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INTELLIGENT DIALOGUE:

PRIME ANGST
MAY 2008
INTRODUCTION

THERE’S NO QUESTION that money is could be a completely new combination important factor in whether economies
a major worry of the moment. of factors that will change the financial feel bullish or bearish. But we also
Individuals are worried about prices landscape beyond recognition. know that financial fundamentals are
going up and jobs disappearing. important. So maybe current sentiment
Have globalization and high-speed
Businesses are worried about prices is a return to sober realism after a long
interactive technology made economies
going up and the economic cycle going spell of partying. Or is it exaggerating
more robust and quicker to bounce
down. Banks and financial institutions the problem and becoming a self-
back? Or have they made economies
are worried about the big losses they’ve fulfilling doomsday prophesy?
more vulnerable?
taken. And governments are worried We don’t claim to have any definitive
about their financial systems holding up Financial authorities such as the U.S.
answers to the questions asked here and
under the strain. Federal Reserve have intervened to
throughout this white paper. We are not
stave off a meltdown. Have they done
In short, we know for sure that the specialists in economics or finance.
enough? Do they have the tools and
world is in the midst of an international Porter Novelli’s expertise is in
sufficient cash to shore up the system
economic crisis. But there are plenty of understanding the questions that matter
and restore confidence? Can they
things we don’t know yet. to our clients and their stakeholders; it’s
control events, or will events end up
in harnessing these questions to foster
It may be that this is just another controlling them?
the dialogues that build brands and
phase in the up-down, yin-yang cycle We know that sentiment (business their business.
that all economies go through. But it and consumer confidence) is an

2 INTELLIGENT DIALOGUE: PRIME ANGST


WHERE HAS ALL THE MONEY GONE? - - >

ANYONE WITH AN E-MAIL account is all homes could revert into desolate, to work. Traditionally, lending capacity
was limited by two factors: finding
too familiar with spam announcing, dangerous places. Firms that are just
“Refinance now!” and “Easy credit at low hanging on may go under as credit lines borrowers who could be trusted to repay
rates.” But anyone paying attention has and consumer demand dry up. what they borrowed, and adhering to a
probably noticed that such messages have This white paper aims to provide a regulatory safeguard that ensured financial
broad view of the factors that precipitated institutions have enough capital to cover
become rarer over recent months. The
the crisis and raise five big questions, as the risk of borrowers defaulting. By
reason is simple: The waves of cheap
well as many secondary questions, about international agreement, their capital had
credit flooding the financial system have
some of its most resonant effects. to be at least 8% of their assets.
retreated. And they’ve left a tsunami’s
worth of damage in their wake. But as the U.S. subprime market gained
momentum, financial institutions made loans
By now, we’ve all read countless articles WHAT HAPPEN ED? at higher rates—but often with artificially low
about the “Subprime Bust,” the “Credit
IN A NUTSHELL, we stopped being thrifty. “teaser” rates that would jump up after a few
Squeeze” and the “Financial Crisis.” But
In the early 2000s, seduced by easy credit, years—to people with poor credit, then
while the first victims were borrowers who low interest rates and a rapidly expanding bundled these loans into debt obligations
took out risky subprime mortgages, the real estate bubble (which created the illusion called mortgage-backed securities (MBSs),
casualties now include a far greater swath of wealth), home buyers racked up enormous which they sold to investment banks. Banks,
of the population. The U.S. subprime crisis debt by taking out the biggest mortgages they in turn, packaged MBSs with higher-rated
has spawned a related, and scarier, prime could qualify for. Eager to capitalize on this investment bonds into collateralized debt
crisis, in which people with traditional 30- trend, lending institutions began marketing obligations (CDOs) and sold them to
year-fixed mortgages and even people who unorthodox loan products—adjustable-rate hedge funds. And hedge funds borrowed
own their homes outright are feeling the mortgages whose rates would adjust rapidly money using the CDOs as collateral.
pinch. Even among those who can still pay upward, interest-only mortgages that would This created huge profits as long as real
their bills, economic anxiety is epidemic. leave homeowners with no equity—and estate prices rose. But when subprime
Things may get worse before they get offering them to buyers with poor credit who borrowers started defaulting on their loans,
better, and there’s no predicting what all wouldn’t have qualified for a mortgage at all prices fell. So did the value of CDOs, and
the effects will be. If parents can no longer just a few years earlier. lending institutions got worried and started
borrow against the equity in their homes Predicated on the belief that the calling in their loans. Suddenly, nobody
and students can’t get education loans, economy would continue growing and wanted to buy CDOs, and balance sheet
then college enrollments may fall and housing prices would keep going up, these (capital) valuations plummeted. The
schools may have to lay staff off. Once- were big risks—and a radical departure ramifications have been pronounced,
gentrifying areas with many repossessed from the way the mortgage industry used fromWall Street on down to Main Street. ID

