Illustration by David Simonds
SOME view history as just the biography of great and of villainous men. By this account bank bosses are to blame for the great crash of 2008. Most have now been booed offstage. With the departure on September 30th of Ken Lewis, the head of Bank of America, only three chief executives at America’s ten biggest banks before the crisis remain in position. Europe has let lots of blood, too: the bosses behind fiascos at UBS, Fortis and Royal Bank of Scotland (RBS) have gone to the guillotine.
Michael Moore is once again claiming conspiracy. Yet the cock-up theory of history also has a lot going for it in this case. Certainly, bank bosses displayed the hubris of all big corporate baddies: paying themselves loads, making nutty expense claims (try an $87,000 rug) and, in one case, playing bridge in Detroit as their firm collapsed. Compared with Kenneth Lay of Enron or Bernie Ebbers of WorldCom, however, they were amateurs. Most were useless rather than venal.
Far from expertly manipulating their firms’ books, many could not understand them. Citigroup’s boss reportedly learned of its $43 billion of toxic assets only in September 2007 (he was told losses were unlikely). UBS’s own post mortem found that “at no stage” did managers have a decent assessment of its subprime exposure. Merrill Lynch signalled a $5 billion write-down in October 2007, only to increase it to $8 billion a mere 19 days later. Even when they had decent numbers, executives struggled to manage their mutinous staff. One ex-boss says his job was “less management, more crowd control”. Meanwhile shareholders pushed bosses to take risks. The vast majority backed RBS’s suicidal takeover of ABN AMRO.
Like scholars of jurisprudence lost in a state of nature, corporate-governance gurus are scraping around, trying to formulate new rules. Sadly, there is no archetype of success. Some acquisitive firms such as Bank of America, Fortis and RBS floundered; others including Barclays and JPMorgan Chase prospered. Managers at Lehman Brothers and Bear Stearns owned lots of shares, yet did not run their companies for the long term. Imperial chief executives have been blamed for these firms’ collapse, yet they did brilliantly at JPMorgan and Santander. A hyperactive risk committee may have helped the latter, meeting 98 times in 2007, yet Credit Suisse’s risk committee got out of bed only six times, and it did pretty well too.
On any measure of banks’ boards—experience, gender, age, independence—there were successes as well as failures. As for the notion that a spunky outsider could have spotted the rot, look at the independent directors of America’s blow-ups. Citigroup had a former CIA boss to grill executives, while Lehman had an ex-rear admiral to confront its combative boss and an economist nicknamed “Dr Doom” to temper its rabid spirits.
What firms need is a culture of excellence—but that is like saying all football teams should be like Manchester United. Perhaps the clearest lesson is that big banks are as close as businesses can get to being unmanageable. Bank of America’s assets are now ten times those of Exxon Mobil, America’s most valuable firm. A balance-sheet of $2.3 trillion is beyond the ken of mere mortals. Even firms staffed only by all-knowing deities—such as Goldman Sachs—look like giant black boxes to outsiders. If the new bank bosses want to be in charge, they must shrink and simplify their firms. That way, next time round, they really can be blamed for everything.