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Banking as a Business: Performance, Reform, Judgment and Narrowness
By Dave Livingston, Managing Principal, Llinlithgow Associates (
www.llinlithgow.com
)
Dave is a management consultant primarily focused on improving enterprise performance by coupling strategy with execution thru the design and implementation of workable, integrated management systems.He blogs on this and related issues in Economics, Markets
& Investments and specific industries and companies at
www.llinlithwo.com/bizzx
, his BizzXceleration blog.
Introduction
When the Forest Service fights a major fire they can’t put the whole thing out all at once. In the famousYellowstone Fire of the 80s one of the problems is that areas that had been brought under control turned out to beonly temporarily tamped down. Underneath the ashes they were still smoldering away and when conditionsshifted, the wind picked up or changed direction, fresh ground was gained with new “fuel”, etc. the storm wouldburst forth again. Oftentimes with no warning. In fact we actually drove thru those fires one vacation and had theprivilege of literally driving thru a “controlled” area that was close behind us several hours later so that we had todrive miles out of our way to get back to our hotel. You might curse the inconvenience but then you had to stopand think – what would it have been like to have been caught in the middle of it when it started back up again? Onthe whole we’re thankful for the judgment of the fire boss who saved us from a lot of trouble, and maybe evensaved our lives.We were smart enough to obey the Fire Boss because we had too – the roads were close. Now that thesmoldering re-regulation fires are beginning to burst back into flames the Finance Industry seems to be doing justthe opposite. Despite repeated attempts on the part of the Administration since the beginning to reach out andwork with them constructively they have been lobbying behind the scenes as hard as they can to limit and reducethe various reform legislation packages. Along the way they have repeatedly treated the political establishment,the Administration and the various regulatory agencies and the President with disdain and disrespect. Worse,they have treated the Public with disdain and disrespect by announcing record bonuses, arguing that thosebonuses were the result of their own performance instead of government funding and support and reacted in atone-deaf and disdainful fashion to the widespread distress in the economy that most people are suffering thru.The core of their argument is that what they do is good for the economy and the country and their bonuses areearned and necessary to the efficient and effective functioning of their businesses. Sadly all the evidence isagainst them on that score. First, and most obviously, by almost destroying Western Civilization (that’s really notmuch exaggeration either – we came within a gnat’s eyelash of a second Great Depression which might havebeen much worse because of the accumulated debts engineered across the entire society by the Industry). Next,they came with inches of destroying their Industry itself, and certainly destroyed a decade’s worth of paper profits,as reported but actually more funny-money than reality. Third, thru the magic of financial engineering the Industryhas been the prime mover, admittedly with the heartfelt cooperation of the consumer, has saddled the economywith expanding and exponentiating debts. Then that debt has seriously hampered economic growth, drivensavings to negative rates and resulted in decades of declining and stagnant growth with negative total jobcreation. In other words rather than efficiently and effectively allocating capital to help the economy they havemanaged to harm it in a profound way. And done so by by creating paper profits on which they paid themselvesexhorbitant bonuses. Finally, there have been few, or no, major innovations in the market (aside from internalproducts and services that simply worsened the fundamental problem) that created new value for the rest ofsociety.
Page 2 of 34 Strategy without execution is fantasy. Execution without strategy is thrashing.Either without a management system is unlikely.
Table of Contents
1.
Ask Not For Whom the Siren Shrieks: Let the Finance Wars Begin 3
2. Debt, Wealth, Finance & Outlook: Sixty Years of Bubbliciousness 63. Pictures for a Prosecution: Wall St. Bonuses vs. the Public Good 114. Bonus Fantasies vs. Political Realities: the Reform Firestorm This Time 135. Firestorm Flaring up: Finance Reform, Compensation Wars & Sausages 146. Paying the Piper: Finance Industry, Performance, Value & Regulation 187. The Business of Banking: Challenges, Issues & Outlook 218. Jobs, Debt & Growth: Level Setting the New Normal 25
9.
Pecora 2 Hearings, Malfeasances, Your Future & Cusp Points 30
10 About Llinlithgow Associates 34
Page 3 of 34 Strategy without execution is fantasy. Execution without strategy is thrashing.Either without a management system is unlikely.
Ask Not For Whom the Siren Shrieks: Let the Finance Wars Begin
September 19, 2009
http://llinlithgow.com/bizzX/2009/09/ask_not_for_whom_the_siren_shr.html
The title is a play on words of course, taken from
John Donne's
Meditation VII
, which starts, "Noman is an island entire of itself; every man is apiece of the continent, a part of the main" and endwith "And therefore never send to know for whomthe bell tolls; it tolls for thee.". The message beingin a society we are all mutually interdependent.Sadly, this is a message which not only seems tohave been lost on the Finance Industry but theywould appear, judging from last quarter'searnings and their source in proprietary tradingprofits, to turned on its head. Ask not for whomthe bell rings for it rings for me, but never thee.Having been monitoring and analyzing thebusiness performance of the Industry for twoyears now we were, and are, nonetheless verysurprised.Because the other side of that coin is that society requires that it's major organizations and institutions provide aservice that creates value. And, especially, does no harm to society. When the opposite is true, and when it lookslikely that the behaviors will continue, society has no choice but to act. Well this week is the anniversary ofLehman's fall and it behooves us to ask what lessons have we learned, what have we done to fix the systemicand systematic problems and what will we do. Washington has been focused on saving us from our own and theindustry's follies but the President marked the occasion with a speech to Wall St. putting them on notice that thereckless behaviors of the past will no longer be tolerated; and inviting them to constructively contribute to creatingnew regulatory regimes. An invitation they've had for months and been fighting in every possible way. The weekended with the Fed's announcement that they will start setting compensation policy. Meanwhile Barney Frank onMSNBC provided pretty clear indications of where he sees things going and Pecora II is about to kick off. Now it'sa siren rushing to the crime scene and the results could be very ugly.
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