We talk to former US Secretary of the Treasury John W. Snow

Snow discusses his role as non-executive chairman at Cerberus Capital Management, his thoughts on a strong dollar and what career path he really should have taken.
John W. Snow - who served as the Secretary of the Treasury of the United States from February 2003 until June 2006 û was in Hong Kong yesterday on behalf of the private investment firm Cerberus Capital Management. An affable man, he has a unique ability to smile while talking, and has a voice that goes up a pitch at the end of sentences so as to keep you hooked on the topic.

But he doesn't seem like a politico. Rather he comes across as a grandfatherly economics professor and seasoned businessman. Perhaps, though, thatÆs down to his nearly 25 years spent as a chief executive officer of the transportation company CSX Corporation û and the fact that he is, indeed, a grandfather. Now, in yet another twist in his career, heÆs helping to head up New York City-based Cerberus, one of the worldÆs leading private investment firms with approximately $22 billion under management in funds and accounts.

Tell me about your role at Cerberus?

I joined Cerberus about six months ago as non-executive chairman of the group with responsibility for strategy, business development, assessing transactions and helping to hire people and helping to manage the organisation, with a focus as well on going to where I can be of value to the people in the organization. I support the efforts of offices in Europe and offices in Asia, such as in Japan and Taiwan - and weÆre looking to expand here in China -- so IÆve been supporting the activities of the people in the field. And IÆm also 'an extra set of hands' to help get into whatever problems there are that management faces because as you know management is a field where youÆre never quite sure what the problem is that you are going to be working on because they tend to take on myriad forms.

If weÆre looking at a company where I have an expertise, or if weÆre looking to make an investment in a company that I know something about I may offer some judgments on the political climate, or the business climate or the economic climate. So IÆve been using my experience to help out because as you know I spent a long time in business after my first stint in government in the Nixon-Ford administration, basically 25 years in business, and my point is that if you spend a long time in business you get to know some industries really well, and while I wouldnÆt pretend to know about some industries as well as others, you do develop an eye for people who can get things done and those who canÆt and they cross industries.

In announcements from Cerberus you repeatedly see the words ôlong-term investmentö which is such a different perspective than the earnings-driven thinking of publicly listed companies.

Well one of the ironies, I guess, of the world weÆre in today, is that many public companiesÆ management teams feel they canÆt implement their longer-term plans, their three-to-five-year plans, because to do so might take them off this escalator that they think that theyÆve got to be on to meet earnings expectations. And so being in a private equity company they are able to pursue opportunities to create long-term value that they feel constrained from pursuing in public companies because of the relentless pressure of the quarterly earnings.

Do you think this 'short-termitis' will push more and more companies to look to private equity for help?

I think it is doing that. I think there are a couple things that are doing that. ThatÆs a factor, and itÆs a big factor. CEO, CFOs and management teams are in business because they want to create things û all the good business leaders I know have that instinctive quality that they want to make something, whatever it is, and they want to make it better. And sometimes to make it better you have to make current investments, and hire people and train people and do all sorts of things that donÆt show any current results. In fact the reported numbers will get worse if you take on some big thing like zero defects or quality management or process engineering and really get your organisation focused on doing this, because all the training that youÆve got to do will almost surely knock your earnings out for a couple of years. Then youÆve got to go explain to the Street, and say: æYou know our earnings are down but donÆt worry about it. Believe me, weÆre going to be up there in the future. Trust me. Trust me.Æ

ThatÆs a big factor. But I also think that just the environment of oversight and regulation -- with boards of directors focussed on Sarbanes-Oxley-type issues - that weÆve got in the United States right now has amounted to a real change in the focal point of companies. If you talk to CEOs and CFOs and chief legal officers and so on, what you find is that there is an awful lot of attention paid to the form of Sarbanes-Oxley. [The thinking is:] 'Are we doing what needs to be done to appear to be in compliance so that if we ever get sued we have this paper trail that shows we had a six-hour auditing session, whether we need it or not?'

I think theyÆre over-conforming, and boards are a party to this, they are more concerned that they are protected. What youÆve got is more and more lawyers running companies and so thereÆs probably less focus on the basics of business strategy, achieving long-term results, and so on. And thereÆs almost, I think, almost undeniably, a risk aversion in corporate America that isnÆt helping.

So whatÆs the way out?

Well, I think weÆre just going to have to work our way through Sarbanes-Oxley. I see that there are some people in public life in the United States, thereÆs [Michael] Bloomberg and my successor at the Treasury [Henry Paulson], and others who are beginning to raise questions about whether or not there needs to be some rebalancing in Sarbanes-Oxley. Almost surely there does.

There needs to cultural rebalancing, in my view, where people get back to understanding that corporations are given a critically important role in society to mobilise a large amount of capital and they are expected to deploy capital, to grow the business, to grow shareholder value and in the process create jobs and create wealth. ThatÆs their role.

