November 28, 2008
Mission-muddle
President-elect Obama has named Harvard economist (and ex-Harvard president an ex-secretary of Treasury) Larry Summers to direct his National Economic Council.
Here’s Summer’s take on why Fannie Mae and Freddie Mac got so out of control:
Summer’s solution: divide these firm’s activities into sharply focused components, some with a public purpose, other private. Then spin them off.
[See the August 23 post for more details on how mission-muddle provided cover for these organizations' unsound, bigger-is-better strategies.]
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Here’s Summer’s take on why Fannie Mae and Freddie Mac got so out of control:
"The illusion that the companies were doing virtuous work made it impossible to build a political case for serious regulation.
When there were social failures the companies always blamed their need to perform for the shareholders. When there were business failures it was always the result of their social obligations.
Government budget discipline was not appropriate because it was always emphasized that they were 'private companies.' But market discipline was nearly nonexistent given the general perception -- now validated -- that their debt was government backed.
Little wonder with gains privatized and losses socialized that the enterprises have gambled their way into financial catastrophe."
Summer’s solution: divide these firm’s activities into sharply focused components, some with a public purpose, other private. Then spin them off.
[See the August 23 post for more details on how mission-muddle provided cover for these organizations' unsound, bigger-is-better strategies.]
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November 26, 2008
“Are unions killing the American auto business?”
Carlos Ghosn, CEO of Nissan and Renault, was featured in Bigger Isn’t Always Better as a good example of an adaptive leader able to switch from “fixer” to “grower” orientations as the situation required. In a recent Business Week interview he displayed the mindset of a grower as he answered a question about labor’s role in renewing the US auto industry:
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"Frankly, I don't think the question is unions.
The question is: Do you have the flexibility to operate and be competitive?
If a union helps you be flexible, then the union is an asset. If the union forbids or handicaps this flexibility to operate, then you have a problem. We have unions in France and Japan. If you can reach an agreement by which unions help you be flexible and [respond] to the market, in a certain way they become an asset."
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November 25, 2008
Citigroup, and the limits of aggression-driven expansion
The New York Times on Citigroup, November 21, 2008:
[See my December 13, 2005 post: "Does synergy scale?]
Definitely not new issues.
Here’s what Bigger Isn’t Always Better said in Chapter One about Citi in 2006:
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"To some extent, Citigroup’s fortunes have declined as the storm in the broader financial industry has grown angrier.
Many analysts argue that the globe-spanning conglomerate, largely built by Sanford I. Weill, had never really worked as a cohesive unit. Different divisions have consistently battled, and promised synergies between units have rarely emerged."
[See my December 13, 2005 post: "Does synergy scale?]
" 'They never spent the time, the money or the energy to integrate all of the businesses,' said Meredith Whitney, analyst at Oppenheimer. 'And so the credit card business speaks Mandarin while the mortgage business speaks Cantonese. It’s not a functional family. And because it’s not a functional family, it’s extraordinarily expensive to operate all the separate businesses, and you don’t get any of the advantages.'
Many of these problems were masked during the credit boom this decade. But with the financial crisis in full swing, the bank’s failure to unite its empire has become more exposed than ever.
'A lot of the issues facing Citigroup are not new issues, they have simply grown greater in severity,' said Michael Mayo, an analyst at Deutsche Bank."
Definitely not new issues.
Here’s what Bigger Isn’t Always Better said in Chapter One about Citi in 2006:
Citigroup fueled its ascendancy to the position of the world's largest bank by replacing an emphasis on controls and coordination with a hyperaggressive, push-the-ethical-envelope corporate culture.
Known by some Wall Street analysts as the bankers with claws and fangs, Citi's executives are now working overtime to repair the damage to its reputation caused by money-laundering scandals in Japan, questionable bond-market trading practices in London, and allegations of conflicts of interest during the tech-stock boom and bust.
