Entrenched Managements: Yet One More Reason Why TARP = CRAP

Citigroup is up almost 80% over the past few days, while Bank of America has nearly doubled. Each CEO has come out with a bullish statement, Citi to the effect of “We’re raking it in” while B of A has defiantly exhorted “We don’t need no more stinkin’ money.” These words helped set off a frantic rally, as market sentiment has, almost overnight, been flipped on its head. Could things have looked more bleak last week? I don’t think so. But today’s feeling was downright optimistic. Did we get a plethora of new data to cause this reassessment? Not that I saw. Have we seen credit spreads dramatically tighten in line with the equity markets bullish rampage of the past few days? Nope. So what gives? At least as it relates to the financials, the key message is this: TARP has turned big-time CEOs into traders with losing books swinging for the fences. Not exactly what Congress or the Treasury had in mind when they decided to bail out the biggest, most complicated financial institutions. With our money.

Clearly much of the price appreciation is due to a vicious short-covering rally that Messrs. Pandit and Lewis kicked off. But the fact is, what do they have to lose? If they can fool us long enough, credit spreads will come in and recovery will become a self-fulfilling prophecy. Otherwise, Congress (read: the US taxpayer) will bail them out once again. Citi, B of A and AIG have each had multiple bites of the bailout apple, so what’s another bite among friends? They are inclined to do this because their reputations are already severly damaged; in essence, short of outright fraud, they can’t get any worse. Therefore, they are motivated to throw caution to the wind, be super-positive and hope for the best. If new management with fresh reputations were on the scene, the would be much less inclined to release bullish statements without empirical data to back it up. This is a major flaw of TARP: letting incumbent managements stay around. It has created perverse motives that serve neither the troubled institutions nor its shareholders very well.

How are buyers of Citi going to feel if they enter at $2, think it’s going to $5 because of Vik’s words and then see it crater to $0.80 based on deteriorating fundamentals and the need for additional dilutive equity issuances? i’ll tell you how – pissed off. Now you can say “caveat emptor,” and you’d be right. But wouldn’t you rather have new managements with motivations aligned with those of shareholders, instead of old managements motivated to rehabilitate their reputations? Rather than be so focused on capping pay, how about insisting that a new slate of managers take over as well as some new independent directors? I think this would yield far better outcomes for everyone involved. Congress and Treasury have taken their eye off the ball. Time for a little less populist BS and a little more common sense reform.

About Roger Ehrenberg 94 Articles

Roger is an active early-stage investor, having seeded or invested in over 20 companies in asset management, financial technology and digital media since 2004. Prior to his venture days Roger spent 18 years on Wall Street in M&A, Derivatives and proprietary trading.

Throughout his career he has held numerous executive positions, including:

President and CEO of DB Advisors LLC, a wholly-owned subsidiary of Deutsche Bank AG. His 130-person team managed over $6 billion in capital through a twenty-strategy hedge fund platform with offices in New York, London and Hong Kong.

Managing Director and Co-head of Deutsche Bank’s Global Strategic Equity Transactions Group. In 2000, his team won Institutional Investor magazine’s “Derivatives Deal of the Year” award.

As an Investment Banker and Managing Director at Citibank, he held a variety of roles and responsibilities in the Global Derivatives, Capital Markets, Mergers & Acquisitions and Capital Structuring groups.

Roger sits on the Boards of BlogTalkRadio; Buddy Media; Clear Asset Management; Global Bay Mobile Technologies and Monitor110. He is currently Managing Partner of IA Capital Partners, LLC.

He holds an MBA in Finance, Accounting and Management from Columbia Business School and a BBA in Finance, Economics and Organizational Psychology from the University of Michigan.

Visit: Information Arbitrage

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