When is Running a Bank Like Cancer Surgery?

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

When the patient wakes up from cancer surgery, the first logical question is “Did you get it all?” If the answer is unfortunately “No”,  you probably have another operation. But if the answer then is “No” a second time, you most likely get another surgeon!

 Balance sheet problems at banks, like the one caused now by the subrpime mortage/credit meltdown and related difficulty in marking-to-market the related assets held by major financial institutions, are like a kind of cancer, and since we are now coming into the third rounds of surgery in the form of announced billion-dollar write-downs, it’s little wonder that shareholders are demanding that boards of directors find another surgeon — starting with Merrill Lynch and now Citigroup.

Neither if these CEO’s apparently “got it all’ the first time around, or even the second. The markets punished their respective stocks severely, the boards held emergency meetings, and both gentlemen have “resigned”.

Interestingly, neither board was ready to install a new surgical team, instead opting for an interim period of something like “palliative care” of their wounded staffs (if not their balance sheets). No doubt executive search firms are working overtime coming up with lists of usual suspects for these positions with the right surgical resume, plus much-needed ability to guide the patient through post-operative recuperation. This period will probably involve less strenuous exercise of the M&A muscle both may have overworked recently, overconfident of the worth of the supposedly “AAA” assets on their balance sheets which are now in tatters thanks to rating agencies that simply blew the coverage worse than an NFL cornerback trying to keep pace with Randy Moss with the game on the line!

There will be more time for detailed diagnosis later on after the new surgical teams take charge; the question for the moment is really “Who’s next?” And the other question lurking is how on earth do financial institutions ride heard on their risk profiles when the only people truly competent to understand the risk imbedded in the instruments they hold are their own creators, who design them specifically to be opaque to independent, outside consultants (let alone unwary purchasers)?