Business Insight Zone

Goldman’s tower of finance in Jersey City.

What financial crisis?

The Guardian gives the skinny on Goldman Sachs:

Goldman to make record bonus payout

Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm’s 140-year history after a spectacular first half of the year, sparking concern that the big investment banks which survived the credit crunch will derail financial regulation reforms.

A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm. [ . . . ]

(Hat tip: the Wall Street Journal’s indispensable MarketBeat blog.)

• Item: Looks like Warren Buffett made a really good investment in Goldman last year.
• Item: It’s not just Goldman that’s doing so well. According to the Guardian piece, Barclays, Credit Suisse, Deutsche Bank, JPMorgan, and Morgan Stanley are also reaping major rewards.
• Item: Just like two years ago, “there sits Goldman Sachs, immaculate in a tailored suit, cool as the other side of the pillow, basking in the glow of a quarter in which earnings rose [a ton] from the same period a year ago.”

The more things change, the more some things stay the same.

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Related:

• Must-read: Michael Lewis on the Meltdown
• Keep your powder dry in business.
• Good context on Goldman Sachs.
• Company of the Day [21 September 2007]: Goldman Sachs.

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Photo by Aby Jose, used under a Creative Commons license.

They do it to drive me crazy.

I love FORTUNE magazine and have been reading it for ages, but this item makes me grind my teeth:

The 10 largest U.S. bankruptcies

To save you from paging through the whole thing, here’s their list, with asset values in billions of dollars:

1. Lehman Brothers — $691  — 2008
2. Washington Mutual — $327.9 — 2008
3. WorldCom — $103.9 — 2002
4. General Motors — $91 — today
5. Enron — $65.5 — 2001
6. Conseco — $61 — 2002
7. Chrysler — $39 — 2009
8. Thornburg Mortgage — $36.5 — 2009
9. PG&E — $36 — 2001
10. Texaco — $34.9 — 1987

(Note that the links for WorldCom and Texaco are to historical records, which are available to Hoover’s subscribers.)

There are two major problems here:

I. Nominal figures. Freshman economics students have it drilled into them that when you compare nominal figures across a range of years, you’re not comparing apples to apples. Yet this list ranks all of these bankruptcies by nominal dollars without a caveat (or, if FORTUNE is using real figures, the article doesn’t say so).

Here’s the same list with everything converted into billions of 1987 dollars:

1. Lehman Brothers — $413.2
2. Washington Mutual — $196.1
3. WorldCom — $73
4. GM — $54.4
5. Enron — $46.8
6. Conseco — $42.9
7. Texaco — $34.9
8. PG&E — $25.7
9. Chrysler — $23.3
10. Thornburg Mortgage — $21.8

(Note that the calculator I used only went through 2008, so I used that year for 2009 bankruptcies.)

Granted, this doesn’t change the order of the top six companies on the list, but (a) innumeracy about real and nominal values is common enough that it ought to be opposed at every turn; and (b) this listing at least compares apples to apples in terms of scale.

II. Financial assets. Banks, mortgage companies, and other financial services companies are in the business of holding assets. I ran a search on our Build a List tool for companies with more than $100 billion in assets, and what do you know? — it was dominated by banks, insurers, and the like for page after page.

In other words, it doesn’t work to suggest that the Lehman Brothers bankruptcy is seven times as big as the General Motors because Lehman held seven times as much in assets. We could compare revenue ($19 billion to $181 billion for fiscal 2007) or employees (28,600 to 266,000) or something else, but grading on assets alone gives us a false picture.

Or am I just missing something? Bankruptcy experts, economists, et al. feel free to weigh in — the floor is open for comments.

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Photo by Ed Yourdon, used under a CC-Share Alike license.

. . . are now available to subscribers of the San Antonio Business Journal at this link.

The short version, for non-subscribers or those in a hurry: not as bad as the U.S. economy in general, and not nearly as bad as it could be for Texas.

If I understand correctly, the story will be free for anyone to read next month — I’ll try to remember to tell you when that happens.

Many thanks to Donna Tuttle of the SABJ — whom I met at the San Antonio Social Media Breakfast in January — for giving me the opportunity to write the column.

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Postcard image of Fort Worth’s Farmer’s and Merchant’s National Bank by Janice Waltzer, used under a Creative Commons license.

The pokey. The joint. “Inside.” The ol’ Graybar Hotel.

Call it what you will — it’s where Bernard Madoff belongs, for the rest of his life. No bail arrangement should be made, despite his lawyer’s pleas.

