Financials: Is Fiscal Prudence Too Much to Ask For? 28 comments
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Banks are using this time to take substantial write-offs against their assets. The time is right for them to do this and the investment community expects them to. It would be imprudent for any institution to NOT take substantial write-offs now. But I am only arguing that the write-offs should be realistic.
It should not be the case that managements try and ‘overshoot’ their losses so as to show favorable results in the future. The managements of financial institutions must work to regain the trust of their customers and investors and this can only be achieved if the managements show that they understand and can control their balance sheets. To me, it is just another sign of bad management to try and manipulate earnings now so that these institutions can recoup these faux values in the future. How dumb do they think we are?
Yesterday, Citigroup, Inc. (C) reported its fourth RED quarter, writing down another $4.4 billion in assets. This brings their total write-downs to about $45 billion! Merrill Lynch & Co. (MER) wrote down $9.5 billion bringing its total write-downs to over $50 billion! The day before J. P. Morgan Chase & Co. (JPM) reported write-downs of $3.6 billion as well as a $640 million after-tax loss related to its acquisition of Washington Mutual. Wells Fargo (WFC) set aside $2.5 billion for future loan losses and the Bank of New York Mellon Corp.(BK) increased its credit loss provisions by 20%.
This is the time in the financial cycle when organizations must come up with a firm estimate of the asset base they have to work with. They must reduce their reliance on financial leverage as much as they prudently can. They must reduce their interest rate risk by immunizing their balance sheets as much as possible. They must reduce their reliance on accounting ‘gimmicks’. They must improve their reporting and communicating processes so as to achieve as much openness and transparency with their customers and investors as they can.
To me, these are nothing more than good management practices (See my post of October 14, “Good Management Never Goes Out of Style.”). They tend to go out of use as an economy heats up and are forgotten the most right before a financial system starts to contract. Thus, management must take time and effort to get their act back in order once the contraction begins. Businesses NEVER just “tend to business” during these times because they must focus on getting back to basics and this can almost totally distract a management during this period.
Furthermore, in my estimation, financial institutions have another task at this time. To me their business model has to change somewhat to reflect the advance of Information Technology and the uses of information and data that have resulted from these advancements (See my post of October 16, “The Special Case of Financial Institution.”). It is going to be interesting to see how banks and other financial institutions adjust to these changes and create workable models of sustainable competitive advantage without just relying on financial engineering to generate earnings. Trading models and arbitrage models are unstable in the longer run and cannot help build institutions that are going to excel and last.
The financial industry is going to be a very interesting one to watch in the next few years and there are going to be some real opportunities in which to invest. It may be a little early to “pick a horse” right now…although we seem to be coming through the financial collapse, we still have the economic contraction to go through, and this will cause other strains and stresses on our banking and financial system. And it seems as if most analysts are predicting that this adjustment will be relatively long and deep.
There will arise some financial organizations that will really be good buys. The question will be about how to pick them. I have expressed some ideas over this past week and I will just repeat what I think are going to be the most important factors to concentrate on. First, don’t just look at the person at the top. J. P. Morgan’s Jamie Dimon and Citi’s Vikram Pandit are getting a lot of the press right now. They, and a couple of other chief executives, are ‘showing well.’ The important thing to me, however, is the quality of the teams the chief executives are building around them. This may be difficult to discern, but a ‘good’ top executive is one who is proud of his or her team and allows them to be known and to shine. Stay away from the chief executive (and his or her company) who is the only one allowed to be in the spotlight.
Second, check out where the organization is going. The idea of focus is crucial here. Is the organization doing a good job of defining its business and the fundamentals that underlay this business? As mentioned, organizations get in trouble when they cannot define their businesses well and rely on financial engineering or ‘gimmicks’ to produce results. This is going to be somewhat tricky as financial institutions ‘re-tool’ their business model to fit modern information technology and the new regulations and regulatory institutions that will inhabit the environment. Look less to trading and arbitrage to carry the day and more to the development of products and services that build on the evolving technology and establish customer relationships.
Finally, observe how the management team brings innovation to the marketplace. Financial institutions are dealing more and more with Information Goods and consequently must learn how to adapt and innovate within a constantly changing world. In order to do this well, managements must learn from the Information Technology industry. The managements of financial institutions must realize, however, that information is inexpensive, tends to be ubiquitous, and cannot be controlled. How these managements handle this reality is ultimately going to determine who the winners are in the future.
