What Will Tomorrow Bring: Retro Fashion in Organizations

The organization, whether group, tribe, team, corporation, or government represents the ugly, bloody edge of our evolution as social animals. It's complicated ... and we're not NEARLY done yet. Perhaps a few millennia down the pike we will get it right.

At the moment, I feel safe in saying that we are all collectively burnt and battered into pessimism about our ability to get it right. Look left. Look right. Share your booze with your neighbor. Their loosened lips will start to tell you how anti-government, anti-bank, anti-corporate, or anti-politics they are. 

I can't purport to foresee the best master plan. But I am an organization-man. Based on daily frustrations, I can highlight a few very very VERY simple things which will ever-so-slightly evolve us. These things were once fashionable in organizations, but have gone out of style. It's time to go retro.

• Meeting agendas and minutes
• Documentation of decision taken and justification thereof
• Reading materials prior to meetings
• Discussing and understanding issues prior to meetings
• Taking time to give the context of a discussion beforehand
• Following up on your OWN To Dos
• Speaking in simple sentences which directly respond to the question at hand
• Making decisions based on informed analysis and then EXPLAINING your decision-drivers to anyone who will listen. Rinse and repeat until you have consensus.
• Saying you were wrong. And knowing why.
• Building objective business cases for investments
• Viewing man/hours as a valuable asset you are investing
• Overtly recognizing and funding innovation time at all levels (except at Google, of course)
• Having a secretary to keep the high-priced execs from spending hours formatting documents and finding conference rooms for meetings. (talk about inefficient division of labor)

Goldman needs Privacy

At one point this week, the headline was:

Roiled by op-ed, Goldman loses $2.15 bn m-cap

Goldman didn't get where it was by being a public company. It was a partnership for the first 130 years before going public only 13 years ago. Those have been a pretty awful 13 years for the firm.

The latest round of headline-generators and talking head fodder would have never happened if Goldman were still private. The dude wouldn't have even had the motivation to publish the op-ed. The Times wouldn't have cared to print it. Nobody outside the firm would care to read it.

Instead, over the course of a few hours of stock trading, value was "destroyed" to the tune of ... well, more money than 99.999% of the world's population will see in their lifetimes. Actually, add a few more 9's after the decimal. Billions. With a "B." As in Buffett-sized.

Or was it? If a whiny Dear John to a former employer full of news (which, as Forbes pointed out, everybody already knew) can destroy billions of bucks, then maybe that value didn't really exist to begin with. Stepping back from the greater fool theory, perhaps GS should be valued based on the discounted cash flows it can generate. Novel concept, eh? Maybe I should write a book and teach at Wharton.

Then again, maybe my book should take a different approach. Perhaps Goldman should never have become GS in the first place. Perhaps a financial firm with ridiculous leverage ratios, a wacky capital structure, a penchant for mercenary dealings (AIG collateral call ring a bell?)  needs a small, concentrated, captive based of owners rather than a whole "street" of busybodies to answer to.

The only way Goldman's stock has impressed is in its volatility. It hasn't even doubled over the past 10 years. Hardly a good investment. The management has never been able to find an acceptable balance between staff incentives and shareholder value. Perhaps no such balance can exist for more than a few microseconds. Perhaps GS is an unstable element with a short halflife. Maybe they're in a constant state of containing the meltdown, hoping it wont Fukushima on them tomorrow ... or the next day. Perhaps this is distracting them from their "day jobs" of making deals with and on behalf of clients.

Nice adventure, guys, but it's time to take your marbles and go home. Cash in the chips and go private.

Buy!/Sell!: Uninformed Stock Picks

Long:

+ Um... Well... There's... No, wait. I know this one ... 

Short:

- Research In Motion. How's this for a losing strategy: Happen onto a temporary natural monopoly. Underinvest for a decade. Let Apple and Google (et al) blow you away in the market. Ignoring your lack of expertise or differentiating value, throw millions at trying to flank these titans. Discover you've created a product nobody wants and sell it at cost (less marketing). Justify this by saying you are going to sell your old products in emerging markets at a high margin. Discover emerging markets are even more sophisticated than mature markets in this industry, with Apple and Google (et al) already dominating.

They will get bought by Google or one of its suppliers for pennies. RIM's customers will be ported over to the buyer's platform and products. The end.

(note: this is not investment advice!)

Nik's Laws: Profit

If profit is outlawed, only outlaws will profit.

What Will Tomorrow Bring: Financial Utilities

The story of the financial industry is a breathless one. With all that money sloshing around, smart people know that there is profit to be made. Unfortunately, due to that same money (=liquidity) and profit potential, financial products and services get commoditized very quickly. Competitive advantage is fleeting. It's textbook hyper-competition. Constant, hostile, explosive innovation is necessary to survive.

Unfortunately, that also leads smart, sensible people to do horrifically stupid, risky, nonsensical things which relieve immediate (financial or political) pressures but which have been entirely "un-thunk" in terms of their end-state consequences.

Hyper-competition also intrinsically conflicts with hyper-regulation.

Last year I predicted that the weight of new regulations (written and unwritten), political instability, and economic realities would force financial institutions to give up their for-profit status to become utilities:

Financial Institutions will once again be lobotomized. Divided into two classes:
- Utilities (aka retail banking)
- Casinos (aka everything else)

"Utilities" are done for as a for-profit enterprise. Just like Amtrack and Con Ed, they will require permanent and heavy subsidy verging on nationalization to survive the tonnage of regulations which will be piled on.

