Published 2013.10.24 CommPRO.biz

Shareholders Come Last!

Corporate America, particularly the Monster Too-Big-To-Fail Banks, have it all backwards. A crazy concept, Shareholder Value, conceived as a business strategy in the late 1980s by college professor Dr. Alfred Rappaport, continues to ravage our economy even though it has been thoroughly discredited. One of its early advocates, Jack Welch, sang its praises back then when he was CEO of General Electric. He touted shareholder value for all to hear. Twenty years later in 2009 Welch turned around and said in a newspaper interview, “Shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy; your main constituencies are your employees, your customers and your products".

Welch isn’t the only one to see the light. Jim Collins of Good to Great fame has been pointing to what makes great companies and the importance of long-term strategies rather than the quarter-to-quarter madness obsessing our corporate world today. It is especially dangerous in the case of the Monster Too-Big-To-Fail banks. Striving for short term goals, empowered by immunity from gambling laws, FDIC protected depositors, seemingly unlimited interest-free money from the FED, and the knowledge that there’s a taxpayer bailout waiting if they go too far, leads them to take wildly reckless chances. And the Monster Banks are doing just that, they are going too far.

Back in the real world where corporations are coming to the new Jack Welch, Jim Collins view, they understand that sky-high executive compensation encourages greed, not leadership. Measure after measure shows a different parameter on the road to success. Perhaps most dramatic is the work of two Professors Rajendra Sisodia and Jagdish Sheth. They set out looking for companies that met a list of standards that at first glance seem out of reach, companies that focused on their customers, their employees, their vendors, their communities, the environment and finally last in line, their shareholders; companies striving to serve all their stakeholders. They call them “Firms of Endearment.”

The professors partnered with writer David Wolfe who suggested that before they got too excited when they actually found more than two dozen such companies, that they had better check to see if any of these companies made any money. You know, the “result” where Jack Welch pointed out that shareholder value comes into play. To everyone’s surprise the public companies that made the Firms of Endearment list returned eight times the S&P average over the ten years prior to the list compilation.

Clearly this shows beyond any doubt that all things being equal, the Firms of Endearment high road is far superior even to the taxpayer supported route the Monster Banks inflict on our society. The whole idea that if you take care of the basic stakeholders, your bottom line will take care of itself is lost on these folks. David Wolfe wrote a great book, Firms of Endearment, that details the high road research and results. If you are holding your breath waiting for the Monster Bank CEOs to read it, forget it.

Published CommPRO.biz 2013.10.03

Wall Street Ethics

Mid-September (2013.09.15) marked five years since Lehman Brothers, one of the largest investment banks ever, filed the largest bankruptcy ever, sending sky rockets up all over the world and marking the beginning of what we’ve come to call the “Great Recession.” Lehman’s implosion triggered a serious of herculean bailouts of the rest of our banking sector by the American taxpayers.

Hank Paulson, who became Treasury Secretary after a career at Goldman Sachs, saw a danger of another depression if the banking sector collapsed. He hurriedly threw together the bailouts. However, he failed to impose the controls needed to keep the banks from abusing these funds, leaving them free to award themselves over the top bonuses. The Federal Reserve kicked in billions more, throwing open the doors to the risky gambling (see London Whale) that caused the collapse.

Lehman wasn’t the only bank gone wild; all of the dozen or so monster banks were behaving badly. Lehman was just pushing the limits of the regulation-free climate the banking lobby created over the preceding two decades. Repo 105 was the accounting gimmick of choice at Lehman. The tricksters there would sell off billions of their really bad stuff before each quarterly reporting period, making their books look as though they were sound when in fact they were anything but. Emails, written just before the bankruptcy, show that senior management pushed their subordinates to cover their tracks.

On May 18, 2008, almost exactly two months before the bankruptcy filing, Senior Vice President Matthew Lee had a letter hand delivered to four of Lehman’s top executives with a copy to their house counsel. In it he detailed these practices and questioned both their legal and ethical grounds. Management responded by firing him. Later, Lee identified Repo 105 as one source of the collapse for the federal investigators. Matthew Lee is still out of a job today; nobody on Wall Street has hired this honest man.

Not so most of the schemers who played fast and loose with the financial facts at Lehman. According to a Huffington Post tally, three quarters of the Lehman folks -47 of 63 involved in the Repo 105 scam- are employed in the financial world and doing just fine thank you. In fact, while most Americans are struggling to recover from the crash and millions are unemployed, the Wall Street banksters are fine.

And why shouldn’t they be –aside from ethics and stuff like that– the banks know if they overplay their hand again, Repo 105 or whatever, a taxpayer bailout is just around the corner. So they gamble with your savings, secure in the knowledge that the FDIC will cover their losses and that we’ll loan them whatever they need to get back on their feet. Just don’t ask them to support the small businesses that create jobs or anything like that. Leave that to the suckers who run the regional and community banks.

Published 2012.01.30 in CommPRO.biz

Too Big To Loan?

Earlier this month (2013.01.16) the president of the Dallas Federal Reserve Bank, Richard Fisher, delivered a speech worthy of a Texas straight shooter. It was followed up the next day by a 30+ page report supporting the need to deal with the danger a handful –about a dozen- Too Big To Fail (TBTF) banks present to our economy.

These are the same financial monsters whose reckless actions pulled the rug out from under the world economy and brought about the 2008 crash. The folks who put millions of people out of their homes, crippled small businesses and drove the unemployment numbers in America sky high. The same handful of reckless banksters, who rolled the dice, lost and left the rest of us with no alternative but to bail them out.

In an effort to avoid a repeat of this disaster the Congress passed the Dodd-Frank Act. In the end the TBTF banks’ lobbying efforts allowed them to stay focused on risky speculative (AKA gambling) deals, knowing full well that contrary to its intent, Dodd-Frank does nothing to protect against another taxpayer bailout. Mr. Fisher concedes there’s little chance that we can rein-in their reckless behavior in the short term. He does, however, offer an escape hatch to take the taxpayers off the hook to some degree.

If he had his druthers, Mr. Fisher would slice the monster banks into separate entities, none large enough to destabilize our economy. He would peel away all of their financial activities that fall outside the banks’ traditional role. While that remains the long-range goal laid out in the Dallas Fed’s report, their short-term goal seems to correct much of the problem.

Mr. Fisher points out that the insurance protection created in 1933 –The Federal Deposit Insurance Corporation (FDIC)– was intended to cover our hometown and regional banks. The 98.8% we ordinary folk are used to dealing with, not the 12 monster banks, the 0.2% who hog nearly 70% of all banking assets. Assets we furnish them with to make small business loans and create jobs. But that’s not what the use it for. Instead they use the free money we furnish to make wild bets, secure in the knowledge that if they lose, we pay.

Restricting FDIC protection to its intended role would roadblock moves like the one Bank of America made the first of this month (January 2013). They moved derivative contracts worth $15 trillion from their broker-dealer division to their insured depository institution. Guess who’s on the hook if those puppies go bad?

It’s past time that the low interest cash we provide the banks goes to the 98.8%, the regional and Community Banks who will provide small business loans. If the monster banks -the 0.2%- want to gamble, let them do it with their investors’ cash. And make sure those investors know that their funds will not insured by America’s taxpayers.