Just Say YES: the CFPA, Finance Misfeasance, Trust and Strategic Outlook (UPDATES)
We've spent a lot of time over the last couple of years looking at the credit markets, the economic
impacts and the performance of the Finance Industry and their impact. Rather than review previous findings and/or charts and arguments we thought we'd try and focus on the Industry, it's strategic outlook and the regulatory and business climate by telling video clip stories. Which will highlight some of our key concerns. Starting with this recent clip from WealthTrack where an asset allocation guru (David Darst of Smith Barney) and a bond guru (Robert Kessler of Kessler Advisors) take a pass at bond strategies, the economic outlook - particularly the inflation outlook and what asset allocation strategies should be. They both raise some interesting points but, frankly, we've never heard a more politely but heated dispute on WT in any program. As they get in the argument and counter-arguments start flying fast and thick so it may well be worth your while to listen twice, take notes, take a break and then think really hard about what they're saying. Our take is that Darst is talking his book - though eloquently with a lot of "stuff" to back him - but his book is based on conventional wisdom. Kessler is talking his book a bit as well but his book is more in line with what we think is actually going on in the world. In fact as background to this discussion it'd pay you to go back and take a really good hard look at the post on money and inflation risks (It's All About the Money: Markets, Economy, Credit, Oh MY!) as well as our quarterly update (Skirting the Abyss: Economic Outlook, Financial Crisis & LT Consequences). The latter especially on the credit markets conditions and the economic implications.
Consumer Protection, Re-regulation and Trust
Most of us tend to view Big Business as if J.R. Ewing is the model and, sadly, there's some evidence of that. Particularly when you look at how customers are treated (need another tech support joke?). But, at the end of the day, for a company to stay in business there has to be a certain minimal level of trust that what they sell us will actually do something close to what we pay for. Nowhere is this more true than with regard to Banking and Finance. And nowhere has the level of trust been more badly damaged. Irreperably? Well time will tell. As we point out in the update and all the recent headlines are supporting banks are still facing asset writedowns, a weak economy and further loan problems plus a poor long-term outlook. And last year's trading based profits which should have been put to addressing those problems and were instead used to pay bonuses is about as "in-your-face" as it gets on respect for customers and value delivery. No where does this come thru louder and clearer than in this recent video clip where a bunch of SNL veterans reprise their Presidential imitations to pay a midnight visit to Pres. Obama to urge him to pass the Consumer Financial Protection Agency.
Interestingly enough they stretch it thru every President back to Chevy Chase as Ford and Jim Carrey as Reagan. In passing they actually make both an honest case and an honest admission of some of the root causes - which is and was the unbridled ideology of unregulated markets (a point that was no where better discussed than in the Atlantic's profile of Geithner and the various rescue packages, which we put up yesterday and again today and which you really need to read at some
point). Anyway passing CFPA is a very good idea because the Industry has proven terminally (implied puns intended) unwilling to put customer interests ahead of short-term profits but it shouldn't be. Trust is an asset that takes decades of careful investment, nurturing and protection to build. But it is not self-sustaining and you can badly damage it in an afternoon. Well we've had about three years of really bad afternoons - you have to wonder what's left? You also have to wonder how that's going to impact the long-term outlook for the Industry. We think it's going change people's willingness to deal with Banks in the most profound way though it will take time to work out because we've got so much digging to do.
If you'd like something a little more substantive then this Rose interview with Elizabeth Warren provides it, as well as a broader discussion of some of the financial, monetary and credit issues we've been discussing. Three things stand out to us: first, every lobbying group is adamently opposed, two she says the same things in essence that the SNL President's say (or that we've been saying for that matter) and this interview went relatively viral - considering the subject - very quickly. There are indeed a lot of angry folks out there. Oh yeah - one more thing. All the necessary legislative authorities already exist what's open is where they'll sit. The reason they weren't enforced was because of the mental mindsets of the regulators over the last two decades. Does anybody think that hasn't changed or that they won't and aren't already doing their best to enforce "never again"?
Industry Adjustments and Outlook
Another interesting Rose interview, this time much briefer, was this one on a recent biography of Jaime Dimon. The one bank CEO who's come thru all this with relatively flying colors. In the spirt of our emphasis on value, business performance and management systems we'll point out that seems to because he wholeheartedly endorses and enforces those principles as well as knowing what he's doing. He also, as he's said repeatedly, supportive of regulatory reform "almost" down the line with the current set of proposals. His one big objection is a TBTF or Volcker Rule breakup. Now how that'll play out isn't clear but the principles behind the Volcker Rule - public monies should NOT be used as private risk capital (as it was this last year) is pretty clear. The real problem is going to be the mechanisms. Dimon probably has a case for scope and scale - what we need are workable ways to wind down large institutions along with capital requirements matched to risk and limits on predatory proprietary trading. Like the NRA and gun control you'd think private and public interest are joined in finding good engineering to solve these problems but apparently not.