Evidence continues to pour in to support this including:

• More than 8,000 entries in the OCC's list of sanctions here. They are just one of a half-dozen governmental agencies which take enforcement actions against banks
• 111 bank collapses in the past 12 months per the FDIC's Bank Failure website. Twenty-six banks collapsed between 2000 and the end of 2007
  
• Voluntary closure of a regional bank this week "in an extreme example of the frustration felt by many bankers as regulators toughen their oversight of the nation's financial institutions"
• According to a Marakon report (source of the chart above), "only four US banks, or 10% of banking equity capital, are expected to generate returns above the cost of equity; a staggering 90% of banking capital is not performing"

But you ain't seen nothing yet. The above are mostly smaller institutions. The financial titans (Titanics?) are better at fighting and delaying, but trust me they are also bending under the weight. Their stock prices are beginning to reflect it.

UCSD professor Frank Partnoy yesterday published his opinion in the Financial Times with a piece titled "The coming world of smaller banks." He highlights not only the unavoidable reductions in share prices and headcounts, but more damningly, the unavoidable extinction (or drastic evolution) of the standard banking business model:

If all of the world’s major banks had failed during 2007-08, and regulators had permitted Apple, Facebook, Google and Microsoft to take over the economy’s capital allocation function, how would employment numbers have changed? Surely any neo-bank would hire smart lenders, traders, analysts and advisers, the people who have the strongest relationships with, and knowledge of, the institutions that demand or supply capital. But would they have hired all of them? Half? How many people would a new bank really need? Hedge funds take on traditional bank functions with a fraction of the employees.

He concludes:

[Banks] will occupy a smaller place in the economy and they will be less profitable. In a decade, there will be fewer professionals working on Wall Street than there are today.

If I map his comments onto my own, it becomes clear where the job losses will be. The "Financial Utilities" will be characterized by a low-skill, low-innovation, low-margin, high-volume business model. Since capital and information are almost entirely digital these days, there is nary a barrier to massive automation. The remaining jobs will be the folks keeping the computers humming and the 'relationship' people in high-touch areas like customer complaints and regulatory relations.

Take THAT Paranoid Saudi/UAE/India

(ad placed by the government of Bahrain in the August 19th Economist)

Less is More

From today's Meet the Press:

Kramer: The CEOs I talk to - they're hiring ... in Russia, they're hiring in Brazil, China ... its rather quizzical that we know what the Communists will give us, but we don't know what the capitalists will give us.

Greenspan: Investment occurs when you have a stable economy and when you can foresee what's going on in the future ... it's very critical that we get the uncertainties out of the system.

It's simple math, included in pretty much every good risk model - volatility is a multiplier on risk. Higher risk leads to lower willingness to invest at a given return. (Smart) investment is a multiplier on growth. Growth is a multiplier on income. Sustained income (without excessive debt) creates wealth.

Washington ... don'tcha want wealth? Think of all the new taxes you could levy.

Yeah, What HE Said: Opportunities

Most critiques of free markets can be better phrased as business plans.
- Devin Finbarr of Intellectual Detox

What Will Tomorrow Bring: Death to Paper Dinosaurs!

On Chris Matthews this morning, a bevy of career journalists held a pity party. Boo hoo, the world is coming to an end! We're headed off a cliff!

Were they talking about the economy? Politics? Healthcare? Afghanistan? No, all that was over on Meet the Press.

These highbrow muckrakers were singing the dirge of the whole "all the news that's fit to print (and most of it that isn't)" industry. RIP Rocky Mountain News. RIP Seattle Post-Intelligencer. RIP New York Sun.

The quotes were just so ridiculous to me:

"The Internet doesn't have the fact checking."
"The Internet dumbs people down because it's so targeted." "You'll never get that out-of-the-corner-of-your-eye story about haircuts in Cambodia."
"We're losing the group sensibility that creates stories."
"We'll just never have those good ole days of newsroom collaboration. Blogging is very solitary."
"Everyone loses when a newspaper shuts down."
"There's just something special about freezing your butt off going outside in the morning to get the paper in your jammies."

Puh-leaze. I won't rebut line-by-line; I have enough windmills. I would write it off as a generational gap, but sadly, even some younger journalists bemoan the change.

I feel almost silly making the following self-evident statements. The Internet is the salvation of journalism. It puts news on steroids, going wider AND deeper. It enables new levels of cost efficiency and simultaneously new levels of democratization/decentralization. It's vastly lower bars to entry increase entrepreneurial participation. The spectrum of available viewpoints is broader, and can be communicated more effectively via richer multimedia. Rather than damaging credibility, democratization actually ensures that sharp minds and good ideas gain much better (and quicker) visibility. They are self-propelled by the level of interest they generate. No need to support the massive old "launch" infrastructure.

These journalists need not worry. Democratization does not erode their credibility ... as long as they continue to earn it ... and invest some new synapses in figuring out what's going on.

This guy, certainly gets it. He's an Ivy League math/econ major who calls print media "the dead tree and typewriter industry." Yet he's the Web Editor-in-Chief for The Daily Pennsylvanian and is avidly pursuing a career in journalism. Why would such a smartypants peg his future to such a dinosaur? He's not afraid. He understands the new business model. Why does it not surprise me he's a first generation American?

He's not alone. Fellow Ivy-leaguer Jason Kilar is closer in age to the talking heads on Chris Matthews, yet he's not scared either. He's dragging print and TV into the 21st century kicking and screaming ... and making big bucks at it.

Sam Altman, a poster child for a bright future, and Inc. Magazine's #4 "coolest entrepreneur", told Charlie Rose that when he wants to know the most important thing going on right now, he checks Twitter. "It always scoops traditional media."

Even Al-Jazeera isn't complaining ... and in this case, that's a good thing.

When a Bad Reputation is Just Fine

For a couple of weeks, I've been following a debate on the importance of reputation.

In this entry on his NY Times blog, Paul Krugman argued that insurance companies don't give a rat's rear about their reputation or the satisfaction of their customers. He didn't say, but clearly was saying that he'd found yet another need for a governmental white knight. He explicitly launched snark at a series of Bryan Caplan Econlog posts which placed great importance on reputation in economic decisions. Bryan responded with this post, entertainingly including pirates and VDs in his case. At the end, he asked his audience:

What is your favorite example where reputation doesn't make voluntary
interaction work well? Is the problem demand, supply, or what?

