Posted tagged ‘financial services sector’

Banking Reforms

September 21, 2009

Senator Chris Dodd who is chairman of the Senate Banking Committee, and upon whose watch the implosion of the banking and investment sectors began, has introduced a bill to revise the way this sector is regulated. In the business world when things go not the way you want, many CEOs (and most weak ones) announce a “reorganization” as the medicine to cure the illness. We should all be weary of this approach.

With every situation where the results are not what you want or expected, management experts say the first step should be to gather data and work to understand the “root cause”. All to often, the fault lies in assumptions, execution, or monitoring. All these are, in fact, failures of leadership.

With the banking and investment implosion, it should not take a genius to know that both the Clinton and Bush Administrations had made deals with the devil where they cheered these industries on, implicitly agreed to look the other way, and in return expected the banks and investment firms to keep the economy booming. While the Government slept, the financial sector drove off the edge of the cliff. What makes anyone think that a new regulatory arrangement will perform any differently when the executive branch appoints people who will look the other way?

There are clearly still abuses with banks and a huge lack of transparency with the investment community, and these situations should be fixed. Maybe targeted changes in the scope of existing agencies would help but a complete revamping smacks of future problems. Can you not hear Senator Dodd say in 5 years, “no one could have anticipated these new developments. It just slipped through the cracks”.

Vision and Leadership

August 7, 2009

It is August and the wheels of government are turning slowly. The great “to do” about nothing ended yesterday when Sonia Sotomayor was confirmed as a Supreme Court Justice.  Health care reform legislation is banging around with the public only slightly more informed about what the new reform might look like. And we are being told that the Stimulus is working (albeit slowly) but unemployment is still rising. GM and Chrysler are functioning again, and the big banks look like they will survive if not flourish. What is there to worry about?

In the last election, Americans voted decidedly to reject the Republicans and George W Bush years of divisiveness and abject foolishness in foreign policy. President Obama promised a much brighter and more promising future. As time passes, however, Americans will forget George W Bush and will focus on whether they think the future is really more promising. It should be clear that if Republicans offer that promise convincingly, they will do well in future elections.

The rock and the hard place facing President Obama is that he can not have it both ways. He can’t promise a better future and stick with the notion of bipartisanship. Why? The answer is that there is nothing in it for Republicans, or so they think.

Obama must set out clearly his vision and use his Presidential leadership tools to get these visions enacted into law. Continually seeking consensus and worse bipartisanship, is a prescription for a stalemate (root cause, campaign financing via special interests). President Obama must be prepared to demonstrate the courage to enact his vision, and to require Americans to pay for it. If the vision is a good one, after the grousing that always takes place around taxes, growth will return and Americans will see the wisdom of Obama’s vision.

And what if the future does not get brighter?   Democrats and President Obama will lose.  And, this is a very distinct possibility since the American economy has been so terribly whopped with math, science, and engineering being replaced by sociology and even less descriptive studies. Look around and tell me where the engines that will drive national wealth creation lie?

We had 8 years of the Republican laissez faire style of free enterprise and what we got in return was an explosive growth of the financial services sector at the same time there was a mass exodus of manufacturing jobs. We had a sharp increase in college and university attendance with graduates obtaining useless education and huge debts. We had a holiday from common sense where we over built houses and then decided to practically pay people to live in them.

Now tell me again there is not room for a brighter vision of the future and the courage to make it happen?

Big Business – Free Lunches

July 31, 2009

The paradox surrounding health care reform is less the idea of extending coverage to the almost 50 million Americans without coverage, then it is more about how to reign in the current year over year escalation of health care costs. We hear from health care industry experts that this can not be done without heavy risk to the quality of care Americans expect (that is those insured). But make no mistake, health care is a big business and there is no free lunch.

Some suggest that Medicare is the problem and that it pays doctors too much for too many tests. Others suggest that private insurers are carving out too much profit for their services. And still others say that Hospitals, especially community ones, are inefficient and waste money. What is inescapable, however, is that what ever measures are used to reduce total health care costs, it will translate into job losses for direct health care providers and all the suppliers to these companies. It is simply the math of it.

So, if you follow this logic, then the right next step for lobbyists is too obfuscate, spin, and distort the reform debate so that there will be a “no change, change” and things will go on as usual.

This outcome will comply with the “no free lunch” theorem. The status quo will ensure two things. First, the jobs and profits will continue. Second, the whole health care maze will come tumbling down as it bankrupts the American economy in the near future.

It seems strange that we have just experienced a melt down of the financial services sector where a disproportionate amount of profits flowed into a sector in comparison to the value it was creating. It is not that banks, investment firms, and insurance companies were not important or valuable, it was that their incomes were simply too much relative to this value. The overall health care industry is different, of course, but in a strange way similar.

The financial sector forgot that their role was about managing risk and instead thought it was about making profits, the more the better. The health care industry seems to have forgotten that their job is to provide health care for everyone and to do it in a way that its costs are in fact covered. It does no one any good for hospitals to be a money losing proposition nor for drug companies to go bankrupt.

Why should drugs made in America be cheaper in Canada and Americans not allowed to import them? Why should someone be insured through their employer and if terminated or departs on their own will, lose coverage, and if that person tries to get insurance again will most likely pay much more and could possibly be denied any coverage? Why should someone go to a doctor or a hospital, be asked to undergo several diagnostic tests and then be asked to pay for them at a different cost than his neighbor simply because he has a different insurance plan or no plan at all?

There is a huge opportunity in front of us to reform health care and include all Americans in coverage, and at the same time, ring out inefficiencies, excess profits, and provide stable good paying jobs to many people.

