Sharp, literalist viewers of AmazonBay will have noted that I had BNP Paribas and ABN Amro (see Economist link for background) getting together in the summer of ‘06… well perhaps I was a bit premature and while Chris has managed to help me out by putting ABN in play, BNP Paribas doesn’t look like they are going to throw their hat into this particular ring.
Of course, as I have previously stated, giant bank mergers were not the main point of my scenario but rather a likely and important backdrop to more profound changes and new competitive challenges set to arise in the financial services industry. This is not to question the logic behind the move to ever more gigantic banks or financial conglomerates, rather I wanted to point out a certain intellectual vacuum in the industry as seeing this as the only (as opposed to just the most obvious/immediate of many) logical strategic response to the march of automation and technology and concommitant economies of scale in financial services.
Don’t get me wrong, I fully expect to see more consolidation - especially in Europe - now that the levee has been broken (pun intended) - but see this ultimately presenting more not fewer opportunities for disruptive innovation and new entrants into the financial services arena.
The problem is, the larger an organisation gets these days, the harder and more expensive it becomes to coordinate people working together. Business thinker Peter Drucker, the man who first introduced the concept of “knowledge workers” in the 1940s, once calculated that “ninety percent of what we call ‘management’ consists of making it difficult for people to get things done.” More recently, top tier consulting firm McKinsey grumbled about all the “internal joint ventures, co-heads of units and proliferating task forces and study groups” which waste everyone’s time trying to find their way around labyrinthine organisational structures.
Dave asks: What is the significance of the Walrus and the Carpenter in my 3 things presentation? Funny thing is he’s the first so far to have asked me the question - I guess the folks at the seminar where I showed it originally just thought it was an extra bit of lunacy thrown in to confuse them.
Actually, following in a long tradition of ‘[insert-your-own-moral-here]’ in interpreting Lewis Carroll’s writing, and seeking a tiny thread of continuity with AmazonBay - which was based on an article I wrote that I titled ‘Through the Looking Glass’ (for hopefully more obvious reasons) I wanted to weave an underlying warning into the message of 3 things. In this context I saw the Walrus as the confident (perhaps even arrogant), somewhat pompous and patronizing embodiment of the financial services (or more particularly for the original audience - the asset management) industry and the oysters as their customers who (mostly, with some usually ignored dissent) follow innocently and blindly the entreaties of the Walrus. Of course, they end up getting eaten. Bad for them, yes…but also bad for the Walrus. Eating all your customers is ultimately a poor strategic option. A cautionary tale.
It is some small consolation to see that I am not alone (read it - it’s funny and oh so true! and there are dozens more on the same blog for those mobile-phone rubberneckers out there…) in finding T-mobile to be laughably bad in almost everything they do…although the joke is sort of on me because our household gives them about £60 per month for an incredibly poor experience. But to face wasting several hours - probably more - trying to port out of this pink hell, just doesn’t seem worth it. So I try to use my phone as little as possible (preferring landlines, skype, my other mobile phone and smoke signals to giving them a penny more than I’m stuck with in my plan.
For those of you that like the grass-roots/anecdotal/kick-the-tires investing style, I guess this would be a big sell signal on Deutsche Telekom. Makes you really wonder what the (usually) extremely sharp people at Blackstone were thinking…then again if they could take control, they certainly is - how do you say? - upside with respect to running the business less incompetently. Not sure the unions would be thrilled however…
Just as I did for AmazonBay, it is probably worth taking 5 minutes to put a bit of context around the 3 things presentation. Once again, the premise was to take 3 examples or metaphors - distillations - for 3 broad concepts. When I originally gave the presentation in person, the audience had no problem ‘getting this’ for the Digital Generation (changing behavioral patterns and expectations driven by generational shifts) and the Singularity (impact of exponential vs linear change in power of technology) but got hung up on Second Life as being my point; when in fact my point (admittedly the most oblique metaphor amongst the three) was that the UI was likely to evolve significantly over the coming years (think branch -> telephone/fax -> internet browser -> virtual reality(?) a la Second Life… We discussed this at the end of the ‘film’ and then extensively in small groups during coffee and dinner later in the day. I suspect this might also be the case for those of you watching the slideshow for the first time and so thought it worth clarifying.
