Forgive me for a little bit of cynicism regarding today’s announcements from Citi and Merrill Lynch. I have seen all of this so many times it is not funny. Having been in banks when this happens the story internally is that before the CEO leaves or is pushed the emphasis on staff is to minimise losses – “take an optimistic view”. New CEO comes in, the view is to “take the pain” or “look at the position conservatively” or “make a prudent provision”*.
The script usually seems to go like this:
- Company does something silly;
- CEO, Chairman of the Board and sundry other executives or senior officers leave;
- New CEO appointed;
- New CEO announces massive losses and uses words like “pain”, “unacceptable”, “crisis” etc.;
- Rescue package announced (optional for added effect);
- New CEO announces large cuts / restructuring / divisional sales / redundancies;
- Next quarter CEO announces big improvements;
- Full year report shows big turnaround, losses almost all / all made good;
- New CEO is big hero and acclaimed a turnaround expert.
Seems we are at step 5 so far – step 6 will come in a few weeks
My guess is that today’s dip might be a good buying opportunity in advance of step 7.
* Note that I am not alleging any form of illegal or unethical behaviour by anyone at all – it is just the way that the “tone from the top comes down.
3 comments
17 January, 2008 at 08:21
Howard Candisbee
Yup. Totally agree.
Except… maybe not this time. The US economy is tanking faster than the news wires can carry the message. Rumours had Citi writing off USD24B, so look for more pain to come this year. We havn’t begun to see the Credit card and Commercial Real Estate writeoffs yet…
17 January, 2008 at 15:53
Andrew
Howard,
You may be right, but I just can’t see a new CEO not trying to get everything out at once. If I were in that position, apart from being much better paid than I currently am, I would be looking to get everything probable or even possible out at once.
30 January, 2008 at 19:56
Martin Davies
Oh it’s all innocuous dawdle, most of these CEO’s have little visibility over the institution as a whole, they are overpaid figure heads and these institutions are generally so large that one single person makes little impact to the modus operandi of the business.
The cycle will go on and mediocrity will continue to buy the propaganda that is fed to it.
What would be really interesting is to see these mammoth banks split and run separate operations, uniquely. In this way there might be a chance that they become efficient little companies aspiring to grow rather than one single entity which suffers negative marginal economies of scale.
Under such a model the dead wood would fall off the ship.