As moths drawn to fire, many responders couldn't help but focus on the pirates and sex. Others have thought up niche examples such as the "fall forward" effect of bad bosses with good employees. They needn't. His question can be answered with common real-world examples. My contribution to the debate is as follows:

When doesn't it work? When there is:
1. A very large, fragmented population of consumers, most making infrequent purchases
2. A largely standardized product (ie: highly regulated or commoditized), leading to high inelasticity of demand to price ... causing price to be the major differentiator
3. And a highly transparent market in terms of price

Airlines, credit card companies, and banks are all great examples. Major players make little investment in customer retention, preferring instead to counter attrition with new customer acquisition, based largely on price, combined with creation of monopoly/oligopoly power (usually only local or short-lived). Any marketer in these industries will tell you that their key metric is the ratio of attrition to acquisition.

Said concretely, an airline can sell confirmed seats to someone else, strand 300 customers in a layover airport overnight, make us stand in line for hours to get re-booked, pack each of us between sumo wrestlers on a tiny aircraft, over-charge us for a bottle of water, and then wreck your luggage. All the while, their demoralized, unionized employees will make scant few attempts to pay attention to, much less accomodate us customers to retain our business. The airline knows it can lure most of us back next time by simply offering the cheapest fare for the route and time of our next trip.

Unsurprisingly, the story is much different in the international market where they have far less ability to secure those temporary monopolies and thus must compete on something other than price alone. Fly the same carrier domestically and internationally. You'll find it hard to believe it's the same company.

Gee, I wonder if therein lie the seeds of a real answer for both Paul and Bryan.

Follow-Up: If we REALLY wanted to fix healthcare, we'd put the patients in charge, not the government!

If you lived in quaint Europe 100 years ago, it would have taken you most of the day to shop and prepare meals. You'd have to make separate stops at the local butcher, baker, grocer, and so on. If the dairyman had no more butter, you'd just have to live without it. If the local miller sold sub-standard, gravelly flour, you'd just have to eat it that way. And since there was no refrigeration, you had to repeat the whole shopping process every day. Fast forward to today, and you can stop at the Super Wal-mart on the way home from work to pick up an incredibly broad diversity of foods at quality incredibly higher. Strangely, healthcare, the Jurassic Park of industries, hasn't had to go through the same evolution. As a result, its tragically inefficient, with quality tragically uneven, at costs tragically high.

Who could disagree with a new healthcare industry that focuses relentlessly on Efficiency, Transparency, Customer (=patient) Satisfaction, and Objective Effectiveness? The devil, of course, is in the dollars ... but not in the way Congress keeps telling you.

All the hype and sob-stories aside, the bottom line problem with US healthcare is that the consumer doesn't get to choose, and doesn't have to pay. The consumer is not empowered.

This can be seen in, for example, the dysfunctional, polygamo-incestuous oligopoly of employer-subsidized insurance. Lose your job and lose your health insurance? Dumb.

The same issue can also be seen within individual insurance plans. Coverage and treatments are black or white, take it or leave it, as opposed to a menu of shades of grey to better fit individuals' situations, expectations, and desires.

Health law and privacy are similarly all-or-nothing. Even when no other treatment works, experimental or alternative approaches are shunned by doctors simply on the basis of legal or bureaucratic grounds. Despite best intent, and even if the patient is warned of heightened risks, one unforeseen turn for the worse is likely to cost even a stellar a doctor or nurse a career. Why risk it? Doctors are afraid to consult anyone else about tough cases. Privacy? We can't even see our own health records, much less share them with others who might help.

Healthcare reform must be addressed on multiple fronts, but if consumer empowerment is a clear path to mitigating a multitude of our issues, why not fix it first? See what issues resolve themselves when people are informed and empowered. THEN size up the residual problems and start making the tough, expensive choices.

Arranging healthcare for the poor and sick is a good goal. Obama's pet "public option" does improve the lot of a certain subset (the poor, the sick, and inevitably the lazy). Sadly, those unfortunate souls may find that they were better off before the plan. Obama demonstrates his demagoguery by placing the lion's share of the financial burden on "the rich." Surcharge expensive health plans; surcharge businesses; surcharge small business owners; surcharge benevolent folks; surcharge those who earn the most; hell, just surcharge Goldman Sachs directly while you're at it. But what happens when costs overrun budgets, as they have in nearly every other public health plan (Hawaii, Massachusetts, Canada, and the UK just to name a few familiar examples)? Does the government begin to ration care, as in Canada? Cancel the plan, as in Hawaii? Or just flat deny coverage, as in Britain?

Moreover does the public option even empower consumers? Does it ensure patients and doctors decide what treatments are best? Or does it give that power to an unaccountable, appointed board of politically-charged "wise men" in DC? Does it increase competition for better ideas, treatments, and service? Or does it simply tilt the playing field toward one plan, one way of doing things, and one group of administrators who get to play by a different set of rules than the rest? Does it "crowd out" other insurance plans because it's better? Or by the fiat of unfairly preferential treatment, enshrined in Federal law? Do we really want a Fannie and Freddie for healthcare? Or Apple and Google?

My take: the public option erodes choice (and thus empowerment) when it should be fostering it.

