The Wall Street Journal's
"Heard on the Street" column today offers another example of the treacherousness of historical comparisons. The short piece comments on Barclays plc's capital raising and compares the big U.K. bank's situation with a floundering Citigroup Inc. in 1991. Citi famously was bailed out by Saudi Prince Alaweed bin Talal. "Heard" argues that investors are concerned that Barclays will right itself only to "repeat Citigroup's subsequent mistakes." And what were those mistakes? "After the rescue [in 1991]," writes "Heard," "profits returned and Citi went on a buying spree. Soon after, the bank lost the plot, with precious equity thrown around without much regard for long-term returns."
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Now this is a little telegraphic -- there's not a lot of room for elaboration in the "Heard" column these days -- but the bank lost the plot? I wasn't aware that there was a script here for everyone to follow. Beyond that infelicity, the real problem is the dramatic compression of time that "Heard" blithely engineers.
Define "soon." One assumes "Heard" is referring to the merger of Sandy Weill's Travelers with John Reed's Citicorp in 1998 -- eight years after the woes of '91. Weill and Reed, and then just Weill, engaged in the usual buying and selling (Weill had already grabbed Salomon Brothers for Travelers in November 1997; he later unloaded Travelers Property & Casualty in 2004. But there were lots of other, smaller deals). Throughout that period, few investors complained about Weill because the stock price was doing reasonably well, despite the bumps of the tech bust.
True, in the Charles Prince era, beginning in 2003 or so, the bank increasingly floundered, then nearly sank under subprime. But those mortgage woes stemmed less from an acquisition -- Weill did earlier pick up some subprime lenders, but Citi would have gone big in mortgages without them -- and more from the need to drive earnings to please, well, investors. (A short and bitchy digression: At one point "Heard"
glibly refers to "Wall Street expectations" pushing Barclays to act like Citi, not really distinguishing between Wall Street investors and presumably less pushy, more sober, non-Wall Street investors. This is particularly odd because Barclays is based in that other financial capital, The City.)
Was subprime a big, profit-eroding mistake? You bet. But it was one shared by many firms. The real point here is that it's a little much for any investor to invest today and expect the vehicle not to make a move -- or a mistake -- over the next 15 years. Inevitably, faces will change. Inevitably, conditions will change. A bank, or a corporation, that stands pat to please its shareholders will wake up one day to find itself either beached or under attack. This, in fact, is roughly the situation Barclays finds itself in today.
What's a reasonable duration for these kinds of investments? Three to five years makes a lot more sense than 10 to 15. The "Heard" argument taps into a deeper meme you hear all the time these days. It has several parts. You read the past through today's stock price; you extrapolate the future by today's stock price. Conclusion: It's all Weill's fault, with the original sin being the Travelers-Citicorp merger. Well, very few complained at the time or for years later about that merger. While the screwups at Citigroup were very real, their lesson to other banks is still open to debate. And anyone who thinks corporate situations will remain stable for a decade or more, or that banks can merrily proceed without at least considering M&A, probably deserves to lose their money.
-- Robert Teitelman
