'Insider' Reed May Not Please Investors

0 Comments | Insight on the News, Oct 14, 2003 | by Jamie Dettmer

Byline: Jamie Dettmer, INSIGHT

'Insider' Reed May Not Please Investors

The New York Stock Exchange (NYSE) received widespread praise in late September for its speedy appointment of a temporary chairman to replace Dick Grasso, who resigned amid uproar over his $186.5 million compensation package. But the quick selection of former Citigroup chairman John Reed risks yet more investor wrath.

One of the biggest complaints about the NYSE is that it is a cozy club run for the benefit of bankers and the stock exchange's members. As a result it has been an ineffective watchdog in an era of corporate malfeasance. While praising the appointment of Reed, William Donaldson, chairman of the Securities and Exchange Commission (SEC), had told the NYSE board ahead of the selection that in the interest of credibility its interim chairman should not be an insider.

Reed is an insider par excellence. He has close ties to the bankers who control the NYSE board and who endorsed Grasso's enormous pay package without any qualms, only to claim later that they had no idea how big it was. A Wall Street veteran, Reed helped to orchestrate the 1998 merger of Citicorp and Travelers and then served with Sandy Weill as co-chief executive officer of the merged group. But the power sharing between the two did not work and Reed retired in 2000.

According to Laurence Fink, who led the NYSE recruitment effort, Reed's "excellent managerial experience, outstanding background in corporate governance and familiarity with the NYSE's varied constituents make him the ideal choice to chair the board." The NYSE says Reed was the only one offered the job, but other candidates at which they looked declined to be considered. Larry Sonsini, a leading Wall Street lawyer, is said to have turned down the job hours after Grasso resigned.

One good spin-off of the temporary appointment of Reed is that the focus now will turn on landmark governance reforms proposed by the NYSE board. Reed has hinted that the board should be restructured, arguing that smaller boards tend to be more effective. NYSE critics will be hoping to see the departure of several heads of investment banks who sit on the board.

Bailout Plan Cause For Division at IMF

The International Monetary Fund (IMF) is divided over a controversial $12.55 billion plan to bail out Argentina. At an IMF meeting held in Dubai in September, four members of the 24-member board refused to approve the plan, arguing that the Argentine package would increase the risk of other states deciding to default on debts in the belief that they will get bailed out by the IMF.

Last year, Argentina defaulted on $90 billion of debts. Concerns about the bailout, which the IMF board finally approved, centered on the fact that Argentina has fulfilled only one of the four criteria laid down by the IMF for rescue. There also has been little movement in negotiations to restructure the country's outstanding bank debt. It is unusual for divisions on the IMF board over bailouts to emerge publicly.

The September meetings of the IMF and the World Bank also were used by U.S. Treasury Secretary John Snow for some domestic grandstanding designed to obscure his failure to secure a pledge from the Chinese to float their currency during a recent flying visit to Beijing. U.S. officials blame the artificially low level of the yuan for a flood of cheap Chinese goods that has seen U.S. exports to China drop and its trade gap widen.

Lack of Job Growth Worries Economists

The U.S. economy, forecast to expand by at least 4 percent through the end of this year, may stall in 2004 unless companies start hiring again. According to some economists, anemic job growth will hinder consumer spending and could have an impact on the real-estate market. Experts say the economy will need to add about 200,000 jobs a month on average to sustain the current pace of growth.

"Until you see job growth, this recovery has to be considered suspect," said Paul McCulley, a managing director of California-based Pacific Investment Management. The United States has shed an average of 56,000 jobs each month this year. A survey by the National Association of Business Economics in September showed that 95 percent of corporate economists believe the United States has a chance to add 100,000 jobs during at least one month in the next two quarters. But that is far short of what is needed to sustain the recovery.

Consumer spending so far has fueled the recovery. But employment isn't growing because companies have increased productivity, doing more work with fewer employees. The Federal Reserve Board has said it is concerned that "the labor market has been weakening." In September the board voted to hold its benchmark interest rate at 1 percent, the lowest since 1958, to spur the economy. Says David Wyss, chief economist at Standard & Poor's, "Unless we get job growth, I don't think the economy's going to have a lot of legs to continue growing rapidly."

The United States has lost 2.7 million jobs since George W. Bush became president, including 2.5 million in manufacturing.