This isn’t a legal argument (which is good, since I’m not a lawyer), but an ethical one.

Madoff has confessed to swindling as much as $65 billion from a host of people and institutions who trusted him. This list includes one of the world’s great voices of conscience, plus many nonprofits that fund all sorts of good works.

If Madoff had used a physical weapon to rob a store of 1/10,000,000th as much money, no conversation about bail would be held. We’d say he’s a menace to society and keep him behind bars until sentencing. Even if he never planned to use the weapon, even if he never meant to hurt anyone, we’d keep him inside — and rightly so.

Madoff’s weapons weren’t tangible. He was much more sophisticated than your typical gunsel. It doesn’t mean the harm he did was any less real, or that his punishment — for stealing ten million times as much money — shouldn’t be equally severe.

Let his family talk to him through a pane of glass.

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Photo by Ben, used under a CC-Share Alike license.

“When innovation is used to disguise risk, as it often has been of late, it really can have disastrous consequences.”

Read this l-o-n-g and good-humored Atlantic interview of Michael Lewis, if only so that you will at last understand the true mechanism of credit-default swaps and the perverse incentives that made some Wall Streeters get buried so deeply in them.

Two more choice tidbits about the financial markets and the regulation thereof:

“Goldman and Morgan Stanley and Lehman Brothers: their returns were increasingly generated by these smart traders making complicated gambles. But that’s ended. The complicated gambles require, one, people to trust them, and two, the ability to borrow large sums of money to make the gambles. And both those things have ended.”

“What’s the risk that the backlash will go too far? Well, everything overshoots, so you can be sure that whatever the reaction is, it will be excessive.”

And one more on the future of long-form journalism — in which field, as will be clear by now, Michael Lewis is one of my heroes:

“[M]y sense is, there’ll always be a hunger for long-form journalism, and that it’s just a question of how it’s packaged. And that people will always figure out how to make it sort of viable. It’s never going to be a hugely profitable business: it’s more like the movie business or the car business in that there are all sorts of good non-economic reasons to be involved in it. The economic returns will always probably be driven down by too many people wanting to be in it.”

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Related:

• Must-read: Michael Lewis on the Meltdown
• A Subprime Primer

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No, Thain didn’t add a convertible Mustang to his list of Merrill-funded expenditures, as far as I’m aware, and I don’t have much to add about Thain to what’s been ably said by Floyd Norris, Heidi Moore, and others.

But Thain’s sad departure did get me thinking of a story a friend of mine told me years ago. He was working in a small business, and the company needed a new company car to make client calls and deliveries. The company president, who might have been feeling the pangs of midlife crisis, settled on the idea that the right car for them was a convertible Mustang.

Nothing wrong with a Mustang, mind you — but it’s hardly designed as a utility vehicle, right? That’s what my friend thought, and he made his case to the boss. They should get something with more cargo room, something with better mileage. Maybe a minivan? A small station wagon? But his arguments fell on deaf ears: the boss wanted that Mustang, and so he got it.

No, it’s not as fancy as the $88,000 pair of armchairs or the $87,000 carpet that Thain spent Merrill’s money for when he refurbished his office. But the principle’s the same, and in the case of the small business, the wrongly directed expenditure on the Mustang meant even more. As silly as Thain’s million-dollar office remodeling was, a million dollars was a rounding error in the scheme of Merrill’s budget, even under the past year’s horrid conditions. But the misspent money for the Mustang . . . it really hurt a small outfit trying to make ends meet.

That little business ultimately went under. It never could have gotten the fanfare that Merrill did, even though, in this one regard, the two chief executives showed similar bad judgment.

The moral of this story: It’s easy to point fingers at the big shots. Thain’s overspending on furniture practically satirizes itself — not to mention making a hash of my verdict, when he was hired, that he was the right man for the job.

But little ol’ you and me, out here in the big middle of American business, we make mistakes like this, too. It’s just that they look like a convertible Mustang parked in a no-name industrial park instead of a fancy cabinet in a fancy office in a downtown New York skyscraper.

So go ahead and make fun of Thain — but take a look around your little corner of the business world, too. The same mistakes might be lurking there.

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Related:

• Merrill taps the right man.
• John Thain lands on his feet.

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Image by Michael Spiller, used under a CC-Share Alike license.

My esteem for Dimon is obvious. It only grows as I read this item:

Along the way, he said, he learned that being effective in the top job has less to do with brains than with other less tangible skills. “It’s not how smart you are,” he said, “or even your communication skills. It’s your clarity of thinking, your work ethic and your effectiveness. Those are management traits that are non-negotiable — if you don’t have them you will fail.”

