A few weeks ago, the day after he testified in Washington before the Financial Crisis Commission, I heard former Citigroup (C) - Get Citigroup Inc. Report CEO, Chuck Prince, speak to a friendly business audience at a closed-to-the-business-press luncheon. I went into the meeting thinking Chuck Prince was a fool; one of the poster boys for the out-of-touch Wall Street CEOs whose actions helped bring the world economy to the brink of collapse two years ago. I left the luncheon with a much more nuanced view of the man.
Prince raised some interesting questions that I -- and I suspect many -- would have a hard time answering, making me concerned about how much we've really learned.
Prince was criticized by author Michael Lewis and others for his quote, "When the music is playing, you have to get up and dance and we're still dancing." That was his explanation, in early 2007, for why Citigroup was so heavily invested in the subprime mortgage space.
It would be easy to write off Prince as a buffoon; someone in over his head. He was a lawyer, after all. He should have know better. People who make big mistakes in business are either idiots (like Prince), unethical (like Skilling or Kozlowski), or evil (like Madoff). We write them off, and move on.
So the obvious question for Chuck Prince is, what the hell happened to almost kill what was once thought of as the world's leading bank?
According to Prince, they held $40 billion in super-senior tranches on housing assets. Alan Greenspan had referred to these assets as "as safe as U.S. Treasuries." Overnight, they went from AAA to junk, according to the ratings agencies. At first, Prince (and his CFO Gary Crittenden) thought it was a $200 million problem. Then, it became an $8 billion problem, then an $11 billion problem, and later back to an $8 billion problem. By the time it was settled, however, Prince was long gone.
It's clear that Prince seethes at the ratings agencies' role. Since his world changed overnight -- with AAA assets becoming junk -- Prince obviously believes he deserves some understanding. At one point in the luncheon, he said:
"I guess what you should take from my story is, don't trust conventional wisdom. Even if the
chairman says some asset is rock solid, don't take his word for it. I guess in 2006, I could have gone down to our trading desk at the tip of Manhattan and told the traders, 'You know guys, I just don't think Greenspan or anyone else knows what they're talking about in reference to these super-senior tranches. I know we're at the top of the pyramid to always get the cash flow from these products, but I just think the world is going to change. Sell them all.' They would have looked at me like I'd lost my mind. They would have wondered, what does this lawyer think he's talking about?"
It's very easy to sit here today, not the person in Prince's shoes, with his training and background at the time, and say he should have seen it coming because
saw it coming. Yet, venturing back to that moment in time, you have to be sympathetic to Prince's position. After all, as Prince pointed out, in second-quarter 2007, Citi announced its best quarter in the history of the bank. As a CEO, that's your job.
I submitted a written question that ended up being asked: "Jamie Dimon of
is often portrayed in the press as a genius coming out of the financial crisis. Martin Sullivan of
is often seen as a goat. As someone who was in the ring at the time, who on Wall Street made the best moves and who made the worst?"
Prince didn't really answer the question. He commented that he knew both Jamie and Martin and felt they were both smart. He then went back to explaining the chain of events that capsized the economy as truly unprecedented, random and therefore, impossible to prepare for.
While I'm sympathetic to this view now more than before, I can't help but think this worldview that Prince possessed was probably widespread among bank CEOs at the time. This was a game -- subprime -- that Prince felt he had to play. Games -- or trends -- happen all the time in finance.
LBOs are hot and then they're not. When the music stops, you get off and you go on to the next game. It had never happened before: The music stopped and the world seemed like it was about to end. That's not how games are supposed to work.
Clearly, more will be expected of CEOs next time. Which leads to the question, what will be the next cause of the next financial crisis?
According to Prince, it won't be in mortgages and it won't be sovereign debt. Big problems are big problems precisely because nobody is looking for them. They come from the side and knock you over.
Remember commercial real estate was going to be the next shoe to drop? Now, nobody's paying attention to that at all. Now we're paying attention to Greece, Ireland, Portugal and Spain. Prince thinks it's because we're looking there that it won't come from there. He doesn't know from where it will come, though.
It's too bad no one in the financial media or blogosphere was asking about where the next bubble is going to come from in 2005. Now, there's an assumption that any sane investor would have run for the hills in 2007, if they'd known
was setting up a trade with John Paulson on the other side. At the time, most would not have cared.
Reflecting on Prince's speech, I tweeted a question the day after on where the next bubble will come from. Here are some of the answers:
- The U.S. running out of money to pay for its social obligations
China's economy crashing from a property bubble (via Jim Chanos)
More insider trading allegations against large hedge funds.
Meeting existing CDS obligations.
Defaulting junk bonds that have been mispriced by banks
General obligation muni bonds
Wherever Chuck Prince goes next. (That was a joke.)
The main lesson from Chuck Prince is that, while we like to comfort ourselves that we would never have made the same big mistakes others did, it's still harder to predict the future than analyze the past.
At the time of publication, Jackson was long Citigroup.
At the time of publication, Eric Jackson was long Citigroup.
Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson