Merkel & the EU: The Bailout or Handcuffs Crisis?

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I'm a member of the 'Economist' Discussion Group on LinkedIn and this week there were a few questions asked by members on whether or not we felt Germany should be bailing out ailing member countries in the European Union. Some people were interested in understanding what kind of risks these bailouts could carry for Germany and other member companies operating from a position of financial strength right now. Here are my thoughts on this important topic:

Let's start with a 'TishTrek Rule' in the Government Bailout Business which I think is applicable in all countries and companies: If one of the first questions you ask after a major failure or financial collapse is, "Bailout or Handcuffs?" Then there can be NO BAILOUT!

For all other situations where 100% good faith was exercised and excellent work and good intentions delivered an adverse result that systemically harmed the economic system of a country, then by all means it's appropriate to offer solutions which can potentially turn a negative into a positive for all stakeholders.

If the situation warrants handcuffs, you better use them! People who intentionally execute actions to produce adverse results for personal profit & who operate without regard to the stakeholders they are accountable to cannot by enabled. If they have the potential, skills, expertise, willingness and opportunity to repeat this behavior, they will. You cannot fail to mitigate a toxic risk that is guaranteed to repeat itself.

Having said that, let me state in general terms that it is VERY difficult (probably impossible...) to get 17 separate countries with all their unique country-centric inner-workings & local processes in silos (some outdated with no sense of urgency when needed) to agree on 'any issue' never mind try to move all countries to one giant enterprise-wide solution. Kudos to the European Union for trying!

I've been impressed by members of the EU who could pull off agreement on smaller issues, so a lot has been going well! Many admire the progress of EU while watching from across the pond, but can that model work when catastrophic issues & risky financial considerations need fast and appropriate answers? The jury is out.

Having said that, the countries that are still financially sound, (i.e. - still have successful tax revenue-producing companies that create tangible goods which are in high demand the world over; and profits are hitting it out of the park), should have concerns & questions. I'm very familiar with a $69 Billion revenue producing chemical company in Germany that is doing beyond excellent, so could Germany’s country leaders be thinking why must 'our people' carry all this 'dead wood/weight' (i.e. Greece & others) without having the benefit of them doing or guaranteeing 'great things' in return for Germany now or in the future?

Well – perhaps Germany should hang in there and fund solutions 'for a time' (that is - for a time period their country is comfortable with...). Why? Because the good people of other countries helped them out, (i.e. the U.S. used taxpayer funds to make sure Deutsche Bank was paid back 100% on the dollar for billions in subprime risks they took & lost after they were bundled and sold to unsuspecting investors. These particular transactions were run through AIG Financial Products Corp in the UK and later contributed to destroying AIG’s entire company & the U.S. economy).

The great news for Germany is that all the counterparties (including Deutsche Bank) carrying those 'known' risks had been 'insured' through those 'special' counter-party contracts AIGFP execs signed off on. In the end, Deutsche and many other banks in the U.S. & abroad were made whole with U.S. taxpayer dollars when 'our' broader economy collapsed AND AIG found itself with no funds to fulfill these CONTRACTUALLY IRON CLAD commitments.'

The U.S. Fed gave AIG the billions they needed to honor those commitments. Okay, everyone gets it - - certain businesses & transactions in Investment Banking cannot happen without counter-parties teaming up in certain areas of business. BUT some argue that it was wrong for this intentional risk and those contracts to fall on the U.S. taxpayer. Many would not expect the German taxpayer to pick up such a tab especially for companies & countries that are not even members of the EU.

With this history in mind, perhaps it's OKAY and FAIR - for a period of time - that perhaps all member companies of the EU must 'give-to-get?’ But honestly - the whole end-result MUST be determined by what individual countries and their citizens think. It's their money and their country so they should be able to determine what a reasonable period of time is, what level of funding is too much, and whether or not it is ethical to support organizations, countries, corporations, etc which have already knowingly failed every stakeholder - shareholder, client, employee, business partner, and country - they were supposed to be accountable to.

