Street Justice (Cramer, 2007) Details

¶ … Street justice (Cramer, 2007) details reasons for the recent ousters of Merrill Lynch's CEO Stan O'Neal as well as Citigroups' CEO Chuck Prince. While the account of their performance doesn't parallel the degree of fraud committed by Enron's top management team, it does signal that companies still have not learned their lessons from that company's demise and that relatively new regulations such as Sarbanes-Oxley aren't enough to prevent major institutional failures as claimed.

The sheer magnitude of losses, $8 billion for Merrill Lynch and $11 billion for Citigroup, that were largely caused by overexposure to risky loans indicate that these companies, just like Enron, are not applying risk management oversight as well as they should have. In fact, the companies still aren't certain how high their losses will go in the future. Critics of Prince have charged that he engaged in acquisitions and buybacks that were too expensive and risky for his deposit base.

and, O'Neal can't even estimate his company's risk exposure with any degree of credibility. He had originally estimated losses to be at $3 billion and then revised this number upward to $8 billion only a few weeks later. Surely, these financially savvy CEOs understood the importance of diversification, but, out of greed, proceeded to assume risks that caused their financial institutions significant losses and that now threaten their financial viability. Also like the Enron case, corporate governance appears to be an issue at Merrill Lynch and Citigroup.

For instance, O'Neal fired coworkers who questioned his timing for increasing investments in the residential mortgage business that lead to Merrill Lynch's losses. Further, O'Neal had gone behind the board to directors to try to arrange a merger with Wachovia in an attempt to cover up the financial losses rather than taking actions to immediately report the problem. The actions by O'Neal and Prince are clearly more than just poor decision making. They represent irresponsible and unethical behavior.

Years after the Enron diabolical, boards of certain financial institutions seem to lack transparency into the decision of their corporate executives and company financials and are not demanding adherence to appropriate levels of risk. Sarbanes was meant to increase accountability, but CEOs are still intimidating those who question their actions and are still trying to resort to cover-up tactics. Given the Merrill Lynch and Citigroup situations, the need for additional government regulation or oversight of financial institutions is currently under consideration.

Opponents of regulation argue that markets and companies operate more efficiently without government involvement. Yet, the recent role of the government in bailing out Bear Stearns demonstrates that the bad behavior of large financial companies impacts everyone. The government had to take action because our.