Less Talk. Treasury Secretary Paulson's Thursday Speech
'I'm not in a position right now to make specific recommendations but I think that in a way that has not been the case to date, the focus of policy has to be on causing there to be more capital for more credit worthiness and more ability to lend in major financial institutions and I'm not sure we are going to get there simply through exhortation.'
--Larry Summers, March 14 2008
What is Summers saying? Less talk, more action. There are many issues facing the U.S. and the global economy right now. Most are not even being talked about. Instead everyone is focusing on the outcomes. As an example of two different problems, the credit or banking crisis is separate from the housing crisis. The impacts of each are therefore different regardless of whether they are interrelated.
Let's forget about everything else except the banking mess for discussion purposes. We've said on here that the Fed is primarily focusing on saving the banking system. Industry leaders and government officials-regulators and politicians-need to jointly come up with solutions to this banking crisis in order to restore confidence to the banking system. Mostly government officials as financial institutions are going to chafe at changes they've spent so much money and so many years attempting to skirt. If this doesn't happen, our problems are going to be exponentially worse. I do mean exponentially. Letting the banking system chips fall where they may isn't a strategy. It's a hope that when the dust settles, we'll have something left that doesn't lead to an economic apocalypse similar to the movie 10,000 B.C. I want balance restored to the economy but I'm not ready to don my saber-toothed kitty cat underwear.
Many are worried bailouts will entice this mess to be recreated or create moral hazards. Indeed there is such a possibility but there is also a possibility it won't. That these messes will cause Wall Street to retrench and refocus on what they should be focusing on. That is supporting the underlying economy's growth as opposed to trying to create their own 'supra-economy'. And understanding their worship to false gods of foolish risk management practices, levered quantitative models and other shenanigans were abject failures that have no place in our banks. In any event, it is imperative the Fed not allow a banking crisis to spread out of control. Since no one knows where that tipping point is, the Fed will likely not allow large institutions to fail. That means more corporate welfare whether any of us like it. Now, if we had not allowed such monopolistic institutions to be created in the first place, the system could have more effectively cleansed itself without intervention. An individual failure might not create a systemic crisis. But, those are yesterdays sins of reducing the action of free markets that I wrote about long ago.
On Thursday Secretary Paulson announced a general outline of recommended changes to oversight of financial markets. The focus point of the media seems to be mortgage lending practices. There is no doubt mortgage lending practices need more oversight but I think we can worry about that one in five or ten years. If there is anything we can expend energy on later it is fixing mortgage lending practices. The few buyers of real estate aren't speculators looking for a short term gain. Plus, many are already facing tighter lending practices instituted by unhealthy banks. Focusing on this issue literally accomplishes nothing in rebuilding confidence and transparency in the financial system. Paulson's speech seemed long on talk and less on substantive and specific actions. Now, if I had a nickel for every person I've ever met in a leadership position that was a great talker I'd personally bail out the banking system.
I am leery of leadership with little operational ability. Poor operational skills are probably the most lacking ability of ineffective CEOs and leadership in general. What are operational skills? The one sentence definition is quite simply the art, discipline and know-how of how to get things done. In other words, an ability to take complex, chronic or seemingly insurmountable issues associated with running a business and breaking them down into identifiable and specific actions that translate into specific resolution. Then being able to lead an organization or group to actually execute on said plan. Sounds silly doesn't it? It's really not. It's an art. I've spent alot of my career building specific operational plans for executives searching for solutions to their problems. That is basically what management consultants do.
In this case, the world expects substantive and specific action plans that are to be taken to restore confidence, transparency and liquidity so that the markets regain an ability to function. We can talk about general outlines of general recommendations all day long. That is what Summers is referring to above. Exhortation isn't going to solve problems. I'm an investor and I have no confidence politicians or leaders of any type have any specific plan given the state of markets and speeches by politicos this past week. Quite frankly, I'm not yet convinced many of them are past the deer in the headlights phenomenon. If I don't have confidence, do the world's financial leaders? Do the world's investors? Do business leaders? Do consumers?
As an aside, I found it interesting that on The NewsHour with Jim Lehrer this past week, Ray Suarez pointed a question to Mark Zandi and Alan Binder about Paulson being part of the Wall Street leadership that has chafed against oversight and transparency for decades. So, is Paulson's recent verbal embrace of banking reforms and increased oversight of the monster he helped create a change of heart? An admission of failure? That oversight is a necessary evil? A lesser evil than Wall Street run amuck?