Now facing a regulatory environment less tolerant of the behaviors that once drove Citi when it was one of Enron's top banking partners, this mega-institution may have reached the limits of aggression-driven expansion. Citigroup … set challenging profit-expansion goals, but failed to put in place a strong framework to guide how they were to be met.
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Act II
My September 5 post highlighted the next shoe to drop in the ongoing financial meltdown drama – credit cards. Follow this link to read a banker’s account of what’s behind it, including minimal income verification by card issuers, and:
Subprime mortgage lending, Part 2.
Some regulatory remedies are also offered for the government to consider in anticipation of a 2009 crunch in massive bank write-offs for consumer credit that never should have been offered.
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"The banks reel in the consumer, charge interest rates higher than those charged by the mob, increase lines without the consumer asking and without their consent, and lure them into overextending. And we can count on the banks to act surprised when they aren’t paid back."
Subprime mortgage lending, Part 2.
Some regulatory remedies are also offered for the government to consider in anticipation of a 2009 crunch in massive bank write-offs for consumer credit that never should have been offered.
Link
November 22, 2008
A change of management
What’s the alternative to the faith-based economic mindset that’s led to a burst-bubble economy?
Hopefully Obama’s.
Obama told Fortune Magazine last summer:
The alternative to faith-based management is evidence-based. Feedback produces evidence.
Feedback is sometimes labeled pushback. It can be fought. It can be made to disappear below the surface through manipulative “change management.” It can be ignored. It can be dissed in hopes of getting everybody on the same page by appeals to loyalty.
Or it can be listened to, interpreted, and used to guide to move forward.
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Hopefully Obama’s.
"He really questions his advisors aggressively," says Harvard's [Jeffrey] Liebman [who is one of them]. "He wants to see disagreements aired in front of him. He likes to have the actual experts in the room."
Obama told Fortune Magazine last summer:
"I don't like ideology overriding fact. I like facts, then determining what we need to do. I believe in a strong feedback loop. Companies that are successful do that."
The alternative to faith-based management is evidence-based. Feedback produces evidence.
Feedback is sometimes labeled pushback. It can be fought. It can be made to disappear below the surface through manipulative “change management.” It can be ignored. It can be dissed in hopes of getting everybody on the same page by appeals to loyalty.
Or it can be listened to, interpreted, and used to guide to move forward.
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November 19, 2008
Tuxes in a soup kitchen
The CEOs of the Big Three auto companies all flew into DC in their individual private jets to testify about their companies’ need for a $25 billion loan bailout.
Didn’t look good to many in congress. One rep noted:
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Didn’t look good to many in congress. One rep noted:
"It's almost like seeing a guy show up at the soup kitchen in high hat and tuxedo. It kind of makes you a little bit suspicious."
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Let Detroit Go Bankrupt, says Romney
It’s not just (off-and-on) liberal thinkers like Tom Friedman who are skeptical of a US automaker bailout. One-time Republican presidential candidate Mitt Romney’s op-ed published today is even blunter:
Instead, Romney offers a plan for a managed bankruptcy.
Perhaps somewhere between Friedman and Romney can be found some good ideas for getting Detroit back on a growth path.
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“If General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.”
Instead, Romney offers a plan for a managed bankruptcy.
Perhaps somewhere between Friedman and Romney can be found some good ideas for getting Detroit back on a growth path.
Link
November 12, 2008
Coming home to roost
Here’s Tom Freidman’s take on why receivership, not a blank check, is needed for the US auto industry.
Since the early 1980’s I’ve had opportunities to work with the US and Japanese car builder’s senior execs. The contrast was – and still is – amazing. The Americans have been on a non-sustainable path for many years - they actively fought-off the constraints that could have guided them toward profitable growth. Business strategies are doomed to fail when they are shielded from reality.
Bigger Isn’t Always Better includes a chapter on facing reality and why this is seldom a natural act.
