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Marveling at Losing a Billion
Watching Security Capital Associates self-destruct earlier this year was an object lesson. In case you missed it, here's the story. At the end of 2006, the company had $1.366 billion of shareholders' equity. A year later, 97 percent of it was gone.
I take no pleasure in bringing you this news. I'm just trying to understand what happens when billion-dollar insurance companies, theoretically the most conservative ventures in the known universe, bet it all on black and it comes up red. I don't have the courage to behave like that, and I've only got $92 and a rain check for some cheap underwear at Target. How do you lose a billion dollars? Security Capital is not the first time I've seen it done. This isn't a 1-in-100-year event. Recently, it's about a 1-in-2.5-year event. The companies are formed; they do well enough; something happens; they explode; hard cheese; there you are.
But ... put a bunch of guys in fancy suits, give them a billion dollars, wish them luck, and before you can ask "How many zeros are there on the end of my bonus?" the billion is gone. Vanished. No trace. Shareholders, employees, pensioners, the cleaning lady: all out of luck. Banks, apparently, are almost as bad. My broker said we made a sensational choice buying Citigroup at 50 bucks a throw, not so long ago. Now we won't get back half of what I started with until my great-grandchildren are 100. Billions lost. Sorry, pal. So it goes. What gives? There are at least three business magazines; they dwell on how to be successful. Does no one read them? The executives of one these doomed ventures must stroll into work after a round of golf at 11:30 a.m. to check their mail before going to lunch and say "I'm told there's a good article on management in the Journal. I'm not going to read it, though. We're committed to a new business model, called driving the boat onto the rocks at full speed." How must it feel when you're the chairman, president and CEO of the company, and you come to work one morning, call your secretary, and ask "How's the old capital and surplus this morning?" and she says "Well, 3 percent of it is in good shape." Who would you call first when they gave you the sickening news? I'd give my hookers a chance to get off the train, since I wouldn't be visiting Washington until the congressional hearings started. I'd call my wife, obviously, who's going to be deeply thrilled that it's rain check time at Target for her underwear from here on out. My lawyer! Gosh, yes, let's get him on the line. And hold all my calls, forever. Like I say, I'm just ruminating. There is only one hard-and-fast rule about trashing a billion dollars, and it is this: the collapse comes immediately after your new office building is completed. You think you're moving on up to the waterfront, but the moment the builder gives you the keys sets off a chain of events that leads to calamity. It's OK, though, careerwise. When the next market dislocation hits, you will lead another start-up company with a billion dollars and celebrate your success by leasing a younger wife and some new children. ROGER CROMBIE is a Bermuda-based columnist for Risk & Insurance®. May 1, 2008 Copyright 2008© LRP Publications |
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