This is for all of Congress and the new Obama administration: It is time to stop bailing out companies and start demanding strategic change in the way our economy works.
Perhaps I am stating the blindingly obvious, but if your ship is leaking badly, just bailing it out is an exercise in futility. Further, even if if you patch the leak, if the reason why the leak happened in the first place is still there, it is going to leak again. You have to do something more, something systemic, to change the future course of events.
And, with all due respect to the experience and sincerity of those leading our current economic fix-it programs, we are not only doing a poor job of bailing out the current economy, we are also laying the groundwork for an even bigger mess in the future.
Yes, there is an economic crisis out there well beyond the ability of any individual to possibly comprehend, and emergency measures were called for. I get that. Many banks and other financial institutions are falling apart, triggered in part by the domino effect of bad mortgages, the layering of complex financial instruments on top of each other, and complicit greed at every level of the structure. The stock market has plummeted, free cash is drying up, small businesses and individuals can’t get credit, and job losses are staggering.
There is also a corresponding crisis of confidence in what lies ahead for all of us, very much in part because the economic mess is so complex to understand.
All of which is why the vast majority of the American public was in agreement with the initial authorization of bailout funds when Congress voted for them. Something had to be done. Quickly.
As time has moved forward since those funds were approved, two things have become very clear. The first is that releasing them quickly (and moving rapidly to deploy them) has indeed probably kept many banks from failing. The second is that it we seem have done almost nothing to deal with the underlying processes and root causes that catapulted us into this particular mess.
Think about it. One financial enterprise begins to tip and the Fed arranges a shotgun wedding to merge it with a bigger enterprise, again and again. Weakened companies are grabbed by other, temporarily healthier, entities. Bank of America acquires Countrywide, one of the home mortgage companies that started the dominoes falling. JPMorgan Chase acquires Washington Mutual. Wells Fargo buys Wachovia. Bank of America comes back again and acquires Merrill Lynch. We may be preventing bank failures but we are building larger companies which could fail just as easily some time in the future.
One of the major complaints about those institutions that received the money and the mergers that happened in parallel is that there was no requirement to have these companies actually help out the American public in the process. Helping out could mean lower interest rates for mortgages and credit cards, plus easier access to loans both for individuals and small businesses, and — with no requirements tied to the bailout funds — very little of that has happened, apparently. Credit card and loan rates appear to have dropped primarily because the Fed has reduced its own rates, while the lending institutions, if anything, have actually increased the margins on their customer base.
Meanwhile, these now even-bigger enterprises have announced major layoffs, with Citigroup saying it would jettison 50,000 jobs, and Bank of America up to 35,000 jobs, among others. Further, as of early 2009, as the economy continues its decline and the combined debts of the new merged companies are beginning to be fully tallied, bond ratings for these enterprises are being projected downward — fast. Oppenheimer’s analyst Meredith Whitney, quoted in an article in Reuters on January 7th, 2009, expects to see substantial increased losses by JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, which in turn will put pressure on capital markets and the U.S. government to find other ways to keep these leaking vessels afloat. She is far from alone in these predictions.
As serious as these concerns are, to me the bigger issue is that, even as we may find ways to continue to patch the new leaks to appear, we are just building bigger boats (with more weight to put pressure on the temporary patches our government is applying) while missing the chance to make major strategic change in how our financial systems — and other companies (such as the automobile industries) — will operate in the future.
Within the corporate turnarounds I have been involved with (through strategic realignment, targeted product innovation, and focussed tactical plans), crises of any kind represent a rare opportunity for strategic transformation of their businesses. There is broad acceptance that something big is wrong as well as that something even bigger is needed to change their future. Just getting the next product out or landing the next customer is understood almost never to be a solution to this scale of an issue. It is easy to get the attention of the management team and to launch big initiatives.
Unfortunately, the most we seem to be doing with our current government approaches is, after banks and others have received their bailout funds, to threaten them either not to give any more — or to take take away what has already been awarded if their situation doesn’t improve (as they have told the auto companies).
What we need instead is first to launch a high-level strategic effort to reshape the fundamentals of our economic structure. We need to tell the companies that have received these bailout funds that they must disclose previously privately-held information in order to assist that strategic effort. We need to form teams to support this which include both those who understand the system intimately as well as brilliant strategic thinkers who come from outside the existing system, so we do not get stuck in a quicksand of old ideas. And we need to prepare the American public that we are going to be shaking things up in a way never seen before.
The Titanic is sinking, people. We should insist on far more than just paying for new patches to keep it afloat.