3 INTELLIGENT DIALOGUE: PRIME ANGST


BIG QUESTION 1

What happens when


borrowers can’t repay their loans,
and how does this affect everyone else?
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W HEN ONE
OWNING A HOME has long been a Financial institutions were all too happy
HOMEOWNER HAS
cornerstone of the American Dream, and to help. Home buyers could qualify for
for Britons, it’s also seen as an essential 90% and even 100% financing, enabling TROUBLE SELLING, IT’S
expression of personal autonomy—in fact, them to buy homes with nothing down.
Refinancing was as easy as pie. Banks AN INDIVIDUAL
former prime minister Margaret Thatcher
made property ownership a central tenet of loaned tens of thousands of dollars at a PROBLEM. WHEN MANY
her political philosophy. Now, even in time with property as collateral. They were
no longer funding sound property HOMEOWNERS (OR
nominally Communist China, the rising
middle class is keen to own their homes. investments but inflating a bubble of asset BANKS) ARE FORCED TO
speculation.
In recent decades, throughout the SELL, IT BECOMES A
developed world and beyond, buying a It’s an immutable law of economics that
bubbles burst. From the Dutch tulip mania SOCIAL PROBLEM.
home has come to be seen as a smart
investment. The more demand there was, of the 1630s to the dot-com boom of the
the higher prices rose and the “richer” late 1990s, the good times don’t last. And
homeowners felt—even if that wealth was sure enough, this property bubble is
illusory. As long as the real estate market bursting far and wide, especially where it’s
remained fizzy, consumers could count on blown up the biggest and fastest, the
selling easily and at a handsome profit, or United States, the United Kingdom, Spain,
else borrowing cheaply (i.e., refinancing) the Netherlands and Ireland. What makes
against the increased value of their
property.
this bubble distinctive is just how many
consumers are involved and how much -->
4 INTELLIGENT DIALOGUE: PRIME ANGST
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they all counted on their property to fund see a lot of owners sell, their property-tax according to the U.S. Department of
current and future plans. revenues decline and they have to cut Labor’s Bureau of Labor Statistics. There
services. If owners go back to being were almost as many in March 2008 alone:
renters, they’re less likely to feel they have 1,571 mass layoffs involving 157,156
What happens when a stake in maintaining their neighborhood. people—the highest numbers for the month
borrowers can’t pay? If people leave town altogether, local of March since 2003. And that doesn’t take
businesses suffer. Streets with vacant homes into account the hundreds of thousands of
THE TERMS VARY from country to
can quickly become dangerous. employees who were let go when their
country, but in general, when borrowers
companies downsized less drastically. In
miss three consecutive payments, the On an individual level, the mortgage
March 2008, the national unemployment
lender has to assign the whole debt to its mess doesn’t just affect the subprime
rate hit 5.1%, up from 4.8% in February and
Tier 1 capital. This amounts to a big loss. borrowers who may have been greedy or
from 4.4% a year earlier. ID
If the lender is leveraged at 7:1, a $70,000 ill-advised. It also hits a broad swath of
debt default will cost it almost half a prime borrowers who went by the book. A
million dollars in lost lending capacity. home that was purchased for $300,000 two SMART TALK
Lenders may force the sale of the assets years ago may have fallen by 15% in
(i.e., foreclose) to recover the debt. value, making it worth $255,000 today; an
Delinquent homeowners get kicked out. In owner who put 10% down now has
the U.S., some struggling borrowers don’t negative equity—a mortgage bigger than
even wait for the hassle of repossession; the value of the property. If he needs to CNN HOST LARRY KING: “If
they move out, put the keys in an move for work or for financial reasons,
and if he manages to find a buyer at
you’re losing your house
envelope, drop them off at the lender’s
office (“tinkle mail”) and disappear. $255,000, he’ll have to say good-bye to the or your job, you’re in a
$30,000 down payment and come up with recession.”
Nearly 3 million U.S. homeowners another $15,000 to repay the mortgage.
(6.3%) were behind on their payments in No wonder antsy homeowners are
the fourth quarter of 2007, and more than a addicted to websites such as Zillow.com,
million more (a record 2% of loans) were in
GERRY WILLIS, CNN
where they can track the price of their
foreclosure. In some areas, the statistics are homes on a daily basis. PERSONAL FINANCE EDITOR:
even worse: Around 4.9% of households in “Two million Americans
the Detroit metro area were in some stage People facing foreclosure have no choice.
of foreclosure during 2007; 4.8% in Others will have to decide between selling have faced foreclosure
Stockton, California; and 4.2% in the Las and taking the loss, or staying put and in the last year, and
Vegas metro area. Whole neighborhoods risking a further fall in value. This may not
be such a big deal in countries such as more are expected to.”
that were fueled by subprime borrowing
are now being hollowed out by defaults France, Germany and Italy, where people
and repossessions. typically buy homes with the intention of
living in them for the rest of their lives. It’s KING: “They’re in a
Even in communities where the likely to come as a big shock to the more recession.”
numbers aren’t this high, the repercussions fidgety and flexible markets of the U.S. and
are powerful. With banks trying to sell off UK, where consumers expect to buy and
the houses they’ve repossessed and sell several times in their life, trading up as WILLIS: “They’re in a
overmortgaged homeowners trying to sell their economic status improves.
recession, and they’re
rather than default on their loans, the
market has become flooded. In this feeling the pain. And
uncertain climate, would-be buyers are Are people without if you live near those
skittish about taking on debt, and lending mortgages safe?
institutions have tightened up their rules. people, your home value
EVEN PEOPLE WHO RENT their homes or
Demand has gone down at the same time is going down, too. This
own them outright are confronted by the
supply has gone way up, and home prices is a-you know, a domino
effects of the prime crisis. As people default
are tumbling. on loans and the financial sector stumbles, effect that’s going on
shock waves ripple through the economy. In
across the country.”
What happens order to cut costs, companies are doling out
pink slips at an accelerating pace. In the
to everyone else? fourth quarter of 2007, there were 1,619
WHEN ONE HOMEOWNER has trouble mass layoff events—defined as more than 50
selling, it’s an individual problem. When employees of one company filing
many homeowners (or banks) are forced to unemployment claims in a five-week
-Larry King Live, January 17, 2008
sell, it becomes a social problem. If towns period—that affected 265,454 workers,

