The Difference Between Business-People and Financiers
Wednesday, September 19, 2012 at 3pmBy John Friedman
Recently we’ve been exposed to a great example of the difference between business-people and financiers, in the guise of a clearly successful financier asserting, quite a bit more broadly, that he was a clearly successful business-person. I speak, of course, of Mitt Romney, private equity hero, repeatedly asserting that he would be a great president because he was so great a success at business.
To my way of thinking, though, even if we assume for the sake of argument that great business people do indeed make great presidents (by no means a clear-cut winning assumption), this begs the question of whether great financiers make great presidents.
It’s an important distinction, as over the past five years we’ve learned — and-how — that there’s a big Big BIG difference between financiers and businesspeople, given that the key domino of The Great Recession (a/k/a the Lesser Depression) was the wholesale gutting of financial businesses everywhere, which only then (if exceedingly rapidly) bled over into the wholesale gutting of the entire global economy.
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Real businesses — let’s call them business-businesses — live and die based on their day-to-day Money-In/Money-Out margin (as in, Are we bringing in more than we’re spending?) and on the ability of the people inside the business-business to make that positive margin consistently come about, primarily through their day-to-day endeavoring (as in, Are we, as a group, pulling the weight we need to pull, and pulling it in the right direction, so that we are we producing something folks want to buy, and are we doing all of this in a way that’s got a good chance of working over a decent amount of time?, etc.).
So a business-business has to be managed, and, if the people inside the business-business successfully manage the business-business, then the output of the business-business ends up as a stream of goods or services that people want to buy, again and again and again and again, and, ultimately, a stream of happy customers (and, in the best of all worlds, though quite rare, a stream of happy employees nicely ensconced within happy families).
Financier-businesses, on the other hand, live and die on something else entirely. They live and die on the deal. Connections and reputations play a huge role (by affording the financier-business the opportunity to buy something well, or to get a loan no one else can), and, rather than a stream of goods or services bought by a stream of happy customers, the financier’s output is a series of one-off transactions. True, the financier-business still needs to have employees, but their role is entirely different from the roles of employees in business-businesses; the role of employees within a financier-business is to make the deal happen in a good way for the other people involved as co-financiers. Happy customers are not necessarily necessary to that result.
Or, you can think of it in terms of Game Theory: success in a business-business rests on a single, long-term extended slice of repeat play endeavoring, while in a financier-business success rests on multiple, independent iterations of single play endeavoring.
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Jack Welch is thought by many folks to be one of the greatest business managers of all-time, having built General Electric into a huge conglomerate good at pretty much everything (including finance, but also including medical equipment, jet engines, power generation, media, consumer products, etc.), and having presided over the company during a 20-year period during which the company’s stock price increased 4,000% (admittedly, during the mostly very good stock market years of 1981 to 2001). To pull all that off, Mr. Welch had to get the best out of hundreds of thousands of employees — getting them to all pull in the right way and in the right direction (in 2011, GE had 301,000 employees) — and navigating GE’s way through all sorts of external obstacles.
Mitt Romney is no Jack welch (indeed, Jack Welch probably isn’t either, as his reputation has taken lots of hits since he left GE — one hit, as it happens, having to do with how during his tenure he morphed a previously 100% industrial company into one that was 50% industrial company and 50% financier). Why, when even Peggy Noonan is calling Romney a failure as a manager of his presidential campaign (“It’s time to admit the Romney campaign is an incompetent one”), it’s time to state that, at least when it comes to Mitt Romney, being a great financier (which for present purposes we will simply assume he is) has little to do with being a great manager of a large, complicated operation with lots of employees and lots of external obstacles to navigate. And what of managing an entire country?
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Has Governor Romney ever managed — day-to-day CEO-managed — a huge, complicated operation of any kind? It’s hard to know for sure.
What sort of day-to-day management did Romney provide to the Salt Lake City Olympics? We know that he is proud of how many sponsorphip dollars he brought in, but, wasn’t that him acting as a financier — a gatherer of dollars — more so than as a manager of people endeavoring?
And then there’s Bain Capital. How many people did he manage there? It’s hard to say what the numbers were way back then (whenever when was), but Wikipedia says that, today, Bain capital employs fewer than 500 people.
Say what you will about Governor Romney’s positions, values, political skills, etc., but, right here right now, most of us can probably agree that he does not appear to be especially skilled at the very difficult management task of running a great presidential campaign.
