View Full Version : my fannie - it was making the numbers that caused the meltdown

john l
10-14-2008, 10:41 AM
a subtle but powerful issue underlying the banking meltdown from the Financial Times:

Remember the little ones at the bottom

By Michael Skapinker

Published: October 13 2008 17:56 | Last updated: October 13 2008 17:56

The great Dr Seuss once wrote a little book called Yertle the Turtle about the construction of a turtle pyramid so high that Yertle, the top turtle, could see everything for miles around. No sooner was the final turtle added to this vertiginous structure than Mack, a little chap at the bottom, burped, bringing the edifice crashing down. The top turtle found it humiliating, but the others lived happily ever after.

Our story today is very similar, except that the little chap who burped was called Ninja. The top turtle, while humiliated, still ended up pretty rich, but it will be a long time before we know whether everyone else lives happily ever after.

Amid the bail-outs and recapitalisations, let us not forget how the Great Meltdown of 2008 started: with the little people at the bottom, the ones with the Ninja mortgages (no income, no job or assets). The brokers and banks who lent them the money were not bothered whether they could pay it back. The bankers thought the value of the houses purchased with the mortgages would rise forever and, anyway, they were planning to package those loans and sell them.

Underneath the great meltdown lay the great disconnection between banks and their customers. The UK may not have gone for Ninja loans, but it did have its cousins, the self-certified mortgages.

Banks once knew their borrowers. When I took out my first mortgage in the mid-1980s, I was called into the branch manager’s office for an interview. The letter from my employer detailing my salary was on his desk. No self-certification then.

It was not just borrowers that banks knew better. They used to see their savers, until that began to seem unnecessary trouble.

Once, as part of my bank’s sporadic effort to market itself, I was asked in for a chat. The manager was pleasant, although not many years from his first shave. He called up my details on his screen. I do not think they had been updated since I first opened the account as a student. I could see that that long-ago page about me was headed “high potential”. When, I felt like asking, do you replace that with “unfulfilled potential”? The manager promised to keep in touch. I never heard from him again.

It is not just banks who lost contact with their customers. So did water companies, airlines and internet service providers. Speak to people about their dealings with companies and they often talk as if they are at war with them – or they would be if they could speak to them.

The technology that has done so much to cut companies’ costs has created a gulf between them and their customers.

There are the telephone barriers, the demands to key in one number after another before you can speak to anyone, usually in a call centre.

Many call centre workers do not seem bothered when you do speak to them. When my internet connection kept stalling, the call centre operatives told me the problem was my own computer. In desperation, I paid a computer engineer to check it. He could find nothing wrong. I telephoned the call centre and triumphantly informed the person I spoke to of the engineer’s verdict. “Your engineer is a liar,” he said.

I do not blame the employees. Underlying the disconnection between companies and their customers is a breakdown of trust between companies and their staff.

Much of it is about pay. The growing gap between senior management and staff salaries, the sense that the top people were in it for themselves, led many employees to ask why they should bother. The closure of their pension schemes persuaded them that they shouldn’t.

How did companies get this way? Underlying it all, in banking and everywhere else, was an obsession with “making the numbers”. The pressure for double-digit earnings increases led to the frantic cost-cutting, the stripping away of employee benefits and the disappearance of front-line staff who knew the customers and cared enough to look after them.

It was because chief executives made the numbers that boards and shareholders were happy for them to earn unheard of sums. And it was desperation to keep on making the numbers that led financial institutions to securitise bad loans as frenetically as the bank next door.

No one knows how this fiasco is going to end. But when it does, companies will return to doing business. Numbers will still matter. Without profit, there is no business. Without cost control, there is no profit. And investors need a better return than they could get elsewhere. (Remember when we used to say they needed a better return than they could get by putting their money in the bank?)

But while numbers matter, they are worth nothing in a business that is not sustainable. What makes a business sustainable? Customers, served by motivated staff. Unlike credit default swaps, it is not complicated.

Andrew Craig-Bennett
10-14-2008, 12:35 PM
Thank you for posting that. Some common sense!:D

10-14-2008, 01:10 PM
Folks tend to forget things like that......in my early years I rode a Cushman motor scooter to work...then a cheap car, then a Honda....eventually I started driving more expensive somewhat exotic cars, but I paid for them whereas my siblings always seem to drive the biggest thing in town and traded every couple of years, I drove mine until there was nothing left.....and now they are scrambling to make ends meet in retirement.....

10-14-2008, 01:16 PM
Would you run for president? That is the most articulate analysis I have heard from anyone on the state of the economy and why. thank you.