Tuesday, April 8, 2014
Spencer Stuart Recruited Executives for Seven of Nine Major Bailout Recipients
Originally Written in April 2014
Edited on January 9th and June 10th, 2016
Table of Contents
2. The Mortgage Industry Bailouts: Fannie Mae and Freddie Mac
3. The Banking and Financial Services Industry Bailouts:
Citigroup, and A.I.G. (and T.A.R.P.)
4. The Automotive Industry Bailouts: Chrysler, General Motors, and G.M.A.C.
5. Spencer Stuart's Relationship with Freddie Mac and Fannie Mae
6. Spencer Stuart's Relationship with Citigroup, A.I.G., and the Treasury
7. Spencer Stuart's Relationship with Chrysler, General Motors, and G.M.A.C.
8. The Rise of Spencer Stuart
10. Politicization and Corruption at Spencer Stuart?
11. Criticism by Former Employees
12. Summary of Complaints Against Spencer Stuart
13. Did the Seven Major Bailed-Out Firms Make the Money Back?
14. What Other Questions Should We Be Asking?
In 2009, Spencer Stuart, Inc., a privately owned executive search consulting firm,1 conducted what the Wall Street Journal called the “Lion's Share of Headhunting for Bailed-Out Firms”,2 reshaping “the boards of seven big U.S. businesses that accepted significant federal bailouts”.2
Spencer Stuart's bailout clientele included seven companies, representing each of the industries that were bailed-out by the federal government under the George W. Bush Administration in 2008; mortgage, banking, and automotive. Yet astonishingly, few Americans have ever heard of the company or its involvement in the 2008-2009 restructuring, which began under Bush, but was supervised by the administration of Barack Obama.
Spencer Stuart was founded in 1956 and based in Chicago, Illinois.1 Its office on Park Avenue in New York City sits in a building which also houses JPMorgan Chase offices. Spencer Stuart has 331 consultants worldwide (174 inside the United States), 54 offices worldwide (24 in the United States), and over 2,000 client companies.3 Spencer Stuart's managing director is Kevin Connelly,4 and its chairman and head of operations in the United States is Thomas Neff.5
According to its website,1 Spencer Stuart's offered services include senior-level executive search and assessment services, board director appointment services, strategic leadership services, board services, and various chief executive offer succession services. It serves “entrepreneurial businesses, private equity firms, family-owned companies, and nonprofit organizations”, operating in a variety of industries, including “business and professional services”, “consumer goods and services, education, nonprofit”, “industrial, life sciences”, “technology, and communications and media”.1
Spencer Stuart's clientele includes Yahoo,6 Boeing,2 and Morgan Stanley.2 The “only major executive search firm with a specialized practice dedicated to recruiting global agriculture leaders”, the firm conducts and published interviews with executives working for agro-industrial companies like Monsanto and Cargill.7 Additionally, Spencer Stuart's clients include multinational corporations, and it operates in the industries of government, financial services, private equity, and clean technology.1
In 2009, Spencer Stuart conducted executive searches for seven firms that accepted bailouts: Freddie Mac and Fannie Mae in the mortgage industry; Citigroup and A.I.G. in the banking and financial services industry; and Chrysler, General Motors, and G.M.A.C. in the auto industry. On August 6th, 2009, the Wall Street Journal reported that earlier in that week. Spencer Stuart had handled the search for a chief executive for A.I.G., then “the latest high-profile crisis-manager placement”;1 A.I.G. tapped Robert Benmosche as its chief as Spencer Stuart recommended.
The Journal also reported that in the spring of 2009, Spencer Stuart helped A.I.G. find six additional directors; “matched up General Motors Co.” … “with Edward E. Whitacre Jr.”; “recruited C. Robert Kidder to become chairman of Chrysler Group LLC”2. Additionally, Spencer Stuart has helped “reshape the board of” … “Citigroup, Inc.,” … “Freddie Mac, Fannie Mae, GM and GMAC Inc.”.2
Before proceeding further, some background on the bailouts and restructuring is necessary.
2. The Mortgage Industry: Fannie Mae and Freddie Mac
Fannie Mae (F.N.M.A.; the Federal National Home Loan Mortgage Corporation) is a public government-sponsored enterprise, publicly-traded corporation, and mortgage securitizer. At the time of the bailouts, Freddie Mac was ranked the 53rd-largest American company by revenue.8
Freddie Mac (F.H.L.M.C., the Federal Home Loan Mortgage Corporation) is a public government-sponsored enterprise, publicly-traded corporation, and mortgage buyer and mortgage-backed security seller. At the time of the bailouts, Freddie Mac was ranked the 54th-largest American company by revenue.8
Fannie Mae and Freddie Mac operate in the secondary mortgage market, a market pertaining to the sale and purchase of securities or bonds collateralized by the value of mortgage loans.
The Housing and Economic Recovery Act of 2008 (H.E.R.A.), which was designed primarily to address the subprime mortgage crisis and restore confidence in Fannie and Freddie, authorized the Federal Housing Administration (F.H.A.) to guarantee up to $300 billion in 30-year fixed-rate mortgages for subprime borrowers.
On July 30th, 2008, H.E.R.A. was enacted, and on September 7th, Fannie and Freddie were placed under the conservatorship of independent federal regulatory agency the Federal Housing Finance Agency (F.H.F.A.).9 Hank Paulson, President Bush's Treasury Secretary, put a ceiling of $100 billion for investments in Fannie and Freddie to cover the companies' losses.9
Five months later, after Barack Obama was elected president and inaugurated, and appointed Timothy Geithner to the position of Secretary of the Treasury, Geithner raised that investment limit to $200 billion.9 The total combined cost of bailing out Fannie and Freddie was estimated at $400 billion in April 2009.9
3. The Banking and Financial Services Industry: Citigroup, and A.I.G. (and T.A.R.P.)
Citigroup Inc. (or Citi) is an American multinational banking and financial services corporation. Citigroup was the eighth-largest American company by revenue at the time of the bailouts8 and is now one of the four major American banking corporations.
