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Catch-22: Bank CEOs Cannot Serve Two Masters

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Freddie Mac tragedy serves as a cautionary tale for our post-bailout world

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This past weekend, my wife and I took our kids to see the Twenty-Fifth Annual Putnam County Spelling Bee, a musical parody of spelling competitions.

In the spirit of that show, I offer the following:

Host: The word is "Voluntold"

Speller: May I have the definition?

Host: "Voluntold" is "When someone -- for example, your boss -- "volunteers" you for something, then tells you that you have to do it."

Speller: Can you use it in a sentence?

Host: Bank of America (BAC) CEO Ken Lewis was "voluntold" to keep quiet and close the acquisition of Merrill Lynch.

Speller: V-O-L-U-N-T-O-L-D. Voluntold.

Host: That would be correct.


And so too would be that David Kellermann, the acting CFO of Freddie Mac (FRE), was "voluntold" to change the language in SEC filings at the request of his regulator.

And, I would offer, that John Mack, CEO of Morgan Stanley (MS) was "voluntold" to "de-risk" his firm (reducing leverage and cutting the dividend to a nickel) in exchange for the opportunity to purchase a regional bank with deposits.

And these examples are just taken from today's headlines. Over the past 18 months, there have been more than I can count.

But why?

Ask any executive of a regulated company who's been through a crisis, and all will tell you the same thing: "Once you realize that they (the regulators) hold all the cards, you realize that it's just easier to do what they tell you and put the best face on it that you can." In short, to accept being voluntold.

And that's what's happening within our banking system, particularly among the "systemically important" banks. Executives are following Washington's orders and putting the best face on it that they can.

While I will let others debate whether this is right or wrong, I will just offer its importance to common shareholders. Put simply, common shareholders have no cards; increasingly, neither do preferred shareholders, nor subordinated creditors. If someone must be sacrificed in the interest of national security-- – and financial system strength clearly qualifies -- then shareholders will be the ones to take the fall.

Voluntold executives cannot serve 2 masters.

And here I would like to stop for a moment to offer my condolences to the family, friends and colleagues of Mr. Kellermann. For people of integrity, which I understand by all accounts Mr. Kellermann was, the stress of trying to do the right thing in a "voluntold" world is enormous.

And in that regard, for every CEO we see on the front pages of the Wall Street Journal, there are thousands of individuals inside these firms struggling-- – trying to make a difference for their clients and their families -- in environments filled with irreconcilable priorities.

As a community, we must not lose sight of this - particularly since most are trying to be part of the solution.
No positions in stocks mentioned.
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