You may ask: How long do we want to reward 'FAILURE' with taxpayer funds and hand government-sponsored 'competitive advantage' to failed companies competing against 'some' number of competitors that brilliantly executed with world class standards?

Others may ask: Why are we agreeing to penalize the HEROES of the Lost Decade who didn't cheat? (i.e. That is those companies whose investors risked their capital and in return the companies they invested in actually succeeded by putting mitigating risk, executing compliance standards, living the tenets of cost-containment; and the interests of shareholders, clients, employees & their countrymen first?

Some might suggest: How about giving taxpayer dollars to companies to honor their excellence, business integrity, accountability; and the fact that their companies never showed up @ a U.S. Fed-Sponsored or EU Lending window with their hands out to survive!

Why not give MetLife Bank & the new ALICO Co, (recently purchased by MetLife from AIG) taxpayer money to lend to small businesses! They've earned it! Chief Investment Officer Steve Kandarian spotted the mortgage-backed securities "BUBBLE" & the serious risk issues that doomed all of our countries in 2005 (that's 6 years ago!) so he and the MetLife management team acted on it. They all - including rating agencies - had the same data Mr. Kandarian had. How each company acted on the data is what created the champions & the losers of the LOST DECADE. Mr. Kandarian was rewarded for putting MetLife's survival 1st when they appointed him President + CEO of MetLife in May 2011, (Isn't that a great story about REWARDING a hero and winner of this Lost Decade?)

My point is that there's a GIANT hidden problem as I see it: Massive systemic risk -in the form of toxic assets and bad employees - is still sitting inside many of these companies our sister-countries are trying to save. So aside from handing lending funds to companies like MetLife to help small businesses grow, we have to focus on the people who willingly took action that failed their companies; and who are now sitting on piles of bailout funds intended for small business growth. I promise they will spend it to dilute toxic assets that are not transparent to us, on bonuses, etc.

We have to fire and/or handcuff more people to learn how they pulled this off: I thought we all agreed that 'smoke-n-mirrors' almost destroyed the world financially?!! Then explain why ‘we’ left the majority of the employees who ‘blew the smoke’ and ‘carried the mirrors’ that harmed us inside these companies? We all missed the opportunity to fire the traders, financial engineers/ analysts, compliance/ risk, and information technology professionals who executed the steps that collapsed their companies. As a result, we remain in terrible financial danger! All employees who touch any part a Financial Trading Transaction from Direct Market Access and Order Mgmt to Clearing Ops should have their career movement monitored by FINRA and/or the equivalent Global Regulatory authorities in other countries, (i.e. A U4 and U5 system should follow everyone). Otherwise, you are firing people who simply walk up the street to my office and get hired in the same exact job in my unsuspecting company.

We ALL targeted THE BIG CEOs like Chuck Prince from Citi for termination. But, I can assure you Mr. Prince never sat in ‘the technology pit’ at the Citigroup Capital Markets & Banking (CMB) Newport Operation in Jersey City, NJ during the firestorm of mortgage fraud & toxic bundling. He didn’t have a clue.

In many companies employees were asked and/or paid to create valuations on toxic mortgage assets using bogus asset valuation models. I know this because a few of my employment candidates walked away from these 'opportunities' with their integrity in tact. Yes – Candidates with PhD’s who were Chartered Financial Analysts were asked by many global leaders to not apply tools, inputs, and required valuation models that are always required to manage the equity, fixed income, and derivative investments for individuals and institutions. Anyone who did this should be banned from the industry; and stripped of their CFA certification. I don’t care if they don’t directly face an investment client or handle the actual assets, their risk assessments, algorithms, and conclusions are critical to every client’s investment strategy and to the ‘survival’ of the financial sector.

Sadly, other employees happily rigged the information technology systems in the 24/7 trading, surveillance, compliance and other transactional areas, (i.e. $10 billion in losses @ UBS and Societe Generale alone…). Does anyone really believe that the CEOs actually knew such things were going on? I don’t believe it, but they’re on the hook anyway for their failures in hiring!

