As people move through a financial crisis, the hope is that future ‘surprises’ will be avoided. In making things better and getting the system operating once again, efforts are made to identify problems and then set out to resolve the problems. Problems are not solved over night, but being aware of the problems and then honestly working them out is the way to put things right.
The fear is the unknown...a surprise!
Last Thursday the financial markets got a surprise. Greece’s budget deficit was worse than had previously been reported.
Was this incompetence or lying?
That is not the matter now, the fact is that Greece’s budget deficit is worse than had been expected.
The market sold off and the Wall Street Journal reported in “Traders Bet On a Default From Greece” (http://online.wsj.com/article/SB20001424052748704830404575200573581527764.html#mod=todays_us_money_and_investing) the following:
“Greek bond prices posted a drastic decline Thursday as traders began betting a debt default is inevitable, even if the country receives a massive bailout.
The Greek bond market is now priced for a "catastrophic event," says Sebastien Galy, senior foreign-exchange strategist at BNP Paribas.
Greece's woes helped sink the euro to an 11-month low before the common currency recovered some of its losses.”
Thursday, Moody's Investors Service downgraded Greece's debt rating and warned that additional cuts could be on the way. Tuesday, Standard & Poor’s lowered their rating of Greek debt to “Junk” and at the same time reduced the rating on Portugal’s bonds two levels.
The question plaguing the financial markets now has to be the reality of the ratings on other sovereign debt. This always happens when the market gets a shock! If the figures on the deficit of Greece were wrong, what about Portugal? What about Spain? What about Italy? What about Great Britain? What about the United States?
How far this uncertainty travels depends upon the time and the state of the market. European stock markets sold off yesterday. The Dow-Jones index closed down by 213 points. The Dow stock futures had been down by 30 to 60 points. Markets hate uncertainty!
How can we make the world more transparent?
Eventually the numbers all come out. As Warren Buffet has said, once the tide goes out one discovers who is not wearing a bathing suit.
And, this is an argument for short selling and Credit Default Swaps! Yes, those that cut corners and those that cheat and those that don’t reveal the full extent of budget deficits hate short sellers and the CDS. They hate them because they reveal that the “Emperor is not wearing any clothes” let alone a bathing suit.
The response? Point the finger at the “other guy”, the greedy trader! Divert attention! It is people like those “greedy traders” that give capitalism a bad name! Ban short selling! Eliminate Credit Default Swaps! Those greedy bastards!
Well, the surprise is out! Now we have to see how far the contagion spreads.
The press is having a ball with the title, the PIIGS!
Portugal, Italy, Ireland, Greece, and Spain ate from the trough till they were fat and happy and then they were too bloated to deal with the consequences. So the focus is on them.
This is great for the United States because we now get another “run to quality” boost. Monday, we saw the headline in the Wall Street Journal, “All Signs Point to a Costly Auction”: (http://online.wsj.com/article/SB20001424052748704388304575202493992895602.html#mod=todays_us_money_and_investing). The lead statement: “The U.S. Treasury market faces a challenging week, as investors deal with hefty debt auctions, the uncertainty of a Federal Reserve meeting and key economic data that will likely show the economy continued to grow in the first quarter.
That combination likely means the government may have to pay to sell the $129 billion securities.”
This morning we read in “European Jitters Give Two-Year Auction a Boost” (http://online.wsj.com/article/SB20001424052748704471204575209880025823948.html#mod=todays_us_money_and_investing):
“Treasury prices rose Tuesday as investors sought safety in low-risk securities after S&P cut its ratings on Portugal and Greece, sending Greek sovereign debt to ‘junk.’
The reach for safer securities helped to buoy the $44 billion two-year auction, which attracted good demand and helped keep Treasury prices higher.
The auction, the first of several note sales this week, was more than three times oversubscribed.”
The Euro has dropped below $1.32, a level it had not been at since April 28, 2009.
Unfortunately for Goldman Sachs this news is not yet eclipsing the headlines that it is receiving concerning the government’s case against them. But, at least, there is another “finance” story on the front pages of the major newspapers. Good for Goldman, bad for finance!
Still, the issue is about disclosure, transparency, and openness. There are many in finance who do not like “day light”! If anything comes out of the efforts to reform the financial system it should relate to disclosure. If people want to be in the ‘ballgame’ they must fully disclose. If they don’t want to disclose, then they must be excluded and pay the penalty.
And, full disclosure includes “mark-to-market” requirements. People who place bets by mis-matching maturities must also “fess-up.”
Anyway, we have been surprised! Now, the system must re-evaluate everyone so as to identify any other surprises that might exist. In the process, everyone else pays!
Showing posts with label financial credibility. Show all posts
Showing posts with label financial credibility. Show all posts
Wednesday, April 28, 2010
Thursday, August 6, 2009
Bank of America and the Appointment of Sallie Krawcheck
This continues to be a trying time for the finance industry. Articles like the one that appeared this morning in the Wall Street Journal just do no good for the stature of those who admit to working in finance in one way or another. The article I am referring to is “Behind BofA’s Silence on Merrill,” http://online.wsj.com/article/SB124952686109510009.html.