5 INTELLIGENT DIALOGUE: PRIME ANGST


BIG QUESTION 2 SMART TALK

WILLIAM SCHNEIDER, CNN


-->
SENIOR POLITICAL ANALYST:
“Most Americans believe
that this recession
that they see already
here is likely to last
at least for another
year. We are finding
that three-quarters of
Americans say they have
already cut back money
on leisure activities,
movies and going out to
dinner and clothing
purchases.”

-CNN’s Your Money, March 23, 2008

Is today’s crisis a prelude to


even bigger disasters in other sectors,
such as education and retirement?
THERE ARE TWO POLES of opinion on Surowiecki recently wrote that it could
“become the ‘first national casualty’ of the
S TUDENTS ARE “TAKING the prime crisis. Some economists see it as
a “hundred-year flood”—a rare and ongoing credit crunch.”
A YEAR OFF” BECAUSE devastating event that will completely On a personal level, all around the
change everything. Others view it as just world, some of the most profound effects
THEIR FAMILIES CAN’T another trough in the cycle of ups and will be felt at the beginning and end of
BORROW AGAINST THEIR downs that all markets go through; some adulthood.
people get lucky on the ups, and others
HOME EQUITY FOR get unlucky on the downs. At the very
TUITION. THE IVY LEAGUE least, it looks like this is going to be a What happens when
deep trough. funding for school fees
WILL LIKELY WEATHER Globalization means that the effects of dries up?
THIS STORM, BUT the bust are felt far beyond its epicenter in RISING HOME EQUITY and easy credit
the U.S. subprime market. Some of the
THIRD-TIER COLLEGES world’s biggest names in banking, such as
have enabled many families to stretch a
little bit further with education. After all,
MAY SUFFER BECAUSE Switzerland’s UBS, have taken a big hit. families with middle-class aspirations have
The entire economy of Iceland, which
THEIR ENROLLMENTS depended heavily on international
always looked to education as the way to
a brighter future. And if that’s not worth
ARE DOWN. investors, is in such dire straits that New taking on a second mortgage, what is? As
Yorker financial columnist James