The issue now is not so much to assign blame for Detroit’s woes (there’s plenty to go around), but sort out what to do. Freidman offers a useful way to start thinking about this.
Link
Since the early 1980’s I’ve had opportunities to work with the US and Japanese car builder’s senior execs. The contrast was – and still is – amazing. The Americans have been on a non-sustainable path for many years - they actively fought-off the constraints that could have guided them toward profitable growth. Business strategies are doomed to fail when they are shielded from reality.
Bigger Isn’t Always Better includes a chapter on facing reality and why this is seldom a natural act.
The issue now is not so much to assign blame for Detroit’s woes (there’s plenty to go around), but sort out what to do. Freidman offers a useful way to start thinking about this.
Link
November 10, 2008
More details are not always better details
Several years ago a stock broker tried to interest me in a complicated “structured” investment product his company put together. I asked to see the prospectus. It took over 100 pages to describe this “product.” I think I understand enough about finance to figure out what the document was saying, but reading it I could never figure out how the thing worked or was supposed to make money. I guess the broker expected me to rely on his judgment and that of his mega-firm (a recipient, since, of several bailouts). Anyway, I fortunately decided to pass on the opportunity. It was among those that lost a lot of its value recently, despite the lengthy verbiage about it being absolutely safe and liquid.
The moral of this episode is nicely summed up by something the artist Georgia O’Keefe said in 1922:
In other words, if it doesn’t boil down, it may not really be there.
[See the Sept 20 '06 post for more on this theme and how it plays out in Apple’s strategy vis a vis Microsoft.]
The moral of this episode is nicely summed up by something the artist Georgia O’Keefe said in 1922:
“Nothing is less real than realism…. Details are confusing. It is only by selection, by elimination, by emphasis, that we get at the real meaning of things.”
In other words, if it doesn’t boil down, it may not really be there.
[See the Sept 20 '06 post for more on this theme and how it plays out in Apple’s strategy vis a vis Microsoft.]
November 09, 2008
Optimization
A week ago I gave a talk about the causes and implications of the current economic crisis. The audience was a cross-section of typical Washington-types – lawyers, federal regulators, an economist, NGO leaders, international development experts, and an academic or two.
I covered all the usual suspects – belief-based economics, under-regulation, dumb-regulation, the banking industry’s new business model, and a few others. I also got to (try to) explain CDS’s and CDO’s.
Lots of fun. Especially afterward when I was asked to summarize the message for future business leaders in one lesson:
I covered all the usual suspects – belief-based economics, under-regulation, dumb-regulation, the banking industry’s new business model, and a few others. I also got to (try to) explain CDS’s and CDO’s.
Lots of fun. Especially afterward when I was asked to summarize the message for future business leaders in one lesson:
“Time frames matter. You’ll make more profit in the medium and long run if you don’t always try to maximize it in the short run.”
Meet the “bigger-isn’t-always-better” consumer
Harvard Business School professor John Quelch calls these new shoppers “simplifiers.” Their market segment will be among the fastest growing. Their emergence poses both threats and great opportunities for marketers. Businesses looking for sustainable growth ignore them at their own peril.
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Would less be more if the financial services sector shrunk?
Dumb idea: letting bigness become a proxy for best
Alex Edmans from Wharton and Jack Bao of MIT …
Their perceptive report explains why otherwise smart companies keep patronizing places that don’t deliver what they were looking for. It also sheds light on why so many merger deals destroy, not create, value.
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“…examined nearly 30 years of returns to shareholders from mergers and acquisitions, and found a strong negative correlation between a bank's market share and the returns of its acquirer clients. In other words, the more market share a bank has, the less value it is likely to deliver.”
Their perceptive report explains why otherwise smart companies keep patronizing places that don’t deliver what they were looking for. It also sheds light on why so many merger deals destroy, not create, value.
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Mea culpa
Alan Greenspan’s October appearance before a congressional committee investigating what went wrong.
Speaks for itself.
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Speaks for itself.
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