I do think Chuck Prince & other CEOs are guilty of failing to put high caliber talent around them who shareholders could trust to operate with business integrity when no one was watching. They deserved to be fired for that failure alone, but.... every company and country missed the opportunity to eliminate the actual employees & the Trading Services vendors who worked in tandem in the corporate trenches to dupe all. How come so many of these people are still employed? The professionals who operate in this kind of packs are often smarter than most employees inside every Global Regulatory Body on the planet and they know it, (i.e. think SEC and Bernie Madoff).

My worry as a behavioral recruiting expert is that this massive systemic situation means there’s a 100% chance that many of the same employees will repeat the behaviors that harmed us in the first place; and they’ll use Germany’s BAILOUT FUNDS to help them. Some of these folks walk up the street and launch a hedge fund under another name or dive into the unregulated OTC derivatives market and know one can stop them from executing new schemes in a new financial system where they can operate virually undetected as the guy who almost destroyed Citigroup. When U.S. Treasury Secretary Robert Rubin, acting CEO of Citi after Chuck Prince was booted out, was bounced from Citi in NYC; a week later he was doing his business in his executive office @ Morgan Stanley in Purchase, NJ - Westchester County.

While were on this topic, we’re all fools to bailout any Bank or Investment firm without doing an audit of their vendor management & RFP programs. Make sure they have the tools & processes in place to flag executives inside their companies who are silent clandestine partners in vendor companies that win business to support their company in the following areas: Trading Transactional Services, Buy/Sell Side Compliance, Surveillance & Employee Monitoring Solutions, Clearing Operations, Pre/Post Analytics, Global Connectivity, and Execution and Routing. Employment and Contract Help agencies, Stock Loan partners or other business tied to Liquidity Services, etc. leave corporations wide open for unethical and costly problems because execs create a built-in conflict-of-interest when they own external companies that execute business with the companies that employ them. When they own less than 51% of a company, it conveniently keeps their names off contracts and under the radar of internal corporate controls.

If a vendor relationship allows a Broker/Dealer or Financial Representative to profit off every transaction or gives them a % of every deal inside the company that employs them, it puts the best interest of investors at risk. Clients won’t ‘necessarily’ be offered the ‘best price-best value’ solution or the very best equity financing deal if an Financial Rep is ‘pushing or recommending’ only the external funding partner they own or are tied to while omitting other competitive options for the client that may be available. Any company where the FA enjoys external profits or financial gains that are not transparent to the investor cannot be allowed. How do we do this?

Since this is a systemic and recognized problem in the industry, I suggest we start by regulating the OTC derivatives market just as Presidents Clinton and Obama have suggested we do; then make any ‘vendor policy’ violation by a FINRA licensed professional a felony. The rule has to be: If he/she willingly profits in the procurement of goods, services, tools, technologies, and human resources tied to the trading transactional services which support their clients and/or investors of their firm, they will be banned from doing any kind of business in all corporations that are regulated. We can never stop the waste of taxpayer Bailout Funds unless we end all these financial relationships today.

If the top and most revered government officials in Germany already figured this out, then we should stand with them and say - "No! – That is the great country of Germany has no interest in continuing the charade that rewards on-going failure like the United States has done." More importantly why give an unfair 'continued competitive advantage' to all the losers and cheaters of this decade?

If Chancellor Merkel thinks unworthy recipients are preparing to continue the assault on all people in every country touched by the subprime mortgage / CDO man-made disaster and if she believes such generosity would be robbing the next generation on every continent, then she should say, "NO!"

Every recruiter can tell you that you must have leaders @ ‘every’ level of your company who can look at facts and execute with courage & integrity. That's it. The solutions will grow on people if the manner in which they arrive at a conclusion is FAIR & JUST and most importantly if the solutions they deliver get the job done! - Tish