-->
6 INTELLIGENT DIALOGUE: PRIME ANGST
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prosperity has grown in developed cash into their checking accounts to stay What happens to
countries, this has pushed up the demand afloat if their job disappears. For starters,
for education as well as the costs. experts say, they should learn to cook, get older people who were
In the UK, for example, where public
a library card and, perhaps, a skateboard counting on their
(state) education has been in turmoil for
to fill the hours they used to spend at property investment?
the mall.”
decades, parents have looked to private RECENT DECADES HAVE been a turbulent
schools as a way of giving their children the time for pensions. Employees and former
best possible start in life. One consequence
SMART TALK
employees of big corporations can no
has been that the fees for UK private schools longer be confident that the company will
have risen twice as fast as retail prices. still be around to pay out their company
In the U.S., many homeowners counted pensions. Pension funds have
on borrowing against the equity in their KIM KIYOSAKI, AUTHOR OF underperformed or gone bust. Few people
homes to pay their children’s school or with individual retirement accounts
RICH WOMEN: A BOOK ON managed to save enough to cover the gap—
university tuition. But now, as property
prices fall, many parents find themselves INVESTING : “I think especially as people are living many more
unable to qualify for that second years after retirement and often needing
there is going to be a expensive medical care in the process. For
mortgage. And they can’t count on student
loans to cover the gap, because the recession coming. I many people, cashing in the equity in their
subprime mess has made lenders wary. home looked like the safest bet for their
don’t think the retirement years.
Students are “taking a year off” as their
families regroup. The Ivy League will government has any way However, the credit crisis and falling real
likely weather this storm, but third-tier to bail us out of this. estate prices will make that difficult if not
colleges may suffer because their impossible for older homeowners who had
enrollments are down. They may have to I really think it’s a been hoping to withdraw equity from their
lay off staff. In some “college town” cities, perfect storm of oil home (known to the Dutch as “eating your
where the school is a prime employer, the house up”). Others who had counted on
effects could be felt far beyond the quad. prices-energy prices- downsizing—selling their current home, buying
going up, the whole a cheaper one and living off the difference—
How will the prime subprime mess, the
may find that plan won’t work anymore.
crisis affect millennials? weakening dollar,
Furthermore, in the United States, older
people in particular were victims of
WHETHER THEY’RE IN school, delaying
unemployment going up, predatory lending—even “reverse
their enrollment or already graduated and
mortgages” that actually increased as time
working in an entry-level job, Americans the retail sales are went by. Some retirees are finding
and Europeans in their late teens and early
dropping. . . . And it’s a themselves not only without home equity
20s are affected differently than their older
but even without a home. The American
counterparts. They grew up during the global problem, not nuclear family is exploding as members of
greatest period of wealth creation in
just a U.S. problem.” this generation move back in with their
modern history. This is the first real
adult children (and those children’s young-
economic downturn they’ve seen—and it’s
adult children, too).
arriving just when they expected to be
coming into real spending power and Global demographics make this concern
independence. Their inflation-adjusted especially acute. In most developed
earnings are down, their job security is in countries, the population balance is tipping
doubt, and their student loan debt is high. toward the gray end of the scale, with
-Larry King Live, January 17, 2008
The economy is very much on their minds: median ages of 36.7 in the United States,
In an October 2007 Pew Research Center 39.9 in the UK, 39.2 in France, 43.4 in
poll, 80% of voters ages 18 to 29 cited the Germany and 43.8 in Japan. The big issue
economy as a “very important” concern, And whether because they’re delaying for countries with aging populations is
versus 61% who named the environment college or because they’ve “boomeranged” balancing the books: As more people retire
as a major issue. back home after graduating and having and need more health care, and fewer
trouble paying the bills, more and more people enter the workforce and generate
As a blogger on mlive.com put it, “Now
20-somethings are living with their parents. wealth, where will the money come from? ID
is indeed the time for millennials to pump