As I advocated over a year ago in this blog entry, a better plan would decentralize control to those who have the strongest interest in getting it right: the patients. This would naturally put a burden on their primary health providers to ensure patients were informed with the best facts and recommendations, so they could make the best choices. As I put it in my earlier blog:

There is no measure of supply and demand driving the rates of top doctors up or warning me against going to cheap-o ones. Insurance companies (and Medicare) engage in collective bargaining to drive rates down for some, but it's like squeezing a balloon - the air just moves around inside - there's no net savings. Horrifying though it may be for you to think of being sick and having to bid on some Medical eBay for a spot at the best hospital, this would drive overall costs DOWN by rooting out inefficiency, inappropriate risk, statistically unsuccessful procedures, and bad eggs. It would provide a whole new incentive system which would align the interests and thus the efforts of patients, hospitals, insurers, scientists, technologists, businesspeople, investors and doctors alike.

It would also create a bouquet of different kinds of offerings, at different price points. Health care is the only industry I can think of that still follows Henry Ford's original principle: "Any customer can have a car painted any colour he wants so long as it is black." To see hints of what healthcare could be, look no further than the current world of elective/cosmetic treatments. It should be no mystery why medical tourism is referred to as a "nip-n-tuck tour." That whole industry is built on treatments people want which are not covered by insurance (and on wealthy citizens of countries with sub-standard levels of care). Suddenly, incentives are aligned. Choice and price exist ... and, unsurprisingly, so does a diversity of offerings. The differences are shocking.

Empower the patient, and they'll always opt for the Cadillac treatment, many say. You need faceless insurers and that group of wise men in DC to tell people "no." Hopefully by now, my rebuttal of that is predictable.

• First, if the whole industry stepped into the 21st century and was forced to improve on all fronts, the overall average cost-per-level-of-service would come down, just like Wall Street brokerage fees after deregulation broke apart that cartel. To use Dubya's words, it would make the whole pie higher (we knew what he meant).
• Second, if care was properly priced, and if people could choose their level of care (and assoicated price), the whole industry would look a lot different. For proof, look out on the streets today: hundreds of different cars exist with different levels of performance, comfort, and safety, all zipping around together on the freeways.
• Third, again if pricing and choice were introduced, many people would find out that they pay for a Cadillac today, but only get an old Chevy. These folks could pay less, and keep the exact same level of treatment.
• Fourth, yes, people who choose cheap-o policies need to be told "no" when they ask for Cadillac service. Canada or Brittain, for all their warts, at least address this point well. You should be courteously re-routed to the appropriate level of care. You don't use an elephant gun to kill an ant. You don't need an ER full of trauma docs and machines that go bing to fix a rash or when your kid swallows a coin. Wait 'till the morning and go see a nursing clinic.
• And finally, having set aside the impact of those first 4 points, we get down to some residual "tough nuts" to crack. Recently, we've all had our eyes opened to just how bad humanity is at making choices at the margin. We always assume that the unthinkable won't happen to us. Remember, more than half of bankruptcies are triggered by exorbitant, unexpected medical expenses. Avoiding this very difficult, expensive (to the overall economy), and destructive route would give the economy a measurable boost. As a society, it needs to be viewed as foolish and unacceptable to go around without at least a modicum of catastrophic-only insurance. I'd welcome thoughts on how to get there. Like Obama, I'm willing to consider all ideas. I even think we could make it financially viable to socialize this level of care without breaking the system or Uncle Sam's budget. I also think that private solutions could be had.

My blog entry last year highlighted 7 major issues with our healthcare system. To summarize:

1. Risk-aversion: FDA approval is painfully slow and bureaucratic. Healthcare providers choose the safe treatment to avoid being sued.
2. Litigation: lawyers keep us all honest, but ambulance-chasing and malpractice insurance have run amok
3. Stone-age Science: how is it that we STILL have no cure for the common cold, the most frequent killer (heart disease), or the most common ailment (back problems)? Medicine should be a science, not a craft.
4. Stone-age Technology: Hand-written paper files and prescriptions? Seriously? Find me a successful banker, journalist, engineer, marketer, accountant, grocer, soccer mom, or even a McDonalds worker who hasn't deeply integrated the power of computers and the interwebz into their lives.
5. Ambiguous Economics: the economics of choice and price are largely absent ... and predictable, unfortunate consequences have ensued.
6. Reactiveness: As Obama pointed out in this week's press conference, prevention is worth a pound of cure. So pay for it!
7. Mutated Morality: OK, so here goes. The sticky wicket of healthcare. Nobody likes to admit two things: some people are too sick to live ... and the Bible was not meant to be interpreted literally in the realm of healthcare. Get used to it. Death is a part of life. (Allow me to duck now.)

The "better" plan addresses these things, and more. Through the principle of putting patients in the driver's seat, it:

• Prevents maladies (and thus lowers long-term cost) by focusing on "wellcare"
• Abandons all the hype, BS, bureaucracy, and litigiousness in favor of careful cost management and a focus on customer service a'la the HelloHealth clinic in Brooklyn
• Requires an objectivity about determining what works and and what's most efficient. Then, ensures those things are deployed wide and quick (and that old, inefficient, or ineffective things disappear right quick).
• Frank Lichetenberg's recent study shows us the way. It should be mandatory reading on this topic.
• Encourages the creative destruction of new technologies and procedures. (Again, see Lichtenberg for some interesting figures.)
• Studies the system with the rigor of a physicist, and rebuilds the system with the structure of a systems engineer. (idea courtesy of Dennis Cortese, former Mayo Clinic CEO).
• Ensures that the consumer is fully informed by aggregating all his medical records, test results, history, etc in a single place. Sorry, privacy nuts: this is one area where a trade-off is required to gain improvements in care

Principles are nice, but concrete, actionable ideas are better. Don't worry, I have those too. Too much for one blog, but stay tuned. I'll be back in a few days with some very detailed conversation-starters!

Yeah, What HE Said: Peter Peterson Edition

Pete Peterson is Former Commerce Secretary, CFR Chairman, Founder of Blackstone Group, Former CEO of Lehmann Brothers, Former Chairman of the NY Fed, 150th Richest American, Donor of over $1billion, Founder of the PGP Foundation for fiscal sustainability, Husband of Sesame Street creator Joan Ganz Cooney. Last week, he was on Charlie Rose to remind us we can't just borrow our way out of this mess, personally OR Federally.

