Too Big To Fail
Can we prevent future occurrences?
If so, how?
In his April 1, 2009 Wall Street Journal article, Preventing ‘Too Big To Fail’ Isn’t Easy, Sudeep Reddy noted that Gary Stern, the president of the Federal Reserve Bank of Minneapolis, had repeatedly warned regulators of allowing banks to get too large. He also quoted Former Fed Chairman, Alan Greenspan, who said “Knowing when the crisis will happen is not possible for human beings.”
While I agree that we may not be able to predict the exact time that a crisis will occur, we can certainly get early warning signals that we’re creating one. Certainly Mr. Stern had that ability. The key is that the earlier we can identify that an effort is going to fail, the smaller the crisis we’ll face when it does occur. How can we avoid the “too big to fail” mistake in the future? There are two questions that I find particularly helpful in discerning whether or not a merger or acquisition will fail.
The first comes from Juli Niemann, Smith Moore & Co.’s resident economist who asks “Are they investing cash?” Juli says that managements make more prudent investments when they’re using their company’s cash than when they’re borrowing the money from others. We need only recall our youth to validate her statement. Who among us wasn’t more frivolous in our spending when our parents were footing the bill than when we had to cough up the money ourselves?
- The second question is one that has served me well both in my personal investments and my client work. The question is “What’s in it for the customer?” An industry leader acquiring a relative newcomer to the industry can significantly increase customer value if:
- the newcomer has offerings that the industry leader does not
- those offerings are valued by the industry leader’s customers
- it would take years for the industry leader to develop comparable offerings
- it would take the newcomer years to build the name recognition and gain the level of customer confidence the industry leader possesses
- there are markets in which the industry leader has a presence that the newcomer doesn’t serve
Had these questions had been asked prior to the Bank of America/Merrill Lynch and Wachovia/A.G. Edwards mergers would the regulators have approved them? We’ll never know for sure, but three things that are obvious is that all four companies had:
- stellar reputations with strong brand recognition
- wide distribution channels which made them readily accessible to customers and prospects
- a wide array of offerings designed to satisfy virtually any customer need
From that vantage point, was there really any reason for those mergers to occur?
It’s counter-intuitive, but these two simple questions:
- Are they investing cash?
- What’s in it for the customer?
can provide regulators with the insights they need prevent a recurrence of the “too big too fail” fiasco we’re currently suffering.
The 7 Steps to Becoming INVALUABLE program I offer is designed to help you see more effective ways of doing business – ways that dramatically improve your bottom line while making your life easier. In today’s blog I used Step 1, Contributory Negligence, to demonstrate how simple, inexpensive and easy to implement solutions can be when we break problems down and begin to look at them from the standpoint of what we did to contribute to them.
I also used Step 5, Contrarian Mindset, to look beneath the level of complexity most people see to the lowest common denominator(s) that drive the challenges we face. In this instance, two fairly simple questions serve as powerful indicators of how to avoid “Too Big To Fail.” For more information on the 7 Steps to Becoming INVALUABLE visit www.furtwengler.com/7steps.htm.
Please share your experiences and wisdom with Invaluable Leader readers by posting your comments. If you’d like to receive a weekly email reminder for The Invaluable Leader blog or if there’s a topic you’d like me to address, please send me an email at dale@furtwengler.com.
Tags: contrarian mindset, counter-intuitive, economics, regulation