It's time for a short off topic rant. Did anyone see the recent 60 Minutes interview with Carl Icahn? Icahn is a very polarizing figure for many. Mostly because alot of corporate management does not like shareholders watching over them to ensure they actually know what they are doing. Personally, I believe his type of shareholder activism is a significant positive on corporate governance. Something that is also in need of more transparency and reform to enable further shareholder rights. Icahn isn't altruistic in any sense of the word. He runs his business for personal gain as he should. If a corporate management team has a sound strategy and strong execution plan they are working diligently, they need not worry about the likes of Icahn. If you are Ed Zander at Motorola, as an example, who seemingly had no control over the operational aspects of the company but was a great talker, then as a shareholder I want an activist or cumulative activism to force change. Zander was representative of a fraternity president re Icahn. Is Paulson a fraternity president or the real deal? Time will tell. Watch this clip of the Icahn video and to see what I am talking about.
My favorite clip of the Icahn interview is describing some of his experiences with management incompetence. I realize no one is perfect and we all make mistakes. That we are all human and prone to moments of stupidity is a given. This is not my point. I make these types of remarks because I want people to release this aura associated with unquestionable brilliance or unquestionable loyalty associated with leadership. That somehow they should not be questioned or held to account as everyone else is. An example? Executives making an average of 550 times the average American's salary. It was about 35 times just twenty five years ago. That shareholders and society have let this happen while average wages have made little progress versus inflation was accomplished by another art. The art of bamboozling reinforced by media and leadership. Bamboozling that is allowing the creation of uber rich CEOs and senior management while the average American's wages have been relatively stagnant in real dollar terms for decades. And while overall shareholder returns over the last ten years have been anything but good.
None of this has anything to do with a concern that someone is making too much money as is often used to incite class warfare. CEOs are hired stewards. Professional managers. If they want to be paid like an entrepreneur and have the freedom from oversight of an entrepreneur, they should go start their own companies and take the associated financial and career risks. Risks that the Google founders took. Or Steve Jobs took when starting Apple. Or Bill Gates. Or Warren Buffett. I hope all entrepreneurs make billions of dollars. Taking risk should be rewarded handsomely as entrepreneurs are the job creators and constructive change agents of our society. But, hired stewards have a fiduciary responsibility to the company owners. That means they need to be managed just as other employees are managed to the benefit of shareholders and to the long term value of the company. And please don't tell me CEO pay is where it is because it is what the market will bear. Compensation packages are typically negotiated by compensation firms with conflicts of interest and it is done outside of the transparency of free markets or unbeknownst to company shareholders until after the fact when these massive payout packages are being handed out.
What are CEO's worth? Who knows. But, if we have a transparent process of monitoring their results and the compensation process that allows company owners and free markets to participate, we'll find out. Today that isn't happening.
--Larry Summers, March 14 2008
What is Summers saying? Less talk, more action. There are many issues facing the U.S. and the global economy right now. Most are not even being talked about. Instead everyone is focusing on the outcomes. As an example of two different problems, the credit or banking crisis is separate from the housing crisis. The impacts of each are therefore different regardless of whether they are interrelated.
Let's forget about everything else except the banking mess for discussion purposes. We've said on here that the Fed is primarily focusing on saving the banking system. Industry leaders and government officials-regulators and politicians-need to jointly come up with solutions to this banking crisis in order to restore confidence to the banking system. Mostly government officials as financial institutions are going to chafe at changes they've spent so much money and so many years attempting to skirt. If this doesn't happen, our problems are going to be exponentially worse. I do mean exponentially. Letting the banking system chips fall where they may isn't a strategy. It's a hope that when the dust settles, we'll have something left that doesn't lead to an economic apocalypse similar to the movie 10,000 B.C. I want balance restored to the economy but I'm not ready to don my saber-toothed kitty cat underwear.
Many are worried bailouts will entice this mess to be recreated or create moral hazards. Indeed there is such a possibility but there is also a possibility it won't. That these messes will cause Wall Street to retrench and refocus on what they should be focusing on. That is supporting the underlying economy's growth as opposed to trying to create their own 'supra-economy'. And understanding their worship to false gods of foolish risk management practices, levered quantitative models and other shenanigans were abject failures that have no place in our banks. In any event, it is imperative the Fed not allow a banking crisis to spread out of control. Since no one knows where that tipping point is, the Fed will likely not allow large institutions to fail. That means more corporate welfare whether any of us like it. Now, if we had not allowed such monopolistic institutions to be created in the first place, the system could have more effectively cleansed itself without intervention. An individual failure might not create a systemic crisis. But, those are yesterdays sins of reducing the action of free markets that I wrote about long ago.