My father was a Greek immigrant, comes over at age 17, has a few pennies in his pocket, doesn't know a word of English, 3rd grade education, goes to the middle of Nebraska and takes a job nobody wants, namely washing dishes in the caboose of a railroad. He takes that job in that steaming kitchen. He sleeps there, he eats there, and saves almost everything he had. And then he opens up the inevitable Greek restaurant. 24 hours a day, 7 days a week, 365 days a year for 25 years and when he finally shortened the hours, he had no key to the front door 'cause it had never closed. And he was kinda my model of the workaholic.

And then he addressed our current situation:

Paul Volcker thinks the chances are 75% that there will be a dollar crisis in 5 years ... and what does that mean ... the dollar falls suddenly, interest rates go way up, inflation, recession, housing problems all over again and so forth. And that's the vulnerability and this country's just got to learn to save more, which means the government not dissaving and more personal savings. We just can't continue.

A few months prior, in an EXTREMELY highly recommended op-ed for Newsweek, he explained (emphasis mine):

The moment is overdue for us to become moral and worthy ancestors ... For years, I have been saying that the American government, and America itself, has to change its spending and borrowing policies: the tens of trillions of dollars in unfunded entitlements and promises, the dangerous dependence on foreign capital, our pitiful level of savings, the metastasizing health-care costs, our energy gluttony. These structural deficits are unsustainable ... Underlying these challenges is our broken political system. Our representatives, unlike our Founding Fathers, see politics as a career. As a result, they are focused not on the next generation, but on the next election. When the long-term problems are large and real, they anesthetize us, mislead us, divert us—anything to keep us from giving up something or having to pay for it ... Our problem is not a lack of options. It is a lack of will to do something about them.

Here's one last quote from him, said back in 2004:

I remain a Republican, but the Republicans have become a far more theological, faith-directed party, not troubling with evidence.

Corporate Newspeak 6: 1984 Edition

Perhaps the clearest and most awful example of corporate culture dumbing down communication (hence the term Newspeak) is this set:

The What: (n) The topic or scope of discussion.

The When: (n) The date range or schedule.

The How: (n) The method.

Usage: "Ok, so we're talking about the potential re-assessment of our medium-term FY11 strategy around the proposed strategy for our 300's. Buying planes... that's the what. 2011, high level, is the when. Let's move on to the how, okay? That's where I'm still murky and I wanna make sure we reach out to the right groups to leverage our enterprise-level past learnings around procurement terms."

I find it painfully sad that most corporate animals operate with so little mental exertion in an arena so unnecessarily complex that they find it necessary to use explicitly call everyone's attention to the fact that a date range is "the when" things happen.

Are the REAL English terms so difficult?

No Funny Business to See Here ... Please Keep Moooving!

At the risk of stating the obvious, money is the raw material of the financial industry. Banks need a constant stream of new money, just as a microchip factory needs silicon. In fact, most banks can't go even a single day without new money (a dangerous strategy that has not gotten the attention it deserves through our recent little trouble). For a period of weeks in late 2008, even good banks couldn't raise money at a rate they would accept.

Enter Uncle Sam, who agreed to do what most other countries have done for years: guarantee bonds issued by banks (called GGBs by most, TLGP-IDIDGP by the Feds). This was a tacit subsidy. It meant banks could issue bonds (=borrow new money) at a much lower interest rate than the panic-driven market rate they could otherwise get. The argument was, with all the turmoil and tumult, nobody could tell the good banks from the truly bad, so they had to throw them ALL a lifeline.

The panic has more or less subsided, but the subsidy has persisted (as Reagan predicted). By now, its clear which banks are bad (Bear, Lehman, WaMu, MS, Citi, GMAC). Absent government guarantee, these zombies were or would be gone in 60 seconds just like Memphis Raines.

Then there are the "Chosen" banks. These banks have carped all along that they're fine, they're healthy, they don't need government help ... but in the interest of a strong, patriotic esprit de corps, they'll take a share of whatever the government doles out to help Uncle Sam's PR campaign.

Suuuuure, dude. Not for nothin' the definitive book about Wall Street is titled Liar's Poker. Bankers are bulldog deal-makers. They're ruthless prestidigitators. They're voracious precision-tuned, profit-hunting machines. They're self-proclaimed Ayn Rand Dollar-worshipping Capitalists ... though I'm not sure Ayn would agree.

Clearly, the Chosen banks saw the meltdown coming last fall and realized that the winning strategy was to get as cozy with the US Government as possible. Led by the ultimate opportunist Jamie Dimon (who had spent 15 years kissing and conniving his way to the helm of JPMorganChase), the Chosen banks played lapdog to the Treasury and the Fed. "See that maimed bank in Seattle, Jamie? See it? See it? GO FETCH!" And he did. Time and again. Tacit, of course, was the agreement that Hank, Ben, and Timmy would make sure his dog food bowl always runneth over and that he got a steady diet of Scooby Snacks.

Which is where the GGBs come in. The Chosen banks don't need the subsidy, but as it tuns out, they're some of the biggest beneficiaries of it. By borrowing at artificially cheap rates, they're able to artificially boost their bottom line. Deals and businesses that would be unprofitable at market rates suddenly look brilliant. Recent headlines tell the tale:

• WSJ: Goldman Flexes Its Profit Muscle
• Times of London: JP Morgan reports record revenue

Last week, the quarterly summary was published on these GGBs, the vast majority of which are bank bonds. The numbers are telling...