Aside from this metaphor being perhaps the least obvious, I think one of the reasons it sparked so much debate is that - of the three - it created the most discomfort from the crowd (mostly 40 to 50 something successful white males in senior executive positions at financial services firms.) They ‘get’ that the next generation is different (indeed as ‘Baby Boomers’ they can relate to such a generational change, whether they can adapt is obviously a more open question…); they ‘get’ or at least can understand the argument, that technology is transforming business and at an accelerating pace. However - and perhaps only at a subconcious level (although here I could well be being presumptuous) - the idea of conducting ’serious business’ in what to them appears only as some kind of interactive video game, well that is a cognitive step too far. Even for those whom I felt suspected I might actually be on to something, seemed to react defensively as if in self-admission that this was something they could not adapt to and so to deny its plausibility was an exercise in intellectual self-preservation. And for those (surprisingly few) with some previous knowledge of Second Life, the manifest weaknesses of the platform and well-founded scepticism as to its ultimate future got in the way of the ‘idea’: instead of discussing the idea, it became all about Second Life specifically. Clearly this is a much more debatable point, to which I myself am completely agnostic and have no real value to add as to whether or not Second Life will become the next de facto UI or will just be a historical footnote.
Anyhow I obviously welcome comment and debate on these ideas - and indeed I felt it was successful in doing just that on the day in Monaco, but wanted to head off at the pass so to speak, debate specifically centered on the strengths and weaknesses of Second Life. Not that it is not a fascinating subject but because I don’t think I have anything particularly insightful or informed to add to that debate which has also so ably been carried on in other forums. (For those interested in that debate, try starting here or here or for a summary Bruno’s post (who btw pointed out that it was perhaps worth writing this contextual clarification.)
Was catching up with Susan today and it reminded me to post this presentation I did last November for an ‘asset management think tank’ that Susan produced (with Reed Midem). She asked me to speak to this group of senior executives from (mostly large) financial services firms about how the changes brought on by technology might impact their businesses going forward.
No problem.
Oh, and… I get eight minutes to do it. Easy peasy.
So I got to work. My first attempt came in at about 72 minutes and in any event would clearly not make any sense to anyone but me (and maybe JP, a clear demographic of one!) So that went in the trash and working in the wee hours of the morning in Monaco - with only the magic of my trusty MacBook Pro and Keynote (sound familiar? - Al eat your heart out! …wonder if I can get Jeff Skoll to finance the movie version too? ) I started again from scratch.
Obviously I needed to:
Distill the ideas.
Create a jumping off point [pun intended], not a conclusion.
Capture their attention.
Carl Icahn agreed Monday to sell the Stratosphere, three other Nevada casinos and 17 acres of land on the Las Vegas Strip to Goldman Sachs Group’s real estate funds for $1.3 billion.
Ok ok, it’s a real estate play I know but still fun.
Blogged in Markets by Sean Thursday April 19, 2007
Like everyone - well all 0.000001% of us (humans) that work (or worked) on the ’street’ - I’ve got an opinion on the current state of the sub-prime mortgage market in the States. And I’ve been wrestling with the dilemma of whether or not to weigh in…
Fortunately Going Private has done all the heavy lifting for me:
The Going Private reader, most likely being of the free market and capitalist ilk, will also likely wonder “where’s the problem?“(my emphasis) as CLOs tend to be sophisticated investors and certainly are (or should be) well aware of what they are buying and able to (even if they, by choice, do not bother) carefully manage the risks thereof.
…
The Going Private aficionado will reply, “who cares?” If the alternative to the occasional blow-up is a paternalistic, top-down economy designed to protect sophisticated investors from themselves then the Going Private reader will prefer the blow-ups(my emphasis) (or retire from worldly affairs to the shelter of their Lake Como estate). Going Private readers believe in freedom, and consequences.
