September 28, 2008
Last Thursday Harvard’s president assembled the university’s top economists and business thinkers. In 90 minutes they provided what is easily the clearest explanation-to-date of what went wrong, why, and what needs to be done. Not to be missed, especially Elizabeth Warren's contribution.
Follow the link to the watch the webcast (requires RealPlayer).
September 18, 2008
Among the examples Wharton cites:
“In 2006, the Office of Federal Housing Enterprise Oversight (OFHEO), which monitors the financial health of Fannie Mae and Freddie Mac, released a report describing an arrogant and unethical culture at Fannie Mae where employees manipulated earnings to generate higher bonuses for executives between 1998 and 2004. 'Our examination found an environment where the ends justified the means. Senior management manipulated accounting; reaped maximum, undeserved bonuses; and prevented the rest of the world from knowing. They co-opted their internal auditors. They stonewalled OFHEO,' said James Lockhart, the director of OFHEO when the report was released.”
September 10, 2008
My August 5 post about Hudson City Bancorp is one example.
Follow the link below to read about some federal mortgage success stories. Compare and contrast with Fannie Mae and Freddie Mac. Give special attention to how different ownership structures (government-owned and co-op vs. stock-option-fueled publicly-listed) drive different growth paths. Which structure is best in what circumstances?
September 08, 2008
Too big, too fast
bottom-lines the situation in Washington DC:
“The downfall of Fannie and Freddie stems from a series of miscalculations and deferred decisions, both by their executives and government officials, according to company insiders, regulators, auditors and outside analysts. The companies expanded rapidly in recent years, initially playing down the risks posed by a housing bubble. Then, as the housing slump expanded nationwide, they resisted raising enough new capital that might have provided a financial cushion to weather the storm. Lawmakers, paralyzed by partisan infighting, delayed strengthening regulatory oversight of the politically powerful companies.”
While, in the "other Washington,” a similar story unfolds in the Times about the firing of the CEO of the country’s biggest saving and loan:
“Mr. Killinger is the latest chief executive in the financial services industry to lose his job as the credit crisis has worsened. Earlier on Sunday, the heads of Fannie Mae and Freddie Mac were forced out after the Treasury Department orchestrated a takeover of the companies. The chief executives of Citigroup, Merrill Lynch, Wachovia and Bear Stearns have also been dismissed as losses mounted.”
“Washington Mutual, based in Seattle, has been one of the lenders hit hardest by the downturn in the housing market. It has one of the biggest portfolios of so-called pay option mortgages, and had long focused its operations on lower-income urban borrowers. Losses at the bank have been devastating.”
September 05, 2008
Geoff Colvin now warns us about the next shoe that’s about to drop:
“The next credit crunch: why our easy access to plastic is about to dry up.”
Many of the dysfunctional dynamics - and more-must-be-better bankers – behind the mortgage mess are also threatening the consumer credit market.
Past bubbles-and-busts (such as dot.com and telecom) primarily affected investors and industries. The current mortgage and upcoming credit card crunches go much deeper into the heart of the American economy. It’s an economy driven by more by consumers than businesses, which makes these bubbles much more explosive when pricked.
“There would have never been a subprime mortgage crisis if Wall Street's underwriters had not been on the phone to bankers and brokers with incessant calls for more ‘product,’ by which they meant any loan for any amount to any borrower that could be packaged and sold off without even a pretence of due diligence and shopped around to the rating agency most likely to trade a triple-A rating for a triple-A fee.”
Steve goes on to warn:
“These people are not your friends. They have already racked up half a trillion dollars in credit losses, wiped out five years of shareholders' profits and taken the wind out of the sails of the global economy. Given the situation, you'd think the leaders of this industry would have stepped forward to acknowledge the extent of the damage and apologize for their deep complicity in it. Instead, they have pointed fingers at the media and short-sellers, offered lame excuses about unforeseen market forces and warned of dire consequences from increased regulation, as if things were not dire enough already.”
And he’s very clear about what needs to happen if things are to change for the better:
“This is an industry that has lost all credibility -- with investors, with corporate clients and with the public. Its fundamental problem is a corrupt culture that is shaped by inflated fees and excessive compensation that bear too little relation to the risk, skills and innovation involved. Until that excessive compensation is competed away and that culture is transformed, Wall Street will continue to serve up a steady diet of booms, busts and financial scandals.”
Read his full article – and check out his past columns for a heavy dose of the kind of clear thinking that’s been so missing on Wall Street and in Washington.
Recent McKinsey research supports the observation in my August 3 post: Global Supply Chains – Longer Isn’t Always Better.
“Soaring oil prices, a falling dollar, and rising wages are undermining some of the reasons manufacturers moved offshore,” says McKinsey.
“For managers of global supply chains, the question now is whether or not to consider scaling back offshore production by returning operations to, or closer to, the United States.”
The McKinsey analysis shows that for a number of high-tech products, costs have changed enough, in many instances, to significantly undermine the benefits of offshoring to Asia. They note:
“The wage differential between Mexico and China has also narrowed significantly. In 2003, Mexican workers made over twice what their Chinese counterparts did; today that gap has narrowed to 1.15 times.”
I’m flattered to be in the company of other honorees including John Bogle, Marshall Goldsmith, Seth Godin, David Maister, Tom Peters, Daniel Pink, Fred Reichheld, and Bob Sutton.
Follow the link above to the Top 100 list which includes links to all these other great blogs.