The Parts Are Greater than the Sum

Say What?

You didn’t misread that.

I know, we’ve always been taught that the sum is greater than the parts. The United States of America is greater than Alabama, Wyoming and the states alphabetically in between. A-Rod’s ten year, $275 million contract is more than the sum of Rodriguez’s hitting, fielding, throwing and steroid enhanced abilities. I get it. But synergy claims the opposite and its definition takes us right back around the bases to A-Rod.

Synergy (noun) the working together of two things (muscles or drugs for example) to produce an effect greater than the sum of their individual effects.

You can’t say dictionaries are not up to date on the latest steroid or performance drug. Synergy is the love-child of the corporate conglomerate. Every corporate raider out there (and a good many CEOs) made millions taking synergy on the road for an extended tour. And, like the love-child, synergies seldom grow up to meet expectation.

What Chop-Shop business theory, trumpeted by beaming CEOs before their stockholders as the synergy of an announced (or impending) merger, actually produced is a dizzying worldwide churn of corporate takeovers and sell-offs. Citigroup, a favored current target of outrage, elated then deflated investors in a woozy swing from $50-60 all the way down to less than a buck. Citigroup accomplished what appeared to be a spectacular feat of alchemy when they took over Travelers Group in 1998.

It took but ten short years to fly that plane into a mountain. Fasten your seatbelt and flashback to the story of a guy by the name of Sanford Weill.

We all love stories.

Sanford Weill and Citigroup

Twenty-some years ago, Weill was a good bit younger, vastly more hungry and the planets seemed aligned in his favor. A master at acquiring, Weill grew his money-tree from the get-go by grafting branches of other firms to his small tree. His original securities and quite modest brokerage morphed from a small firm with his name on the door, to ever larger deals with his name less and less in the spotlight;

  • Berlind, Potoma & Weill (1960) became

  • Carter, Berlind & Weill (1962), then

  • CBWL-Hayden, Stone (1970), then

  • Hayden Stone in 1972 (the last time we see Weill’s name)

  • 1974 brought a merger with Shearson Hammill and a

  • 1979 merger with Loeb Rhoades Hornblower and Co. produced

  • Shearson Loeb Rhoades, the country’s second largest brokerage at $250 million in capital, a mere speck in the eye of today’s brokerage capitalization.

Second largest was never Sanford’s comfort zone, but it’s refreshing to remember that as recently as 1979, $250 million was still a pile of money instead of petty-cash for year end bonuses. I (perhaps like you) am not yet sure how and when millions actually became billions and quickly trillions, three sneaky zeros at a time. In approximately thirty years, like the old Polish zloty, the numbers took on six additional zeros, a ten-fold increase every five years. Weill was doing great while the world in which his investments multiplied through Alice’s looking-glass became more and more hollow. Hollow is an interesting word. Hollow is masked by exterior appearances, as in ‘who expected that mighty oak to fall, it looked so robust?

Two years later, in 1982, Sanford sold Shearson Loeb Rhoades to American Express. The acquirer had finally been acquired. But president of American Express was not the same as CEO or Chairman and Weill wasn’t happy as AMEX’s second banana. Without getting too deeply into the Weill biography, Bank of America was not interested in his pitch to become CEO. So he went back to basics.

Looking around, which was always Sanford’s long suit, in 1986 he talked Control Data Corporation into spinning off Consumer Credit, a losing subsidiary. It wasn’t AMEX, but he had control.

  • In 1987 he acquired Gulf Insurance.

  • In 1988, he paid $1.5 billion for Primerica, the parent company of Smith Barney and the A. L. Williams insurance company.

  • In 1989 he acquired Drexel Burnham Lambert’s retail brokerage outlets. Sanford was once again on a tear.

  • In 1992, he paid $722 million to buy a 27 percent share of Travelers Insurance, which had gotten into trouble because of bad real estate investments.

  • In 1993 he reacquired his old Shearson brokerage (now Shearson Lehman) from American Express for $1.2 billion.

By the end of the year, he had completely taken over Travelers Corp in a $4 billion stock deal and officially began calling his corporation Travelers Group Inc.

  • In 1996 he added to his holdings, at a cost of $4 billion, the property and casualty operations of Aetna Life & Casualty.

  • In September 1997 Weill acquired Salomon Inc., the parent company of Salomon Brothers Inc. for over $9 billion in stock.1

Voila! Troubled Travelers Corp, fattened by $13 billion in acquisitions, became a big enough fish to swallow Citicorp for a mind-boggling $76 billion. It was 1998 and the clock would tick long enough for Weill to get out, Chuck Prince to slip into his shoes and all those parts become greater than their sum. Or so it seemed.

The boogie-years ushering in the new millennium barely stuttered from the dotcom-bubble burst and took off into the new and uncharted territories of such things as hedge fund derivatives, sub-prime loans, consumer debt consolidation, home equity loans, credit default swaps and other Wall Street machinations so complicated they have yet to be clearly defined.

If ever there was a poster-boy for the Chop Shop, it would be hard not to nominate Sanford. The New York Times, putting aside any criticism of political clout, unrestrained lobbyists, the repeal of the Glass-Steagall Act (separating banks and investment banks) or the entirely unregulated hedge fund industry, fairly gushed over Weill in July of 2007;

Tributes to Sanford I. Weill line the walls of the carpeted hallway that leads to his skyscraper office, with its panoramic view of Central Park. A dozen framed magazine covers, their colors as vivid as an Andy Warhol painting, are the most arresting. Each heralds Mr. Weill’s genius in assembling Citigroup into the most powerful financial institution since the House of Morgan a century before.2

His achievement required political clout, and that, too, is on display. Soon after he formed Citigroup, Congress repealed a Depression-era law that prohibited goliaths like the one Mr. Weill had just put together anyway, combining commercial and investment banking, insurance and stock brokerage operations. A trophy from the victory, a pen that President Bill Clinton used to sign the repeal, hangs framed near the magazine covers.

