Warren's (Ridiculous) Prescription for Banks: Wipe Out Shareholders, Fire CEOs

Professor Elizabeth Warren, head of the TARP’s Congressional Oversight Panel, says that the CEOs of major TARP recipients should be fired, and the banks’ shareholders wiped out:

"The management of the institutions receiving subsidies from the government must be replaced," she said in an interview last week.

Warren picked out the head of Citigroup for special mention, but will recommend all bailout recipients -- which include Goldman Sachs and Bank of America -- get the same clean-out at the top. . . .

"It is crucial for these things to happen," she said. . . .

Together with the firings, Warren said other essentials needed to ensure the banks' survival include accurate valuation of the troubled assets currently being held, and wiping out current shareholders -- a move that would create turmoil in stock markets around the world.

Subtle! Logic (and fairness) of move not immediately apparent, however. . . .

First, most of the major TARP recipients (like, all but two, if memory serves) didn’t even want the money in the first place. Now that the banks have been forced to take it anyway, the Professor would reward their CEOs by canning them? Remember, too, the executives Warren wants fired--people like Richard Davis, Jamie Dimon, and John Stumpf--are some of the most capable anywhere in American business. They were emphatically not part of the cause of the financial industry’s problems, and have been instrumental in several of the key fixes to date, like, say, via Morgan’s (MS) emergency acquisition of Bear Stearns, and Wells’s (WFC) acquisition of Wachovia. How the banking industry will recover faster with those guys on sideline is a bit of a mystery.

For that matter, a unilateral wipeout of shareholders by the government wouldn’t be such a great way to attract new private capital to an industry that Warren herself seems to think desperately needs some. . . .

It would be easy to dismiss the woman as irrational, but she teaches at Harvard! More likely explanation of Warren’s weird recommendations: She’s a long-time critic of the banks, and never misses a chance to stick it to them when she can. There’s nothing the matter with that, of course. It’s a free country. But why anyone thinks Elizabeth Warren can be a fair-minded arbiter of the execution of the TARP plan remains a mystery. . .

Comments

[Long US stockS:]

Stock folder wiped out (almost- lately gained again) because of Short sellers. Take care analyst driven short sellers first. Like me,
many others do not like their 401k to be wiped out.


On Apr 07 09:09 AM epeon wrote:

> There are elements of truth to what she says. For example, have not
> the stockholders of Citigroup and BAC been already wiped out? It
> wasn't long ago that Citigroup was 50, for example. And, much of
> the management should be replaced. Maybe not all, but certainly some
> of it. And, why are the boards not held responsible?

Apr 07 04:58 PM

[Econ 101:]

YES!!! Way to go "Amateur?" !! People need to hear this over and over again. We have been raped by these people. The bankers and the politicians working in concert for the Soros crowd. Our money, our FREEDOM and our counry are being stolen right under our noses by facists.


On Apr 07 03:50 PM Amateur? wrote:

> Fire the CEOs of ALL TARP recipients? Obviously not but that is not
> what she suggested. But why not fire the CEOs that oversaw the destruction
> of their companies? Seems reasonable to me that these people are
> held accountable for their actions. Nobody screamed it was unfair
> that GM's boss was forced out.
>
> This interview with William Black (former S&L regulator/cleanup
> guy) speculates why they not been fired. Decide for yourselves.<br/>
>
> www.pbs.org/moyers/jou...
>
> And for those too lazy to watch it, I've pulled out the relevant
> excerpt:
>
> BILL MOYERS: Why are they firing the president of G.M. and not firing
> the head of all these banks that are involved?
>
> WILLIAM K. BLACK: There are two reasons. One, they're much closer
> to the bankers. These are people from the banking industry. And they
> have a lot more sympathy. In fact, they're outright hostile to autoworkers,
> as you can see. They want to bash all of their contracts. But when
> they get to banking, they say, "contracts, sacred.' But the other
> element of your question is we don't want to change the bankers,
> because if we do, if we put honest people in, who didn't cause the
> problem, their first job would be to find the scope of the problem.
> And that would destroy the cover up.
>
> BILL MOYERS: The cover up?
>
> WILLIAM K. BLACK: Sure. The cover up.
>
> BILL MOYERS: That's a serious charge.
>
> WILLIAM K. BLACK: Of course.
>
> BILL MOYERS: Who's covering up?
>
> WILLIAM K. BLACK: Geithner is charging, is covering up. Just like
> Paulson did before him. Geithner is publicly saying that it's going
> to take $2 trillion — a trillion is a thousand billion — $2 trillion
> taxpayer dollars to deal with this problem. But they're allowing
> all the banks to report that they're not only solvent, but fully
> capitalized. Both statements can't be true. It can't be that they
> need $2 trillion, because they have masses losses, and that they're
> fine.
>
> ========
>
> This is not some conspiracy nut-job. He's telling the truth that
> nobody wants to hear. I'm glad the head of the congressional oversight
> committee actually has teeth. I just hope she gets involved in the
> conflict ridden public/private partnerships before the taxpayer loses
> another few hundred billion.

