Comments on: Trust, Bankers and Soldiers of Fortunes – You get what you pay http://blog.business-model-innovation.com/2010/02/trust-bankers-and-soldiers-of-fortunes-you-get-what-you-pay/ A fresh approach to strategy Sat, 24 Jul 2010 18:07:57 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: kay plantes http://blog.business-model-innovation.com/2010/02/trust-bankers-and-soldiers-of-fortunes-you-get-what-you-pay/comment-page-1/#comment-246 kay plantes Wed, 03 Feb 2010 07:20:00 +0000 http://blog.business-model-innovation.com/?p=517#comment-246 Great insights Patrick. Incentives and rewards for employees (and hiring criteria as well) must be aligned with the value promise to your customers or else you have an organization that will never deliver on its value promise. Stated another way, "You get what you pay for" as an employer. As an economist I have another read into the banking mess in the US at least. Banking in large measure became a commodity. To achieve earnings targets and lower costs banks consolidated from local to state banks, decades later to national banks and then to global banks. (Citibank represents the worst of this as they never did integration effectively and ended up as one bank with multiple systems, a big contributor to their profit issues.) In any commoditizing industry, look for consolidation to lower cost structures. Once consolidation was mostly done, how were earnings targets to be met? By taking on more risk. Years before the 2008 financial melt-down, these big banks funded the Anderson-Enron debt deals sold to the public as equity deals. Look into the footnotes of some of the US-headquartered global banks' 10K's and you'll see the fortunes they paid to the US government for their involvement in Enron's deception. Underwater mortgages yielded higher returns, with the risks of default offloaded to others through securitization. Only the banks (other than Chase and Goldman Sachs) held onto some of the securitized assets as they were earning good returns. Individuals in the banks made all these decisions because, as you say, they were paid on return. The Fed raised interest rates, underwater mortgages defaulted, housing prices started to fall adding to the default rate on mortgages and lowering the price of securitized pools of mortgages and therefore bank capital. And the rest is history. Giants for the most part compete as commodities. That's OK for retailers like Walmart and Amazon. It's not OK for banks, unless we impose walls that prevent them from taking undue risks with our money and government backing for personal and shareholder return. Obama has the right idea--unfortunately the US Congress' races are largely financed by the financial services industry so what the US Congress will do is unclear. The US needs a louder voice from its business community overall. Unfortunately, US business has outsourced political involvement so only the special interests speak up. Best, K Great insights Patrick. Incentives and rewards for employees (and hiring criteria as well) must be aligned with the value promise to your customers or else you have an organization that will never deliver on its value promise. Stated another way, “You get what you pay for” as an employer.

As an economist I have another read into the banking mess in the US at least. Banking in large measure became a commodity. To achieve earnings targets and lower costs banks consolidated from local to state banks, decades later to national banks and then to global banks. (Citibank represents the worst of this as they never did integration effectively and ended up as one bank with multiple systems, a big contributor to their profit issues.) In any commoditizing industry, look for consolidation to lower cost structures.

Once consolidation was mostly done, how were earnings targets to be met? By taking on more risk. Years before the 2008 financial melt-down, these big banks funded the Anderson-Enron debt deals sold to the public as equity deals. Look into the footnotes of some of the US-headquartered global banks’ 10K’s and you’ll see the fortunes they paid to the US government for their involvement in Enron’s deception. Underwater mortgages yielded higher returns, with the risks of default offloaded to others through securitization. Only the banks (other than Chase and Goldman Sachs) held onto some of the securitized assets as they were earning good returns. Individuals in the banks made all these decisions because, as you say, they were paid on return. The Fed raised interest rates, underwater mortgages defaulted, housing prices started to fall adding to the default rate on mortgages and lowering the price of securitized pools of mortgages and therefore bank capital. And the rest is history.

Giants for the most part compete as commodities. That’s OK for retailers like Walmart and Amazon. It’s not OK for banks, unless we impose walls that prevent them from taking undue risks with our money and government backing for personal and shareholder return. Obama has the right idea–unfortunately the US Congress’ races are largely financed by the financial services industry so what the US Congress will do is unclear. The US needs a louder voice from its business community overall. Unfortunately, US business has outsourced political involvement so only the special interests speak up.

Best, K

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