President-elect Obama
President-elect Obama,
Many of us in the progressive community are waiting to see how you shape the team to deal with the economic crisis that is affecting so many. So far, it’s not looking all that great, and I think we owe it to you to say so. You see, we all have so much hope that you will truly change the nature of politics in America. Your very election has been historic, but it will only become heroic if you face down those who have gotten us into this economic mess.
When you were elected President of the United States, you may not have realized that you were also elected CEO of the largest private equity “distressed asset” purchaser in the history of the world. You make those hedge funds guys pale in comparison to the kind of money you will be able sling around, and you can really make a difference if you do it right. The first thing, of course, is to realize that this is going to be half your job for the next 4 or 8 years. To do it well, you will need to begin by structuring these deals well. So far, on the other guy’s watch, that hasn’t really been the case.
Watching your appointments, I have to say I’m growing a bit worried. A buyer of troubled assets does a couple of basic things: one fires the managers, infuses the enterprise with equity or convertible debt, wipes out the shareholders, negotiates debt or other obligations, and then sells off, retools, or reforms the different parts of the enterprise. Those that are sold help pay for what the rest need. You install new management with clear accountability and metrics.
But with AIG, Citibank, and other deals being done right now, this is not what is being done. Instead, senior management is being left intact, shareholders remain largely undiluted, and even stock options are largely unaffected by the bailout packages. Where is the accountability in that? Big poorly run financial companies are using bailout money to purchase sounder, better run regional banks. Shouldn’t the opposite be happening?
Last July, Rob Johnson spoke to our Momentum conference and set forth an analysis that remains the best I’ve ever heard on the subject of how the bailout occurred. In a nutshell, it boiled down to big players chasing money in an unregulated environment, convincing themselves to overvalue complex assets in the process. Another friend, a former bank regulator, told me recently that one cannot penetrate these unregulated complex instruments to find the underlying mortgages to see whether Gertrude Stein’s there is actually there. In Johnson’s words, “it’s as though they put all these mortgages, or parts of them, into a blender and then told you that what resulted was good for you.” Anyway, it all makes me more than a bit worried about what you have to deal with.
More than anything, I hope that you find the kind of independent minds that can dispassionately analyze what they see and propose remedies without regard to their impact on themselves or those they know well. Many of those you have thus far recruited have better credentials for their contributions to what created the problem than ideas for how to remedy the results.
Why, for instance, are you all leaving Joe Stiglitz at Columbia undisturbed? Many suggest his is the most sanguine voice on both the problem and the solutions you might consider.