On the same day as the four-year anniversary of the Dodd-Frank bill — signed into law to make U.S. banks more stable and better capitalized — it was announced that CIT Group had purchased OneWest Bank for $3.4 billion.
The two headliners in the deal were none other than John Paulson, who once infamously collected $4 billion by betting against failing home mortgages in the run-up to the financial crisis. The other was CIT’s John Thain, who drove Merrill Lynch into a ditch before it was sold to Bank of America®. Thain, you might recall, once spent $1.2 million decorating his executive suite, including more than $1,000 for his gold-plated wastebasket.
Be that as it may, Bert Ely, who has long covered the financial industry, said about the proposed merger, “This is probably as close to a win-win as you could get.”
While Ely is probably right in his assessment that it’s a “win-win” for Paulson and Thain, it is hardly a win for the rest of us.
Rather, the deal is the latest sign that these and other whack-a-mole executives most responsible for the Great Recession continue to emerge from the ruins and wildly prosper. While Main Street in the wake of the crash had its economic heart ripped out, teflon-coated Wall Street counted few casualties, and even those c-suite executives whose reputations were temporarily tarnished, have arrogantly and vigorously moved on.
In a former century, these bad actors might have been called scoundrels, pickpockets, or thieves, but these vultures in their bespoke suits and Ferragamo loafers are far more insidious. There is really no word for their hubris. What’s worse, their behavior has now spread far beyond Wall Street.
Thus, is it any wonder that so Americans have lost faith in their institutions? Before you think I’ve swallowed a handful of sour grapes, hear me out.
First, I’m no Luddite. I understand that capitalism eventually has to devour its own under the principle of “creative destruction.” It’s why, for example, of the original 12 Dow Jones industrials, only General Electric remains part of the index. So, I get why change — even the most disruptive kind — marches on. I wholeheartedly endorse English landscape painter John Constable’s observation that “No two days are alike — not even two hours.” More so, I stand shoulder to shoulder with General Eric Shinseki, who famously said, “If you don’t like change, you’re going to like irrelevance even less.”
In the interest of full disclosure, let me add that I’ve worked as a senior bank marketer for almost two decades, including several fallen companies I’m about to discuss, including Home Savings of America (once the nation’s largest thrift), Washington Mutual (which took over the No. 1 mantle from HSA) and Indymac Bank, so I’ve seen the sausage-making up close.
But again, don’t think for a minute that I believe wealthy executives’ abuses are solely limited to the financial sector. Misbehavior takes place and is rewarded everywhere. But let’s start with the low-lying fruit.
When it was leaked in the summer of 2008 that Indymac Bank was seriously undercapitalized, depositors started a run on the bank. For my part, I was ordered to stop pushing bank products so that I could stand outside two branches in my home town to assure panicked customers that their money was safe, when I didn’t even know if my money with the bank was safe.
In 2009, Paulson and a few other handpicked billionaires put up about $1.5 billion to buy the bank, renamed OneWest Bank, on the condition that the FDIC absorb most of the losses. Wouldn’t you and I love such a deal (I don’t care how much money you lose, we got your losses covered)! Since that transaction, Paulson and his investors reaped $1.9 billion in dividends to go along with their latest multi-billion dollar windfall. Meanwhile, the FDIC suffered $13.1 billion in losses, a record for a single failed bank.
After the proposed merger, CIT will become a $67 billion asset-sized bank, catapulting it past the government’s “systemically important financial institution” (SIFI) threshold of $50 billion, whereby banks have to pass much stiffer capital “stress” tests. Only the day before, an outcry went up in the Wall Street Journal that the limit was too restrictive — another unintended hangover from Dodd-Frank, hamstringing the profitability of banks. I guess Thain didn’t get the memo, or just crumpled it up when he did. Of the deal, he said, it “diversifies and lowers the cost of CIT’s deposits,” adding, “We think it’s a terrific outcome for customers and shareholders.” Interestingly, in his glee, he left out the word, “employees.”
At WAMU, I was in charge of the employee newsletter, among other duties. In other words, I was responsible for spreading the happy news. I was the Kool-Aid vendor. Like others, I was impressed with our chairman Kerry Killinger. On one visit to Los Angeles, where I was based, Killinger stayed at a Holiday Inn equivalent. How could you not admire that kind of thrift. Yet, betraying his conservative Iowa roots, he had at some point began sanctioning riskier and riskier loans. After the bank collapsed, despite its $307 billion in assets, Killinger pulled in more than $100 million in compensation in his last five years at the helm. Meanwhile, Doug Wisdorf, a member of the bank’s communications office reporting to shareholders, hanged himself about a year after the bank’s demise.
Home Savings of America
I worked in the corporate communications office as an assistant vice president before Charlie Rinehart joined the company from Avco Financial Services. He quickly ascended the ranks, becoming chief executive in 1993 and also chairman in 1995. His plan to transform the venerable savings institution into a consumer banking giant ultimately failed because WAMU and Kerry Killinger snapped it up in 1998. Thousands of employees lost their jobs (don’t ask me how I retained mine, but I guess someone had to be the bearer of bad news), but Rinehart walked away with millions.
Fortunately, I was never employed by World, but thousands were. For years, the company competed directly with Home Savings, WAMU, Countrywide and other financial institutions. Morningstar Inc. named the company’s founders, Herb and Marion Sandler, “2004 CEOs of the Year.” Two years later, the bloom was off the rose. World’s parent company, Golden West, was sold for $24 billion to Wachovia Bank, with the Sandlers taking home $2.4 billion. This was their reward for pioneering highly risky pay-option mortgages. Bloated with these assets, Wachovia was near collapse when Wells Fargo bought it in 2008. Unrepentant, Herb Sandler blamed the collapse on his banking rivals for perverting how pay-options worked.
Except for the freshly engorged CIT, all the aforementioned have been relegated to the dustbin of savings and loan history, but not before their executives walked away with millions.
Other executives model their behavior after these sharks
Only this week did we read about the thousands of employees laid off by Microsoft, with a letter announcing the layoffs that began, “Hello there.” Not coincidentally, Steve Ballmer, who was CEO of Microsoft from January 2000 to February of this year, is reportedly worth more than $20 billion, despite a questionable record of corporate stewardship that saw Microsoft outmaneuvered by Apple, Google and Facebook during his tenure. With his private war chest, Balmer has offered $2 billion to buy the NBA’s Los Angeles Clippers, more than 12 times the team’s 2014 revenues, an unheard of valuation. The norm is about six times revenue. But for Balmer, it’s only funny money, which the public will ultimately end up coughing up in the form of higher ticket and concession prices.
Los Angeles is also home to the storied Los Angeles Dodgers franchise, which Frank McCourt bought for no money down in 2004. After running the team into the ground and using the team as his and his wife’s personal ATM, raising ticket and parking prices and alienating nearly everyone in the storied organization, the Dodgers filed for bankruptcy protection in 2011. In the 2012, Guggenheim bought the Dodgers for $2.15 billion, making McCourt a very wealthy man.
So, the latest announcement of another bank deal or another executive being enriched, despite past failings, hardly causes a stir anymore. Despite their past abuses, excesses, errors and missteps — leading to unemployment misery and devastating financial losses for countless thousands of people — zombie executives continue to feed at the top of the food chain, impossible to kill off.
Dodd-Frank and other well-intentioned regulations drafted after the Great Recession are toothless tigers against this unstoppable and insatiable menace.