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HomeA Question of Competence
Posted by Larry Doyle on November 23rd, 2009 12:27 PM |
Band-aids, quick fixes, partisan posturing, and the like will do little to address the structural and cultural deficiencies which played into our current economic crisis.
High five to SH for sharing a report (a link to the full report is provided at the end of this post) by Harvard Business School’s William A. Sahlman entitled “Management and the Financial Crisis (We have met the enemy and he is us…).” Sahlman does an outstanding job of pinpointing five critical components of firms and institutions that failed during this crisis. At the end of this post I have provided a link to Mr. Sahlman’s 35-page report, but allow me to provide some highlights. Sahlman writes:
I assert that most of the problems evidenced so prominently during this financial crisis can be traced to failures in five related managerial systems inside each major private and public actor in the financial markets:
Incentives – how risk and reward are shared; how people behave if they act in their own perceived best interests given the structure of pecuniary and non‐pecuniary payoffs
Control & Information Technology – how limits are placed on behavior; how information is captured and shared; how risk and reward are measured and how those assessments affect tactics and strategy
Accounting – how managers choose accounting policies; how managers measure economic profits & losses, as distinct from GAAP profits and losses
Human Capital – the process by which people with certain characteristics (skill, experience, networks, character, and attitude) are attracted and managed or encouraged to leave any organization
Culture – the values that guide individual and group decisions
While Sahlman thoroughly reviews these five factors and how they misfired in a number of failed institutions, he goes one step further in addressing why they misfired. I commend him for it. He writes: (more…)
Geithner and Congress Take the Gloves Off
Posted by Larry Doyle on November 19th, 2009 2:23 PM |
Do you get the sense that Americans are increasingly fed up with the incestuous nature of the Wall Street-Washington relationship? How so? The gloves came off from both sides of the aisle today in the midst of Congressional testimony from Treasury Secretary Geithner to the Joint Economic Committee.
Despite what you may think about the policy and programs of the Obama administration, the sentiments shared by selected Congressmen are clearly reflective of the mood in the nation today.
No jobs on Main Street combined with massive bonuses on Wall Street is a surefire recipe for an enraged electorate. Washington can spin it however they want and attempt to deflect blame to the prior administration, but real leaders and real leadership are defined by the saying embraced by Harry Truman, “The buck stops here.”
Leaders who accept credit but redirect blame aren’t leaders.
LD
The Problem Is Not the Market, The Problem is You
Posted by Larry Doyle on November 19th, 2009 12:14 PM |
Trading on Wall Street is fascinating. Picture yourself surrounded by individuals within three to four feet on every side, a manager at the end of the trading row, and salespeople screaming to get your attention. In what may appear to be bedlam, one must be able to properly manage significant levels of risk.
What are the key character traits necessary to manage risk? The ability to calculate quickly while maintaining exceptional levels of poise, focus, and discipline. Why do so many competitive athletes make their way to Wall Street? These trading floors are the equivalent of locker rooms and athletic fields.
As with any athletic atmosphere, there are also some very healthy egos on Wall Street trading desks. The very nature of the enterprise attracts those who have strong belief in their own abilities. Competition promotes ego. That said, throughout my career I witnessed varied levels of success inflate individual egos to the point where the ego became unmanageable, the risk outsized, and the subsequent losses fatal. That scenario repeated itself at every shop on Wall Street.
Having witnessed it, I kept a short cutout from a trader’s magazine. The magazine item addressed the topic of losses. I wish that I saved this clip, but I distinctly recall its message. In so many words, it said ‘the problem is not the market, the problem is you, the trader. You need to accept that the market and its participants are not wrong, but that you and your ego are not willing to accept initial losses so they grow to the point where the losses become fatal.’ (more…)
Liu Mingkang Provides Sense on Cents
Posted by Larry Doyle on November 16th, 2009 8:21 AM |
Liu Mingkang, Chairman of China Banking Regulatory Commission
With friends like this, who needs enemies?
That trite saying is far too simplistic in defining the diverse and convoluted nature of U.S.-Chinese relations. That said, as President Obama prepares to arrive in the People’s Republic of China for the first time during his Presidency, he is faced with an extremely aggressive overture from Liu Mingkang, China’s chief banking regulator.