• The Zombies and the Chosen continue to gain huge advantage from the GGB program, issuing mountains of the stuff.
• Uncle Sam is clearly routing the business of creating these GGBs to the Zombies and the "Chosen." The list reads like a junior high BFF list. Each bank's rank in the list is exactly commensurate with the level of coziness they've achieved with the government.
• The same is happening worldwide. If you want to know the Chosen banks worldwide, look no further than the 5th through 10th ranked bookrunners in this list (see link below). HSBC and Barclays in the UK, BNPP in France, Deutsche in Germany, and Commonwealth in Australia

So much for Geithner's and Obama's promises of government non-interference in the market.

GOVERNMENT-GUARANTEED BONDS
BOOKRUNNER                         VOLUME                MARKET     #OF
4/1/2009 - 6/25/2009               (US$ MLN)      RANK   SHARE      ISSUES
JP Morgan                          13,896.9         1     21.2       10
Citi                               13,449.9         2     20.5       13
Morgan Stanley                      6,920.6         3     10.5       12
Goldman Sachs & Co                  5,113.1         4      7.8       10
Bank of America Merrill Lynch       4,535.9         5      6.9        6
-----------------------------------------------------------------------------
BOOKRUNNER                         VOLUME                MARKET     #OF
1/1/2009 - 6/25/2009               (US$ MLN)      RANK   SHARE      ISSUES
Citi                               46,105.0         1     20.7       33
JP Morgan                          38,853.1         2     17.5       30
Bank of America Merrill Lynch      34,737.0         3     15.6       21
Morgan Stanley                     29,086.8         4     13.1       29
Goldman Sachs & Co                 20,896.0         5      9.4       27
Source: Thomson Reuters

Corporate Newspeak 5

Kangaroo Manager: (n) A manager or executive who improves their job title, reputation, and compensation by hopping from company to company every 1 to 2 years. Through this pattern of activity, individuals avoid remaining in any position long enough to be held accountable for the results of their decisions and thus entirely obfuscate their track record. This is in contrast to the frequently maligned "traditional manager" strategy of improving title, reputation, and compensation via a consistent stream of successful accomplishments and recognitions.
Also: Up-and-Comer, Executive Material, Chosen One, Fast Tracker.

Critical: (adj) Belonging to the class of things which encompasses everything in the known universe.

Gaps: (n) Fuck-ups.
Also: Pain Points, Failures.
Note: the singular form exists only hypothetically.

Deferred: (adj) Belonging to the class of actions and events which will never happen. Not in a billion years.
Usage: "Phase 1 of the project has been deferred so resources can focus on the pain points of Phase 3 while planning activities for Phases 2 and 5 continue."

Legacy: (adj) A euphemism for the class of people, processes, technologies, and decisions which existed prior to a merger, for which nobody (even those originally involved and still present) currently takes responsibility, and on which any current pain points can be blamed. Contrast with "Kangaroo Managers."
Also: Heritage.

Efficiencies: (n) The class of actions and decisions which is characterized by either self-evidence or abolishment of business controls, people, and/or processes put in place previously to address a pain point which occurred prior to the tenure of the current decision-maker(s). Typically used to justify destructive or risky decisions made by Kangaroo or Pelican Managers.
Also: Short Cuts.
Note: the singular form exists only hypothetically.

Metrics: (n) A mystery-meat confab of general goals, explicit targets, a methodology for computing performance relative to those goals and targets, the act of computing, and the current result of those computations for a given individual or group. Contrast with "carrots."
Note: in typical usage, the speaker is referring to only a subset of the above concepts, but desires to remain ambiguous about which.

Good Progress: (n) A euphemism for activities which are behind schedule or below desired metrics. Used in order to distract from said deficiency.

Aligned to: (adj) Perceived to be at least partially in compliance with a strategy and/or policy which is too vague, contradictory, or nonsensical to be followed literally.

Day-to-Day: (n) Metonymy (look it up, people) representing the class of actions and events necessary to actually run a business but which are too boring, unpleasant, and/or complicated for executives to trifle with or comprehend.
Also: in the weeds, on the ground, in the trenches

Operations: (noun) Doers. Usually abbreviated "ops." Often carries a negative connotaion of someone who is too obsessed with making a business function to comprehend strategy, policy, and "the big picture."
Also: little people
Usage: "The execs have established the strategy and laid out governance. Finance is tracking the metrics. And the little people in Ops are in the trenches handling the day-to-day."

Established: (v) Decided by default without any human effort by those responsible for the decision, often by the most junior staff involved due to a vacuum of action by the designated leadership.
Usage: "The Board have established a framework of critical metrics and governance which will prevent such a crisis in the future."
Note: can only be used in the past-participle tense (look it up, people).

So What I'm Hearing You Say...: (ic) You're clearly wrong and I wish you had said ...

The Skyrocketing Cost of Education!

To all ye out-of-work destitute Wall Street bankers: Fear not. Minimal vocational re-education is required for you to join the next big industry .... Education.

Yes, a standard Harvard MBA only costs $175,000, leaving little room for nine-figure professorial salaries. Yes, for some people, a copy of Atlas Shrugged ($8.95) is enough of an eye opener. But the new trend in education caters to those "feeling" style learners who must experience it to learn it ... of course, with copious amounts of hand holding. For them, a few current offerings:

• Hands-on independent studies on pitfalls of Leveraged Buy Outs of failed businesses:

Course.......Price
GM...........$50 billion ($19 billion deposit required)
Chrysler.....$12 billion and 100,000 jobs (best value!)
AIG..........$170 billion plus 10% of the value of shares on NYSE
Act now! Inflation pricing starts soon!