7 INTELLIGENT DIALOGUE: PRIME ANGST


BIG QUESTION 3

Does the prime crisis


have health implications?
SMART TALK

ANDREW KOHUT, PRESIDENT,


PEW RESEARCH CENTER:
“It is not a pretty
story. Every month-
January, February, and
March-we get a more
negative reading on the
national economy. Only
11% are telling us in
the recent poll that the
national economy is
either excellent or good.
We have to go back all
the way to the recession
of the mid-’90s to get
such a negative
appraisal from the
American public.”

--> -The NewsHour with Jim Lehrer, March 27, 2008

IN THE U.S., at least, it looks likely that who did. They were also three times less
it will. The country is undergoing a likely to fill prescriptions for necessary
health care crisis in which 47 million medication. ‘These unmet medical needs
Americans are uninsured and their ranks directly put a child’s health at risk,’” said a
are growing. Time magazine recently researcher at Cincinnati Children’s.
reported that “As the economy spirals The crisis affects adults, too: “Leading
downward, a series of recent reports health researchers at the Urban Institute
forecasts that the country’s health-care on April 29 warned that each percentage-
crisis is about to get worse, particularly for point rise in unemployment would result
children.” The article cites a study in an additional 1.1 million people losing
conducted at Cincinnati Children’s health insurance,” the same Time article
Hospital Medical Center that found that reported. Even people who still have jobs
“kids who did not have continuous health and employer-funded health plans are
insurance were 14 times less likely to have
regular visits with a pediatrician than those
struggling: Premiums have shot upward at
a rate ten times greater than incomes. -->
8 INTELLIGENT DIALOGUE: PRIME ANGST
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“A S THE ECONOMY SPIRALS DOWNWARD, A SERIES OF RECENT


REPORTS FORECASTS THAT THE COUNTRY’S HEALTH-CARE CRISIS
IS ABOUT TO GET WORSE, PARTICULARLY FOR CHILDREN.”

Forced to choose between buying insurance the journal Public Health, unemployed men worries about job security and anxiety
and making mortgage payments, a growing and their families had an increased about the financial future have not cheered
number of people is opting out of health incidence of mortality, particularly from anyone up.
plans. suicide and lung cancer; they were more
Recent research bears that out. A study
likely to use general practitioner and
Whatever the reason, families are published in the journal Development
hospital services and receive more
forgoing medical attention. Time reported Psychology found that “a reduction in
prescribed medicines; and their use of
that in a poll conducted by the Kaiser disposable family income constitutes a risk
tobacco and alcohol increased after the
Family Foundation in April, 29% of for child mental health through increased
onset of unemployment.
respondents said they’d postponed economic pressure and negative changes in
necessary care, 24% had put off a The mental health effects will likely be parental mental health, marital interaction,
test or treatment and 23% had chosen not even worse. The prime crisis has hit the and parenting quality.” MSNBC.com
to fill a prescription. U.S. at a time when the nation was reported that “divorces and reports of
already in a pretty glum frame of mind, abuse are rising as families burdened by
Furthermore, research has shown that
thanks to 9/11, the war in Iraq and impending foreclosure take their stress out
unemployment is itself detrimental to
alarming reports about climate change. It on one another.” ID
health. According to a review published in
goes without saying that mortgage angst,

SMART TALK

SCOTT GURVEY, NIGHTLY DAVID WYSS, CHIEF DEAN MAKI, CHIEF U.S.
BUSINESS REPORT ECONOMIST, STANDARD & ECONOMIST, BARCLAYS
CORRESPONDENT: “For POOR’S: “People are CAPITAL: “There does seem
seven years, the scared. . . . What they to be something of a
American consumer has are scared about is the media effect, as well.
been the hero, spending future. Their Consumers say they’re
with abandon in spite expectations for the hearing worse news on
of market turmoil, future are at the the economy than any
geopolitical threat lowest levels we have time in the last 50
and natural disaster, seen, well, in 15 years years. . . . So that does
until now. There is on these reports, 35 seem to be playing some
now no question years on the numbers role in addition to the
that the consumer is earlier this week from rise of inflation and
pulling back.” the Conference Board.” softer labor market.”

