Sharks and Saints…

I am in my final semester at business school earning my MBA from Chapman University. Here at school, we are initially drummed from the very first classes that the primary goal of the firm is to provide value to the shareholders and the importance of understanding the time value of money.  It’s been a whirlwind. Essentially, damn the torpedoes and full speed ahead!

We are taught to evaluate portfolios, make strategic choices for the firm based on financial ratios, data, and past Harvard business cases that we have broken down, analyzed, diced and sliced six ways to Sunday. SWOT analysis’ and Porter’s Five Forces are a part of our waking thoughts. We all feel that we now could either be some well-paid corporate nobody or the next Jeff Skilling, or hopefully fall somewhere in between the two.

It’s fascinating because on one hand, we are really supposed to maximize the value of the firm, increase shareholders wealth, and not worry about the little people that we may be squashing in making our key strategic decisions.

A little voice in my head asks me where is the sense of ethics, the Golden Rule, and all of the good deeds we are supposed to espouse as we make our way up the ladder.  A quote comes to mind and I am not sure who said it first, but it goes a little something like this “be good to the people who are around you when you are on your way up, you most likely will pass them again on your way down.”

This brings me to my parting thoughts, and that is, above all, be a good person, even if it costs you financially a bit more to do so, and I believe that companies big and small should also strive to adhere to this philosophy.

An individual is only as good as their word, reputations do end up preceding you, and you cannot take money with you when you die.  Legacy is all that is left.

~Make it memorably good.

Through the shadows…

I want to throw in my two cents on the Occupy Wall Street movement that has become so en vogue as of late. The concept of tent cities popping up in and around the civic centers in many major cities is a unique site as in our modern day, there really has not been a reason for the people to get together and rally around some central key issues since the days of the Vietnam War some forty years ago.  Indeed, this sort of thing just doesn’t really happen in America anymore.

This all began a few months ago, mid-September 2011, some people got together and began to rally around one main demand.  “We demand that Barrack Obama ordain a Presidential Commission tasked with ending the influence money has over our representatives in Washington.” These people have come to believe that money, lobbyists, and special interest groups are behind most of the policy making in Washington and as such, they are fighting to be heard. Many discuss the growing divide between the rich and the poor, TARP, the public taxpayer bailout of mismanaged corporations, and the shrinking middle class as points of note in the ongoing debate.  One thing that’s certain is that people have begun to really take notice of the movement on an international level, and that in and of itself is no small feat.

The Guy Fawkes mask—worn by a ­protester in New York on Oct. 5—has become ­symbolic of the Occupy Wall Street movement

It is definitely an interesting debate, with those who are critical of the  Occupy Wall Street movement declaring that the participants are anti-capitalist, anti-corporate, anti-materialist extremists.  These views are squarely at odds with mainstream economic thought.  That said, with the overturning of dictatorships abroad, people hurting financially an suffering though a lo of debt with a government in Washington making them many hollow promises, the timing is right for such a movement to take place.

Whether it will work is anybody’s guess, but people are taking note, and that of itself is a big accomplishment.  With the overall fragmented nature of the Occupy Wall Street movement, lack of unity, and underlying stories of squalor and abuse in certain tent camps, it will most likely not last.  But people have taken note, and that’s a start.

In closing, I think it is important to analyze the words of one of the starters of this movement David Graeber as I believe it touches on something much deeper than a group of people in a city causing a chaotic scene with tents and holding signs….

“And there’s a stream—so that very morality of debt has a lot to do with it. For example, in almost all the great world religions, they talk about debt as if paying your debts is morality. In fact, even the word for debt, sin and guilt are often the same. That’s true in Sanskrit, that’s true in Aramaic. The Lord’s Prayer doesn’t actually say, “Forgive us our trespasses,” it says “Forgive us our debts just as we forgive our debtors.”  Of course, the trick is, you don’t actually forgive your debtors, do you?” David Graeber Interview with S & P Futures


A house divided against itself cannot stand…

Even though these words were said in 1858 regarding the deepening division between North and the South, Abraham Lincoln’s timeless words hold true for a great many set of circumstances and situations. And if you stop to think about what I’m alluding to in saying that, it really is true that nothing cuts as deeply as division from within.

In applying his words to the present state of the European Union, it is important to look back to the end of WWII.  With the United States becoming the new global powerhouse coming fresh off its victories in WWII, European leaders wanted to make sure that their countries would remain strong and relevant in the global economy.    From just after the end of WWII up till recent years, a large number of treaties, agreements, and trade deals have been made between its members, some with much wrangling and negotiation involved, at times it has been at a pace of two steps taken forward and one step backward.  And it is easy to see why the work to this point has been difficult at times, some of the nations have wanted full economic and political integration and they have been countered by nations  and leaders that have not wanted to give up their status in the world as sovereign nations to a board of politicians and bureaucrats in a different country.