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It’s a real shame. Right now it feels a bit like watching Research in Motion’s Blackberry fade to black in the face of Apple’s iPhone dominance. Mightn’t we all be better off if Blackberry had figured out how to extend its once greatness into today’s smart phone environment? After all, we’d then have two (three?) great and wonderful platforms competing against each other.
This week it does not feel like our political process is gaining the benefit of any such competition.
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Yesterday Percentages Ruled
Tuesday, September 18, 2012 at 10amBy John Friedman
Yesterday the Boss of the Fabric of the Universe called together all the mathematical concepts, had them line up in a row, and asked, who wants to have a big day?, at which point all the mathematical concepts (who, to a concept, like to have their days maintain a steady routine), stepped backward — all, that is, except %, who was a little groggy after a grand party the night before, and therefore appeared, relativity and all, to have stepped forward to volunteer for the job. So the Boss of the Fabric of the Universe said, thank you %, here’s what I have in mind for you, at which point the Boss of the Fabric of the Universe and % went off and huddled and planned.
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Yesterday we saw the one year anniversary of Occupy Wall Street. Back then, the conventional talking-head wisdom and general lay comment was that OWS was too diffuse, too anarchic, and, above all, too lacking in a message to make any difference. But out of all that fog came a very clear message and a very memorable bit of language, about income inequality, with talk of the 99% and the 1% — so much so that, today, if you say the 99%, pretty much everyone knows what you mean. Same thing for the 1%.
Yesterday we also saw the release of a tape in which Mitt Romney — always thought to be a number’y kinda guy, because, hey, that’s what finance types are all about, right? — made another percentage famous, this one 47%, when he said this:
There are 47% who are with [Obama], who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it [I hear the Midwesterner in him in that last hyphen-filled chunk] — that that’s an entitlement. And the government should give it to them.
And then a few moments later he then went on to say,
My job is not to worry about those people. I’ll never convince them they should take personal responsibility and care for their lives. What I have to do is convince the five to ten percent [there’s that % thing coming up again] in the center that are thoughtful, that look at voting one way or the other depending upon, in some case emotion, whether they like the guy or not.
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So who is the 47%? Thank you to Annie Lowrey, of the New York Times (whose job it is to know this sort of thing), for pointing out, via the Twitter Pipes, that the now-famous 47% figure comes from The Tax Policy Center, which is a joint venture of the Urban Institute and Brookings Institution, both of which Wikipedia lists as “liberal think tanks.”
You can see all of the TPC data online (I am working on how to more easily post tables in the WordPress visual editor box . . .).
The 47% figure is the “Percentage of Non Paying Tax Units” in 2011. In absolute numbers, it’s 76 million tax units (in law school, we called them “taxpayers”; I’ll sometimes call them “folks” below); those are the people to whom Mr. Romney referred. 76 million of ’em
Here are some interesting numberoids that jump out of the data:
- The 1% (or, more accurately but less catchy-ly, the 0.9%) had cash income levels above $500k in that year.
- About 2% of that particular 0.9% paid nada income tax (29 thousand folks out of 1.34 million)
- 43% of the tax units had cash income levels below $50k
- About 68% of that particular 43% paid nada income tax (71 million folks out of 104 million folks)
- 15% of the tax units had cash income levels above $100k
- About 2% of that particular 15% paid nada income tax (491 thousand folks out of 25 million folks)
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This is yet another Rorschach Test. What do you see when you look at those numbers? Do any of the numbers in there make you huff and puff? Do any of those numbers make you snort a big ridicule of disgust?
Please do take a look at the the TPC data online — spend some time in there (5 minutes should do) and see a set of numbers which, apparently, both Repubs and Dems are looking at and using, and apparently agreeing upon . . . . See in there a set of numbers that speak loudly about how we have things set up right now.
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And aren’t you glad that you learned percentages in school?
They really are quite handy, aren’t they? Think about it: how comfortable are you in dealing with fractions? Or square roots or cosines or exponents or any of those other things you learned in math class.
Do you use ’em much? My hunch is that most people will answer that question in the negatory.
But how about percentages? I’ll give you 80/20 odds that most people over the age of 20 are pretty comfy using %s.
Just don’t ask ’em how many times something that’s increased by 200% has gone up.
. . .
. . .
. . .
The answer is 3.
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September the 15th: It was Four Years Ago Today . . .
Monday, September 17, 2012 at 11amBy John Friedman
. . . that Sargent Economy taught the people to feel . . . pain, very deep pain, of the economic variety, and different from what we, here in the U.S. and born after 1940, had ever directly felt before.