What does Mr. Mingkang have to say? Well, let’s just say he has a drastically different opinion on U.S. monetary and fiscal policy than his counterparts in Washington. While our wizards in Washington, Messrs. Bernanke, Geithner, and Summers would lead us to believe that the rebound in markets is a precursor to a rebound in our economy, Mr. Mingkang has a decidedly different take. The Financial Times sheds light on this topic in writing, China Says Fed Policy Threatens Recovery:
The US Federal Reserve is fueling “speculative investments” and endangering global recovery through loose monetary policy, a senior Chinese official warned just hours before President Barack Obama arrived in China for his first visit.
Liu Mingkang , China’s chief banking regulator, said the combination of a weak dollar and low interest rates had encouraged a “huge carry trade” that was having a “massive impact on global asset prices”. (more…)
Goldman Sachs Doing God’s Work?
Posted by Larry Doyle on November 10th, 2009 12:20 PM |
Do you get the sense that Wall Street in general and Goldman Sachs in particular are getting overly miffed at the disdain heaped upon it by the American public? I do.
In a spirited defense put forth by Goldman Sachs CEO, Lloyd Blankfein invokes the Lord’s name in promoting the virtues of Goldman Sachs’ work. Aggressive move by Mr. Blankfein. The Wall Street Journal highlights this story in writing, Goldman Sachs’ Blankfein on Banking: ‘Doing God’s Work’:
The Times of London’s mammoth 6,900-word piece on Goldman Sachs over the weekend contains plenty of fodder for those that see the investment bank as Wall Street’s top dog, as well as those that see it as a creepy, conspiratorial vampire squid of finance.
But the key quote that’s getting attention comes in Goldman Chief Executive Lloyd Blankfein’s exchange with a reporter after a question on whether there should be limits to compensation:
Is it possible to make too much money? “Is it possible to have too much ambition? Is it possible to be too successful?” Blankfein shoots back. “I don’t want people in this firm to think that they have accomplished as much for themselves as they can and go on vacation. As the guardian of the interests of the shareholders and, by the way, for the purposes of society, I’d like them to continue to do what they are doing. I don’t want to put a cap on their ambition. It’s hard for me to argue for a cap on their compensation.”
So, it’s business as usual, then, regardless of whether it makes most people howl at the moon with rage? Goldman Sachs, this pillar of the free market, breeder of super-citizens, object of envy and awe will go on raking it in, getting richer than God? An impish grin spreads across Blankfein’s face. Call him a fat cat who mocks the public. Call him wicked. Call him what you will. He is, he says, just a banker “doing God’s work”
Wow!! Let’s navigate. (more…)
Neither a Buyer Nor Seller Be
Posted by Larry Doyle on November 6th, 2009 1:18 PM |
What does it all mean?
Observing the market’s muted reaction to the Unemployment Report this morning makes me think of a phrase not popular on Wall Street. That phrase, ‘neither a buyer nor seller be’ sends a mixed message bordering on indifference as to market activity.
Why are so many market participants not involved or less caring of the daily price action? I would put forth the following reasons:
1. Overriding concern with trying to get their own financial house in order.
2. A general level of disbelief in the integrity of certain market structures (for example, high frequency trading activities).
3. ‘Don’t fight the Fed’ meaning when the Federal Reserve is actively involved in the market, as they are now, it is never prudent to take the other side of the Fed’s trades.
4. Limited trust in the financial regulatory oversight of Wall Street.
5. Limited trust in the statistics being put forth from Washington. For example, questioning the integrity of the 640k figure of jobs saved or created by the Obama administration.
Add it all up and what is an individual to do?
Neither a buyer nor seller be….
What do you think?
LD
Retaining Risk on Wall Street: Necessary but Painful
Posted by Larry Doyle on November 5th, 2009 1:03 PM |
How did Wall Street lead the United States economy into the ditch?
The pure ‘originate to distribute’ model employed on Wall Street spelled the death knell for Wall Street and our economy.
I addressed how firms won under that originate to distribute model in a commentary from November 12, 2008, “The Wall Street Model Is Broken….and Won’t Soon Be Fixed!!”:
At the turn of the century, the Wall Street model was a pure “originate to distribute” model with little to no residual risk on behalf of the originators or underwriters. When there is no residual risk, those who “WIN” are the players that can purely process the most volume. Well, how does one get volume? Lower the credit standards, put fewer restrictions on borrowers, little to no covenants (NINA Loans: no income, no asset check). WOW!!! What were we thinking?? Well, Wall St. felt, “let’s worry about it tomorrow or maybe not at all because we are making too much money today.”