I remember asking a CEO a couple of years ago, because I was worried about this, whether he felt that other CEOs had become more risk averse. And he said, æWell, almost surely yes'. And he told me that he had recently gone to his board for a big capital project and he thought to himself, if I had been a CEO for only a year, or 18 months, would I have taken such a far-reaching goal proposal to my board? And he said, æProbably not. Ya know, IÆve lived with this board for eight-or-nine years, I really know them and they know me and thereÆs a lot of trust developed. . .but ya know, probably not.Æ So what that means is that some investments that would create value for the enterprises are at least delayed if not foregone. ThatÆs a significant issue. If youÆre not getting capital deployed effectively, if youÆre not taking appropriate risks, itÆs hard to grow the company.

YouÆve made the move back and forth between government and business but there seems to be an increasing number of high-profile people who are doing that. Is such a cozy relationship a good thing?

Well I donÆt know what the data is on the trends, but IÆve got 25 year intervals, so IÆll be coming back. (laughter) IÆll be a robust 92, so when I get that call from a future president, IÆll be saying, æCan you speak a little louder?Æ

I donÆt know what the data is, but thereÆs been a long, long tradition of people working at government agencies and then going into the private sector. In fact, if the truth be told about that, there was probably more of it before we got this heightened ethics stuff. It used to be that you would go to a good law school, you would go to the IRS or to the SEC or to the US Attorneys office, youÆd put in a tough seven or eight years, and well you know, you got out of law school at about 27 or something, and youÆre now 34 and you want to earn money. and so you went out and worked for a law firm or a corporation and it wasnÆt a bad thing, you know. It served a couple of important purposes, in my view. One, you had high-quality people. And two, it got the clients effective representation by people who understood the agency or the US Attorneys office. So it probably created more of a compliance mentality on the part of companies to have people inside these companies who really understood how the SEC or enforcement bureaus worked. ThereÆs just more attention called to it today, but I donÆt know that thereÆs any more of it.

Ok, so whatÆs your view on the strength of the dollar, the yen and the Rmb?

Well, I havenÆt changed my views on any of that. (Long Pause).


(Laughter). Currency values are best set in open competitive markets. I think the strong dollar policy is the right policy. Nobody can devalue themselves into prosperity. And central bank governors, finance ministers arenÆt smart enough to figure out what the value of a currency should be. Only the markets can do that.

In the middle of the night, when youÆre thinking about grandchildren and the future, what sort of macro-economic shock scenario disturbs you?

Well, I actually think that the system is pretty darned stable and that it can withstand shocks pretty well. Just think, it withstood $75 oil and Katrina and a meltdown in the equity markets in the United States, so weÆve been through a lot of shocks in the United States and yet continued to grow at roughly 4% and took the unemployment down to 4.6 and so on and so forth. So it would have to be a pretty big shock to really upset the applecart in a big way.

Because of the way the financial markets work today and the extraordinary efficiency of financial markets in disaggregating risk through derivatives and hedges and credit swaps and all this neat stuff, thereÆs been an offloading of risk. Look at banks they donÆt run any risk anymore to speak of, they offload it to somebody else.

The one I worry about, I guess, and IÆd put it at the top of the list, but this is all remote û I donÆt want to scare anybody û but if we moved in a protectionist direction, that could really knock the global economy off its pins because it really depends upon open trade. And if the United States ever moved away from open trade, youÆre going to see other places, like Germany, France, Latin America, Italy, Korea, oh boy! They would say, æIf the United States is going that way, weÆre going to trail right behind them.Æ And weÆd shrink the global system and then capital markets would react because what they count on is these global flows keeping productivity high, growth high, even prosperity high. And if they donÆt see that happening thereÆs going to be a painful crash.

If you had one thing to do over in your career, what would it be?

Uhm.I think I would have studied horticulture rather than economics.(Laughter).

You mean in terms of the Treasury? Mainly things came out pretty well. But the one thing that didnÆt, that I wish we could do over, was Social Security. We just never could get that right.

You know I think it was a way to defeat the President [George W. Bush], by making the argument in the next election that said: æWe saved you from privatisation of Social Security that would take Social Security away from you.Æ Look, we were never taking about privatisation. We were talking about putting the system on a financially sound basis. You canÆt look at that system without concluding that itÆs not on a long-term financially sound basis. But the fix is pretty modest, itÆs something like seven or eight tenths of a percent increase in annual inflows, and seven-tenths of a percent reduction in annual outflows, which doesnÆt sound like a lot but it makes it actuarially sound going out forever.

And the president showed some courage on that. He said youÆve got to deal with it and letÆs deal with it now, and the math is all straightforward, we laid out the math. But we never could get any consensus on how to deal with it. In private people would say, æOh, I know youÆre right, but I canÆt do it.ö The opponents of the president, on the other side politically, knew they had a good issue. They knew they had it politically. I had friends of mine, Republicans, who were conservatives, strong supporters of the administration, saying, æYou know this is tough for me, because you know my Democratic opponents, going back a long period of time, have always said that I secretly want to take Social Security and privatise it, and now youÆve come across with a proposal that demonstrates that theyÆre right.Æ [I'd say:] No congressman, thatÆs not it.

But you know we made a mistake by not being clearer that we werenÆt talking about privatising it.and when we talked about personal accounts we gave the critics of the initiative an opportunity to characterise us as privatising it. We didnÆt handle the public relations.but thatÆs the one I wish we could do over.
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