• Popular! New! "Trial-by-fire" Style Finance 101 .... Price: $700 billion
  
• Private! Experiential MBA: .... Price: $1.9 Trillion (and counting)
  
• Investment Basics: .... Price: $ ("socially priced" at 35% of your net worth)
  
• Keynes vs. Friedman vs. Hayek: Fiscal and Monetary Policy: .... Price: $ (1 percent of GDP)
  
• Pass-or-Fail Monetary Policy 301: .... Price: $(price determined one generation after you take the class)


• And the ultimate: On-the-job-training in the White House: .... Price: $ Priceless

Follow Up #5: You've Heard of the Illuminati ...

Look what has grown new legs and crawled out of the "this one just won't die!" file ...

I originally asserted here that the Illuminati did, indeed, exist, just not in the way most of us pictured. I pointed to insurance companies as the voracious gobblers of any ole stinky (um, I mean toxic?) asset that one might want to offload:

"one thing I've learned: if you have an asset to sell, they're buying. If you
need an asset, they have it...

They only rely on risk math when it agrees with their preconceived notions and personal preferences. The sheer magnitude of their assets (and liabilities?) allows them to mask, ignore, and walk away from huge screw-ups. Certainly a 'Black Monday' or two might cause some of them to crash and burn, but the more likely risk is that someone will realize the Emperor really isn't wearing anything. This will lead to inquest and meltdown. In the end, some politician will have the bright idea of creating an FIIC (Federal Insurance Insurance Corporation) to ensure that "no American ever has to fear not getting his insurance payout."

Fear these guys, not because they're big and powerful -- or because they're old, white, and male -- but because they are careless with YOUR money and if they fall, they fall hard."

Ahem. I told ya so. I'm just sayin'.

As I blogged here, the illuminati story came back around with a new twist: in a WSJ poll, a majority of readers advocated the idea of Goldman taking over the Federal government. Mind you the poll was from July '08 ... Oh, what a difference a few months make.

Well, then recently Matthew Malone updated the evidence in a Portfolio Magazine piece. The WSJ this week declared that readers had gotten what they asked for. They upped the ante by proposing a mini-series-of-horror to prove that Goldman is, indeed, Illuminati:

Scene 1. American government is now run by the 'Goldman Conspiracy'
Scene 2. Huge conflicts motivating Wall Street's 'Trojan Horse'
Scene 3. Wall Street's 'quiet coup' also runs world's banking system
Scene 4. Wall Street used the meltdown to take over America's government
... yadda yadda ... oy vey!

Do I believe it? I'm not telling. I don't wanna end up like this.

Having Vision but Flying Blind

They're misunderstood, if not neglected entirely. They're maligned. They're abused. They each need to be adopted ... by all of us.

I won't be so bold as to say whether Obama or I first sweetened to this set of keys. Clearly, however, we've all been burned by their absence. At least the new administration is trying them out. And I don't mean vision, itself.

You see, having vision is a great thing. Quite rare is the fortitude to choose the right path in spite of the fear mongers, detractors, and wailing interest groups. More rare, however ... in fact, nearly extinct these days ... is successful execution. My recent blog bemoaned and pondered the failings of the US over the past few years. To me, these were seldom from lack of vision, skill, or will. The ideas were sound. The people were smart. But despite having vision coming out of all orifices, they were flying completely blind. Calamity came from complete failures of execution.

Utter failures of execution. On many levels.

It is thus nice to begin to see ghosted hints and hear soft whispering breezes indicating that some people in corporate and political America "get it." It's early days, and this blog will have many follow-ups, but let me describe what's on my radar so far:

A focus on communication.

• Conveying the right message. One side effect of our current info overload is that people have become amazingly good at hearing. People hear more than just the words spoken and can quickly identify the message being conveyed. Too often, Bush administration representatives were speaking about one thing (terrorists in Guantanimo, for example) but projecting a message about something entirely else (caginess from a deep mistrust of the current justice system or the public stomach). It is critical that speakers determine, memorize, and deeply understand the message they're trying to convey. This doesn't mean memorizing a speech and presenting it deer-in-headlights style. It means knowing the message well enough to convey it while sounding like a real person. This builds trust. So does consistency. For an administration, the SAME message needs to be broadcast via multiple channels. It needs to be immutable in its repetition. And the message needs to be right. It needs to be strategic. In the corporate world, for example, the message should convey a specific brand identity and aspiration.
  
• Closely related is Selling the value proposition. Yes, this is Corporate Newspeak. Said in plain English, this means that communicators need to really understand the relative benefits of what they're advocating. This needs to be incorporated into their message every time they communicate. To say it even more simply: sell, sell, sell.
  
• Communication isn't a one-way street. Listening actively to feedback is not optional. It is a diferentiator between failure and success. Actively means listening to and understanding everything they say, literally and in terms of message. It means checking your understanding "So your main goal is X because Y?" It means accepting things that don't sync with your view or message. Once understood and accepted, communicators must be willing to do the unthinkable: incorporate their message into their own, either by responding or by absorbing.
  
• Taking another step back, though, communicators need to make damn sure they've got the right vision as well as message. They can blunder through it; they can be lucky enough to be in the right place at the right time; OR they can do it the right way by investing in information. They must collect, standardize, and analyze data. They must ensure their people AND their audience are properly educated on the issues. They must be brave enough to risk some time and money in skunkworks which may yield nothing, may yield something that doesn't fit with their current vision.

A focus on accountability.

• You cannot have accountability unless you know what your goals are
  
• Then you must identify what the measurements of success should be
  
• Then you must measure what the current state is. Now. With all it's warts.
  
• Finally you need to build the right incentive programs. You need to test your carrots and sticks for perverse incentives.

Blog Shout Out: Separation of Owners and Executives

Phil Goldstein guest-blogged on The Icahn Report recently advocating more inclusivity in proxy vote ballots. While I agree with him, I'm not sure I see it as the end-all be-all that he does. That's not why I'm giving him a shout out. It's his priceless intro. He had me at "nutshell" but went on to offer some awesome and appropos quotes:

What is fundamentally wrong with corporate governance in America? In a nutshell, it is difficult for stockholders to hold management accountable for its misdeeds.