Here is a reminder of what awaited us as we opened the Sunday New York Times on September 14, 2008:
In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, filed for bankruptcy protection and hurtled toward liquidation after it failed to find a buyer.
But even as the fates of Lehman and Merrill hung in the balance, another crisis loomed as the insurance giant American International Group appeared to teeter. Staggered by losses stemming from the credit crisis, A.I.G. sought a $40 billion lifeline from the Federal Reserve, without which the company may have only days to survive.
The stunning series of events culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral in the markets stemming from a crisis of confidence.
“My goodness. I’ve been in the business 35 years, and these are the most extraordinary events I’ve ever seen,” said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration.
At 1:45 a.m. the following Monday morning, September the 15th, 2008 — a day that has lived in infamy ever since — Lehman filed for bankruptcy in lower Manhattan (note for the language-curious: most people pronounce the name of that now-mostly-departed financial-co as LEE’ min).
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One day later, the Reserve Fund — the first ever money market fund and, as we would soon learn, the owner of a lot of Lehman IOUs — broke the buck. Breaking the buck is the money market fund equivalent of your bank telling you that the dollars you stored in your checking account are now 97-cent dollars rather than 100-cent dollars, and is tantamount to saying “we are out of business.”
If you were to draw up a list of what constitutes the “mortar” of the brickwork that is our financial system, money market funds, and the investments they own — mostly commercial paper (big company corporate IOUs that must be paid back in weeks or a couple of handful of months at most) and repos (ABC Bank sells something to XYZ Bank, and simultaneously agrees to buy it back from XYZ Bank at a slightly higher price, with that slight difference in price being tantamount to interest XYZ Bank pays to ABC Bank) — would be good candidates for the top of the list.
After that, we — all of us, regardless of degree of financial wonkiness, as this was truly a story of global proportion spreading via the lay level — spent several weeks thinking that the economic world as we knew it was coming to an end. Politicians flailed. More banks failed. Humans near-wailed.
That very acutely-worrying period — when the mortar fell out of the brickwork of the financial world in which we all live and the bricks went all wobbly — lasted into early October; the effects of it remain with us to this day.
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Many financial entities bit the bullet back then. Merrill and Countrywide Mortgage were subsumed by Bank of America (the financial-co roll-up monster out of Charlotte, NC), while Washington Mutual done got et up by J.P. Morgan Chase (the financial-co roll-up monster out of Manhattan, NYC).
AIG, putatively more insurance-co than bank, turned out to be very mortar’y as well, and had to be financially bear-hugged by Uncle Sam, the deepest pocket of all, which in this case was surely needed — gosh a’mighty was it ever needed — as it took a promise of roughly $175 billion of Uncle Sam’s backing to keep AIG on life support long enough to avoid it doing a Lehman-squared (cubed?), we’ll-take-the-whole-place-down-with-us, sort of belly-flop of a catastrophe.
So too went Fannie Mae and Freddie Mac, the government’s mortgage-market-making arms; it took a bear hug from Uncle Sam to keep them up and running as well.
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Do you remember this? Do you remember where you were/how it felt?
I ask because, I firmly believe that, for the financial part of your brain, the phrase September the 15th should have roughly the same shivers-up-the-backbone, chill-inducing impact that the phrase September the 11th has on the I’m-an-American part of your brain.
Life and death is different from mere money in an absolute way, but that mere money thang has impacted the lives of billions of people during the past four years, and, with very few exceptions, that impact has been bad, very bad.
With some luck, the Powers that Be will never forget, and will continue to proactively take steps to ensure it never happens again — the 11th or the 15th.
It’s wicked complicated stuff, but my hunch is that the Ps that B have done, say, 20% of what probably should already have been done. The banks and other mortar-players, you see, have more power than just about anyone, and power does not take kindly to oversight or regulation or, for that matter, the relinquishing of anything whatsoever. Even if doing so threatens the entire economic system as we now know it.
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So, please, do remember September the 15th, the day Lehman went in (and under), and please do keep in mind that the financial ocean, upon which all of us financial boats are a’ bobbin, can swamp everything, you and your loved ones included, before you even know what just hit you.
And then, please please please go about your business, with a lot of joy and a lot of hope, because the world in which we live tends to get better — much, Much, MUCH better — over time, if you take a long enough view.
Yay.
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That Phish was *THIS* Big . . . No . . . Really . . . It Was
Tuesday, September 11, 2012 at 1pmBy John Friedman
Now *that* was a great phishing expedition.