Fundamental Questions About the Future of the Industry
So we come back to our two fundamental questions - to what extent can we trust the Financial Industry to be careful of the public interest and, if we can't, what do we do? And, second, what is the strategic outlook for the Industry - how well do it's business models work. As it happens those are questions we've been digging into for close to two full years now and we collected all our prior work in a set of white papers that you can download (they're also addressed in summary in the recent update).
UPDATES: Some Major News to Roll In
There was lots of breaking news and events so far this week that bear directly on the questions of reform, financial industry performance and the strategic outlook. Of that lots five are really major and four of them we've added to the top of the readings stack. Our previous listing of our analysis of reform and industry business performance has been moved to the bottom. An irony is that much of the news is in line with the major arguments of those papers.
The five major things are Sen. Dodd's decision to move his bill without joint sponsorship, the release of the latest Feds fund flow report, a major conference this week in NYC from the Roosevelt Institutute with some major names (Soros, Stiglitz, Warren,...), a major speech by Gary Gensler of the CFTC on re-regulating derivatives and the release of Booz & Co.'s annual industry outlooks. What do they all have in common - the firestorm of re-regulation is happening while at the same time the business environment is changing.
Specially the Flow of Funds report finds that de-leveraging is proceeding at the fastest pace in postwar history, some of it thru default of course, but representing a fundamental strategic change. But because the Industry has spent the last year stone-walling change you're getting a huge, and now organized backlash, where momentum is building. Dodd's announcement yesterday is well covered but the speeches by Gensler and the conference not so much, even though they may be critically important. The other thing everybody is missing that is critical is that a lot of more rigorous regulation can happen and is right now thru enforcement of current authorities.
Finally, and something we've been saying for a long time, the Finance Industry's businesses as businesses need to be fundamentally rethought, they need to focus on customer value, new products that actually deliver value and operational effectiveness. The two Booz reports (one on Retail Banking and the other on Capital Markets) are excerpted in the readings as well with a pointer to the full report. If you have any interest, i.e. you think the banks are in good shape going forward, think again. Speaking of which Britain's Financial Services Authority (FSA) has proposed a Round II Stress Test and our good buddy Calculated Risk has taken another look at that issue. In line with our prognostications about the continuing tsunami's of bad debt:The Next Stress Test Scenarios
Oh yeah, btw. The Examiner for Lehman found out they were screwing around with the books as well. But that you can read in the news, on the front page. This other stuff confirms the game is changing big time, and the industry is not adapting to it.





































the biggest bailout since the GD and ending with the largest regulatory re-thinking since the cumulative total of GD and intervening decades legislation and regulation. REALLY stop and think about that for a moment - almost EIGHT DECADES of incremental change has been compressed into sixty days. Or being slightly more fair 120 going back to Sept and the TARP kickoff. Five weeks ago everybody wanted to hang Geithner for malfeasance and lack of detail, now he's a genius and a hero. Be careful what you ask for too ! Pundits and interests on the left, right, up and down are all choking, albeit more quietly, on these details. Yet nothing should be a surprise since there's a clear pathway from Bush Administration decisions and recommendations, including Paulson's tentative plan from last spring (btw on of the key readings is a FT oped by Henry supporting a regulatory overhaul that looks like this one on a worldwide basis). Of this set of initiative what's most important - the economics, the financial technicalities, the politics or the popular reaction ? Actually all of them !! What's still missing is a context to help organize, categorize and organize our thinking about these myriad complexities so we're going to take our best shot at explaining what's going on. And make no mistake - these are enormous changes, mostly for the better IOHO, long over-due and the Finance Industry and it's role will never be the same again. The last three decades of business models, strategies and profit/performance relationships are gone forever ! We ended the last post with the accompanying cartoon to capture the popular reactions to date and so we start there. Now lets dig into the strategic context.











