Tomorrow has arrived and Wall Street must now deal with the concept of retaining risk in their loan originations. The topic of ‘risk retention’ has been bandied about over the course of the year, but it was ratcheted up dramatically in a recent meeting of the House Financial Services Committee and U.S. Treasury on October 27th.
What came out of that meeting has potentially dramatic implications for the entire spectrum of loan origination, securitization, and distribution businesses on Wall Street and their subsequent impact on Main Street. Let’s navigate. (more…)
Goldman Sachs ‘Shooting Fish in a Barrel’
Posted by Larry Doyle on November 5th, 2009 9:37 AM |
Those who take risk do not always win. A variety of mathematical models dealing with risk address and negate the chance of almost uniform success by one party. While those on Wall Street would promote the overwhelming risks in the industry, I would maintain that Wall Street circa 2009 is not in the risk business. How so? Let’s review results from the firm regarded as the best at managing risk, that is Goldman Sachs.
The Financial Times provides insights into the Goldman Sachs ‘casino’ in writing this morning, Goldman Benefits From Trading Bonanza:
Traders at Goldman Sachs recorded only one daily loss in the third quarter, highlighting the trading bonanza sweeping Wall Street as central banks continue to pump billions of dollars into the financial system.
The performance – revealed on Wednesday in a regulatory filing – compares with two losing trading days in the previous quarter and confirms that the authorities’ drive to revive markets after the crisis is yielding huge windfalls for some banks.
Before the crisis, banks regularly recorded trading losses on several days in a quarter.
Goldman made more than $100m in profits on 36 of the 65 days in the three months to September and recorded more than $50m in profit on more than eight out of 10 trading days, the filing shows.
To lose money on a total of only three days over the last two quarters defies rules of logic, assuming that markets are free, fair, and balanced. Even in Vegas the house doesn’t win at that rate. The question begs then as to the nature of the supposed risks being taken by Goldman and every other Wall Street firm. Beyond the risks, we also need to question the very nature of the markets themselves. When a firm makes money 98% to 99% of the time, don’t tell me they’re taking risk. They are doing nothing more than ‘shooting fish in a barrel.’ How so? (more…)
How Will The Fed Exit ‘Hell’?
Posted by Larry Doyle on November 4th, 2009 3:06 PM |
None other than Meredith Whitney, the top rated bank analyst on Wall Street, characterized the Federal Reserve’s quantitative easing program to purchase mortgage-backed securities (MBS) as a ‘deal with the devil.’ Can the Federal Reserve sneak out of hell without disturbing the other residents? Can the Federal Reserve regain its stature of credibility and independence in the face of such massive government intervention and Wall Street influence? The challenge embedded in communicating how the Fed will ‘exit hell’ will be the single greatest determinant of economic and market direction over the next six months.
Did we catch a peek into those depths of hell today given the release of the most recent Federal Reserve policy statement?
What did we learn? (more…)
12th Street Capital Reviews FASB 166 and 167 and Tells Us Why Wall Street Will Need More Capital
Posted by Larry Doyle on November 4th, 2009 12:00 PM |
Money makes the world go round. Right now the world is not going around all that well because there is neither sufficient capital nor sufficient demand for capital from a global standpoint. That said, profits and bonuses are back on Wall Street so they must have sufficient capital, right? Not so fast.
While our wizards in Washington and on Wall Street are projecting an image of ‘come on in, the water’s fine,’ a crowd based in Norwalk, Connecticut has plans that hold major implications for our markets and economy. What crowd is this? The Financial Accounting Standards Board, otherwise known as FASB.
Recall that last spring Congress, supported by a heavy influence from Wall Street, rammed through a relaxation of the FASB’s accounting rule requiring fair value mark-to-market accounting. Regardless of what you think of that legislation, I think there is no doubt that the change allowed banks to mismark a wide array of assets and forestall losses. The need for the accounting rule change could be and will be debated ad nauseum. I believe the powers that be at FASB felt emasculated in the process.
Fast forward and let’s review the next major piece of accounting legislation emanating from FASB. That being FASB 166 and 167. I will admit I am no accountant, but I understand enough about the markets and accounting to know that the implementation of these rules, scheduled to go into effect in January of 2010 (in November 2009 for certain institutions depending on their fiscal calendar), will likely have a major impact on a wide array of financial institutions. (more…)