And through all of this over the years, these various agreements and landmark treaties; (the treaty of Paris, the treaty of Rome, Single European Act (SEA), and the Maastricht Treaty) have all been created with the focal points of unity, fair trade, and equality at their core.  They have worked as the drivers that have caused the European Union to ultimately work together to have one collective voice that represented Europe in the global economy.  The creation of a single currency, the euro, represents a cap that signifies the unity of all of these countries.

This brings us to now, and quite frankly, there is an ever-growing divide between the strong countries (led by France, Germany) in the EU and the ones that are requiring assistance (like Greece, , Portugal, Spain, and Ireland).  This division cuts to the core of what these countries have worked so hard to forge together, and I liken it to a situation where it is easy to smile when times are good, but when it’s raining and things look dark and murky, that is when your true character comes out.

It has all culminated to now when some are in their proverbial hour of need.  Consequently the solidarity and unity of the EU are going through their toughest test, and quite frankly if they are to not able come together and back these fellow EU nations when they need it financially, the euro and the EU that created it will fall.  So it’s a gut check time for all of Europe, and the global economy and stock markets are looking to see if it really is as unified as it said it was going into the creation of the single currency and moreover, the European  Union as a whole, because a house divided against itself cannot stand.

A German Hangover…

It is once again Oktoberfest in Deutschland, that season where the people get together and raise a glass (or for some many) of good German beer and celebrate in the traditional fashion with German food, music, and traditions. It is a celebration deeply ingrained in the German culture, originally started in 1810 to celebrate a royal marriage between Prince Ludwig and Therese of Saxe-Hildburghausen.
Typically, Oktoberfest one of the best times to be in Germany as the place is alive and everyone is intent on having a good time. This popular tradition is also widely appreciated here in the United States. And of course, when lots of drinking and merrymaking occurs, this equals hangovers the next day.
The hangover I am referring to however is German certain post-war financial policies and what it means for them today. It is summed up quite nicely by a member of German parliament: “We Germans don’t look to see what’s in our own national interest, we’re drunk with Europe.”
Germany is the strongest member of the European Union and constant breadwinner for maintaining the value of the Euro. To get in that position, German policies have been open door and they really have profited nicely from the policies that have made German industry strong. When the idea of a unified currency came about, Germany led the charge for it, thinking it would continue building on the several decades of good business and by eliminating the hassle of monetary differences between the countries; it would increase their market share both continentally and globally.
Which brings us to now, and because Germany and German banks have drank the Kool-Aid and are holding bonds from Ireland, Spain, Greece, and Portugal thinking they were just enhancing and building trade and financial ties between business partners in a union. Now that these countries are needing bailouts, markdowns on their debt, and other financial easing measures, Germany finds itself very exposed to the underside of having a unified currency and they aren’t too happy about it.
German governments and central banks simply got drunk on Europe and building their economy at all costs without weighing all of the potential ramifications. Consequently, they are presently experiencing what I did the day after my visit to an Oktoberfest celebration last weekend in San Diego, which is a massive hangover.

Evaluating the price of a haircut…

Beginning with the title, when I think of haircuts in the traditional sense, I think of barbershops, clean styles, and sometime light conversations. It evokes a feeling of nostalgia, and I am sure we all have had an older family member reminisce about going to the local barber at one time or another or walked by the old barbershop on Glassell St. here in Orange. But this haircut has taken on a new meaning and for many countries and banks around the world, this definition has nothing to do with hair out of place and everything to do with finances being out of place.

My present focus for this week’s blog is centered around the financial turmoil in Greece and what it will mean for them and the rest of the world when their sovereign bonds and securities go under the scissors.  The term ‘haircut’ in this sense means a reduction of debt. Used in this context, the value of these securities which are being held and traded by many of the major European banks needs to be adjusted downward in order for Greek to not go into complete default.  Greece’s finance minister just yesterday laid out three possible scenarios he sees will be prevailing the short term fate of Greece in a grading from best case to worst because basically they’ve got debt that they can’t pay.

    • A 20% haircut of all bonds, plus the bailout monies from the EU nations needed for the next tranche of bills owed by Greece.
    • A 50% haircut for all bondholders, which will gravely devalue the assets and initiate orderly default of the country’s finances.
    • The bailout accords fall apart and Greece begins a disorderly default on all of its financial obligations.

If any of these scenarios happen, what it will mean to everyone else is that most of Greece’s debt is with foreign creditors, and so foreign banks and governments would have to take massive hits over the loans that the Greek financial system is unable to repay in full.  This will have ripple effects that will affect market conditions on a global level as lending and credit issued will become more scarce, and trading of international bonds and securities will also take a decrease as more and more banks become wary of the ramifications of Greece and its financial woes.

Obviously, time will tell what direction these predictions truly end up taking, but on a surface level, it is discomforting to say the least in knowing that many poor choices by a certain few will have a negative effect on a very large group of people that were completely uninvolved in the creating of this mess.

In taking this whole situation and having just emerged from our own form of financial restructuring and bailout here in the United States, how do you feel this will play out?