Yesterday I listened to Jack Brennan, CEO of the trillion-dollar Vanguard Group, pioneer in low-cost mutual funds and people's capitalism. He got me thinking that if the great Senator Carter Glass was the main force behind a financial structure that served us well from the Glass-Steagall Act in 1933 to 1999, then Phil Gramm was the Samson who tore it down and left a war zone.
What Brennan said that made me think was: "Vanguard is guided by three principles - respect, patience and humility." I asked him at the end: "These are unusual, value-heavy words. Do you have ethical issues with the subprime loan-CDO era?" "Yes, I do, we do," he said, "That's how we see it. Vanguard didn't own the CDO stuff."
It makes sense to me. I expect more financial brands will be jumping into the morning-after post-CDO era by positioning themselves as the anti-CDO, the long-term sustainable partner. When the city mice have just been gobbled up by fat cats before the eyes of their country cousins, the country mice will be eager to return home. Is it just nostalgia that makes me think that requiring mortgage lenders to do the boring work of servicing their mortgages until they are paid off would make them more careful about the quality of the mortgagees' credits?
Back in January, before the Bankers Panic of 2008 was fully on display, the environmental NGO Ceres issued a report grading large banks on climate change issues. It put European banks at the top of the list - HSBC (70 points out of 100 on the Ceres Climate Change Governance Checklist), ABN AMRO (66), Barclays and HBOS (61), and Deutsche Bank (60).
At the other extreme, Bear Stearns got zero points and Lehman Brothers - despite a well-received report on climate change - scored a mere 26. Other U.S. financial institutions were in the middle. Goldman Sachs invested $1.5 billion in clean energy in 2006 and scored 53. Merrill Lynch launched an Energy Efficiency Index in 2007 and scored 52. Morgan Stanley established a Carbon Bank in 2007 to help clients go carbon neutral and scored 49.
If these ratings had been used as a proxy for long-term thinking, they would have been helpful. They would, in the context of the illiquidity of the credit markets, have been a good predictor of overleveraged assets and higher potential for insolvency. I wouldn't expect that the most responsible management is always blessed with the best financial performance, but in this case the greener bankers have come out better than the low scorers.