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A salutary shock is needed, and a big one. Citigroup’s market capitalisation of $250 billion makes it too big for any hostile or private-equity takeover. But if its shareholders want to see some sparks fly, they should consider the deal that has been a Wall Street pipe-dream for years: a takeover, by Citigroup, of Goldman Sachs, the leanest and meanest and by far the most profitable of America’s investment banks. The argument against such a merger used to be that Citigroup’s bureaucratic culture would suffocate Goldman’s animal spirits. But nowadays Goldman looks more than equal to the challenge. Tie the two banks up in a sack, and most people would bet on Goldman to come out happily rubbing its tummy.
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You might think that if American bosses were having a harder time with their boards and shareholders, then their sometimes fantastic pay and severance packages would come under pressure. But my friend and colleague, Matthew Bishop, who follows such matters closely, predicts that these dizzying packages, at least for the bosses who survive, are going to get bigger still, for two main reasons. One reason, almost perversely, is that if ill-fitting and underperforming chief executives get ejected more readily — as has happened at Home Depot, Bristol-Myers and Gap, among others in the past six months — then better bosses will be able to demand more money (particularly in the form of guaranteed severance payments) as compensation for this general decline in job security at the top. A second factor working in the fat cats’ favour is the growing competition from private-equity firms, which are snapping up public companies and their bosses with them, at ever fancier prices.
These are strong arguments. But still, I am not persuaded, mainly because I find it hard to believe that any manager could possibly be worth, say, $210 million, which was the severance payment made by Home Depot to its departing chief executive, Bob Nardelli, at the beginning of this year. The negotiating of such things has little in common with regular wage-bargaining, more with a ransom demand or a divorce settlement: not a market solution, but a one-to-one struggle. A chief executive is not ‘worth’ his pay and severance package, any more than your divorced spouse is ‘worth’ half your income, or a house in Belgravia. It is purely a question of what they could get away with at the time.
Mr Nardelli’s successor is now running Home Depot for $8.9 million a year. That still sounds a lot of money for what I refuse to believe can be all that difficult a job, but it is a step in the right direction. If there is an exotic derivative somewhere out there which tracks an index of top managers’ pay, this seems to me a time for going short in it.
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Talk to people in investment management, and you will detect a sense of vague unease that asset prices everywhere seem almost unnaturally high. It is the feeling that things are too good to last, as if something titanic, of which 9/11 was merely a foretaste, must soon overwhelm us. One common analogy is with the assassination of Archduke Franz Ferdinand in Sarajevo in 1914, which plunged the world almost overnight from an age of prosperity into an age of warfare.
What, now, might be our Sarajevo moment? No political assassination, at least by a lone madman, would do the job; it might even bring some slight relief. You would have to think more in terms of a plague, or a terrorist attack on Saudi oil infrastructure, or an asteroid veering towards the earth.
One well-informed person who came into the Economist for lunch a few weeks back said he thought it a 10 per cent likelihood that a terrorist would contrive to explode a small nuclear bomb in New York within the coming ten years. Thinking this quite a conversation-stopper, I took the idea to a man deep in the structured-debt market, and asked whether this might be our generation’s Sarajevo moment. He thought for a moment before replying in a way that made me realise how little I knew about pricing risk. It would be a terrible thing, he said. But, viewed solely in terms of its impact on world financial markets, it would fall into roughly the same class of event as a fit of delirium hitting Ben Bernanke, the chairman of the US Federal Reserve, when talking about prospects for the dollar.
Robert Cottrell is deputy editor of Economist.com.
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