We Need a Perspective Reset - 3 / 23 / 2009

We Need a Perspective Reset People. 4 months ago, before President Obama took office, before Tim Geitner became Treasury Secretary, Hank Paulson recommended the very bail out plan we are hearing about today. Readers know that I am no fan of Paulson. He is a very capable and persuasive manager, but when caught in this historic and unprecedented financial crisis, his solution was to rely on answers from the same market cronies (CEOs) who were asleep at the switch when the train went roaring by.

During that uneasy time, the Summer of 2008, I was asked by the BBC to make a statement on my position for the first bail out. This was the late summer bailout that created a blind pool of money that was flexible enough to acquire "whatever" needed to be acquired to stabilize what seemed like a banking sector nose dive to zero value. Hours before the congressional vote I stated that "The President (Bush) has made an international statement that we must bailout bank balance sheets. If we do not the world's faith in US economic leadership will be shattered and the US will lose whatever leadership role it has." Congress declined it. The markets dove, the US dollar dropped. Five days later the Senate approved it, along with the Executive branch, and in a re-vote touted by many as full of pork, Congress approved the bail out 10 days after its first failed approval.

So finally, here it is. And ahead of its announcement, President Obama sat, yet again with the media, 60 minutes. His statement "I think that systemic risks are still out there. And if we did nothing you could still have some big problems. There are certain institutions that are so big that if they fail, they bring a lot of other financial institutions down with them. And if all those financial institutions fail all at the same time, then you could see an even more destructive recession and potentially depression." A very political way of saying, "That's my answer to the statements that AIG is nothing more than a pass through Hank's and Tim's favorite banks."

I credit the Opinion Editor of the New York Times this Sunday in permitting Frank Rich the space to properly call out the systemic cronyism which first created this problem and now continues to benefit from the "solutions". It allowed Governor Corzine (a former Goldman Sach's CEO) to tell it like it is, "The people have a right to be angry. We are rewarding failure with bailouts and bonuses."

He could not be more right about this. A significant reason for the mess we find ourselves in is the short sighted reward strategy put in place by CEO's and Board Members who continued to adjust their strategy to suit the shareholder's desires for quarterly results. It created a culture that produced short term gains at the expense of long term sustainability. And then paid them for leveraging their business model in the short term in order to produce quarterly earnings and annual bonuses. Well, we know now for certain that these business strategies end badly. Enron, Countrywide, AIG, Citibank, Merrill, Fifth Third Bank, Lehman Brothers, Bear Sterns. Will this list ever end? No.

Shareholders do not see themselves as owners of businesses, they see themselves as participants in the gains and losses of these businesses over short periods of time. If they saw themselves as owners, which they are, shareholders would be running at the corporate offices of these businesses listed in the last paragraph with torches and pitchforks. Calling for legal action against Board members and Executives who illegally transferred 100's of millions of profits from their shareholders into their own pockets. In certain circumstances, that's embezzlement.

But shareholders are not taking action. These "brilliant" fund managers who run your investments are simply repeating the same tired mantras. "Unforeseen market environments and historic changes have led to the losses in the companies we invest in and in the value of their stock." No one needs a fund manager who does not see historic changes coming. These historic market moves were being called for 24 months ago. These fund managers simply created index funds weighted in sectors they were comfortable with sat back and watched. Do the words "Fiduciary Responsibility" apply to any of these so called CFA fund managers? ITS A JOKE. Shareholders must must begin to act like owners policing the companies they own to build real value over time. Otherwise you are a speculator, a gambler.

Seek out and invest in companies that are building value. I think it has become apparent that the biggest companies are not building value they are acquiring value and then leveraging it. In a default or failed business model, it's the shareholders that lose. Not the employees who receive cash bonuses that far exceed the value they created for their shareholders.

Wake up people.

Build Value Every Day.

Brad van Siclen