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This article has 28 comments:
investors don't trust the balance sheets...hmmm sounds like 'confidence'
700B can't fix distrust!
The Bush Administration and Paulson will just step right up to the plate and offer the breast of the American taxpayer to suckle on...
Bad home loans... No problem...
Bad credit card debt... No problem...
Bad car loans...No problem...
Bad home equity loans...No problem...
Just take money from the taxpayers to redistribute it in our economic system and give it to the freeloaders and incompetents. That will make our economy healthy and sound.
Step up to the Bush-Paulson breast and suckle away.
Remove their entire reserve basis so as to expose them for what they are. Central Bank fiat distribution agents.
While we're at it, everyone should cease doing any business with them at all if possible. Don't even get a loan from them. Let them stagnate and die.
They deserve no less.
Today the core curriculum at the nation's business and law schools can fairly be summarized as "lie, cheat, and steal, and when you are caught, claim ignorance and feign indignance." Until we stop grinding ethics out of people, and start leading by example with ethical behavior and standards that reinforce it (and punish its violators), we are never going to recover lost trust.
great idea about removing your cash... but you do pay taxes right?
so, we remove cash and gov. taxes more and injects your tax dollars to replace your real dollars.
we are screwed either way!
For the record, I don't have or participate in revolving credit debt... actually I'm a fringe Dave Ramsey freak that uses cash... I have no debt. nor will I search any out
I know, I know... old school loser scared of growing my business...
guess what, I slept well last night
what is up with your 'website'
are you the rockwell fella on there?
I was curious to your background... I went to Auburn and saw that website is 'headquarted' there
"What do bankers do?"
Well, they take your money and lend it out
then make some more and lend it too.
"Make some more!? Surely you jest;
t' would take a printing press!"
Au contraire mon freir,
they make it from thin-air.
"They make it from thin-air!?
But that's dishonest, absurd!"
Yes, hence the Federal Reserve.
I agree 100 percent plus... DON'T do any business with these firms and let them die off.
thedozer:
I digress here for a moment... But thedozer recommended a book, The Forgotten Man...
Thanks for the tip! It's on the way. Interesting how there were some politically motivated reviews. Too many people don't understand that the New Deal didn't work. It's not a Democrat or Republican issue, just an economic fact of life.
This banking deal will follow the way of the Edsel...
banks are hoarding cash instead of lending... but lending is a banks lifeblood. right? so they can't not lend forever... they will dry up.
ahhh, but the government to the rescue... I mean, life support. The government injection is only prolonging the inevitable... death of the institution in question
so I ask you... would you rather live for 13 months in a painful vegetative state or a bullet to the head?
I do have political leanings... however, you said it. This is not a partisan issue in my mind.
furthermore neither of the parties represent my beliefs as I believe in SOLVENCY. I am a firm believer that government is a terrible steward of your money. furthermore, it is unconstitutional. and if I were on capitol hill and I were asked a question... I would simply APPLY the constitution... Brilliant! That's kinda why it's there. I wasn't there, but I doubt they wrote it while drinking.
The forgotten man, I just started it, and I am so pissed already! I mean... you can simply look at the bullet timeline of policy creation and implementation and it is SO absurd! Oddly enough, we are getting back on the same path now!
I'm also learning myself on the 'fair tax' per Neil Boortz. I'm sure you and smarty have thoughts... I'd love to hear them!
I don't know that the fair tax is the answer, but the current system is so flawed, I'm going to explore the argument.
Bullet in the head... That got me thinking of what the modern Wall Street crash will look like since all of the windows on high floors are blocked or sealed. Maybe you'll have "SUV suicides," where brokers end it all... Maybe you'll walk around Westchester County, New York and see SUV's that look like somebody splashed tomato juice on the windows.
Could of had a V8!
I'm very practical in my beliefs, but this runaway spending government is really ticking me off... hence I sound like ron paul
that was good!
I agree with fair tax, but let me point out something here... I lived in Europe for several years and I've had extensive experience with some of the systems over there, particularly Denmark and Germany. They have national flat taxes BUT you get something for them. NOT HERE IN THE U.S.A.!
