The Financial Crisis: What Drucker Would Have Said

Peter Drucker would have had plenty to say about the recent turmoil on Wall Street, beginning simply with: “I told you so”

By Rick Wartzman

Peter Drucker didn’t have a whole lot of nice things to say about those on Wall Street, at one point likening them to “Balkan peasants stealing each other’s sheep.”

Given the magnitude of the latest crisis to grip Fannie Mae, Freddie Mac, American International Group, Lehman Brothers, and their friends, one can only imagine what kind of acid analogy he might have used today.

Or perhaps he would have simply said, “I told you so.” After all, so much of the trouble that has befallen these giants of the investment banking, mortgage, and insurance sectors—and that threatens to “undermine the financial security of all,” as President George W. Bush put it—comes from a foolish disregard for the kinds of fundamental lessons that Drucker taught about risk, reach, and responsibility.

Some prefer to complicate things. Indeed, there is a temptation, in certain quarters, to fuzzy up what has happened here—to mask the basic management failures that are at the root of this disaster by pointing to the intricacies of credit-default swaps, “naked shorts,” and other arcana.

Market Overview: Survival of the fittest

Source: IBSJ Wealth Management Supplement – November 08

The recent market turmoil has obviously had some form of impact on the wealth management sector, but what other changes have taken place recently and how have these impacted the industry?

The recent headline announcements of the type that UBS, the world’s largest wealth manager, is cutting 2,000 jobs may imply a crisis in the wealth management sector. Behind the headlines it can be seen that those cuts are apparently being made to other UBS lines of business, such as commodity trading and investment banking. But the turmoil in the world’s financial markets has impacted the wealth management world.

One direct impact has been the fall in the equity markets. Ian Cookson, advisor to the executive committee at EFG International in Switzerland points out that ‘the fall in equities market has meant two things: one is that the value of the assets under management has taken an enormous hit. And the other is that trading volumes have gone down.’ As asset management charges/custody fees are based on the value of assets under management then ‘this hits you in the pocket’. Lower trading volumes have also reduced fee income.

Analysis: Sovereign Wealth Funds – Wealth of nations

How do governments invest their own wealth and why is it such a controversial area, asks Don Brownlow

Source: IBSJ Wealth Management Supplement – November 08

Middle Eastern and Chinese investment into the US banking system has been widely reported. How have those investments faired during the current banking turmoil, where did the money come from and who are behind this type of government investments?

Back in 1960, when Kuwait placed some of its newly found oil-wealth into an investment fund and called it the Kuwait Investment Authority, it didn’t know that it had just created one of the first international Sovereign Wealth Funds. Depending on how they are counted and which are included, there are now around 40 of these state investment vehicles. By conservative estimates, at the end of 2007, they controlled $3.3 trillion – more than the total amounts in hedge funds and private equity combined. Of the 40 or so funds out there, twelve have been formed since 2005. Governments are now controlling an increasing share of international wealth.

Although some of these funds are new, many of these state investment vehicles have been around for a lot longer than the term Sovereign Wealth Funds (SWF) which was coined to describe them. There are still on-going scholarly debates as to a definition of exactly what constitutes an SWF, but John Nugée, managing director, State Street Global Advisors, offers a simple working definition: ‘SWFs are sovereign-owned asset pools that are neither traditional public pension funds nor reserve assets supporting national currencies’. There are many other definitions but most allude generally to ‘special purpose investment funds owned by governments’. Nugée told a briefing earlier this year that ‘some funds don’t want to be known’ as an SWF ‘because of the bad press’.

How the Credit Crisis Could Forge a New Financial Order

Published: October 15, 2008 in Knowledge@Wharton 

In the middle of a battle, it’s hard to know what the landscape will look like after the smoke clears. But as the government wrestles with the credit crisis, economists and finance experts are starting to make some predictions.

Individuals and businesses will have a harder time getting loans in coming years, but also may be less eager to take on debt. There will be “more” financial regulation or “better” regulation, but definitely not less regulation. There will be intense efforts to see what is going on inside previously opaque areas like hedge funds, derivative markets and subsidiaries set up to evade restrictions. Instruments like credit default swaps, which helped bring down AIG and other big financial institutions, are likely to become more standardized, allowing them to be traded on centralized exchanges so that values will be easier to fix.