American International Group, Inc. (A.I.G.), is an American multinational insurance and financial services corporation. A.I.G. was the 13th-largest American company by revenue at the time of the bailouts.3
The Troubled Asset Relief Program (T.A.R.P.) was enacted in pursuance of the Emergency Economic Stabilization Act, which was passed in October 2008 and authorized the Treasury to spend $700 billion.9 The Dodd-Frank Wall Street Reform and Consumer Protection Act reduced that amount to $475 billion, although the spending cap was later reduced to $418 billion.10
Citigroup received a total of $45 billion in T.A.R.P.; $25 billion in October 2008 and another $20 billion in November.9 Additionally, the Treasury committed $5 billion, the Federal Deposit Insurance Company (F.D.I.C.) committed $10 billion, and the Federal Reserve contributed $220 billion, estimated as of April 2009.9 Citigroup received additional aid from the government to limit its losses from a $301 billion pool of toxic assets.9 According to ProPublica's April 2009 estimate, the bailout of Citigroup would cost a total of $280 billion.9
A.I.G. was given an initial $85 billion credit line from the Federal Reserve.9 The federal government offered aid to A.I.G. to keep it from collapsing on four separate occasions.9 The Treasury offered $70 billion to A.I.G., and the Federal Reserve offered it $110 billion.9 While the total cost of that A.I.G. bailout was $180 billion, the total cost of bailing out A.I.G. was $220 billion, due to the $40 billion spent by the Treasury as part of T.A.R.P. (all according to ProPublica's April 2009 estimates).9
Aside from Citigroup and A.I.G in 2008, Bank of America also became a beneficiary of T.A.R.P. in 2009, receiving an estimated total of $142.2 billion.9 According to the Treasury, 97 percent of the loans (non-inflation-adjusted) which were disbursed under the program had been paid back as of December 2012.10
Spencer Stuart was not requested to make executive recommendations for Bank of America. According to the Government Accountability Office (G.A.O.), the government had minimal or no involvement with Citigroup (being only an investor in the firm), while having involvement with A.I.G. as a condition of that firms receiving government assistance.13
4. The Automotive Industry: Chrysler, General Motors, and G.M.A.C.
Chrysler Group L.L.C. is an American automobile manufacturer and one of the “Big Three” (also known as the “Detroit Three”) American automakers.
General Motors Company (G.M.) is an American multinational corporation headquartered in Detroit, Michigan. It is one of the “Big Three” American automakers. General Motors also sells financial services. It was the fourth-largest American company by revenue at the time of the bailouts.3
G.M.A.C. Inc. (the General Motors Acceptance Corporation) is the former name of Ally Financial Inc., a bank holding company headquartered in Detroit, Michigan. G.M.A.C. was the 78th-largest American company by revenue at the time of the bailouts.8 The firm provides financial services to people who buy automotive vehicles.
Chrysler, General Motors, and G.M.A.C. were the primary beneficiaries when a $630 billion spending bill authorized by Congress in late September 2008 allocated a total of $25 billion in low-interest loans to the auto industry, which are intended to aid the industry's push to build more fuel-efficient, environmentally-friendly vehicles.9
According to the L.A. Times, “In 2011, Treasury closed the books on its $12.5-billion bailout of Chrysler and took about a $1.3-billion loss”.11 Concerning the “$49.5-billion bailout” of General Motors11, which was only $14.5 billion as of May 200912, the Times reported “an approximately $10.5-billion loss for taxpayers”.11
5. Spencer Stuart's Relationship with Freddie Mac and Fannie Mae
In August 2009, the Wall Street Journal reported that “Spencer Stuart's work at government-aided companies began last fall, after the government seized Freddie Mac.” 2 This “last fall” time frame means that Spencer Stuart's involvement with these companies began in fall 2008; during the Bush Administration, and within weeks in either direction of Barack Obama's election to the presidency.
The article from the Journal continues, “the big mortgage company” (i.e., Freddie Mac) “tapped Spencer Stuart to help find six board members because the recruiter had handled previous hunts for Freddie directors, recalls John Koskinen, Freddie Mac chairman. … Three of six new Freddie Mac directors announced in December came from Spencer Stuart's list, according to Koskinen, who also said Spencer Stuart “gave us a wide range of very qualified people”, although “not everybody said yes” to all of Spencer Stuart's recommendations.2
By August 2010, all of each of Fannie Mae's and Freddie Mac's ten directors had been designated by the government; with Fannie Mae receiving eight new directors since November 2010, and with Freddie Mac receiving nine new directors during the same period.13
Rahm Emanuel was Barack Obama's Chief of Staff in 2009, and therefore had the key role in influencing Obama's pick for Secretary of the Treasury. Obama and Emanuel chose Timothy Geithner, who was then President of the New York Federal Reserve Bank. In 2000, Emanuel was named to the Board of Directors of Freddie Mac by president Bill Clinton, whom he had served as a campaign donations and policy adviser.
In May 2001, Emanuel resigned to run for the U.S. House of Representatives; this means that he was on Freddie Mac's board between 2000 and 2002, when according to the Securities and Exchange Commission (S.E.C.) the company misrepresented its income in order to “present investors with the image of a company that would continue to generate predictable and growing earnings”.14 While at Freddie Mac, and while the company was plagued with scandals involving campaign contributions and accounting irregularities, 15, 16 Emanuel earned at least $320,000, including later stock sales 15, 17.
As a congressman, Emanuel recused himself from votes concerning Freddie Mac until at least several months before the presidential election in November 2008.14 Within months of Barack Obama assuming office, his administration rejected an F.O.I.A. (Freedom of Information Act) request to review correspondence and board minutes during Emanuel's time as a director.15 The Office of Federal Housing Enterprise Oversight subsequently accused Freddie Mac of having “failed in its duty to follow up on matters brought to its attention.” 14
Despite Emanuel's bad reputation, he was elected the mayor of Chicago, Illinois in 2011, and Spencer Stuart conducted the consultation work for the employees of his office. Upon Emanuel's election, his transition committee website announced online that the mayor's office was hiring: “When you submit your resume today, it will be stored confidentially at Spencer Stuart, a well-known and reputable executive search and human resources firm. It will be reviewed by Chicago2011 staff, and every resume will be handed over to the City Hall human resources department on May 16.” 18
Aside from Freddie Mac, Spencer Stuart also did consulting work for Fannie Mae, the company that was in charge of securitizing the sub-prime secondary mortgages which were bought and sold by Freddie Mac. Such securitization involves pooling various types of contractual debt in order portray loans and mortgages as secure investments to potential buyers.