This afternoon I received an email that looked to be from US Airways, telling me it was time to check in for my flight. As it happens, I *am* flying somewhere tomorrow, and to a destination to which I have never flown before, so, thinking I must be flying some strange (for this SF’er, anyway) airline like USAir, I clicked on the link in the email.
Always nice to check in early . . .
Good ol’ Firefox, though, right then and there, said that I was being hijacked, so I backed off, closing the window that the link-click had opened and which was now displaying that unmistakable “Don’t go there” screen that FF puts up in these situations.
Thank you FF.
Silly me, though, I thought FF had misfired, so I opened another window and went directly to USAir and tried to plug the confirm code from the email into their flight check-in app. It wouldn’t work! Funny thing, though, is that the error message said, “This confirm needs to be six characters long” and, by gum, what I was typing in was six . . . count ’em, six . . . characters long. So now I am vewwwy confused.
So I went to my rezzies folder in my email client and it was only then that I realized that I was flying a different airline!
I’d been totally had.
So how many phishes does it take to find an email box of someone who is flying tomorrow? Someone who might also be flying on US Airways? And what sad fate will befall those persons who actually click through to the link and put in the confirm code?
I am pretty sure I avoided that fate.
But I have to say that this was the best phish I’ve ever seen.
In the immortal words of the recently late Michael Clarke Duncan, when online, careful boss . . . careful.
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Remembering What the Red Queen Said: The Luck of the Draw
Friday, August 24, 2012 at 10amBy John Friedman
In related news:
1. Luck vs. Skill in Texas Hold ‘Em. Earlier this week, in U.S. vs. DiCristina, a federal judge in New York ruled that “skill, when sufficiently honed, makes the difference between winning and losing in poker.” http://is.gd/jwEiOL at p. 118. The judge, apparently persuaded by all sorts of graphs and probability analyses from the defense’s experts, ruled, in essence, that running a Texas Hold ‘Em house was just not a federal offense because being good at Texas Hold ‘Em takes a good amount of skill, and therefore Texas Hold ‘Em is not a verboten game of chance.
Card sharps and online gambling interests everywhere let out a collective WooHoo when they heard this.
2. Luck vs. Skill in Real Estate Hold ‘Em. According to Zillow Real Estate Research, real estate pain in the U.S. is relatively rare among the elderly and pretty much a 50/50 proposition among those under 40:
Looking at our sample of borrowers, we see that negative equity [i.e., owing more on the mortgage than the house is worth] is most common in younger age brackets with 39% of borrowers age 20 to 24, 48% of borrowers age 25 to 29, and 51% of borrowers age 30 to 34, underwater on their mortgages. All told, 48% of borrowers under the age of 40 are underwater on their mortgages. However, while the rate of negative equity is higher in younger age brackets, the delinquency rate is noticeably lower.
So the young folks are more underwater, but they’re hanging in there.
Now I have some questions I’d like to ask the Zillow folks (primary among them: how do these numbs look on a per capita basis?), but, still, it takes one’s breath away — yes? — to think that there’s a coin’s-toss of a chance that someone under 40 with a mortgage has had a terrible time of it, doesn’t it?
Maybe they also invested in an IPO for the first time back in May, when Facebook came out?
Why, it reminds me of how the numbs apparently show that professional hockey players are just about always born in the first three months of the year.
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The common thread here is that we are all of a time and space. Much of what is true about us pivots on the particulars of the time and space in which our us first came into being and from which it thence evolved.
Or, as my favorite Red Queen quote puts it:
Progress and success are always relative. When the land was unoccupied by animals, the first amphibian to emerge from the sea could get away with being slow, lumbering, and fishlike, for it had no enemies and no competitors. But if a fish were to take to the land today, it would be gobbled up by a passing fox as surely as a Mongol horde would be wiped out by machine guns.
In history and in evolution, progress is always a futile, Sisyphean struggle to stay in the same relative place by getting ever better at things. Cars move through the congested streets of London no faster than horse-drawn carriages did a century ago. Computers have no effect on productivity because people learn to complicate and repeat tasks that have been made easier.
This concept, that all progress is relative, has come to be known in biology by the name of The Red Queen, after a chess piece that Alice meets in Through the Looking Glass, who perpetually runs without getting very far because the landscape moves with her.
Matt Ridley, in The Red Queen
Yes, folks, that is the primary source of the RQ in the now nearly-fully-departed JFRQ Consulting.
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P.S. If the title makes you think of Grace Slick and then scrunch up your nose, it’s because the title *is* Grace Slick, but it also contains the lyrical/textual equivalent of a spoonerism — kind of like a tripped-out Archie Bunkerism.
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