On Thursday Secretary Paulson announced a general outline of recommended changes to oversight of financial markets. The focus point of the media seems to be mortgage lending practices. There is no doubt mortgage lending practices need more oversight but I think we can worry about that one in five or ten years. If there is anything we can expend energy on later it is fixing mortgage lending practices. The few buyers of real estate aren't speculators looking for a short term gain. Plus, many are already facing tighter lending practices instituted by unhealthy banks. Focusing on this issue literally accomplishes nothing in rebuilding confidence and transparency in the financial system. Paulson's speech seemed long on talk and less on substantive and specific actions. Now, if I had a nickel for every person I've ever met in a leadership position that was a great talker I'd personally bail out the banking system.
I am leery of leadership with little operational ability. Poor operational skills are probably the most lacking ability of ineffective CEOs and leadership in general. What are operational skills? The one sentence definition is quite simply the art, discipline and know-how of how to get things done. In other words, an ability to take complex, chronic or seemingly insurmountable issues associated with running a business and breaking them down into identifiable and specific actions that translate into specific resolution. Then being able to lead an organization or group to actually execute on said plan. Sounds silly doesn't it? It's really not. It's an art. I've spent alot of my career building specific operational plans for executives searching for solutions to their problems. That is basically what management consultants do.
In this case, the world expects substantive and specific action plans that are to be taken to restore confidence, transparency and liquidity so that the markets regain an ability to function. We can talk about general outlines of general recommendations all day long. That is what Summers is referring to above. Exhortation isn't going to solve problems. I'm an investor and I have no confidence politicians or leaders of any type have any specific plan given the state of markets and speeches by politicos this past week. Quite frankly, I'm not yet convinced many of them are past the deer in the headlights phenomenon. If I don't have confidence, do the world's financial leaders? Do the world's investors? Do business leaders? Do consumers?
As an aside, I found it interesting that on The NewsHour with Jim Lehrer this past week, Ray Suarez pointed a question to Mark Zandi and Alan Binder about Paulson being part of the Wall Street leadership that has chafed against oversight and transparency for decades. So, is Paulson's recent verbal embrace of banking reforms and increased oversight of the monster he helped create a change of heart? An admission of failure? That oversight is a necessary evil? A lesser evil than Wall Street run amuck?
It's time for a short off topic rant. Did anyone see the recent 60 Minutes interview with Carl Icahn? Icahn is a very polarizing figure for many. Mostly because alot of corporate management does not like shareholders watching over them to ensure they actually know what they are doing. Personally, I believe his type of shareholder activism is a significant positive on corporate governance. Something that is also in need of more transparency and reform to enable further shareholder rights. Icahn isn't altruistic in any sense of the word. He runs his business for personal gain as he should. If a corporate management team has a sound strategy and strong execution plan they are working diligently, they need not worry about the likes of Icahn. If you are Ed Zander at Motorola, as an example, who seemingly had no control over the operational aspects of the company but was a great talker, then as a shareholder I want an activist or cumulative activism to force change. Zander was representative of a fraternity president re Icahn. Is Paulson a fraternity president or the real deal? Time will tell. Watch this clip of the Icahn video and to see what I am talking about.
My favorite clip of the Icahn interview is describing some of his experiences with management incompetence. I realize no one is perfect and we all make mistakes. That we are all human and prone to moments of stupidity is a given. This is not my point. I make these types of remarks because I want people to release this aura associated with unquestionable brilliance or unquestionable loyalty associated with leadership. That somehow they should not be questioned or held to account as everyone else is. An example? Executives making an average of 550 times the average American's salary. It was about 35 times just twenty five years ago. That shareholders and society have let this happen while average wages have made little progress versus inflation was accomplished by another art. The art of bamboozling reinforced by media and leadership. Bamboozling that is allowing the creation of uber rich CEOs and senior management while the average American's wages have been relatively stagnant in real dollar terms for decades. And while overall shareholder returns over the last ten years have been anything but good.
None of this has anything to do with a concern that someone is making too much money as is often used to incite class warfare. CEOs are hired stewards. Professional managers. If they want to be paid like an entrepreneur and have the freedom from oversight of an entrepreneur, they should go start their own companies and take the associated financial and career risks. Risks that the Google founders took. Or Steve Jobs took when starting Apple. Or Bill Gates. Or Warren Buffett. I hope all entrepreneurs make billions of dollars. Taking risk should be rewarded handsomely as entrepreneurs are the job creators and constructive change agents of our society. But, hired stewards have a fiduciary responsibility to the company owners. That means they need to be managed just as other employees are managed to the benefit of shareholders and to the long term value of the company. And please don't tell me CEO pay is where it is because it is what the market will bear. Compensation packages are typically negotiated by compensation firms with conflicts of interest and it is done outside of the transparency of free markets or unbeknownst to company shareholders until after the fact when these massive payout packages are being handed out.
What are CEO's worth? Who knows. But, if we have a transparent process of monitoring their results and the compensation process that allows company owners and free markets to participate, we'll find out. Today that isn't happening.
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