Incentive Pay

March 23, 2009

Any competent public relations firm would be counseling senior executives of  large financial services firms (and especially those that received TARP funds) that they are in a no win game. “Keep quiet, speak of the American Way, and don’t do interviews”.  The game they speak of is the rhetoric around the size of the executives’ remuneration packages, both base pay and of course their bonus packages.  I wonder what the top earners are actually thinking?

  • I can’t do without….  Just fill in the item.  Fancy car, beach home, downtown flat, children’s private schools, and winter weeks in Aspin are just examples of the type of white knuckle fear that is running through traders and top executives.
  • I earned that money...  Just imagine what someone would think if huge bonuses had been their way of life as when that person was particularly good at winning (read beating colleagues) by bringing in more revenue.
  • I’ll go someplace else, if necessary, and take my customers…  Denial at its best is summed up here.  This type of person truly believes that world is full of fools and he is there to catch them.
  • I am living the American dream where working hard has its rewards…  This is another example of denial and a person who is great believer in laissez faire.
  • I can see that some others have abused the system and new controls are inevitable, I better begin thinking of other methods to earn big bucks…  This is the pragmatist who never the less is more interested in taking home the 7 figure bonuses.

In short, it is unlikely that the TARP receiving part of the financial services sector will be able to reform itself.  The corruption and bending of individual values has probably gone too far and too deep.  For those firms dramatic change is needed and it is doubtful the inmates can do it.  But what should be done?

First we must understand what is the real problem.   The current “mission” of TARP receiving firms is to make money for share holders (owners) and selected employees (traders and top executives).  Think about it.  Do you select a bank or investment firm that places your interests second to their own interests?  Financial services firms exist to serve the needs of their customers and all government regulatory agencies should be viewing the corporate (or private) behavior in that light.  People put money in banks or invest in stocks, bonds, or funds with the thought that their money is safe and will grow in size for future uses (college education, retirement, second homes, etc).  This is a key aspect of how our country grows.

Second, we must reward institutions that meet the customer focus needs and act towards other institutions in a way that prevents their growth and making false promises to customers.  There are plenty of banks, investment firms, and insurance companies that are reputable and can easily replace the role of the current TARP crowd.  With transparency and accountability, these other firms should be able to grow (without acquisitions) and gradually replace the Citibank and AIGs of the world.  Remember the underlying role of these institutions is to receive money from customers, keep it safe while putting the money to work, and return the money at some time in the future with the promised (read reasonable) return.

For the TARP crowd, the path forward should involve a change in their Boards and top management.

Looking Back

February 28, 2009

If one looks back over the last 8 years, the seeds of today’s deep recession can be seen.  To be fair, the Clinton Administration presided over the earliest seeds, the dot-com bubble.   In many ways it set forth the “faux business model” that would thrive during the Bush years.   

As you may remember the “dot-com” fade grew from the wild west of the new internet age.  Company after company set up shop using a web address as their mailing address.  These companies offered everything from medical advice to books.  The one thing most had in common was that they themselves did not make anything, they only sold the goods or service.  But the scam of dot-coms was not just that their business model was unsustainable (they were selling something that someone else made), it was the attempt to take the start up companies public through an IPO.

Market conditions were ripe with plenty of liquidity and a thirst by investors (some not so savvy) to make a quick profit.  The cheaters offered IPOs with big promises and little history of their companies performance.  For sure there were plenty of promises (and plenty of sizzle) but very little data.  A second group of cheaters pushed to get in line and obtain an initial block of stock from the IPO.  This second group were the predecessors to today’s “flippers”.  This group bought the IPO stocks and then timed a sale when the stock had risen sufficiently.  This game was so good for a short time that, believe it or not, some investors even borrowed money to buy these IPOs.  (Sound familiar?)  When finally investors began to think through what was going on, experience was showing that many of these dot-coms were not living up to their promises.  Suddenly the dot-com bubble burst.

Enron, MCI, and Adelphia were the poster child of the next generation of scam thinking.  The companies that “cooked their books” and are remembered for that crime.    All these companies had business plans that relied on growth of revenue to outdistance costs and in the process dazzle investors who in turn would buy more company stock (sending the stock price through the ceiling).  The leaders of these companies syphoned off their loot by selling stock options at huge profits.

With these two examples of “free enterprise gone wrong” fresh in Government officials’ minds, one would have expected the Government to be much more vigilant. Instead the Republican mantra was laissez faire.  The grand daddy of all schemes grew symbiotically with the growth in new house construction.  From all appearances this looked like healthy growth and certainly stimulate wide swaths of our economy.  

Soon the banks were doing a great business and recording excellent earnings.  Then investment firms and hedge funds saw an opening.  They could attract a lot of liquidity by promising untraditionally high returns (10-20%).  The stage was set perfectly again.  The public, through investments and 401k’s, wanted the attractive returns and chose not to ask how it was possible or that the senior executives of these firms were taking their cut first and their cuts were mind boggling huge.  

With the collapse of the financial services sector, this game has ended.  There should be criminal indictments but only time will tell.  Even with indictments it is hard to predict whether any lessons have been learned.

During this entire time frame another phenomena has been taking place.  There has been a steady exodus of manufacturing jobs and a disinvestment in math and science education.  Math and science represent hard work and manufacturing has come to represent less desirable work.  Of course the truth is that so much of Americas manufacturing base moved off shore, restarting the US economy is going to be very difficult and will require hard work.  

“Looking back” can not change today’s problems.  “Looking back”, however, can help guide us to both the short term and longer term fixes.  Laissez faire is ok as long as there are rules and the sherif is honest and around.  There is no substitute for hard word and real value production.  The American dream can be revived if we simply use common sense and perform the necessary hard work.