Apr 07 05:11 PM

[D. McHattie:]

I watched the William Black interview a couple nights ago. I would recommend that anyone interested in the truth should do likewise.

Black was heavily involved in the successful clean-up of the Savings and Loans disaster in the 80s. He made a great point that when Japan had its financial crisis in the early 90s, the US tried to get Japan to adopt our same Savings and Loans approach. Japan ignored our advice and experienced 'the lost decade' of 0 economic growth.

Which model are we now pursuing in our current crisis? Why, the Japanese model, of course. Because our administration is gutless and our electorate is ignorant.

Apr 07 08:49 PM

[Hmm?!:]

Elizabeth Warren is a Harvard Law Professor who knows nothing about business or economics. She lists "financially distressed companies" as a research interest and that is it!

Great!.......Somebody else experimenting with trillions of our tax dollars.

Meanwhile over 300 hundred economics professors, say NO! Signing a full page ad in the Wall Street saying...... stop the stimulus bill and take back the 200 billion slated for our colleges.

But instead the dog and pony show continues. I hope this one at least paid her taxes.

Apr 08 01:48 AM

[Gary A:]

The banks are hiding something. That is why the stress test for individual banks won't be made public. This is a big disaster waiting to happen. I would like to see the corporate bank bondholders also take a haircut. It is past time. We need to make this work or dump these banks and start over with another bank.

These banks are hiding something. If you look at the most honest banker, JP Morgan's Jamie Dimon, the guy has worry written all over his face.

Apr 08 02:28 AM

[Bandwagon2009:]

Oh great, yet another academic opining on what to do with the business operational matters. That's all we need. Interestingly enough the populist cry of "throw the bums out" which used to be oft repeated in the 90's refering to the incumbent congressmen/women and other politicians (remember Ross Perot)...now seems to be taken up by the very same politicians towards business and banking leaders. Clever eh?

Where were these guys a few years ago...when the whole CMO/CDO mess was starting to fester.

I also wonder why it is so easy for Prof Warren and her ilk to vilify folks like Ed Liddy -- who is doing this for no money, and really doesn't need this job...in reality neither does Pandit or Dimon or Stumpf....they can all go retire and play golf in some warm location, they don't need to take this abuse.

But they do it anyway -- maybe it is ego, maybe hubris, maybe intertia, or maybe it is shame, OR but maybe (really) it is because they believe they can help and do it for a sense of duty (and yes the glory which may come of it, if they are successful)

Apr 08 08:42 AM

[Bill40:]

Not all TARP CEOs should be fired.
But CEOs of insolvent TARP companies should be.

We as a country need to throw up from all the debt we've incurred. If we don't throw up we'll just walk around with nausea for a long, long time.

Somewhat gross, but the best analogy there is. Throwing up means letting shareholders/bondholders of failed companies get whacked and not debasing the dollar through endless propping.

Apr 08 10:17 AM

[ThatGuyInTh...:]

Sir. My ancestors were murdered by Stalin's minions. Until someone knocks down your door at 5am and sends your relatives to Siberia, please shut up. You don't know what you're talking about.

I support firing these fools. With power, economic or otherwise, comes responsibility. They abused theirs, plain and simple. Firing and preferably jail time will send a nice solid message to future fools that actions have consequences. This *is* why we have laws, eh?

I understand that they broke no law. An executive at a bank (surprised?) where I once worked in the 80s once said to me, "Son, if you're going to commit crimes, start with the legal ones first."





On Apr 07 06:35 AM Ishortyou wrote:

> overrunning the will of the companies just like Stalin.

Apr 08 10:22 AM

[Jeff Skilling:]

The CEOs don't deserve to be fired for accepting TARP money, you are correct, Mr. Stichnoth. They deserve to be fired for their corruption in participating in the massive bank ponzi scheme whos sole purpose appears to have been the enrichment of bank executives.

Now we have the TARP, TALF and all the other bailouts which are nothing other than a massive transfer of losses from these criminals to the taxpayer. Privatize profits, socialize losses... That's the American Banker way, right?

Fire the corrupt managements, sue the incompetent Directors, zero out the shareholders, force debtholders to convert to equity - it's the only truly capitalist way out of this.

Then we can have the trials.