If you pay $10.00 to taxes to the national government in Germany or Denmark, you get $9.9999 back through services. Excellent schools, universities, highways, public transportation, parks, airports, etc. In the United States, you pay $10.00 and you may get $1.00 in services and then they will say that you owe them $5.00 more. It is nuts.
Here is another example... Do you remember when all of these states started to get these Power Ball lottos, etc.? It was going to help our kids with better schools. Nothing. Zip. It's like government is a black hole when they get your money...
I'd pay the government even more taxes than I do now, but I want to see it spent on things that are useful for our country -- better schools, transportation, universities, etc.
Well, thedozer, this is what I would prefer. Declare a Jubilee, ala the Old Testament. All home mortages from fractional reserve banks to be forgiven. After all, they created the money from thin air to loan out, let them be payed back with thin-air. Then institute "free banking" with 100% reserves and competing currencies. Abolish the Fed. Negotiate with our foreign creditors. Set up food kitchens and other temporary safety nets. Close our overseas bases and bring the troops home. None of this would benefit me personally since I owe no bank anything.
OR
Elect Ron Paul in 2012 and let him figure out what to do.
can I put ted nugent on the ticket with ron paul?
sounds like you may be anti-war, and I'm okay with that... but I'd like to know that we could defend ourselves if attacked...and Ted fill that gap!
hell, put him on the ticket and we could cut defense!
CURBS,
in europe they are better at the government/social..ist programs as everything gets better with practice!
fact is...well let me read the book first or I'll speak out of turn.
I know there is a difference in 'flat' and 'fair' tax. to what extent I will have to learn.
but even in Germany, where they actually use the dollars 'productively' it leaves the door for corruption open...
unfettered access to unlimited amounts of money that you didn't have to work for... it just sets a bad precedent. It even sucks in theory
I wish unlimited access to $$$$ was my problem. Why, I think I'll run for Nancy Pelosi's seat in Congress.
Hehehehe.
I am pro-defense but that does not mean I preemptively attack my neighbors. If Ted is OK with Paul, he is OK with me. Another poem:
I used to be annoyed,
in fact, paranoid.
But then I found it best
if enemies I made less.
This lesson do I give
to the country where I live:
the US.
nice poem, fyi on my background... I write songs here in Nashville... I sing em too.. finally got a record deal
my first single is going to radio now and I'll probably be leaving seeking alpha as my time is going to be a square root of what it is now..
but I do enjoy all ya'lls discourse!
smarty, curbs, moonbat & others
ya'll are GOOD PEOPLE
Good luck on your career and NEVER give an inch with regard to artistic integrity.
If I ever want to kill me self, it will be suicide by cop. I will inform the DEA that I saw a marijuana seed in someone's apartment and give them my address. I haven't decided if the automatic I meet them with will be loaded or not.
yeah, Ron Paul and Dennis Kucinich on the Independent ticket, now there is a ticket I could get excited about.
investmentscientist.co.../
Manipulation of interest rates is a cheat and one that is bound to fail as it already has.
seekingalpha.com/artic...
cut and paste the above into your web browsing bar a very good article
Curbs, moonbat, thedozer: Great stuff.
I don't have anything to do with 'my website' except to advertise it. It's a great place to educate yourself. I've been reading it for nearly 10 years now and it's where I first discovered Ron Paul about 8 years ago.
Believe it or don't, I intended to write in Ron Paul for President in 2004 but there wasn't a spot for a write in on the ballot. I guess I'm ahead of my time.
As for taxes, I say get rid of everything except excise taxes. Require spending to be less than the amount collected the prior year minus any shortage from the year prior to that. Force fiscal prudence and the many-headed hydra of government will wither and die, replaced by private concerns which actually produce stuff that the public wants and needs with much less waste. Cronies would have to find real jobs that actually do some good for the economy.
I'm also with moonbat (and Ron Paul) on the multiple competing currencies idea provided they are all fully backed by something tangible. No fractional reserve banking. Everything funded from somebody's savings or you just don't bother.
And FYI. It WAS a full moon, on Tuesday.
Good luck with the recording career dozer. Feel free to use any lyrics I have posted here on SA.