Being that the two companies, Fannie and Freddie, have such similar interests (i.e., evaluating versus investing in mortgages), it would follow that Fannie Mae might be susceptible to the same kind of presenting “investors with the image of a company that would continue to generate predictable and growing earnings” 14 which Rahm Emanuel and his contemporaries at Freddie Mac possibly sought to achieve through misrepresenting income and earnings.
6. Spencer Stuart's Relationship with Citigroup, A.I.G., and the Treasury
After its work in the mortgage industry, Spencer Stuart was tapped again, this time to help in the banking and financial services, reshaping the boards of Citigroup, Inc. (citing “people close to the situation”)19 and the American International Group (A.I.G.).2
Between November 2008 and August 2010, Citigroup (which as of August 2010 had 15 directors) got eight new directors, none of them designated by the government13. During the same period of time, A.I.G. also got eight new directors, ending up with two of their thirteen directors (as of August 2010) having been designated by the government13. For A.I.G., those other designators were shareholders and board members13.
According to the Wall Street Journal, which cites “someone close to the situation”, “Spencer Stuart was chosen because the recruiters” (i.e., Spencer Stuart) “were already up to speed”.2 A.I.G. accepted the Treasury Department's appointment of Spencer Stuart's recommendation. Robert Benmosche2, as its president and chief executive officer. Benmosche had previously worked in retail and consulting; as well as life insurance, overseeing the demutualization of Metropolitan Life Insurance Company20.
The Wall Street Journal reported that Spencer Stuart's Chairman Thomas Neff “helped recruit” … “Timothy Geithner to be president of the New York Federal Reserve in 2003”,2 where he served until 2009, when he began to serve his four years as Secretary of the Treasury. As a brief reminder, the person advising President Obama on his cabinet picks at that time was Chief of Staff Rahm Emanuel, a former director of the Board of Freddie Mac, and a client of Spencer Stuart via his Chicago mayoral office.
7. Spencer Stuart's Relationship with Chrysler, General Motors, and G.M.A.C.
Aside from the mortgage, banking, and financial industries, Spencer Stuart was also tapped to conduct executive searches for three companies in the auto industry, reshaping the boards of automobile manufacturers Chrysler and General Motors, as well as the General Motors Acceptance Company (G.M.A.C.).2
Between November 2008 and August 2010, General Motors and Chrysler got all new directors. As of August 2010, ten of G.M.'s thirteen directors, and three of Chrysler's nine directors, had been designated by the government.13 Additionally, during the same period of time, G.M.A.C. got eight new directors, ending up with three of its nine directors having been designated by the government.13
Other designators include shareholders and board members, and could include union representatives.13 In May 2009, The Street reported that, according to the Wall Street Journal, the “United Auto Workers union” (U.A.W.) “has been offered 39% of GM in exchange for health-care concessions”, and “will likely get to pick at least one board member in the future”.12
In May 2009, A.B.C. News reported that the U.A.W. had yet to vote to approve receiving “17.5% of” G.M.’s “common stock, $6.5 billion of preferred shares and a $2.5 billion note to finance a trust that will take over retiree health care costs starting next year.” 14 The next month, Slate.Com reported that United Auto Workers controlled “about 65 percent of Chrysler and 17.5 percent of General Motors”.21
Spencer Stuart “recruited C. Robert Kidder” (Charles Robert Kidder) “to become chairman of Chrysler Group LLC”,2 and the Treasury Department appointed him as the company's chairman. Kidder had previously served as chief executive officer of 3Stone Advisors LLC (an investment firm that focuses on clean-tech companies)22. Kidder was also the C.E.O. of Duracell23 and Borden, Inc.; and he currently serves on the boards of Merck and Morgan Stanley.23
In early 2009, General Motors announced that it was hiring Spencer Stuart to find replacements for at least half of its twelve directors12, and also “to find a permanent chief executive with extensive global, manufacturing and turnaround experience”.19 Kent Kresa, the interim chairman of General Motors, hired Spencer Stuart “in a bid to line up new directors to join the board as early as this summer”.12
According to the Wall Street Journal, “Spencer Stuart won a competitive “shootout” that GM officials conducted Thursday in Detroit. Its unsuccessful rivals for the assignment were Egon Zehnder International, Korn/Ferry International” (America's #1 consulting firm by revenue) and Heidrick & Struggles International Inc.”.19
In December 2009, the Wall Street Journal reported that G.M. was “hoping to attract a current or past CEO familiar with operating in Asia”, and that G.M. officials “prefer a “global-minded” CEO but don't favor a European or Asian executive for the job”.19 Sources close to the matter said that people at G.M. were “willing to consider executives outside the auto industry”, and that the “successful candidate” … “should have restored staff morale following a successful corporate turnaround”, and “can work well with U.S. government agencies and prepare the now private manufacturer for an initial public offering.” 19
Spencer Stuart recommended that chairman and interim C.E.O. Edward E. Whitacre become chairman of General Motors.19 The Treasury Department appointed Whitacre; and then on June 9th, 2009, Steven Rattner (then the head of the Treasury Department's Presidential Task Force on the Auto Industry) announced Whitacre's appointment.
In his book Overhaul: An Insider's Account of the Obama Administration's Emergency Rescue of the Auto Industry, Rattner wrote that “Ed Whitacre, with his reputation for toughness and intolerance of bull, was an important symbol of what we were trying to achieve”, continuing, “I was delighted to hear that Ed has served as campaign finance chair for Kay Bailey Hutchison”, and “that he had contributed to the campaigns of other Republicans, such as John McCain, as well as a handful of Democrats, including Rahm Emanuel.” 24
8. The Rise of Spencer Stuart
The Wall Street Journal reported that this “string of placements reflects the” … “firm's strong position in U.S. director searches and the way it is plugged in to government officials, who several times have turned to Spencer Stuart as they took big stakes in troubled companies over the past year.” 2 New Hampshire based consultant David Lord, who counsels companies about choosing recruiters, estimated that, around the time of the bailouts, Spencer Stuart conducted at least half of all board searches.2
While becoming what the Wall Street Journal called “the go-to recruiter when Uncle Sam wants bailed-out companies to install new directors and other top officials” in 2009,2 Spencer Stuart went from being the number three executive search firm in the United States by revenue 2 to number two as of late September 2012.4 In 2008, when it conducted over 400 board searches, it raked in $267.8 million,2 and in 2012 it earned $365.7 million.4
But not everyone is pleased with the success of Spencer Stuart, Inc., nor are they convinced that the firm is truly seeking to drive “mobility and diversity”, and create “a culture based on meritocracy”,24 as an employee said in the firm's publication “Building Corporate Leadership in India”. That employee, according to the firm's website, is a “core member of the firm's North American Board and C.E.O. practices, as well as ... Consumer and Private Equity Practices”.