Apr 08 10:56 AM

[The Geoffster:]

Right on Jeff. Didn't you kill yourself?

Apr 08 12:37 PM

[bwbang:]

In a revolution, sadly some innocent people lose their heads. And what we need now in the US is nothing short of a revolution.

Apr 08 12:43 PM

[Bob Lobb:]

Nothing but conspiracy nutjobs on this site. Sad. I mean, are you fools really calling for "revolution?" And you really believe our president is "Stalin?" What a joke. You guys really have ODS. Obama Derangement Syndrome. You guys really want him to fail and you WANT a Depression. I've read many posts where you guys are really relishing the idea. Scumbags.

Apr 08 02:31 PM

[Chrisvnerd:]

Yes, they were all bailed out.

They didn't directly take the government's money, but without it, they're as dead as AIG. Just because AIG defaulted on the CDS's, doesn't mean it's solely their fault for the breakdown, just like how the defaulted mortgages themselves aren't solely the fault of the people who couldn't pay their mortgage. I'd ask both the mortgage lenders and the buyers of CDS the same thing: "What the hell did you expect would happen when you made the deal?'

On Apr 07 09:00 AM MidwestGuy wrote:

> The other financial institutions did not get a "bailout" from AIG.
> They had business contracts with AIG and they expected AIG to perform.
> AIG was at fault for selling contacts that they did not have the
> financial resources to honor, and that is why AIG needed funds. The
> funds other financial institutions received still required them to
> make concessions because of AIG problems; one article today said
> that AIG contracts were settled for, on average, 43 cents on the
> dollar. And AIG's failure to be able to honor their contracts was
> the main reason other financial institutions were in trouble in the
> first place.
>
> The purpose of the government funds was to allow AIG to settle their
> commitments, and because of the problems, those commitments are being
> settled for less than the contract value.
>
> So yes, other financial institutions took AIG funds..but those were
> funds AIG was obligated to pay because of contracts, and their business
> partners had to make concessions because of AIG financial problems.
>
>
> When companies (seekingalpha.com/symbo...) do not/cannot
> honor legal contracts entered into in good faith, it certainly does
> affect the financial health of their business partners.
>
> And that is why the government could not let AIG simply fail...their
> failure of AIG to honor their contracts would have brought down many
> other financial institutions, and the failure of financial system
> would have magnified the current economic problems exponentially.
> Nor does the government have the right, at least given the current
> regulatory environment, to have gone in and taken AIG over and managed
> the contracts or the unwinding of the contracts. Whether that would
> have improved things or not is an open question that I hope gets
> a good, hard look as we move forward. Still, it was not an option
> when the &amp;*()) hit the fan.
>
> Is it infuriating? Yes. But to think that other financial institutions
> should all pay the price for AIG, and that the financial system should
> be allowed to fail because of AIG, would only make things much, much
> worse.
>

Apr 08 05:02 PM

[Y2K:]

I think she has a good strategy....but I would alter it a little. For every CEO change made the gov't should retire.....without the golden gov't parachute retirement......2 people from the congress. Start with Queen Nancy and her mouthpiece Barny. Then just work her way down the list of liberal cause, give someone something for nothing followers. Anyone that spoke up for Fanny Mae etc should go first. Anyone in retirement from congress that helped create this mess should have there retirement canceled. Anyone that flies in an Air Force jet or a free limo should be canned by executive order.

Apr 08 05:32 PM

[ed233:]

Since this present government seems to have justified itself in firing the past CEO of GM. And since government has a vested interest by advancing money on behalf of the taxpayer, then there should be an appointed team of investigators comprised of legal and accounting experts to do a thorough audit of the large banks for the purposes of discovering where the corruption lies and which of the CEO'S took illegal compensation at the expense of the taxpayers, shareholders and workers. It is unfair to paint the whole banking industry with the same brush until a proper investigative approach has concluded.

Apr 08 06:15 PM

[Titus Andro...:]

EXACTLY-ed233

Apr 08 10:53 PM

[the_feds_co...:]

She sounds to me like a brave ,courageous woman who is trying to do the right thing.The leeches and sponges of the country are trying to distribute the banks losses amongst the taxpayer.She is trying to put the losses where they belong . Shareholders and executives should get the heave ho ! Sounds to me like she is the only normal person out there.What a novel idea shareholders must take losses.Executives must get fired. ur right she is obviously some kind of nutjob!(sarcasm)

Apr 08 11:49 PM

[Analyste de...:]

"Remember, too, the executives Warren wants fired--people like Richard Davis, Jamie Dimon, and John Stumpf--are some of the most capable anywhere in American business."