Precisely.
Nobody forced anybody to buy the securities that allowed this exuberant credit market to exist. High yields are generally a signal of higher risk - ie that means sometimes things can go horribly wrong. The only possible villain in the chain is if/when unsuspecting end customers are roped into buying something they clearly don’t understand and that could damage (their financial) situation significantly (using some sort of net worth/VaR type test.) I’m sure their are cases of this can of unscrupulous marketing but the shrill cry of politicians looking to ‘protect’ people from their own folly mostly leaves me cold. The 26 year old with 8 properties, no equity and IO-step-up mortgages on the whole package might or might not be clueless, but is unlikely to have found himself in this position due to ‘mis-selling’ (to use the UK euphemism.)
If the government wants to protect ‘the little guy’, why not introduce some sort of minimal quantitative test based on VaR, customer cashflows and balance sheet - kind of a minimum capital requirement for individuals to create a tolerated ‘threshold of riskiness’ beyond which the ability to lend is subject to a much much higher burden of proof of understanding and examination of circumstances (note I don’t think it should be made impossible - there are always exceptions and a hard frontier would just encourage gerrymandering, probably ultimately to the extent of rendering the test meaningless where it could make a difference.)
The irony (should the legislators and regulators ham-fistedly clamp down on this market) is that it has been one of the most successful markets on the planet in terms of providing credit to poorer and historically (financially) marginalized segments of the population, and it risks being stymied just at the same time as popular/political conciousness is finally waking up to the fact that access to credit and the financial system is probably the single most important factor in driving development and poverty reduction leading to a boom in the profile and funding for micro-credit institutions around the world.
If the politicians want to worry about something perhaps they should take a hard look at the failings of public education to reduce the frightening levels of financial illiteracy in the population…but of course that would be a long hard slog, with no easy soundbites - not much fun in that.
…or: Why is setting markets free so threatening for so many?
In general I’m not prone to getting too emotional about many things - a (British) colleague once attributed this to my Prairie upbringing, which he equated with quiet pragmatic determination. Don’t get me wrong, passionate yes, but emotional no. However, I must admit to getting completely wound up when I see markets that are shackled and controlled for no obvious purpose (other than to perpetuate the power of a select group of annointed insiders although of course this is never articulated and often (implausibly) vehemently denied.) My angst is made even worse when the restrictions are framed in a ‘this-is-for-your-own/the-public’s-good’ and we know best… What a load of rubbish!
There are (sadly) a million examples of this in the naked city, yes Virginia even in supposed enlightened bastions of freedom, markets and democracy. The catalyst for this particular rant - and perhaps setting the scene for future vignettes of the same kind - was an article in the Economist discussing the extraordinary measures the organisers of the Glastonbury festival went through to kill the secondary market in tickets:
Ticket touting is nothing new, as any West End theatre-goer will attest. But promoters argue that the internet has transformed the business from a few men in grubby coats outside a venue into a fully fledged industry. Sporting bodies and the music industry have been urging an official crackdown on touts for several years.
Defenders paint touting as merely the market’s way of correcting artificially low ticket prices. The deals are between willing buyers and sellers. And touts do not always make a profit. Attendance at Royal Ascot, an annual high-society parade with some horse-racing attached, plummeted when it was moved from Berkshire to York in 2005. Glum touts were offering tickets to curious locals at a fifth of their face value.
Indeed, the existence of a secondary market implies that demand outstrips supply. Why don’t promoters simply charge a market-clearing price for the tickets instead of bashing middlemen who do?
Actually the Economist gets it slightly wrong: the existence of a secondary market implies that the clearing price is not the price at which the sellers have offered the tickets - ie that demand at the sale price outstrips supply. But the question as to why promoters don’t seek out this (clearing) price remains. In fact there are two reasons - one good and one bad - but neither are ever put forward by these promoters to defend or explain their pricing policy, perhaps because neither would lend itself to support prohibition of secondary markets, so they resort to the Ugly argument:
Because that would be “unfair”, they say, leaving “genuine fans” squeezed out of popular events by dilettantes with fat wallets.