In May 2009, Wordpress.Com finance blogger NanceFinance reported that “Spencer Stuart is having a field day. … it doesn't look as if it even had to compete for the business” of searching for executives for bailed-out firms.26 In 2009, the Wall Street Journal reported that Spencer Stuart's competitors felt that the company was coasting by on what its former directors had achieved on behalf of the company.2
The Journal reported that Spencer Stuart's “near-lock on searches for companies receiving taxpayer dollars also is ruffling feathers among rival recruiters”.2 In the same article, the Journal reported that work which was “done by individuals who are no longer there” helped establish Spencer Stuart's role in director hunts, another rival grouses.” 2
As an aside, I can't help but wonder, what's with all this talk of grousing and “ruffling feathers”? Do the financial news media have inside jokes about the consulting industry that focus on likening rivals and competitors to annoying birds?
Anyway, the Journal continued, “Gerard Roche, senior chairman of rival firm Heidrick & Struggles International Inc.”, “concedes [‘]a whole lot of jealousy[‘] about Spencer Stuart's board searches for federally assisted concerns. Some other competitors privately express dismay that Spencer Stuart has handled so many board assignments from bailed-out concerns.” 2
Adding fuel to concerns that Spencer Stuart's achievements were the result of a strategy designed to allow the company to cruise by on their past reputation, the Wall Street Journal reported that John Koskinen – then chairman of Freddie Mac, now (as of April 2014) Obama's I.R.S. chief – said that Freddie Mac “tapped Spencer Stuart to help find six board members because the recruiter had handled previous hunts for Freddie directors”.2
But it's not just an independent financial blogger, Spencer Stuart's rival recruiters, and a former chairman of Freddie Mac who are complaining about the company's good (ahem) fortune; General Motors is also getting into the mix. In August 2009, the Wall Street Journal reported that at G.M., “interim Chairman Kent Kresa had planned to rely on his professional network to conduct the company's director search. But Treasury officials this spring “strongly” suggested that he use Spencer Stuart”.2
In May 2009, citing people close to the situation, Joseph Woelfel of The Street reported that “Kresa was hoping to conduct the search for board members on his own, without the assistance from an outside search firm”, and that “Kresa and CEO Fritz Henderson … have been subject to strong government oversight in the weeks since they've been running the company”. 13
In May 2009, NanceFinance wrote that the Journal had recently reported that “the White House had forced its hand-picked chairman at troubled GM to hire a search firm to replace at least half of the members of its board. And even then, Kent Kresa, the former chairman of Northrop Grumman” (an aerospace and defense technology company) “wasn't free to select his own recruiter: Spencer Stuart was the one and only.” 25
According to the Wall Street Journal, at the General Motors Acceptance Company (G.M.A.C.), “Ennis Krupp & Associates, a Chicago pension consultant, helped the Treasury line up a recruiter to find new directors for GMAC as that company transformed into a bank-holding company”.2 The Journal article also reported that “Ennis Knupp held a competitive “shootout” among several search firms, then recommended Spencer Stuart.” 2
Additionally, the article reported that “Treasury had the right to appoint two board members as part of GMAC's aid”,2 that the “government picks joined the GMAC board in May” 2009, 2 and that G.M.A.C.'s choice of Spencer Stuart had nothing “to do with Mr. Geithner's prior interaction with Neff” (Spencer Stuart chairman Thomas Neff). According to the Government Accountability Office, the government had minimal or no involvement with G.M.A.C. (being only an investor in the firm), while having involvement with G.M. and Chrysler as a condition of those firms receiving government assistance.13
In May 2009, finance blogger NanceFinance complained about government micromanaging by allowing the president to “select … an executive recruiting firm for basically government-run firms”. 25 She also complained about “micromanaging pay”, saying that “word that the President is debating how to restructure pay for financial services firms – whether or not they have taken taxpayer bailout funds – is reversing all the feel-good energy in the markets. The Dow is off more than 2%; some bank stocks are down two to three times as much. You can blame the unexpectedly weak report on retail sales for the pullback, but I'm blaming the return of “lemon socialism” – the stealthy socialization of the private sector.” 25
She continued, government “micromanagement is the poison of the private sector” … The Obama Administration “is showing little imagination in addressing the structural flaws in the system. … hewing to an old model that assumes government can simply pull the strings of needy corporations and the chips will fall where they expect.” 25
NanceFinance also commented on a quote from an article co-written by Thomas Neff which appeared in the April 14th, 2009 issue of Business Week.26 In the article, entitled “Why Boards Need to Keep an Eye on Value”, Neff wrote that shareholder “panic and activism are soaring, especially when it comes to CEO compensation. There is a strong move now to put limits on CEO pay, some of which we consider ill-advised. It is a board's responsibility to get incentives aligned with shareholders' interests and focused on longer-term value creation.” 26
Commenting on this quote by Neff, NanceFinance wrote that even “Neff has implied that the heavy-handed federal interference can hurt more than it can help”, and that the statement could reveal that “Neff has a fundamental conflict of interest: Does his pay go up if he can score richer compensation packages for the candidates that get hired at taxpayer-backed corporations?” 25
10. Politicization and Corruption at Spencer Stuart?
Another issue which Spencer Stuart, Inc. has yet to face is the perceived politicization of the company's executive search process.
Considering that Spencer Stuart's involvement with bailed-out companies began under Bush and continued under Obama, and that Steven Rattner of the Treasury Department wrote that he was delighted to hear that Ed Whitacre (who soon thereafter became chairman of G.M.) had contributed to the campaigns of John McCain and Rahm Emanuel, it seems that Spencer Stuart's apparent bias towards recommending executive candidates who donate to winners in both major parties could have negative effects on the company's “meritocratic” reputation.
