Strategic incompetence continued

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… and now we see Merrill Lynch in the same trouble, so perhaps they could answer the same question we put to Citigroup.

Meanwhile, here in the UK, we are told that every household in the country is going to have to stump up Stlg 2,000  to prop up another spectacular failure of strategy, this time at Northern Rock – a bank whose breath-taking brilliance took them to a leading position in the mortgage market.

Again, what makes me especially angry is less the losses suffered by investors who know the risks than the awful hurt done to the bank’s customers and employees – ordinary folk who did nothing to sign up to this damage. So, same question again – who are the people whose strategic errors did this harm to those people, and will they kindly return all the money they were paid in at least partial recompense for the damage they have done to ordinary people?

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Comments

  1. Peter Jung  January 25, 2008

    Dear Mr. Warren,

    I am puzzled by your remarks. How can you be so sure that the losses of, say, Merrill Lynch is caused by mismanagement? Put differently, are your management tools capable of accounting for external factors like changing demographics, misvaluation of mortgage bonds, etc.? And if so, do you think that the foresight of the dynamics of these factors is or shold be responsibility of the management?

    Yours sincerely,
    Peter

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  2. Kim Warren  January 26, 2008

    Hi Peter … It is the primary responsibility of top management to prepare for challenges that could arise, to look for signs that it might be coming towards them, and take anticipatory action – or at least hold back on action that could get them into trouble. These cases all trace back to the feeding frenzy of irresponsible lending to the sub-prime mortgage sector – i.e. lending money to people many of whom probably couldn’t repay it. Not all the big investment banks messed up so badly on this issue, and didn’t have to make such huge write-offs. So some people were being smart enough. The annoying issue for the rest of us is the much, much wider trouble the less-smart ones have caused.
    Cycles like this happen in many sectors – the insurance industry sees them regularly. The UK commercial property sector is just tipping right now into over-supply and falling yields. I was working with a law firm last summer who were throwing every lawyer they could get onto property-related deals and asked them the simple questions “How long will this boom go on, when might conditions come together to cause its reverse, what impact would this have on your business, and what would you do about it?” They found it pretty easy to moderate their hiring plans and turn attention to alternative services that might be in increasing demand as the situation changed.
    It doesn’t need especially sophisticated tools to deal with this kind of question, just the ability to ask what the future will look like if changes continue as expected, and at what point the situation will become unsustainable. To get a better handle on the situation, though, dynamic modelling is quite do-able for most reasonable-sized organizations. [BTW .. demographic changes are amongst the easiest to build confident forecasts, and rarely responsible for substantial, unanticipated impacts on firms].
    Kim

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