The Good
Their pricing policy is predicated on maximizing returns over the medium to long term and reducing uncertainty (volatility) in their cash-flows (thus lowering their future cost-of-capital.) So yes they might ‘leave money on the table’ on an given single event but they create positive marketing spin that feeds into future events and/or ancilliary products. They also attract a more broad and heterogeneous customer base, creating a more robust, sustainable market for their products over time. (Even in the context of the same customer: think of the 20 year old student who can afford to queue for 5 hours but can only afford £20, who 20 years later can’t afford to queue for 5 hours but will pay £200 to see the same act.)
The Bad
By not using price as the rationing method, the intermediary acquires real power by being able to allocate the oversubscribed product subjectively. (And creates a black economy in the process where the face value of the goods bear no resemblance to their real value. Think Zimbabwean dollars…) Unfortunately all too often I suspect the driver (for seeking market control) is for this reason alone.
The article goes on:
Economists (and cynics) offer another explanation. Stefan Szymanski, at London’s Imperial College, points out that it is in promoters’ interests to underprice their products. “You get a much better PR payoff if your event is oversubscribed,” he says. “And since demand is hard to predict, the rational thing to do is to underprice aggressively.” Canny firms recoup their losses on the door by selling overpriced merchandise and refreshments to the captive audience inside. [The Good]
Though ministers have made sympathetic noises to the anti-tout lobby [why???], they have stopped short of banning the practice. Only football tickets are off limits, and that was designed to squelch hooliganism by segregating rival supporters, not to promote social justice. [An example perhaps of the only good reason for intervening in otherwise transparent and functioning markets - ie to protect security; for instance I would not go so as far as to argue for a free market in arms, however the burden of proof (that control is a matter of security) should be robust…)]
So entertainers are looking at other options. The Concert Promoters Association wants to attach a set of conditions to all tickets, preventing resale at a profit. It plans to send them to the Office of Fair Trading for approval. But it seems unlikely that Britain’s competition regulator will rubber-stamp such a price-fixing agreement. [I bloody well would hope not!]
If promoters can’t beat the touts, they may join them, auctioning some tickets off to the highest bidder. “If we can’t get the secondary market outlawed, we’ll take control of it,” says Rob Ballantine, the CPA’s spokesman. That may not put the men in the grey mackintoshes out of business, but it could cramp their style. [Framing the problem in the context of ‘control’ says it all…it’s all about power, not the punter.]
Ok, ok but why get so wound up? It’s just about tickets to sporting events and rock concerts. Well no. This is rather a very good (ie easy to understand) parable of far too many markets for goods and services. And like weeds in a lake, unchecked this behavior risks cutting off the lifeblood of our market economies. The great irony is that in the guise of ‘protecting the common man’ from the ‘brutality’ of the markets, these controllers actually exacerbate and entrench the potential inequality engendered by market forces. This is about individuals or individual groups preferring personal power and wealth at the expense of optimal institutional and economic outcomes. And this behavior is prevalent in far far too many markets for goods and services, including - perhaps especially - in the markets for distributing financial securities. Maybe I should write a book: ‘Memoirs of a Syndicate Manager…’ Anyone (who is honest with themselves) involved in the IPO or debt new issues markets will of course recognize The Good, The Bad & The Ugly.
Great post the other day on ‘You’ve been noticed’ highlighting how the traditional (centralized) banking paradigm is facing a real alternative for the first time in the modern era (notwithstanding the historical success of credit unions, especially in rural locales; of course these depended on a wholly Web 2.0 concept - community!)
How long before the price of this debt is reduced due to better “Social Ranking”, ie on Rapleaf, or eBay? I think we may be seeing the world of Micro-lending re-engineering the world of traditional lending. Instead of just “Bad Debt”, perhaps people will respond to “Bad Rep”, and pay on time? I mean who wants to look bad in the eyes of friends and colleagues?