The facts that Spencer Stuart client Steven Rattner, client Rahm Emanuel, recommended executive Timothy Geithner, and recommended executive Robert Benmosche are Jewish – and the facts that they, as well as George W. Bush, John McCain, Kay Bailey Hutchison, and Barack Obama, have significant political, business, and spiritual or religious interests in the State of Israel, and in protecting U.S. foreign aid to that country – do not do anything to support Spencer Stuart's claims that it desires “diversity” and “meritocracy”, especially given that Jewish Americans only make up approximately 2% of the U.S. population, and are already over-represented in the various federal legislative bodies.
Neither does the fact that General Motors went to Spencer Stuart when it admittedly hoped “to attract a current or past CEO familiar with operating in Asia”, and prefers a “global-minded” C.E.O., but didn’t favor “a European or Asian executive for the job.” 19 It is hard to help but wonder whether Spencer Stuart's willingness to serve a company that admits a bias against European and Asian executives yet still supports global-mindedness indicates something other than “diversity” and “meritocracy”? Perhaps “economic imperialism” would be a more appropriate stated cultural goal.
What is also disturbing about this political bias is the depth of Treasury auto chief Steven Rattner's involvement in politics and finance. In the 1980s, he worked for banking firms Lehman Brothers, Morgan Stanley, and Lazard Freres & Co., and in the 1990s he worked as an economist for the Clinton Administration (which, as a reminder, employed Rahm Emanuel, who was once a finance regulator, as a campaign and policy adviser).
However disturbing, the idea that Rattner would approve of Spencer Stuart's suggestion of Whitacre in consideration of his support of McCain, Emanuel, and Hutchison – and due to their mutual support of continued U.S. foreign aid to the State of Israel – is not so far-fetched. Spencer Stuart would likely find it difficult to explain why General Motors would choose an executive based on the recommendation of a Treasury official speaking on behalf of his own hyper-focus on the State of Israel, when it originally stated that it wanted a C.E.O. with a “global vision”. Whitacre's “reputation for toughness and intolerance of bull” being “an important symbol of what” G.M. was”trying to achieve” 24 couldn't have been the only reason for hiring him.
It is also important to note that Barack Obama, Rahm Emanuel, and C. Robert Kidder each have political and business relationships to all three of the industries which received bailouts; the finance and banking, mortgage, and automotive industries (and also that Steven Rattner and Timothy Geithner lack ties to only the mortgage industry; that is, if we include Geithner's family history with Ford Motor Co., the only one of the Big Three to have not needed taxpayer support during the financial collapse). This suggests that the 2008-2009 bailouts and subsequent restructuring were rife with the kind of revolving-door, C.E.O.-shuffling practices which are reviled by so many Americans.
But perhaps most importantly, we must note and understand the confusing patterns of persons and firms which serve as one another's consulting clients; of people who conduct consultant searches for other consultants (such as New Hampshire based consultant David Lord, who counsels companies about choosing recruiters); and of government agencies being simultaneously creditors of and investors in bailed-out, restructured companies (that is, in A.I.G., Chrysler, and G.M.).
The significance of the facts that Barack Obama recommended Rahm Emanuel for Chief of Staff; in order for Emanuel to recommend Spencer Stuart; in order for Spencer Stuart to recommend executives for troubled firms in the auto, mortgage, and financial industries; has yet to be fully understood.
Moreover, we compound the confusion when we acknowledge three additional things:
1) that G.M.A.C. claimed to have chosen Spencer Stuart for reasons unrelated to Timothy Geithner's history with the firm;
2) that Rahm Emanuel and Spencer Stuart served as one another's consultants (due to Spencer Stuart's work for Emanuel's mayoral office, and Emanuel's influence as Chief of Staff in the restructuring); and
3) that Rahm Emanuel and Barack Obama also served as one another's consultants (due to Obama's pick of Emanuel as Chief of Staff, and Emanuel's subsequent role making recommendations about cabinet-level and other government positions).
Perhaps we could remedy this confusion by learning about the office environment of Spencer Stuart, Inc..
11. Criticism by Former Employees
Anonymous reviews by people claiming to be former employees of Spencer Stuart may be found on GlassDoor.Com.27 Together, they tell a story of an “extremely political”,27 “extremely hierarchical” 28 organization with a “toxic atmosphere and culture”,27 in which employees cannot progress without polishing “egos and” playing “political games”;27 games which one former employee described as “silly”.27
One former employee commented that management “decisions and promotions” are “largely politically motivated”.27 Another commented that senior partners do not have “enough courage and conviction”,27 and that they “are unwilling to make unpopular decisions for fear of losing their own political influence”.27 Yet another former employee complained about deals “cut under the table for those who abide by the country club rules”.27
One former employee complained about seasoned “and junior consultants too busy looking over their shoulders and trying to protect their patch, yet the public story is that of “being collegial” yet the reality is” so “different”.27 Another former employee addressed the management team, saying, “open your eyes and address the political minefields that exist across the organization. … Address the issue of the [‘]old boy network[‘] and the hierarchical mindset that still seems to exist within its most senior ranks”, “which means the rest of the business does not stand a chance...”. 27
The same person wrote that management should take “more of an interest in” employees “and backed” them “up” … “below the Consultant level”, continuing that the firm “has lost many good people because Management is only concerned about keeping consultants happy: even if it means terminating a good employee. There have been a few Managing Directors at the office level who cared about how lower level employees were treated and stood behind them. Now leadership is spineless unless you're a consultant.” 27
Yet other former employees complained about “arrogant, egotistical, degrading consultants” 27 and a C.E.O. (presumably referring to Kevin Connelly, but possibly to his predecessor) who had “no grasp of reality in terms of the amount of good people walking out of the door”.27 One former employee wrote that the company should “Start being team players at the top and perhaps the rest of the organization stands a chance”.27 Other complaints included that big “billers” were “allowed to get away with bad behavior and treating colleagues inappropriately”,27 and that there was inconsistent “treatment of its employees”; “some get the red carpet treatment”, while “others” were “nickel and dimed”.27
But politics, hierarchy, and mistreatment of employees are not the only complaints which former employees have levied against Spencer Stuart on GlassDoor; as claims against the company include incompetence, as well as consultants allowing themselves to get distracted from work to enjoy the indulgences of wealth, thus necessitating deadlines. Wrote one former employee, “Deadlines are integral in search”, “but a lot could be avoided if consultants weren't so “panic” stricken or busy running off during the day to attend events for their kids, getting facials, etc.”.28
Claims of incompetence include complaints about a lack of “qualified”, “genuinely talented consultants within the organization”.28 One former employee wrote that consultants “who claims to be [‘]experts[‘] in their fields when pitching the searches, yet make no calls when” asked to “develop profiles for the search”,28 adding that “clients take notice” 28 of this, and that some consultants are just glorified “sales executives” 28 with “egos a mile wide”.28 Another former employee offered the following advice to management: “Start paying attention to the real problems that are being overlooked by focusing purely on revenue performance”. 28
But is it possible that there is something besides all this which most people actually care about, which could serve as an impartial indicator of whether the bailouts and restructuring, as well as the choices to employ Spencer Stuart in executive searches, were wise, and truly done for the benefit of consumers, workers, shareholders, and taxpayers (or, as Thomas Neff put it, “to get incentives aligned with shareholders' interests and focused on longer-term value creation” 27)?