“We have to design a system where participants cannot threaten the safety of the American economy,” says Wharton finance professor Richard Marston. “I think this crisis is bad enough that it has rung some alarm bells, and there’s a better chance of doing something right … than there has been for decades.”

Financial Crisis: How to Stop the Panic

It is possible to calm the waters, but it’ll mean unlearning our post-Depression lessons

by Peter Coy and Stanley Reed

The world’s governments are shocked and dismayed by their inability to stop the increasingly grave financial crisis. Nothing they have attempted has gotten lending flowing normally. Profitable companies are cut off from borrowing. Confidence is shot. Through Oct. 7 the U.S. stock market had its worst five-day performance since 1932 on fears of a severe economic downturn. Says Stephen Jen, currency economist at Morgan Stanley (MS) in London: “The choices for the real economy are between a recession and a depression.”

Can anything be done to halt this panic? As a matter of fact, yes. It won’t be quick or easy. But the prerequisite for a new approach is unlearning doctrines that were developed in the aftermath of the Great Depression, the last time financial conditions were worse than this. The world has changed in the intervening seven decades, and what worked to quell the financial crisis then may not work now—as anyone trying to borrow money can see.

The Sky Falls on Wall Street

The week started with hope for a U.S. plan to calm world stock markets. By Friday, investors wondered if anything could stop the slide

by Peter Coy

A bronze statue of a bull fighting with a bear is displayed at the Museum of American Finance on Oct. 7 on Wall Street in New York.

 

Stupefying. Dizzying. Deeply unsettling. The panic that swept the global financial markets in the past five business days, Oct. 6-10, will go down in history—either in its own right or possibly as a prelude to something worse.

The Standard & Poor’s 500-stock index suffered its biggest weekly decline since 1933, and markets from Japan to Brazil to Russia tumbled as well (BusinessWeek, 10/9/08). What exactly happened, and what does it mean? It’s worth taking a look back at the tumultuous five days to see what lessons can be drawn and perhaps get a hint of what might come next.

 

The Trouble with Paulson’s Bailout

The Treasury Secretary’s $700 billion initial plan fails to give financial firms the incentive to reform and risks rewarding those who made the biggest mistakes

by Peter Coy

Is this really the best way to spend $700 billion? Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are pressing Congress to enact without delay their hugely expensive plan to vacuum up devalued mortgage-backed securities and other toxic assets. If the plan isn’t passed, Bernanke warned the Senate on Sept. 23, “the economy will just not be able to recover in a normal, healthy way.”

But there’s growing concern that the plan offers a small bang for big bucks. Hard-won experience in the U.S. dating as far back as The Great Depression—and in other countries as diverse as Japan, South Korea, and Mexico—shows that the kind of approach that Paulson and Bernanke are pushing could fail to get the U.S. economy moving again. That is a scary prospect. Because if all $700 billion buys is a bunch of weak financial institutions that have enough money to survive but not thrive, there will be a wave of anger from the taxpaying public that will make today’s mounting restiveness seem mild.

Credit and blame

From The Economist print edition

A must-read on the origins of the crisis

The Bubble Game

ANOTHER week, another drama. The unveiling of the second bail-out plan for Fannie Mae and Freddie Mac on September 7th—to say nothing of the dwindling fortunes of Lehman Brothers in the succeeding days—was a reminder that the credit crunch is proving infuriatingly difficult to bring to an end.

The crunch has lasted long enough to spawn its own publishing mini-boom, as authors have raced to give their diagnoses in print. George Cooper, a strategist at JPMorgan, an investment bank, has produced by far the best so far*, skewering both academic orthodoxy and central-bank policy in the process.

The problem, says Mr Cooper, is that central banks have subscribed to one economic philosophy in an expanding economy and quite another when the economy is contracting. When things are going well, central banks leave the markets alone. But at the merest hint of crisis, central bankers have responded by cutting interest rates to stimulate their economies and prevent asset prices from falling. Tongue firmly in cheek, Mr Cooper describes this as “pre-emptive asymmetric monetary policy”.