Nice straw-man argument. After the 'strength test,' why should we - effectively, we the taxpayer-owners - allow the scammy CEOs to continue drawing lavish salaries? Where were the "shareholders," why did the mutual funds FAIL to reel in the corporate excesses? (One word hint: COLLUSION.)

The major flaw in this Op-Ed screed buys into the fundamental LIE of America, that US firms have "the best & brightest, the most talented & experienced professionals." Bollocks. That nonsense was PR created by these same CEOs - decades ago, as they began stocking Boards of Directors with their cronies, paying journalists to write laudatory articles rationalizing their own grotesque compensation schemes, hiring lobbyists to deregulate & strip-away all checks and balances from their destructive business models.

The "value" they created was just a brilliant & shining lie. Why should they keep their jobs, indeed!

The crisis we're in now is the direct result of systemic corporate malfeasance. Most of the financial CEOs paid $10+ million/yr are just as corrupt as the Soviet oligarchs were - Americans are long overdue for our revolution, to clear out the rot!

Seize CEOs ill-gotten gains, fire the bottom 85%, and enforce strict regulation over the worst offenders. Let's go back having to small local banks, without the Wall Street madness - let the shareholders take a cold bath and flog those who forgot MORAL HAZARD.

Apr 09 12:04 AM

[T-Rex:]

On Apr 07 04:31 AM TJB wrote:

> Maybe several of these banks did not ask for TARP money. But they
> didn't turn down the bailout by proxy from AIG. The last time I checked
> Credit Default Swap counterparties are not supposed to be federally
> insured. The mismanagement of these firms almost created a global
> catastrophe, and the public's growing suspicion of Goldman Sach's
> and Morgan Stanley's manipulation of and profiteering in the oil
> market (to bankrupt Semgroup Holdings amongst other things), not
> to mention suspicous involvement in the demise of Lehman Bros., lends
> creedence to the argurment that a complete house cleaning is in order.
> Then maybe the public will begin to trust the U. S. financial system
> again.

Why on earth would these banks turn down payments on their CDS? They were owed this money, and accepted payment due them...nothing illegal, wrong, or immoral here. You may questions by a bankrupt AIG paid out the money- but you can not fault Citadel, GS...etc for accepting their payment. You going to criticize AT&T for accepting payment from AIG for their cell phone bill? Kodak for receiving payment from AIG for their copier lease? CDS is no different- it is payment due on a contract.

Nice of you to lump all management together- surely all bank managers did not cause this crisis.

Oil trading conspiracy- no doubt that speculation drove prices higher. But to blame GS and MS specifically is ludicrous. Many hedge funds had positions, many mutual fund managers bought up oil stocks, many individuals bought into this as well.

Do you think there is a global cabal with GS and MS and a few others that secretly control gold, oil, money supply, world politics??? Please stop watching conspiracy theory movies there is no secret society that controls everything.

Apr 09 11:05 AM

[T-Rex:]

Chrisvnerd:

In a word- wrong.

As usual when someone makes broad allegations they are frequently wrong. Citadel and GS (among others) did receive payment on CDS exposure from AIG.

But:

A. Citadel and GS are in no danger of going under- and as such suggesting they were bailed out via CDS is ludicrous. The pittance in TARP money GS took can easily be repaid in short order...do no lump all firms into AIG's boat. Neither GS or Citadel is the next Lehman, Bear, or AIG to suggest that is ridiculous. GS has all ready publicly stated that they hedged this all ready...and Citadel was paid a paltry 200 mil- big deal. GS did take aTARP money, so you can state they took federal money- but you can not make an argument that CDS payments equate to a bailout.

B. Yes AIG's CDS debts were paid. Same as rent, heat, lighting, employee salaries, copier leases...were all these firms bailed out because AIG paid a bill? You going to pick and choose what debts get paid? Without paying the CDS debt- AIG is out of business and nobody will help them trade out of anything. Try winding down that business when you can't exit a trade. I'd miss my payment on company cars and office equipment before I miss a payment on a trade.

Getting paid on a debt owed does not equate to being bailed out.


On Apr 08 05:02 PM Chrisvnerd wrote:

> Yes, they were all bailed out.
>
> They didn't directly take the government's money, but without it,
> they're as dead as AIG. Just because AIG defaulted on the CDS's,
> doesn't mean it's solely their fault for the breakdown, just like
> how the defaulted mortgages themselves aren't solely the fault of
> the people who couldn't pay their mortgage. I'd ask both the mortgage
> lenders and the buyers of CDS the same thing: "What the hell did
> you expect would happen when you made the deal?'
>
> On Apr 07 09:00 AM MidwestGuy wrote:

Apr 09 11:22 AM