village, all in our separate tribes but joined in watching this phenomenon, to use another 1960s term, this “happening” — the meltdown.  As individuals, families and communities, the ground under our feet might be solid right now, but we all have to watch it give way in other precincts knowing ours might be next.  And we can capture it all in real time.

So that’s what this blog will be all about: Chronicling the meltdown, from an unsafe distance.

President-Elect Barack Obama's News Conference Monday

There are some who believe our current political class, up to and including President-elect Obama, is not capable of managing the crisis.  Moreover, there are many who think popular history and partisanship has inflated the roles played by past presidents who inherited crises, Franklin Roosevelt and Ronald Reagan. Their policies, some say, either made things worse (FDR) or deserve no credit (Reagan).  But at this point, we can be a little naive, a little hopeful.  Cynicism at this moment would be unearned although we might achieve it.

Today’s scorn should be apportioned to those who stuffed several successful business models into a thing called Citicorp, and proceeded to wreck it:

While much of the damage inflicted on Citigroup and the broader economy was caused by errant, high-octane trading and lax oversight, critics say, blame also reaches into the highest levels at the bank. Earlier this year, the Federal Reserve took the bank to task for poor oversight and risk controls in a report it sent to Citigroup.

The bank’s downfall was years in the making and involved many in its hierarchy, particularly Mr. Prince and Robert E. Rubin, an influential director and senior adviser.

Citigroup insiders and analysts say that (former CEO Charles O. Prince III) and Mr. Rubin played pivotal roles in the bank’s current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits. Mr. Prince and Mr. Rubin both declined to comment for this article.

When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.

And since joining Citigroup in 1999 as a trusted adviser to the bank’s senior executives, Mr. Rubin, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has been roiled by one financial miscue after another.

Citigroup was ensnared in murky financial dealings with the defunct energy company Enron, which drew the attention of federal investigators; it was criticized by law enforcement officials for the role one of its prominent research analysts played during the telecom bubble several years ago; and it found itself in the middle of regulatory violations in Britain and Japan.

For a time, Citigroup’s megabank model paid off handsomely, as it rang up billions in earnings each quarter from credit cards, mortgages, merger advice and trading.

But when Citigroup’s trading machine began churning out billions of dollars in mortgage-related securities, it courted disaster. As it built up that business, it used accounting maneuvers to move billions of dollars of the troubled assets off its books, freeing capital so the bank could grow even larger. Because of pending accounting changes, Citigroup and other banks have been bringing those assets back in-house, raising concerns about a new round of potential losses.

To some, the misery at Citigroup is no surprise. Lynn Turner, a former chief accountant with the Securities and Exchange Commission, said the bank’s balkanized culture and pell-mell management made problems inevitable.

“If you’re an entity of this size,” he said, “if you don’t have controls, if you don’t have the right culture and you don’t have people accountable for the risks that they are taking, you’re Citigroup.”

That was in Sunday’s paper.  In Monday’s, we found out that Obama’s new economic team is a Robert Rubin “constellation.”