What Chuck Prince can teach you about investing
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Another one bites the dust.
Last week, Stan O’Neal at Merrill Lynch paid the price for embracing US sub-prime borrowers too closely. Last night, Citigroup’s Charles ‘Chuck’ Prince went the same way.
The man who headed up the world’s biggest bank fell on his sword as it emerged that the group is set to write down another $8bn to $11bn in sub-prime assets and leveraged loans, says The Telegraph. That comes on top of $5.9bn written down last quarter.
Other chief executives must now be quaking in their boots – or are they?
Pity poor Charles Prince. He was the boss of the world’s largest bank, Citigroup. A Master of the Universe. He lead the bank’s headlong charge into sub-prime territory. After all, as he said, “as long as the music is playing, you’ve got to get up and dance.”
But the liquidity dried up just a few weeks later and the music stopped, leaving Chuck nervously shuffling back to his chair. And now he’s fetched his coat and left the dance hall.
“It is my judgement that given the size of the recent losses in our mortgage-backed securities business, the only honourable course for me to take as chief executive officer is to step down,” said Mr Prince, as he laid down his career for Citigroup.
How noble.
But wait a minute. What exactly is the consequence of Mr Prince’s honourable action? Well, let’s see. Stan O’Neal got $160m for his wanton value destruction at Merrill. Presumably Chuck will get a similar pay-off.
So he admits he drove the bank into a wall. Then he gets a huge pay-off, and all the time off he wants to play golf before going for his next job.
Meanwhile, some other sucker gets to take over and clear his mess up.
Some punishment.
What the board really should do in these circumstances is say:
“Nice of you to offer your resignation, but no thanks. Here’s an idea – you got us into this mess, you can help get us out.” Then they should demote the hapless chieftain to some low-ranking post where they can’t do any damage – say making tea for the credit control department – and deny them their share options unless they remain in that post for at least 12 months.
That’d get them thinking about consequences, instead of spinning the roulette wheel with shareholders’ money in the hope that they’ll get lucky enough for one more good bonus year.
It’s not just Chuck Prince. All of these people get away with it. The ones who suffer in the coming recession won’t be the Stan O’Neals, the Ben Bernankes, or the Gordon Browns of this world.
They’re the Wizards of Oz. They’re the ones who created this illusory world where you can spend yourself rich. They knew it wouldn’t last forever, and that the longer it continued, the more it would hurt when the bubble burst. But they’ve got their golden parachutes and their gilt-plated pensions for when it all goes wrong.
And rising profits and rising house prices equal happy shareholders and happy voters. Who wants to stand up and put a stop to that – and how long would they last in power? The City bayed loudly for Mervyn King’s head when he hesitated to bail out irresponsible lenders with public money. Telling people they’ve got to take their medicine is rarely a popular stance.
So what can you learn from this as an investor? Well, the reality is that short-term thinking is ingrained in human nature. Given the choice of very clear pain now or an unquantified but probably worse level of pain later, most people will opt for the latter.
So anyone who says the business cycle (or boom and bust, as the less technical among us call it) has been abolished, is deluded. The key to successful investing is to understand this and to at least try to be on the right side of the cycle as it turns.
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Turning to the wider markets…Enjoying this article? Why not sign up to receive Money Morning FREE every weekday? Just click here: FREE daily Money Morning email
London's benchmark FTSE 100 index ended Friday 55 points lower, at 6,530, as the banking sector remained weak. Barclays was the biggest loser of the day with a share price slump of over 6% on rumours that it has approached the Bank of England for funding. For a full market report, see: London market close
On the Continent, the Paris CAC-40 was 10 points lower, at 5,720. And in Frankfurt, the DAx-30 was 31 points lower at 7,849.
Across the Atlantic, stocks recovered from from earlier losses to end the day with modest gains as better-than-expected economic data offset ongoing credit market concerns. The Dow Jones was 27 points higher, at 13,595. The tech-rich Nasdaq was up 15 points, at 2,810. And the S&P 500 was up 1 point at 1,509.
In Asia, the Japanese Nikkei had fallen 248 points to 16,268 today, whilst the Hang Seng had slumped 1,526 points to 28,942.
Crude oil futures closed at a record high of $95.93 in New York on Friday, but had since fallen back to $95.19. In London, Brent spot was at $91.95.
Spot gold tracked crude oil lower in Asia trade and was last quoted at $802.00, down from $807.70 on Friday. Silver had fallen to $14.50.
Turning to the forex markets, the pound was at 2.0837 against the dollar and 1.4397 against the euro. And the dollar was at 0.6908 against the euro and 114.54 against the Japanese yen.
And in London this morning, Qatari-backed investment fund Delta announced that it has dropped its bid for Sainsbury's. The decision to ditch the £10.5m bid was prompted by deterioration in the credit markets, along with demands from the supermarket's pension fund which proved too expensive. Sainsbury shares had fallen by as much as 19% in early trade.
Finally, our recommended articles for today...
Will it be an unhappy new year for investors?
- As we enter the penultimate month of 2007, Charles Stanley analyst Jeremy Batstone-Carr is already looking ahead to 2008. To find out why the going is set to get tough - but it's not all doom and gloom for investors - click here: Will it be an unhappy New Year for investors?
Gordon Brown: the new James Callghan?
- Over a decade of uninterrupted economic growth and low inflation may have made our lives easy, but it's also made for a very boring period in British politics. Now things are starting to get interesting again - and that's bad news for Gordon Brown. For more on taxes, the housing market and how Brown's worst nightmare could become reality, read: Gordon Brown: the new James Callaghan?
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