The cure to financial shenanigans

So, I’m riding the train heading back to The City from Washington. I was in town helping a friend with a lawsuit…(more on that later…maybe). I’m reading in the current issue of New York Magazine about Meredith Whitney and her new financial research and advisory firm. For those of you who don’t know, Meredith was formerly an analyst with Oppenheimer & Co. In 2007 she was one of the first analysts to call the beginning of the financial services industry meltdown due to the problems banks were going to need to address as a result of the sub-prime mortgage debacle. I don’t know Meredith personally but from what I’ve seen one TV and read of her work, I think she’s really smart and obviously ambitious. And as always I’m a huge fan of people starting their own businesses. One thing she wants to do with her new firm is advise banks on restructuring and acquisitions. And, herein lies the problem for me. Let me explain by positing a theory for you: I’m going to suggest to you something that will seem like common sense after you’ve read it but as the next few minutes pass (as you read on) I want you to think back to this time and try to remember if you “knew” this as a basic truth.

I’m going to suggest that the foundational problems we’re facing with the collapse of our financial institutions, have very little to do with the nature of financial transactions, balance sheet health, leverage ratios and AAA ratings on securitized mortgage products. These tactical outcomes that lead to the technical depletion of wealth and technical collapse of the credit markets were the results of cultural deficiencies inside the banks and financial institutions. Some (not all) players inside these institutions are perpetuating a culture of greed that has long been and is now the staple and measure of Wall Street success. The mindset of “increasing shareholder value” is one that infects these organizations with a cultural myopia that has proved to be deadly. I think Meredith Whitney is probably a brilliant financial analyst. And I would also bet that what she knows about transforming organizational cultures could roll around in a thimble for a year. The future of the financial service industry won’t be written by those you can best analyze a balance sheet. It will be written by those who understand that a new mindset, one that tends to the needs of a broad range of stakeholders (customers, employees, community, partners..), will lead us away from a culture of greed towards a culture of caring that actually creates real and sustainable wealth for everyone involved.

Now don’t get me wrong, this isn’t a Meredith Whitney trash piece. I think she’s dead on about some of the tactical things that need to happen to get this economy back on track. She’s right about giving regional banks more capital so they can pick up the slack on lending and she’s right about how the big banks need to sell of assets and retrench. But what needs to happen strategically is that our commercial institutions, banks and service companies, manufacturers and technology companies, all need to get out of the quarter-to-quarter, shareholder value mindset (as Jack Welsh says, this is not a strategy) and move towards a real business strategy of caring for the needs of all stakeholders as a means for creating long-term, sustainable value. Mergers, acquisitions, restructurings don’t fail or succeed because the financial engineering piece of the equation was executed correctly, they fail because of the marriage of incompatible cultures or because of the lack of a real organizational strategy. Successful strategies, the strategies that will thrive in the future, are those that recognize that the true path to sustainable value lies in engaging and inspiring employees to put customers needs above all; in developing win-win partnerships with suppliers and not treating them as indentured servants; in contributing to your local communities who give you “public license” to operate. The companies that operate like this will not only return excellent value to shareholders but because of their stakeholder mindset they are infinitely less likely to engage in the financial shenanigans that got us into this mess in the first place.

AIG bonuses

So, the AIG Bonuses...are you mad? I'm mad. I could ruin a company with the best of 'em. Will I get paid a couple million if I do? Not likely. So yeah, I see why people get angry about it. But in the big picture I wonder both how much that money really matters and more importantly, what the hell did we expect? Look I don't know if any of those folks that got the bonuses deserved them or not, but in the larger scheme $165MM in bonuses is nothing compared to the Billions that AIG the company received. That's where my outrage lies. First of all there's this fallacy of systemic risk. If you read Peter Wallison's piece in the WSJ yesterday (if not, here it is: http://online.wsj.com/article/SB123725470200650641.html) You'll start to realize how little the government, and the electorate for that matter, really understands here. The sub prime market had put the financial system in shambles long before we started these bailouts. In fact if you believe what Peter says (and I do) you'll recognize that it was the failure of the system that brought AIG, Lehman and Bear to their knees, not so much the other way around. Yes the stupidity they all showed by creating securities without having any idea about the value of the underlying products (read: mortgages...you see they forget about customers) that certainly precipitated the collapse of the system, but letting them fail was not going to bring Armageddon. Armageddon was already upon us. Secondly, what the hell did people expect AIG to do with the money if not pay compensation to keep people working (arguably for most organizations compensation is one of the top 2 or 3 expenses so if you give me money, obviously I'm using it to pay the people who make the place run), and if not to pay counter-parties? I mean the entire IDEA of systemic risk is: If I fail, I'm connected or indebted to so many other players that I won't be able to pay, so they'll fail too and the system will crash...am I right? So why now is the WSJ, Congress and Joe six-pack so appalled that some of this money would indeed flow to those counter-parties? I ain't no economist (my partner is) but what the hell people? We're getting just what we asked for. If we'd just let capitalism work in the first place, let the bad performers fail and the good guys flourish, we wouldn't be talking about any of this.

How about this...all you small business people out there (woman owned small businesses employ more people than the entire Fortune 500 combined) what could you have done with a cash injection of $1BB? how many jobs would you have created? How many innovative products would you have designed? How many of you would have developed a better, faster, cheaper, leaner, more profitable insurance company business model than AIG?

Just food for thought.
JC

OK, hi everybody. First of all sorry it's been such a long time between posts. And now I have to start all over again since I can't remember my old password and the system google has set up to retrieve it doesn't work, (yeah I know they'll claim user error but trust me I know what I'm doing and it's screwed up!). So I'll try to recover the old posts from Cherry Pickin' and archive them here if I can. For now, stay tuned about my ideas about life. I wonder if NY will change me....not a chance! I'm going to talk about these AIG bonuses in a minute.