12. Summary of Complaints Against Spencer Stuart
Is there something that we should be focusing on besides all of the following?:
1) the ties possessed by Rahm Emanuel and C. Robert Kidder across all three major industries that were bailed-out (automotive, mortgage, and banking and finance);
2) the ties possessed by Timothy Geithner and Steven Rattner to both the banking and finance industry and the automotive industry;
3) Rahm Emanuel's relationship to Spencer Stuart, the consulting profession in general, Bill Clinton, and Freddie Mac;
4) Rahm Emanuel's having been in a position to recommend Geithner for Secretary of the Treasury just two years before choosing Spencer Stuart to staff his mayoral office;
5) the claim by the Wall Street Journal that G.M.A.C.'s choice of Spencer Stuart “had “nothing” to do with … Geithner's prior interaction with Neff”,2 who helped recruit Geithner for the New York Federal Reserve Bank;
6) the self-published admission of Steven Rattner (the head of the Treasury Department's Presidential Task Force on the Auto Industry) that he was pleased to learn of Ed Whitacre's bipartisan political contribution history from Spencer Stuart;
7) the close ties between the State of Israel and the politicians who employed and received contributions from Whitacre (i.e., Kay Bailey Hutchison, John McCain, and Rahm Emanuel);
8) the favorable relationship which many other officials within the administrations of both George W. Bush and Barack Obama possess with the State of Israel (as well as the over-representation of Jewish-Americans within various branches of both administrations, and among Spencer Stuart's high-profile government clients and recommended executives for bailed-out firms);
9) the admitted and open lack of favor expressed by General Motors regarding hiring a European or Asian executive as opposed to a North American;
10) the potential assertions which could be made about Spencer Stuart's tolerance of clients having possibly prejudicial racial, ethnic or national preference, having catered to clients admitting such open favor for Jewish-Americans and defenders of the State of Israel and against Europeans and Asians;
11) that the push for low-interest loans to automobile companies to fund the development of fuel-efficient, environmentally-friendly vehicles, for which the Obama Administration became so well-known, actually began under the Bush Administration while Henry Paulson served as Treasury Secretary;
12) that Ed Whitacre had donated to both parties, including McCain and Emanuel, before that bipartisan push for loans to car companies for green-friendly vehicles began;
13) anonymous claims, made by alleged former employees, that Spencer Stuart Inc. has a political, hierarchical office environment which is plagued by mistreatment of employees, firing good people, incompetence, consultants distracted from work, and management focused only on making money even to the point of ignoring other problems;
14) signals from the choice of Robert Benmosche for A.I.G. (and from Benmosche's history) that more demutualization (i.e., privatization) of large American banking firms is still ahead;
15) that the already very wealthy and profitable Spencer Stuart – which conducts about half of executive searches in North America, and was already the #3 American executive search firm when the bailouts began – received the bulk of the executive recruiting assignments, only making Spencer Stuart more profitable and elevating it to the #2 North American recruiting firm (second only to Korn/Ferry International);
16) that the already very wealthy and profitable Spencer Stuart received what could be defended as amounting to ingratiation and under-the-table special favors (especially considering that the choices to use Spencer Stuart which were made by publicly-traded companies and public officials were apparently made with a complete lack of congressional oversight);
17) the scarcity of coverage in the mainstream media outside of the Wall Street Journal concerning Spencer Stuart's involvement in the restructuring, and the resulting lack of public awareness of the firm;
18) suggestions that the federal government micromanaged the restructuring of pay for financial services firms, even for firms that didn't take bailout funds; as well as the executive recommendations themselves, down to the very recommendation of Spencer Stuart in the first place, which took place as part of the restructuring; and suggestions that this negatively affected some bank stocks;
19) that the government not only may have micromanaged the restructuring, but also inserted itself into the situation at General Motors, getting business for Spencer Stuart in the process; Treasury officials having “strongly” 2 suggested that then interim Chairman Ken Kresa, who “had planned to rely on his professional network to conduct the company's director search” instead, use the firm;
20) suggestions that Spencer Stuart Chairman Thomas Neff could stand to benefit financially from the kind of government micromanagement he has criticized and warned against;
21) claims made by the Wall Street Journal and Spencer Stuart's competitors that the firm is coasting by on the reputation and work of its past chairmen; and
22) the complicated web of multiple people and firms serving as one another's consultants, as well as government serving as both creditor and investor of several firms?
As it turns out, there is something that we should be focused on, and it happens to be the bottom line.
And fortunately for Spencer Stuart, Inc., that is what we are talking about right now, instead of any of the numerous aforementioned concerns. We must do this in order to honor Spencer Stuart's reputation among its former employees as focused solely on making money and increasing revenue, even to the point of overlooking other problems.
Most importantly, we must explore whether the firms that received money through the bailouts made the money back, because we cannot trust any expert in the government or the corporate world to give us reliable numbers, partially owing to the fact that, evidently, there's about a 50/50 chance that such an expert would have been recommended by Spencer Stuart in the first place.
13. Did the Seven Major Bailed-Out Firms Make the Money Back?
Before exploring the numbers surrounding the returns made by the bailed-out firms, it would be helpful to note that when we speak of the bailouts of the banking and mortgage industries, we are discussing bailouts at least some of whose costs had been estimated lower than later estimates and allowances, the sequence of the nominal figures which were requested having ratcheted up exponentially as the financial crisis unfolded.