The problem is one similar to that described by John Plender, the Chairman of Quintain PLC, in the Financial Times yesterday, “Ditch Theory and Take Away the Punchbowl,” http://www.ft.com/cms/s/0/e8b88624-8107-11de-92e7-00144feabdc0.html. Plender presents the folksy strategy for central banking ascribed to William McChesney Martin, former Chairman of the Board of Governors of the Federal Reserve System. Martin is reported to have said that the task of a central banker was to take away the punchbowl before the party got out of hand.
To me, the role a financial officer, especially a Chief Financial Officer, is similar. A financial officer ultimately must be the naysayer in an organization. If the financial officer does not act out this role in an organization then the Chief Executive Officer is not going to be well served by the finance function and the organization is going to be exposed as it grows and considers alternative business options!
No one else in the organization performs this function. A “good” Chief Executive Officer wants a strong person in this position because without someone there to say “no” from time-to-time, the CEO will be like the emperor that is wearing no clothes. A “good” CEO knows this. One thing I look for in evaluating a management team is the strength of the people a CEO surrounds him- or herself with, especially the strength of the CFO.
A strong Chief Financial Officer knows that there is no such thing as a free lunch. That is, when it comes to finance, you never get something for nothing. If you want a greater return on your assets, you can take on riskier assets, or you can increase you financial leverage which, of course, increases risk, or you can mismatch the maturities of your assets and liabilities which, of course, increases risk. Of course, we can extend the idea of “no free lunch” to proposals coming from marketing, or information processing, or purchasing as well, but I am sticking with financial issues because that is where the concern is today.
In the euphoria of the credit bubbles that took place in the 1990s and the 2000s, CFOs and other finance people that believed that there was “no fee lunch” and acted upon this belief seem to have fallen out of favor with CEOs seeking to make bundles of money in the bubbles. Of course, not everyone acted in this way but a significant number did and we are all paying the price for this today.
When one sees articles like the one in the Wall Street Journal mentioned above, you can understand why people on Main Street and why Senators and Representatives in Congress can pick on bankers and others who are in the finance profession. It certainly seems as if a trust was broken and greed ruled the kingdom.
The hiring of Sallie Krawcheck by BofA is, therefore, a hint that maybe BofA understands that it needs to build up its credibility. Krawcheck has a reputation for openness and integrity that has stayed with her throughout her career. The argument is that this trait got her in trouble with the CEO of Citigroup, Vikram Pandit, and cost her the position of CFO which she held at Citi. Taking over responsibility for BofAs global wealth and investment management business in not the same as becoming CFO of the institution, but it indicates that BofA is pulling in someone that is not only talented and capable in finance, but also will add some credibility to the organization in terms of honesty and transparency.
One can learn a lot about leaders and the organizations they lead by observing how they respond to people that possess these qualities, especially in times of trouble. Citigroup seems to have a history of releasing top people that question how financial affairs are being handled. Richard Bookstaber comments on how Citi operated in the area of risk management in his book “A Demon of Our Own Design”. We also see that Jamie Dimon was asked to leave Citi when he began to clash with the leadership of that organization on issues of risk and management. (See my review of a book about Dimon: http://seekingalpha.com/article/148179-book-review-the-house-of-dimon-by-patricia-crisafulli.) It seems as if Citigroup worked hard and long to get itself into the position it is now in.
Of course, BOA and Citi are not isolated cases. One can name any number of organizations from Bear Sterns to Lehman Brothers to AIG to Wachovia to Countrywide to so and so and on and on. The depth and breadth of the problem just indicates how far the finance profession has lost credibility.
That is why I would advise at this time that investors look even more closely at the people, especially the finance people, that the leadership of an organization brings on board. Strong financial leadership is needed within an organization, leadership that stresses telling the truth, reporting asset values at realistic levels, and leadership that rejects accounting rules that only muddle if not mislead investors and regulators.
In this regard I would argue that we have to get back to mark-to-market accounting. To me, people only kid themselves when they finance long term assets with short term liabilities in order to capture additional return and cry and whine when they have to mark down the values of their longer term assets if the market goes against them. They are brave enough to gamble on this mismatch of maturities. They also need to be brave enough to accept the consequences of their actions. There is no free lunch!
In my experience there is one thing that financial integrity does: it causes people to act earlier than they would otherwise. The situation I saw over and over again in doing bank turnarounds was that people postponed doing anything about a bad position because they were not forced to recognize a problem early on. As a consequence they put off doing something about the bad situation and put it off until the problem grew into a much larger problem where they could not postpone action any longer. Good management recognizes problems and deals with them early on.
Hopefully, the hiring of Sallie Krawcheck is a sign that organizations are recognizing the need for strong financial leadership. Then, in hiring more people like her, maybe emperors won’t have to go out into crowds to discover that they don’t have any clothes on. The absence of clothes will have been discovered long before then and the situation will have been corrected.
