October 22, 2008
by Ann Crotty
Even if you’re reading this online in an ashram in the foothills of the Himalayas, you will by now realise that the music has indeed stopped. And the dancing has come to an end.
Citigroup’s ex-chief executive Chuck Prince caught the mood of it all back in July last year, when he observed: “When the music stops, in terms of liquidity, things will get complicated.”
“But,” he added, “as long as the music is still playing, you’ve got to get up and dance; we’re still dancing.”
Months later, the subprime music ground to a halt and Citigroup announced the first of the losses that were to total $20 billion (R201.1 billion at yesterday’s rate).
By November, Prince was out of Citigroup. Rightly so, don’t you think? Of course – except that if Prince had stopped dancing two years earlier, in a prescient attempt to protect Citigroup from the worst of the subprime damage, he would probably have been fired earlier.
This is the very plausible, but troubling, view of Howard Marks, a US-based investment adviser.
In a fascinating letter sent out to his clients in July this year, Marks argued that if Prince had taken Citigroup out of the subprime market when he felt it was in dangerously unstable territory, the group would have lost out on some compelling and easy-to-make short-term profits.
This would have attracted considerable attention from other players in the market, in particular the hedge funds which, Marks believes, would have forced Prince out. Prince would have looked embarrassingly stupid. And the longer the subprime dance continued, the more stupid he and Citigroup would have looked.
The problem is, of course, the market’s fixation on the short term. It is not an American problem, it is a global one.
And it is fed not so much by the competitive market pressure on companies such as Citigroup to perform, but by the competitive pressure on the various layers of agents and operators in the wider fund management industry.
The desperate need to justify their slice of commission is what ensures that Prince and his mates don’t get much of a chance to see beyond the current six months.
This six-monthly, or even quarterly, performance fixation seems particularly inappropriate given that pension and provident funds – which tend to make up the bulk of investments – are supposed to generate returns for the long term. It moves beyond being just inappropriate when, as is currently evident, the fixation on short-term profits threatens long-term viability.
“The things that maximise profit in the short run often serve to decrease profits and increase risk in the long run,” Marks points out. It is not, as John Maynard Keynes suggested, that we are all dead in the long run, it is rather that we are all much poorer in the long run.
Of course, while Prince was dancing up a storm in the subprime market, not only was he safe from hostile shareholder action, he was pocketing extremely generous remuneration packages. Amazingly, if he had been doing what was good for the long-term health of the company, Prince would have been considerably poorer.
The short-term obsession of equity markets, and the ability of remuneration packages to reinforce it, extend well beyond the financial sector. Increasingly in any sector of the market, a long-term share option incentive is something that starts to pay out in three years. Not surprisingly, executives cash in as quickly as they can.
It is likely to be some years before the market recovers fully from the current crisis. That might give us all just enough time to contemplate longer time horizons before the dancing begins again.
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PUBLISHED BY ‘BUSINESS REPORT’ (South Africa)
sandinista vencia as eleições municipais. A situação tinha 50% dos votos, contra 42% da coalizão opositora, quando haviam sido divulgados os resultados de 39% das seções, em 137 dos 146 municípios nicaragüenses. Centenas de sandinistas saíram às ruas para comemorar, com bandeiras nas cores vermelho e preto.