Banking has used technology to great effect in terms of making their processes more robust and massively more efficient over the past 2 or 3 decades. Some of these gains have trickled down to the customer, but most have been absorbed by the management and the shareholders. And I’m not just talking in terms of pricing or margins. Indeed much more important in my view is the heretofore missed opportunity to pass on a truely tailored, friendly and understandable customer experience notwithstanding the fact that the technology (and business models) to do so already exist. However it is not hard to understand why such reticence (on the part of the incumbents) exists: they are making money hand over fist (ie if it ain’t broke, don’t fix it), barriers to entry are very high (but perhaps not just quite as high as they think), they have huge financial and psychological investments in the giant mass-production factories they have built (not easy admitting obsolescence) and all the usual human and behavioral impediments to change in large organisations.
Companies like Zopa and Prosper are certainly interesting and deserve to be applauded, but somehow I think they are only scratching the surface. Furthermore it becomes quickly obviously that the regulatory framework is woefully ill-adapted to allow this new paradigm to flourish. (Of course as Ms Perez so eloquently stated in her masterpiece, this is unfortunately par for the course:
…in the first decades of installation of the new industries and infrastructures, there is an increasing mismatch between the techno-economic and the socio-institutional spheres…
It is indeed intuitive when looked at from this perspective, that the (social) inertia of the existing - and previously successful - paradigm acts as the main obstacle to the diffusion of the new paradigm.)
One example (and there are far, far to many to enumerate here) is the strictly national framework imposed. To participate on Zopa, one must be a UK resident. On Prosper, a US resisdent. Whereas in many instances, trans-national communities would form much more interesting and robust markets. And wouldn’t facilitating a natural flow of capital from developed to emerging economies, leapfrogging underdeveloped financial systems to create access to millions (much as skipping fixed-line infrastructure and moving straight to mobile telephony has revolutionized access to communication for much of the developing world) be a fantastic opportunity? I’m not saying it is impossible; but the mindset and starting point of most regulatory regimes is more adapted to a 19th-century world of independent nation states than today’s reality of a massively complex global tapestry of interconnected communities.
I have an enormous pile of clippings, too many dog-eared pages in brilliant books and a gazillion bookmarks tagged ‘to blog about’ … so perhaps after a several month hiatus, loyal readers may find more substantial fare geared to the core theme of this blog which is the future of financial services.
Forerunners are racers that are sent down ahead of the competitors to set a track and to report any problems or anomalies to the race organisers (ie guinea pigs.) It was alot of fun and great training, although I did get off to a bit of a rough start. On the first run of the first day of Downhill (same hill as the Challenge des Entreprises but a longer course and faster) training, I crashed in the finish area. Slight concussion, bruised tailbone and wrenched back. In a daze went back up and opened the second training run as well - although more slowly…was out for a day so missed the second day of downhill training but feeling better (and needing to ‘get back on the horse that threw me’) I was back for the race day. Also opened the SuperG and the GS. I was pretty slow until the last GS run - I’d be lying if I said the crash didn’t knock my confidence - but it was a great experience to ski alongside some really and truly excellent and world class skiers. Yes, the UK has some very very good racers. Chemmy Alcott who swept the board in the women’s events is one of the best in the world and is still improving. Finlay Mickel is a consistent Top 30 performer in World Cup speed events. And lesser known, but exciting young racers like Dougie Crawford and Louise Thomas and others are coming up the rankings.
Like anything, being with people that are better than you (at something) is the best way to learn, be inspired and improve. And so prepared, I had my best results of the season in a couple of GS races in Courchevel last weekend, coming 4th and 5th respectively, and getting a result of 121 points a lifetime best (!) for GS (I think I got them down to c. 140 when I was a kid, although my Downhill points were sub-100.)
All in all a good way to feel 10 or 20 years younger!
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