-Nightly Business Report, March 28, 2008

9 INTELLIGENT DIALOGUE: PRIME ANGST


BIG QUESTION 4

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If banking and finance SMART TALK

are to blame, who will LYLE GRAMLEY, FORMER


FEDERAL RESERVE
punish them and how? GOVERNOR: “I don’t think
any of us have any
cookie cutter solutions
TO PUT IT MILDLY, it’s unlikely that the “We can’t pretend that there has been no
to the problem. But we
banking and finance industries will emerge reputational damage. Experience says it
from this turbulent period with enhanced goes away after two or three years.” need to begin thinking
reputations. Executives who routinely Merrill Lynch CEO Stanley O’Neal outside the box, because
enjoy multimillion-dollar remuneration for bowed out in November 2007, and his
their expertise and risk-taking genius have
what we’re experiencing
successor, John A. Thain, is currently looking
presided over huge losses and potentially at $22 billion of write-downs. The roll-call of now in financial markets
huger losses to come. big write-downs continues with Citigroup is unlike anything I
Those losses are staggering—more like ($21.1 billion), HSBC ($17.2 billion), Morgan
have seen in more than
the GDP of some developing countries Stanley ($9.4 billion), Deutsche Bank ($7.1
than a big bump in corporate accounts. billion), Bank of America ($5.3 billion), Bear 50 years of looking at
The biggest so far (as of April 16, 2008) Stearns ($3.2 billion), JP Morgan Chase ($3.2 the economy.”
has been Swiss-based UBS, with $37.4 billion), BayernLB ($3.2 billion), Barclays
billion of write-downs, prompting the ($2.6 billion), IKB ($2.6 billion), Royal Bank
departure of chairman Marcel Ospel. His of Scotland ($2.6 billion) and Credit Suisse -CNN Newsroom, March 19, 2008
successor, Peter Kurer, told Financial Times, ($2 billion).

10 INTELLIGENT DIALOGUE: PRIME ANGST


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F INANCIAL INSTITUTIONS’ LOSSES ARE STAGGERING—MORE LIKE


THE GDP OF SOME DEVELOPING COUNTRIES THAN A BIG BUMP IN
CORPORATE ACCOUNTS.
For ordinary consumers, the dented SMART TALK
reputations of high-rolling finance houses
Will it mean a return to
may be of little lasting interest, even stricter regulation for MICHAEL KINSLEY, TIME
though taxpayers’ money is being used to the banking industry? MAGAZINE COLUMNIST:
rescue some from their own lack of
FOR THREE DECADES, the finance “Increasingly, the U.S.
judgment. In fact, “rogue trader” Jerome
industry enjoyed increasingly loose
Kerviel has become something of a folk
[money] abroad. It’s
regulation; banks and mortgage lenders government is borrowing
hero in France, where he is being blamed
have been allowed into each other’s
for Societe Generale SA’s record 4.9
territories, and geographical barriers to borrowing it from other
billion-euro ($7.7 billion) trading loss. But
trade and ownership have been
for regulators, lawyers and financial governments. You know,
dismantled. And they engaged in lending
authorities, it’s going to be different matter.
practices that the U.S. Department of for us to be in debt to
Housing and Urban Development has the Chinese is a very sad
SMART TALK identified as predatory, including:
development-not that
• “Loan flipping,” or refinancing there’s anything wrong
ERIK HURST, PROFESSOR, borrowers’ loans repeatedly in a short
period, with high fees each time with the Chinese, but, you
UNIVERSITY OF CHICAGO know, the average income of
GRADUATE SCHOOL OF • Excessive fees and “packing” that far
a Chinese citizen compared
exceeded what would be expected or
BUSINESS: “U.S. consumers to the average income of
justified on economic grounds and
today are scared. The “packed” into the loan amount an American citizen-the
uncertainty in the without the borrower’s understanding idea that they are
economy is spilling over • Lending without regard to the financing our lifestyle,
to the consumers.” borrower’s ability to repay, it’s a little sad.”
including elderly people living on
fixed incomes with monthly
FASHION CONSULTANT AMY payments that equaled or exceeded PBS HOST CHARLIE ROSE:
SALINGER: “I’ve noticed their monthly incomes “We’re borrowing money
people have adjusted from them so we can buy
• Outright fraud and abuse, with
their spending in terms deceptive or high-pressure sales tactics, their goods.”
often against certain groups—the
of how they’re spending
elderly, minorities and individuals with
their money. They’re not lower incomes and less education. -The Charlie Rose Show, March 28, 2008
as frivolous as they were.”
Loose regulation allowed the industry to
markets open. Regulation will be light, but
make a lot of money through the use of
there will be busts. The state will sometimes
HURST: “There’s more complex new structures (such as CDOs)
have to clear up and regulation must be
uncertainty out there. and to disguise risk through creative
about cure as well as prevention. Or
accounting. Going forward, it seems
More uncertainty, less governments can aim for safety and opt for
inevitable that governments will get
dumbed-down financial systems that hobble
spending. ‘I have to save together to tighten regulation. On the other
their economies and deprive their people of
hand, as the Economist commented recently,
more because I might be the benefits of faster growth. And even then
“The notion that the world can just regulate
the one who loses my job a crisis may strike.”
its way out of crises is…an illusion. Rather,
tomorrow.’” crisis is the price of innovation, so In any event, look for lawyers to get
governments face a choice. They can involved, as there’s ample room for class-
-NBC Nightly News, March 20, 2008 embrace new financial ideas by keeping action lawsuits against predatory lenders. ID

