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Pandit comes out in favor of transparency, an even playing field and -- this is a little murky -- better mark-to-market accounting, particularly in a crisis. We need better, global regulation! Except for the mark-to-market theme, Pandit could be sitting in Washington hatching the 1930s securities legislation. But here's the problem: While it's true that transparency as a regulatory virtue is essentially inarguable, every fiber of the financial system, every firm, every trader, every lunatic in his shorts day trading, is searching for a way to undermine that transparency, to smudge the window a bit (and why not? He's in his underwear). The number of Warren Buffetts out there chasing value stocks the old-fashioned way is vanishingly small; sometimes Warren isn't even Warren. Generally, profits exist in the market in the most opaque, cutting-edge areas: junk bonds, LBOs, derivatives, emerging markets, tech stocks. Every truly profitable business fueling Wall Street for the past 30 years has involved the discovery and exploitation of some area of opacity: that is, knowing something others don't. Opacity, by the way, is not synonymous with illegality, which the media often concludes. True, sometimes skeevy activities can take place in the dark, but more often than not an opaque market may simply be an immature, undiscovered pool of value. Of course, nothing stays opaque for very long, unless you create a fantasy, a bubble, about its prospects. This, as we know, ends badly. But if you magically remove all opacity -- creating a truly transparent regime -- you also extract much of the risk and reward from the game, and you transform financial services into a Web-based order taker. Of course, given the world we live in, given human failings and differences, a purely transparent system is utopian. That's good for finance because a purely transparent system would also compress profits dramatically. All this casts a light on Pandit's canny self-interest here. The institutions that profit the most from a transparent regime are the ones with the largest slug of capital, which can generate commodity profits through huge volumes. In fact, much of the financial system has grown more transparent over the past decades, fueled by regulation and computerized trading systems. That very transparency (read commodization) has forced institutions to innovate, much of which by choice or by chance created deep dark wells of profitable opacity, including many derivatives and much of structured finance, particularly at the more toxic (read subprime) end. This paradoxical trend -- greater transparency, greater opacity -- shows up in the deepening bifurcated structure of finance: a small number of larger institutions that increasingly resemble banks and a growing number of boutiques, hedge funds and private equity shops. The story of Wall Street since the '90s is that the bank model has been winning at the high end; the hedge fund/LBO shop model has dominated the lower end. And the middle, as always, is the most treacherous terrain of all. So why did Citigroup blow itself up so spectacularly on the latest fashion in opaque adventures, subprime? Take your pick. Stupidity, venality, greed, mismanagement. But a big part of it was that investors haven't heard the news that commodity profits and slow growth have won the day. They want size and reward. Thus, the division within finance between large and small was replicated within large institutions like Citi or Merrill Lynch & Co., Morgan Stanley and Lehman Brothers Inc., even Goldman, Sachs & Co. Eventually, that attempt to drive greater profits to keep investors happy, despite an increasingly commoditized market, blew up. So what is Pandit envisioning here? A world where much of the risk and reward are wrung out of the system. A world where a few large institutions can churn out stable profits. A world where any rival that tries to aggressively offer real competition to the biggest firm would succumb to either the inability to find enough profitable strategies or to the restrictions of an increasingly monolithic regulatory system. A world where Citi's natural advantages insure its position. To get a sense of this world, imagine U.S. banking and Wall Street from, say the 1930s to the 1970s, without the attempt to differentiate regulation by institutional type (though that may come if regulatory reform ever hits Congress). In fact, there are good reasons to be skeptical that we will see such a monolithic system any time soon. There is nationalism, of course, which, for all the chatter about flat-earth globalization, has not been wrung out of the U.S. -- both Congress and Treasury regularly engage in mercantilist stick-waving -- or Europe, India, China and Japan. And, again, institutional investors reflexively seek high-growth opportunities; in a global system, they have lots of places to look. The joke here is that institutions, from pension funds to sovereign wealth funds, are among the most opaque organizations around, whether in regard to their own governance or to their desire to trade in the dark. Besides, the last thing they want -- and their constituents, from union workers to Arab sheiks -- is a world where greater transparency and an even playing field produce lower returns. All this explains why nearly everyone wants just a little of the old-time medicine -- just enough to feel better, though not enough to cure a disease that makes a lot of folks a lot of money. It may be a sign of how sick Citi really feels that Pandit is even broaching more radical measures. - Robert Teitelman CategoriesComments Deal Video
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A lot of blogging has already occurred about Citigroup Inc. CEO Vikram Pandit's op ed piece Friday in The Wall Street Journal. Yes, the tone is -- odd. After all, Pandit's very own institution transgressed every one of the principles he sets forth. And arguably, no institution around -- investment or commercial bank -- poses more of a systemic risk than his own. On the other hand, Pandit is implicitly suggesting that those sins were committed by his predecessors, and that he has the new religion. That is, the new old-time religion.
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The real problems ocur when CEOs make deals to make themselves rich even if the corporation goes to Hell in a handbasket. Citi's past couple of CEOs appear to have little control over the entire system of the Corp. And they don't even seem to care about that as long as their own Butts are profiting. So much for honesty and accountability in business.