[Via Peter Galuszka.]

It’s funny, just yesterday I was talking with a friend about a former manager we both knew. The manager was plenty smart, and had crackerjack communication skills — too good, in fact, because this person could make nonsense sound good, convince people to do things against their better judgment, and use beautiful words to duck responsibility.

What was missing was “clarity of thinking,” “work ethic,” and “effectiveness.”

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Related:

• Company of the Day: JPMorgan Chase.
• Jamie Dimon is smart.

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There are pieces of the conventional wisdom that just don’t hold up to scrutiny. The whole mug’s game of earnings forecasts is one of them.

General Electric has just joined many other smart companies (AT&T, Coca-Cola, Google, et al.) in the practice of not giving earnings forecasts — which do help to increase journalistic and stock-market churn, but which don’t bring benefits either to companies or their shareholders.

Two items worth reading on this:

1. The Washington Post’s story on GE’s decision.
2. Henry Blodget’s item from yesterday laying out the non-logic of playing the earnings-forecast game: Why GE Should Never Give Earnings Guidance Again

What say you?

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Image by guano (original source unknown), used under a CC-Share Alike license.

At the beginning of this year, I pointed to Eric Janszen’s Harper’s cover story “The Next Bubble: Priming the Markets for Tomorrow’s Big Crash.” For the moment, I just want to visually quote one graph from the article:

Note the large blue shaded area, which represents the “fictitious value” (the portion of prices brought on by asset hyperinflation) that accumulated in the United States real estate market between 1990 and 2007.

This graph came to mind today when I encountered this sobering news item:

U.S. Home Values May Fall by $2 Trillion This Year, Zillow Says

This comes on top of a $1.24 trillion decline in home values during 2007. So if Zillow’s numbers are about right, that’s three-and-a-quarter trillion dollars of value lost just on the housing side of the real estate market in two years.

By nature I’m an optimist, but it’s numbers like these that convince me that the bumpy economic ride we’ve been having is going to last a good bit longer before it smoothes out.

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Business-oriented stories worth reading on a chilly weekend at home:

1. “Be Nice to the Countries That Lend You Money”

Anyone who’s read this blog for long (for example this post) will know that I’m an unabashed fan of James Fallows, who, besides being one of the best magazine writers alive, is, from my brief personal experience with him, a genuine mensch.

In this Atlantic interview, Fallows conveys the views of Gao Xiqing, a high official in Beijing who manages $200 billion of China’s highest-profile foreign investments. Even setting aside Gao’s official importance, it’s worth listening to him for his pure smarts, and because he studied and worked as a lawyer in the United States. His background gives him a highly informed view of both the Chinese and American sides of the world’s most important bilateral economic relationship.

2. There’s Plenty Of Oxygen In The Air

New York-based venture capitalist Fred Wilson explains how venture-backed companies like Tumblr can thrive even in a dismal economic climate: “For those web services with real usage and a manageable burn rate, I think there will be plenty of oxygen in the air.”

3. Why So Serious?

In this post, the anonymous Epicurean Dealmaker dissects the fundamental problems of thinking that underlie the current financial crisis:

It is my belief that many quants, hedge fund managers, and investment bankers came to believe — consciously or not — that, by explicitly embracing and accounting for chance, they had tamed it. They spent countless millions of man hours designing and implementing elaborate mathematical models and risk control systems based on aleatory principles that could predict, with remarkable accuracy, the variation in return and behavior of securities and derivatives under normal circumstances. They spoke confidently about “value at risk” and “maximum expected daily trading loss” as if they knew what they were talking about. As if those terms actually meant anything. And then they trotted off to their bank, or their prime broker, or the Discount Window to borrow a couple more turns of leverage against their proprietary positions.

But you cannot tame chance. That is what makes it chance. At base, implicitly attributing the kind of predictability these individuals seemed to ascribe to chance was a fundamental error, a category-mistake.

4. How The Tonight Show Will Fuel New Media

Ask A Ninja impresario Kent Nichols speculates in interesting ways about the possible ripple effects of Jay Leno’s new variety show.

5. 10 Ways to Learn Faster - Speed Learning

Jim Estill, who heads the Canadian operations of SYNNEX, writes an interesting blog from a CEO’s perspective. In this post, he suggests 10 straightforward ways you can boost your rate of learning. (My personal area of focus: speed-reading, because I have a bad habit of reading too many things at the same speed I would if I were editing them.)

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Photo by Elvire.R.