Additionally, estimates and allowances were also initially high-balled by government officials, as in the case of T.A.R.P.; and estimates regarding the bailouts of all three industries were high-balled by the news media (including in estimates published by ProPublica in April 20099). This is why it is important to be precise about whether an objective measure of success of the bailouts should focus on returns relative to the initial estimates and allowances, to later estimates and promises, or to the total amount spent on the bail-out of the particular firm or industry.
According to ProPublica,28 $608.9 billion in total outflows were spent (invested, loaned, or paid out)28, and $621.4 billion in total inflows have been returned (including to the Treasury as interest, dividends, or fees to repurchase their stock warrants)28 on all of the bailouts combined (including the bailouts of Bear Stearns and Bank of America, in whose restructuring Spencer Stuart apparently played no role).
This $621.4 billion total inflows figure includes $384 billion that has been returned,28 and $237 billion in Treasury earnings.28 This comes out to a $12.6 billion net return as of March 24th, 2014,28 yielding a +2.053% return over about five years. This comes fifteen months after the Treasury reported that only a non-inflation-adjusted 97% of the T.A.R.P. loans had been paid back.10
Next we shall explore the financial outcome of the Troubled Asset Relief Program (which includes the bailouts of A.I.G., Citigroup, and other housing and financial institutions); followed by the bailouts of mortgage giants Fannie and Freddie; at last followed by the auto industry bailouts.
While Hank Paulson, Secretary of the Treasury under George W. Bush, originally estimated that T.A.R.P. would spend $700 billion,9 Paulson's successor Timothy Geithner oversaw the lowering of that spending cap – first to $475 billion (in pursuance of the Dodd-Frank Act), then to $418 billion10 – only to have that figure end up at a promised $458 billion for the 13 programs that T.A.R.P. created.28
The $458 billion figure is $40 billion and 9.6% above the low estimate of $418 billion in total spending on T.A.R.P., but $242 billion and 34.6% below the original estimate of $700 billion. This example shows why it matters whether we judge the success of T.A.R.P. and the mortgage and auto bailouts based on the returns relative to the initial estimates and allowances, or to later estimates and promises, or to the total amount spent.
According to ProPublica,28 the government has committed a total of $421 billion in bailout money (out of the $438 billion promised) to 935 recipients through T.A.R.P..28 Only 780 of the 935 recipients in which the government invested were intended to return money to taxpayers;28 the rest received a total of $9.6 billion in subsidies through T.A.R.P.'s housing programs.28 Out of those investments, 533 resulted in a profit (totaling $44.6 billion),28 106 resulted in a loss (amounting to $17.3 billion),28 and 141 of the investments are still outstanding.28
Additionally, according to ProPublica, the “Treasury has been earning a return on most of the TARP money invested or loaned. So far the total return is 52 billion” 28 in dividend or interest payments, sales of equity or other assets the Treasury required, and “stock warrants which the Treasury received as part of most of the investments”.28 When we take into account the warrants that are “either sold back to the company or auctioned off” 28 when companies pay back the T.A.R.P. investments, “the government's profit totals $14.9 billion”.28
$245 billion of the $608.9 billion in total outflows were spent on banks and other financial institutions.28 After receiving an initial $85 billion credit line and being prevented from collapsing four times,9 A.I.G. was estimated by ProPublica in April 2009 to have received up to $220 billion.9 However, ProPublica reported in March 2014 that the firm had only received a total of $67.8 billion.28
After receiving an initial $45 billion combined in October and November 20089, and after reportedly receiving an estimated total of $280 billion in order to limit losses from a $301 billion pool of toxic assets9, banks and other financial institutions besides A.I.G., including Citigroup, only received a total of $177.2 billion.28 The exponential growth of the size of the figures requested is worth noting here in regards to both of these major banks.
While Hank Paulson originally placed a $100 billion ceiling for investments in Fannie and Freddie9, Timothy Geithner oversaw the raising of that limit to $200 billion.9 Although ProPublica estimated the cost of the mortgage bailouts at $400 billion in April 20099, just under $200 billion was spent (28).
Of the $608.9 billion which was spent, invested, or loaned as part of the bailouts, $197.15 billion was spent on the mortgage industry.28 Fannie and Freddie took the bulk of this ($187 billion combined); and the Mortgage Mod Program, state housing programs, and the F.H.A. refinance Program received the remaining $10 billion.28
In March 2014, ProPublica reported that, so far, “the companies have paid $185 billion in dividends to the Treasury”,28 which “has been earning a return on its investments and will likely ultimately earn a profit”.28 Assuming these figures are accurate, the mortgage bailouts made back over 98.6% of the investments which were intended to return funds, excepting the $9.6 billion spent on T.A.R.P. housing program subsidies.
In September 2008, before George W. Bush and Henry Paulson left office, the Treasury gave G.M. and Chrysler $25 billion in low-interest loans for more fuel-efficient, environmentally friendly vehicles.9 The Obama Administration continued this push for environmentally friendly vehicles with its subsequent “Cash for Clunkers” car exchange program. In March 2014, ProPublica reported that out of the $608.9 billion spent on the bailouts, $79.7 billion went to auto companies.28
In May 2009, the Wall Street Journal reported that the federal government had spent $14.5 billion on General Motors,12 but that figure rose to $49.5 billion in a report which appeared in the L.A. Times in December 2013.11 The Times reported that the G.M. bailout had resulted in “an approximately $10.5-billion loss for taxpayers”.11
The Times also reported that the Treasury had “closed the books on its $12.5-billion bailout of Chrysler and took about a $1.3-billion loss”.11 Assuming these figures are accurate, the auto bailouts made back no more than 85.2% of the funds disbursed.
To answer the original question succinctly, the banking and finance industry bailouts made back 102.053% of funds spent, the mortgage industry bailouts made back about 98.6% of funds spent (that is, on investments which were intended to yield returns), and the auto industry bailouts made back no more than 85.2% of funds spent.
To clarify, these are non-inflation-adjusted total returns, compared to the final amount spent on each industry, rather than compared to any original or early estimates made by government officials or news media.