This is not a new insight. In 1776, Adam Smith wrote in The Wealth of Nations: "The directors of such companies, being the managers rather of other people’s money than of their own, will not watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Negligence and profusion therefore must always prevail in such a company."

Let's fast forward to 1934. Here is what Congressman Lea of California said in the Congressional record of May 1, 1934: "In the main, the men controlling these great corporations are not large owners of the stocks of the corporations they control. Too often they have yielded to the temptation to control these great business institutions to their own interests, and with a zeal out of proportion to the loyalty they have shown their stockholders. Thus in recent years we have seen the directors of corporations, without the knowledge of their shareholders, voting themselves vast bonuses out of all proportion to what legitimate management would justify. We have had revelations of salaries paid to directors and officers of great corporations which showed shameful mismanagement; which showed that the men in charge of some of these corporations were more concerned in managing its affairs for their own benefit than for the benefit of the stockholders."

It is now 2008 and it is fair to say that the lot of shareholders has hardly improved, considering the trillions of dollars in lost shareholder value over the last year, along with the egregious bonuses and salaries paid for this dismal performance.

Yes, yes, yes. Intermediation between owners and managers clearly creates perverse incentive structures and thus, as you may have noticed, opens up a gaping chasm of opportunity for disaster.

Once again it's back to basics: incentives must be aligned. Any crack of variance between the interests of management and that of the owners will be found and exploited if not monitored like a hawk. My prior post on the ills of modern boards of directors tried to highlight this. I was so bold as to suggest a few incentive-alignment mechanisms for directors.

At root, corporations are organizational structures to facilitate the most effective decision making across a bazillion tiny capital allocation choices. Layers of management are supposed to enhance that "effective" part by setting strategy, establishing standards, reviewing decisions, training staff, monitoring success metrics, and so on.

For the most part, corps do the above successfully. The trick lies in how you define "effective."

For long-term shareholders, effective probably means profit-maximizing whilst risk-minimizing in order to maximize the company's valuation (NPV of future cash flows). For day traders, it probably means share price volatility, for a shareholder-CEO, it might mean meeting revenue or share price targets on certain dates in order to release his performance bonus ... You can already see that even a perfect board would have to arbitrate among conflicting goals of various owners.

For managers, it means getting a good perfomance review and keeping their boss happy so they get a nice promo or bonus. For a middle-aged staffer, it might be stability and healthcare. A Gen-Y up-n-comer's interest might be in flexibility, excitement, and recognition.

Each of this plethora of interests creates an incentive mechanism which guides the person's every action. There are a lot of smarties lately making a sport of disparaging the idea that humans make rational decisions. While I recognize we're not robots and thus mess up, I think that the vast majority of apparently "strange" or "bad" decisions would appear sensical if you could fully map the "context."

I use "context" as a shorthand term for the three factors I feel are at the heart of decision-making:

• the complete incentive mechanism environment faced by the maker
• all the information available at the point of the decision
• and the (current) "horsepower" of the maker's brain process this information. Some humans are better than others at processing information and making decisions, but there are biological limits. Then environmental factors determine whether or not one's brain is working at full capacity like a well oiled machine.

And that's why I don't believe the board (or it's members) are always the cause and solution to every business problem. You can clean up a totally absentee board and improve the company's governance, but they're just a small group of humans. Not even Rain Man could process enough info to make enough decisions per hour to singlehandedly run GE, GM, or Microsoft.

For better and for worse, a board is just a bottleneck of power within an organization. Convenient in some cases, but inhibitory and ineffective if you try to cram too much through it. The daily scandals we see are the direct consequence of an absenteeism which arises less from lazy boards than from the skewed incentive structure under which each employee (especially management) operates.

So while I very much enjoy an agree with most of the gems that appear on Icahn's blog, I would argue that they need to spend a little less time inventing ways to gerrymander and a little more time getting the "context" right. This might require:

• Mapping, measuring, assessing, and alining the incentive mechanisms. Here's a hint for all those newly out-of-work brains in finance and consulting: invent a demonstrably effective framework for rooting out perverse incentives and you'll have companies lining up at your doorstep like Macy's on the 26th of December.
• Ensuring board members have enough information. Accurate information. This implys the need for a staff, as well as inciteful 3rd party analytics (are you listening entrepreneurs?)
• Maximizing each member's computing capacity (for example, by limiting other demands on their attention as I suggested in my earlier blog), and then being realistic about how much you can expect the board to effectively handle. In a sense, this is just another incentive mechanism to be aligned. They're often incentivized to get through their agenda in set number of minutes, and will compromise on the other incentives to achieve that. Bad bad bad. Add board members, add time, and/or delegate power.

Just a start. Now You.

Yeah, What He Said ... Friedman Edition

Thomas Friedman nailed our auto-industry bailout to the wall on Meet the Press yesterday:

"I see no plan, no reason to suggest that these people who drove this industry into complete ditch havea plan to get it out in the long term and not come back in 6 months for another $25 billion ... what was Detroit's plan two years ago? ... It was to subsidize gasoline at $1.99 a gallon ... that was their idea of innovation ... it was like a crack dealer offering subsidized crack rather than going to a clinic to get off the drug. And who was the enabler of that? It was the Carl Levins, all of the Michigan delgation ... where was their outrage two years ago about getting them to be more innovative, getting them on top of the energy-efficiency question. They have been enabling the destruction of this industry ... so show me a plan, show me a plan that says if we give you the $25 billion, you're actually going to change. Remember, we're going to charge that $25 billion on our kids' Visa cards ..."

BTW, Michigan, the auto industry, and crack seem to be frequent bedfellows. Check out this article from July. Silly people, get with it. Michigan is a meth state these days!