Monday, September 29, 2008

Just who is the expert?

In reading a Time business on line article (I'd include the link, but Time already took the article off their site) about the AIG bailout, the author noted that one reason the government decided to jump in was the size and global reach of AIG.

On thing worth noting is that is that AIG got in trouble not because of it’s core insurance business, but because of it’s investments. Investments, what is an insurance company doing in the investment business?

Simple, investments are a place to park the huge profits from insurance premiums. All that money they collect from the people buying insurance is invested at the highest rates they can find. What did you think, they put it in a vault somewhere and let it sit?

Insurance companies put that money to work, keeping only the cash reserves the regulators tell them they need in case they have to pay you for a loss.

What this tell us is that the people making the investment decisions at AIG, the best and the brightest they could find, really didn’t understand the level of risk involved in their investments.

Now when the decisions made by the best and brightest minds we could find go bad, who do we turn to for advise, the same people who made the decisions and the people who trained them.

When I was still working, if I screwed up this bad, I’d be the last person my boss would ask for advice. After all, if my best thinking got us here, why would he expect my best thinking to fix it?

Monday, September 22, 2008

Why the financial savior plans won't work!

In reading about the current crop of “savior” plans for the US financial crises I realized why they won’t really solve the problem.

They are all top down plans and the problem is a bottom up problem. What the government is trying to do is like fixing the fuel pump on your car when the battery goes dead.

Take the mortgage melt down as one example. Bailing out the lenders with direct cash subsidies doesn’t do a thing to stop foreclosures, it only makes it possible for the lender to pay it’s bills and make new loans. A better use for the money is to subsidize the home owner who can’t pay the mortgage directly and let them keep paying on time.

The mortgage crisis is only a crisis if the people who have loans can’t pay them. A lot of the problem surfaced when ARMs (adjustable rate mortgage) reset and drove the monthly payments up. The rest of the problem is people who lost their jobs and can’t find another, or at least one that pays what the lost job paid.

At the core of our financial problems is the fact that peoples income has not kept pace with costs and the cure is to put money back in the hands of the people in trouble. Take the same 700 million dollars, pay it to the same banks, but pay it as assistance to individuals who need help keeping their homes and businesses. Take the interest rates back to where they were when people were making their payments, pay 10% or 20% of the mortgage and let the home owner pay the rest.

The next big example is US auto makers, who don’t need large influxes of cash, they need a large influx of customers. The best way to subsidize Detroit is to subsidize buyers. If you going to give GM, Ford, and Chrysler assistance, do it by making it possible for them to sell their product at a price people can afford. Again, lower interest rates or down payments using the same money you were going to give in the form of a subsidy.

When you prime a pump, you don’t pour a huge volume of water down the well, you pour just a little into the pump! The big companies are the well, the consumers are the pump.

Tuesday, September 16, 2008

Shareholder Value

I was just reading a question on Linked In, the business networking web site, about how to use the Balanced Scorecard method in business. One of the answers talked about “Shareholder Value” and it started me thinking.

Focusing on shareholder value has caused far to many American companies to loose sight of their real business. To paraphrase Warren Buffet “Take care of your product and your shareholder value will take care of itself”.

If you build a quality product, in a cost effective manner, and market it well, then shareholder value is an automatic byproduct. The more you focus on shareholder value as a goal, the less you focus on the product and the product drives your business.

For most businesses shareholder value is measured by stock price and If you manage your business to control your stock price, then your business is your stock price. If you manage your business to produce (and sell) your product, then your business is producing (and selling) your product.

One reason far too many companies focus on stock price is that the stock price and not product sales has become the measure of the senior manager’s success or failure. It’s the kind of thinking that causes Apple to beat all the analyst’s expectations and still have their stock shares loose $17.47, or 10.5 percent in after-hours trading.

Yes, earnings are down from last year, but with over a billion dollars in profit this year, Apple looks they they are making money when a lot of businesses aren’t. So anyone in the real world would say that Apple is successful and that if the market is rational then their stock should be valued to reflect success and their stock price should hold or rise while only failure would drive falling stock prices.

Wednesday, September 10, 2008

One more short sighted decission

Bell Labs ends fundamental research and focuses on applied research.

This article at reports that Bell Labs has ended it long history of basic research and shifted it’s focus to research that applies to it’s current business.

How does this jibe with the often reported stories that the US will become the idea “factory” for the rest of the world?

Bell Labs created the laser as part of their basic research and really didn’t know that it would apply to telephony as a way to send voice messages over fiber optic lines. The fundamental research more than paid for itself by allowing more messages over fewer lines and that supported Bell Telephone’s core business.

What profit making opportunities will Bell now miss because of this decision. We’ll never know but rest assured that just as Japan and China are investing is space they will invest in basic research and that research will result in products that outpace American products. I can’t tell you where or how, but history supports my position that basic research always pays off. It just may not pay off this week.