11 INTELLIGENT DIALOGUE: PRIME ANGST


BIG QUESTION 5

Who will benefit


from the credit crunch?
“I HAVE NO DOUBT
THAT POWER
AND OWNERSHIP
--> OF RESOURCES
ARE SHIFTING
EASTWARD.
THIS RAISES
QUESTIONS
ABOUT
GOVERNANCE
AND PRIORITIES
THAT NEED TO
BE THOUGHT
THROUGH
CAREFULLY.”

THE ECONOMICS-TEXTBOOK reading of supermarkets. Lower-price outlets of all


the prime crisis is that it’s an example of sorts stand to do well as consumers look to
how markets reallocate capital and stretch their reduced budgets. When money
resources to those who can use them most is a source of anxiety, a Starbucks latte may
efficiently. In human terms, it means boom seem like irresponsible indulgence whereas a
times for insolvency practitioners. There Dunkin’ Donuts coffee feels more like an
are buying opportunities for eagle-eyed affordable comfort.
entrepreneurs with cash to buy repossessed
houses and goods at bargain prices. And as Who has the cash and
weak companies shed staff and contract,
well-run companies that operate with spare
what will they do with it?
cash can expect to pick up talented new JUST AT THE TIME the economies of the
hires and expand their business. U.S. and Western Europe are foundering in
the credit crisis, the oil-fueled economies of
the Persian Gulf and the trade-fired
Which retail sectors can economies of Asia are flush with spending
expect to survive and cash. Fortunately for the West, at least in
thrive? the near term, they’re willing to invest some
of it in Western markets. At the beginning
WHATEVER IS HAPPENING to the economy, of 2008, the governments of Singapore,
people still have to eat. But where they eat Kuwait and South Korea provided a large
changes: Good-bye, restaurants and Whole
Foods; hello, home kitchens and discount
chunk of a $21 billion investment to prop
up Citigroup and Merrill Lynch.
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12 INTELLIGENT DIALOGUE: PRIME ANGST
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SMART TALK
The long-term effects, however, could or no-risk investment. But for those of us
lead to painful adjustments as the U.S. trying to make sense of the situation, the
loses, or at least shares, its economic smartest strategy will be to cultivate an
superpower status. Although the details are inquisitive mind, to take nothing for
complex, the big picture is simple: “I have granted and to use these questions and
no doubt that power and ownership of others as the basis for Intelligent Dialogue.
JOURNALIST TONY JONES:
resources are shifting eastward,” explained
“If it is the worst Roger Martin-Fagg of Henley With all the angst it’s provoking, we see
downturn since the Management College in the UK. “This the prime crisis as an opportunity to
raises questions about governance and sharpen the skills needed for the sort of
great depression, how priorities that need to be thought through dialogues that build reputations and
can the rest of the carefully. Among other things, the relationships. When the stakes are so high,
constituent membership of G9 needs to details of tone, manner and intention are
world avoid being change so that it reflects not only the crucial. Stakeholders are in a heightened
dragged into the abyss productive power of countries but also state of alert. Organizations that make
their financial power. The Gulf States light of the crisis and claim to be
along with the United
wouldn’t even qualify for a G30 on the completely in control risk coming across as
States?” basis of their economies, but their financial glib and insincere; official responses to
power is huge.” events such as SARS in China and
Hurricane Katrina in the U.S. have made
ECONOMIST AND AUTHOR As Emirates Business magazine put it,
people suspicious of reassuring
“Western banks are wilting and American
JOE STIGLITZ: “Oh, I don’t pronouncements. Organizations that speak
house prices are in free fall; for the UAE,
of the crisis in apocalyptic, “end of the