The problem is one similar to that described by John Plender, the Chairman of Quintain PLC, in the Financial Times yesterday, “Ditch Theory and Take Away the Punchbowl,” http://www.ft.com/cms/s/0/e8b88624-8107-11de-92e7-00144feabdc0.html. Plender presents the folksy strategy for central banking ascribed to William McChesney Martin, former Chairman of the Board of Governors of the Federal Reserve System. Martin is reported to have said that the task of a central banker was to take away the punchbowl before the party got out of hand.
To me, the role a financial officer, especially a Chief Financial Officer, is similar. A financial officer ultimately must be the naysayer in an organization. If the financial officer does not act out this role in an organization then the Chief Executive Officer is not going to be well served by the finance function and the organization is going to be exposed as it grows and considers alternative business options!
No one else in the organization performs this function. A “good” Chief Executive Officer wants a strong person in this position because without someone there to say “no” from time-to-time, the CEO will be like the emperor that is wearing no clothes. A “good” CEO knows this. One thing I look for in evaluating a management team is the strength of the people a CEO surrounds him- or herself with, especially the strength of the CFO.
A strong Chief Financial Officer knows that there is no such thing as a free lunch. That is, when it comes to finance, you never get something for nothing. If you want a greater return on your assets, you can take on riskier assets, or you can increase you financial leverage which, of course, increases risk, or you can mismatch the maturities of your assets and liabilities which, of course, increases risk. Of course, we can extend the idea of “no free lunch” to proposals coming from marketing, or information processing, or purchasing as well, but I am sticking with financial issues because that is where the concern is today.
In the euphoria of the credit bubbles that took place in the 1990s and the 2000s, CFOs and other finance people that believed that there was “no fee lunch” and acted upon this belief seem to have fallen out of favor with CEOs seeking to make bundles of money in the bubbles. Of course, not everyone acted in this way but a significant number did and we are all paying the price for this today.
When one sees articles like the one in the Wall Street Journal mentioned above, you can understand why people on Main Street and why Senators and Representatives in Congress can pick on bankers and others who are in the finance profession. It certainly seems as if a trust was broken and greed ruled the kingdom.
The hiring of Sallie Krawcheck by BofA is, therefore, a hint that maybe BofA understands that it needs to build up its credibility. Krawcheck has a reputation for openness and integrity that has stayed with her throughout her career. The argument is that this trait got her in trouble with the CEO of Citigroup, Vikram Pandit, and cost her the position of CFO which she held at Citi. Taking over responsibility for BofAs global wealth and investment management business in not the same as becoming CFO of the institution, but it indicates that BofA is pulling in someone that is not only talented and capable in finance, but also will add some credibility to the organization in terms of honesty and transparency.
One can learn a lot about leaders and the organizations they lead by observing how they respond to people that possess these qualities, especially in times of trouble. Citigroup seems to have a history of releasing top people that question how financial affairs are being handled. Richard Bookstaber comments on how Citi operated in the area of risk management in his book “A Demon of Our Own Design”. We also see that Jamie Dimon was asked to leave Citi when he began to clash with the leadership of that organization on issues of risk and management. (See my review of a book about Dimon: http://seekingalpha.com/article/148179-book-review-the-house-of-dimon-by-patricia-crisafulli.) It seems as if Citigroup worked hard and long to get itself into the position it is now in.
Of course, BOA and Citi are not isolated cases. One can name any number of organizations from Bear Sterns to Lehman Brothers to AIG to Wachovia to Countrywide to so and so and on and on. The depth and breadth of the problem just indicates how far the finance profession has lost credibility.
That is why I would advise at this time that investors look even more closely at the people, especially the finance people, that the leadership of an organization brings on board. Strong financial leadership is needed within an organization, leadership that stresses telling the truth, reporting asset values at realistic levels, and leadership that rejects accounting rules that only muddle if not mislead investors and regulators.
In this regard I would argue that we have to get back to mark-to-market accounting. To me, people only kid themselves when they finance long term assets with short term liabilities in order to capture additional return and cry and whine when they have to mark down the values of their longer term assets if the market goes against them. They are brave enough to gamble on this mismatch of maturities. They also need to be brave enough to accept the consequences of their actions. There is no free lunch!
In my experience there is one thing that financial integrity does: it causes people to act earlier than they would otherwise. The situation I saw over and over again in doing bank turnarounds was that people postponed doing anything about a bad position because they were not forced to recognize a problem early on. As a consequence they put off doing something about the bad situation and put it off until the problem grew into a much larger problem where they could not postpone action any longer. Good management recognizes problems and deals with them early on.
Hopefully, the hiring of Sallie Krawcheck is a sign that organizations are recognizing the need for strong financial leadership. Then, in hiring more people like her, maybe emperors won’t have to go out into crowds to discover that they don’t have any clothes on. The absence of clothes will have been discovered long before then and the situation will have been corrected.
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