A storm opened up in Britain this week over the planned resignation of Lloyds Banking Group chairman Sir Victor Blank and the "shadowy" governmental organization thought to be behind the move: U.K. Financial Investments. Blank´s is the story of a man who agreed to work with the government during the height of crisis by buying a teetering giant, HBOS, thus saving the system from collapse, only to be punished as HBOS´ subsequent losses crippled Lloyds, its savior.
Sound familiar? Bank of America chief executive Ken Lewis is facing similar criticism after buying Merrill Lynch & Co. at the behest of then-Treasury Secretary Henry Paulson. Paulson´s gone now and Lewis is holding Merrill´s stinky bag while the rest of the market´s participants point and hold their noses.
And Lewis´ job may not be secure, either. Shareholders recently stripped him of his "chairman" title while Federal Deposit Insurance Corp. Chairman Sheila Bair admitted that the heads of banks needing to raise more capital after their stress tests would be evaluated for their fitness to run their struggling companies.
But policymakers, as much as they´ve come to find themselves at odds with Lewis, should think twice before axing him. The British frenzy could prove an important bit of foreshadowing.
"The story is that the UKFI appears to be operating very independently which has made people like me stop and think," said William Porter, the London-based managing director of Credit Suisse´s European credit strategy unit. "The idea had been that the government-owned banking sector was kind of a limb of policy: You didn´t mind losing a dollar in the banking system if you took 10 dollars in tax revenue because you keep employment up. This issue with Blank suggests that that analysis was too simplistic and we can´t think of an entity like the U.K. government as a single entity."
In the U.S., the question may soon grow more specific: Is the Treasury Department a single entity, or will the outside institutions contracted to help the understaffed agency eventually act on conflicting motivations? This morning, the Financial Times reported that the Treasury had hired Jim Millstein, an investment banker from Lazard, to help "in 'working out' some of the government's existing investments in banks and other financial institutions while structuring new investments to stabilize the financial system." Will Millstein´s arrival mark the creation of an entity like the UKFI?
Of course, the comparison can´t be a perfect one. Though both Blank and Lewis have taken flak for doing deals that at the time looked beneficial to the government, "At least anyone with half a brain could see that Paulson wasn´t going to be the Treasury Secretary from January onwards," Porter said.
And while Millstein´s arrival hasn´t been officially announced yet, a spokesman for the Treasury said the agency was planning to make a statement soon. He emphasized the department´s commitment to transparency, offering the fact that its outside contracts are all posted online (it´s worth noting that despite the availability of the contracts for view, the contracted firms´ activities have remained at least partially veiled, and there´s evidence of input from market participants who aren´t on an official payroll).
The consequences of opacity could be similar in the U.S. and the U.K. "Both episodes are going to look like a material complication of the financial crisis, which I don´t think is over," Porter said. "The basic idea of needing cooperation between the private and public sector to bail out one of the messes will remain. There´s no way this thing is just going away due to economic growth and continued business as usual."
The next time a giant company starts to falter, other private CEOs will be unlikely to step in-even with the government´s pleading-and save the day without first thinking of the about-faces that could potentially follow. A good way to assure a level of confidence and trust between the private and public sectors would be to make entities like the UKFI more transparent and accountable. That, for the U.S. Treasury, would mean taking a more up-front approach to handling its bank stakes and its bailouts. If a situation like the one that developed last November and December rears its head again, more people will need a view inside the back rooms where the deals are struck. Without that view, U.S. policy could end up looking as contradictory and unsettling as the week´s events in London.