think it can. Right now however, a recession in the United States
world as we know it” terms risk rerunning
offers considerable opportunity.” The
you are increasingly the Y2K scenario and being dismissed as
publication went on to say, “Another
sensationalist scaremongers.
hearing stories in positive benefit from the wider global
economic woes and dollar decline has Whether the issue is the prime crisis,
Europe that it looks
been to make the UAE an even more climate change, health care, GMOs or any
like one business attractive destination for foreign capital.… of the other big issues that concern people
person, the skid marks The US may be in trouble following the everywhere, the challenge and the
sub-prime mortgage crisis, but euro-zone opportunity are similar: to earn stakeholders’
are on the road. It does economies appear to be in a robust shape,
trust through dialogue and to use it wisely.
look like Europe will despite dire numbers emanating from the
continent’s banks.” In this cynical, media-savvy age, nobody
be affected. . . . I think
expects organizations not to have vested
that those countries interests; everybody has an angle,
who’ve diversified
IN CONCLUSION everybody “talks their book.” The
THE PRIME CRISIS raises countless imperative for organizations is to talk
their markets and are about issues not just from their own
questions—the starting points for a lively
more dependent on and fruitful exchange of Intelligent perspective but also with awareness of and
Dialogue. What really happened? Is respect for other perspectives, including
China are going to
anyone to blame, or was it just one of those of implacable critics. The imperative
probably weather the those things? What’s happening now? is for organizations to focus on more than
storm far better.” How much worse will it get before it gets their own questions about an issue and to
better? How will we know when it’s over? be aware of wider questions that may be
Engaging with any of these questions troubling immediate stakeholders, or the
raises dozens more about what’s coming stakeholders of those stakeholders.
next for the global economy and
individual consumers. Porter Novelli’s imperative is to stay
aware of many perspectives on big issues
-Lateline (Australia), May 5, 2008 No one can offer all the answers, and and to bring in wider questions that may
there’s no such thing as a fail-safe strategy impact our clients’ business. ID

13 INTELLIGENT DIALOGUE: PRIME ANGST


The Porter Novelli
INTELLIGENTDIALOGUE
Principle
WHAT PORTER NOVELLI UNIQUELY offers can be
summed up in two words: Intelligent Influence. The basis for Intelligent
Influence is Intelligent Dialogue. As yesterday’s mass media morph into
today’s interactive media, people expect to talk back at journalists and
opinion leaders. Yesterday’s way was set-piece monologues broadcast to
passive audiences by powerful brands and media owners. Today’s way is
fluid, evolving dialogues conducted across multiple, linked channels.
Ongoing dialogue is now possible and is truly the best basis of dynamic
long-term relationships. Easy sound-bite answers are seductive; they give
a comforting but illusory sense of resolution. Instead, we need to cultivate
open, questioning minds that ask smart, creative questions. Smart
questions spark Intelligent Dialogue, open up thinking and tap into the
power of many minds.

PORTER NOVELLI was founded in Washington, D.C., in 1972 and is a part of


Omnicom Group Inc. (NYSE: OMC) (www.omnicomgroup.com). With 100
offices in 60 countries, we take a 360-degree view of clients’ business to
build powerful communications programs that resonate with critical
stakeholders. Our reputation is built on our foundation in strategic planning
and insights generation and our ability to adopt a media-neutral approach.
We ensure our clients achieve Intelligent Influence, systematically mapping
the most effective interactions, making them happen and measuring the
outcome. Many minds. Singular results.