But the success or failure of the bailouts and restructuring does not necessarily indicate whether the firms that chose Spencer Stuart, Inc. to recruit their executives made the right choice. Furthermore, there are a host of potential objections to the very manner in which these data are portrayed, which could throw the validity of the conclusions into question.
14. What Other Questions Should We Be Asking?
Aside from asking whether the three bailed-out industries made back all of the money – that is, all the money that had been spent by the time the bailouts ended, concerning only those investments which were intended to result in returns, and without adjusting for inflation – we should also ask whether it is wise for the government to repeatedly revise spending estimates and caps, and to spend money on programs which are not intended to yield returns. We should also acknowledge that neglecting to account for inflation makes the final numbers look more positive than they really are.
We should bear in mind that we may never know what the inflation or deflation rate, nor the growth rate of the economy, would have been, had officials in the federal government 1) not bailed out any firms and not intervened once the financial crisis hit; 2) never securitized sub-prime and toxic assets in the first place; and/or 3) spent more funding and attention on relieving borrowers and foreclosure victims, instead of on the firms whose speculation and other questionably ethical activities drove the financial collapse.
As a reminder, the federal government's having been a creditor of – in addition to an investor in – three firms (A.I.G., Chrysler, and G.M.), was what made the difference in excusing greater government involvement and interaction with companies' personnel (as compared to Citigroup and G.M.A.C., in which government was an investor but of which it was not a creditor).25 This should prompt us to ask, “then why was the federal government not then required to stop investing in A.I.G., Chrysler, and General Motors, as a condition of being permitted to restructure those companies (given the influential inside position which such an arrangement would bestow upon government)?”
We should be wary of both the legal precedents and the financial risks involved with allowing the federal government to bail out and restructure entire industries in this manner. The ratcheting-up of the funds requests which we observed in the bailouts of A.I.G., Citigroup, and Fannie and Freddie, combined with the magnitude of the nominal scale at which the bailouts occurred (i.e., the hundreds of billions and the trillions), risks exposing government and taxpayers to not only the debts incurred through the bailout programs, but also to debts and deficits resulting from deceptive accounting practices.
On February 5th, 2011, the New York Times reported that, through April 30th, 2011, “the government has made commitments of about $12.2 trillion and spent $2.5 trillion” aside from T.A.R.P., including $9 trillion in commitments (but only $1.6 trillion in actual spending) on “direct investments in financial institutions, purchases of high-grade corporate debt and purchases of mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae”.(29) Ginnie Mae, abbreviated G.N.M.A., is the Government National Mortgage Association, a government corporation within the Department of Housing and Urban Development.
It is important to note that when such large amounts of what appears to be wealth are committed to be spent by the federal government, that wealth has not even been earned yet; not by governments, banks, nor individual taxpayers. This wealth is essentially based on the full faith and credit of the American banking system. Some have speculated that the United States federal Government is not $17 trillion in debt, but closer to $200 trillion in debt, due to the wealth which the government has projected the need to spend, and committed to spend, over the next several decades.
Other questions which could be helpful to ask also include the following: “Considering the rising security state in the United States, the low fuel efficiency of American vehicles as opposed to Chinese and Japanese vehicles, and a banking sector that seeks more privatization and further limitation of liability even as the public outcry from Occupy Wall Street sheds light on what these banks are doing, who wants American homes, cars, and bank accounts anyway?” Also, “Did we learn nothing from the overproduction of automobiles in the lead-up to the Great Depression?”
However, one last very important question has yet to be asked. As a reminder, Fannie Mae and Freddie Mac operate in the market for secondary mortgages; also known as mortgage-backed securities, which are securities or bonds that are collateralized by the value of mortgage loans. It is precisely these securities which were combined into with other types of debt obligations (such as corporate loans) into C.D.O.s (collateralized debt obligations).
Since the late 1980s, when junk bonds and C.D.O.s became popular (as if that in itself isn't telling enough), auto loans and credit card receivables have been parts of C.D.O.s. The questions that we should be asking regarding all this are: “Do the bailouts of the banking, mortgage, and auto industries have anything to do with our debts to firms in those industries being combined, collateralized, securitized, and then sold on the open market as if it were an ordinary commodity?”
Additionally, whose “future” is being sold here; futures of a commodity or the futures of individual human lives? Is there even a difference between human life and commodities in the eyes of those at the top of the government and corporate structures? Have the futures of individual human lives been transformed into junk bonds? How can me being in debt, something I consider “bad”, be treated as a market “good” that people want to buy and sell?
What should we do when we find out that our jobs and our ability to pay back our debts are dependent upon an economy that has already bet on our failure; and furthermore dependent upon government to securitize that debt and convince traders that it is worth more than what someone is willing to pay for it?
I hope that, some day, officials at both the U.S. Department of the Treasury and Spencer Stuart, Inc. may help the public answer these questions. I can only hope that such enlightenment would occur at a congressional hearing.
1. “Company Overview of Spencer Stuart, Inc.” Businessweek. Last modified April 7, 2014. Accessed April 3, 2014.
2. Joann S. Lublin. “Spencer Stuart Grabs Lion's Share of Headhunting for Bailed-Out Firms.” The Wall Street Journal. Updated August 6, 2009. Accessed April 3, 2014.
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10. “Monthly Report to Congress--December 2012.” Troubled Asset Relief Program (TARP). Last modified January 10, 2013. Accessed April 3, 2014.
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19. Joann S. Lublin. “GM Taps Spencer Stuart for CEO Search.” The Wall Street Journal. Last modified December 6, 2009. Accessed April 3, 2014.
20. David M. Levitt. “AIG Said to Agree to Sell NYC Headquarters Buildings (Update2).” Bloomberg. Last modified June 2, 2009. Accessed April 3, 2014.
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25. firstname.lastname@example.org. “Geithner said to broker costly AIG deal with Wall Street in secret.” Wall Street Social. Last modified April 23, 2009. Accessed April 3, 2014.
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27. “Spencer Stuart Reviews.” Glassdoor. Accessed April 3, 2014.
28. Paul Kiel & Dan Nguyen. “Bailout Tracker.” ProPublica. Last modified April 27, 2014. Accessed April 3, 2014.
29. “Adding Up the Government's Total Bailout Tab”. Last modified July 24, 2011. Accessed April 3, 2014.
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