These days, Mr. Weill and many of the nation’s very wealthy chief executives, entrepreneurs and financiers echo an earlier era—the Gilded Age before World War I—when powerful enterprises, dominated by men who grew immensely rich, ushered in the industrialization of the United States. These new titans often see themselves as pillars of a similarly prosperous and expansive age, one in which their successes and their philanthropy made government less important than it once was.

Hard to believe that such fatuous praise was heaped on Sanford’s shoulders, from a supposedly autonomous newspaper, not quite a year before the fall. But the Times was not alone. Major media, that bastion of truth and independent thought were all drinking the same fair and balanced Kool-Aid.

In July of 2007, Citigroup stock was selling at about $48, Weill was happily (or at least mercifully) retired and CEO Chuck Prince was all spiffed up to walk out on stage and hear the applause die. Weill retired in 2003 and at the time, Sanford owned 22,777,290 shares of Citigroup with a market value of more than $1 billion. His annual dividend checks then totaled $31,888,206.3 Unless he was wise enough to very quickly diversify, Sanford has since taken a very expensive bath.

The Times’ near orgasmic references to genius, trophies from victory, the Gilded Age before World War I, titans, pillars, successes and government made less important, belies the disaster just around the corner. Even the soon-to-be Nobel honored Paul Krugman, was caught with his pants around his knees.4

Paul Krugman Misses the Boat and Wins a Nobel Prize

Read Paul’s column and see if you think this Nobel Prize winning economist knows what the hell he’s talking about:

(Krugman, NYTimes, July 27, 2007)

Yesterday’s scary ride in the markets wasn’t a full-fledged panic. The interest rate on 10-year U.S. government bonds — a much better indicator than stock prices of what investors think will happen to the economy — fell sharply, but even so, it ended the day higher than its level as recently as mid-May and well above its levels earlier in the year. This tells us that investors still consider a recession, which would cause the Fed to cut interest rates, fairly unlikely.

So it wasn’t the sum of all fears. But it was the sum of some fears — three, in particular.

The first is fear of bad credit. Back in March, after another market plunge, I spun a fantasy about how a global financial meltdown could take place: people would suddenly remember that bad stuff sometimes happens, risk premiums — the extra return people demand for holding bonds that aren’t government guaranteed — would soar, and credit would dry up.

Well, some of that happened yesterday. “The risk premium on corporate bonds soared the most in five years,” reported Bloomberg News. “And debt sales faltered as investors shunned all but the safest debt.” Mark Zandi of Moody’s said that if another major hedge fund stumbles, “That could elicit a crisis of confidence and a global shock.”

I saw that one coming. But what’s really striking is how much of the current angst in the market is over two things that I thought had been obvious for a long time: the magnitude of the housing slump and the persistence of high oil prices.

I’ve written a lot about housing over the past couple of years, so let me just repeat the basics. Back in 2002 and 2003, low interest rates made buying a house look like a very good deal. As people piled into housing, however, prices rose — and people began assuming that they would keep on rising. So the boom fed on itself: borrowers began taking out loans they couldn’t really afford and lenders began relaxing their standards.

Eventually the bubble had to burst, and when it did it left us with prices way out of line with reality and a huge overhang of unsold properties. This in turn has caused a plunge in housing construction and a lot of mortgage defaults. And the experience of past boom-and-bust cycles in housing tells us that it should be several years at least before things return to normal.

I’ve written less about oil prices, so let me emphasize two points about the oil situation. First, we’re now in our third year of very high oil prices by historical standards — prices as high, even when adjusted for inflation, as those that prevailed in the early 1980s, after the Islamic revolution in Iran. Second, unlike the energy crises of the past, this price surge has happened even though there hasn’t been any major disruption in world oil supply.

It’s pretty clear what’s happening: economic development is colliding with geology.

Spun a fantasy, did you, Paul? Several years before things turn to normal?

It is (and was) indeed pretty clear what was happening and it hadn’t a thing to do with economic development and the price of oil. Good old fashioned greed, urged on by way too much investment capital searching for a roost, was failing to collide with the laws forged after the Great Depression to prevent just such another disaster.

Those laws had been chop-shopped by the likes of Reagan neo-conservatism.

Who Knew?

Timing is everything, but who knew? They knew.

Weill got out of Citigroup, as Henry Paulson got out of Goldman Sachs and Hank Greenberg fled AIG. Even Alan Greenspan oozed his way out of the job to write a self-serving book and tag Ben Bernanke with the mess. George Bush went back to clearing brush in Texas and now it’s Obama’s wars, economic plunge, welfare collapse and stratospheric deficit.

Zeros, it was largely about zeros, from millions to billions to trillions.

1 Wikipedia, Sanford I. Weill

2 New York Times: The Richest of the Rich, Proud of a New Gilded Age–Louis Uchitelle, Published: July 15, 2007

3 Floyd Norris, New York Times, July 17, 2003, Citigroup’s Climb to Riches

4 The Sum of Some Fears, Paul Krugman, NY Times, July 27, 2007

published: 13. 4. 2014