Oct

13

I’ve been going to express my views for a couple of months now, but I’m a simple man who believes in the KISS principle and I don’t normally expose my thoughts other then through a circle that I know and who’s views I (maybe) respect. I was taught the hard way about overtrading; in other words expanding and growing a business faster than its financial resources and human capabilities can support. As a new and very young MD in the late 70’s I had to launch new products and take a business out of imminent liquidation at the same time. Then some years later as new business development executive for a conglomerate that had expanded by merger and acquisition as well as organic growth, I had to sort out the jigsaw of pieces for a new strategic business ‘picture’ by merging, cutting, closing and selling businesses and selected assets, as part of future group business development. I’ve done it a few times since then.

It taught me a lot about business growth and development before I even got to business school (INSEAD). Many Government, financial and business executives haven’t had the same fortune as me, learning curve and experiece. I’m still learning!

 Companies and Government have used debt finance to fund long term expansion of operational expenses, especially, in addition to capital investment, increasing high levels of leverage without implementing a recapitalisation program for the future foundation of the ‘business’. Blatently bad or lax management is evidenced with business models that just should never have been accepted at board level and launched. Some products and services within the finance and banking sector beg the question of what was the amount of avarice and greed that actually forced business decisions through and past good business practice. Were there any ‘pyramid-type’ models out there? Where was corporate governance? What about culpability of executive directors and non-execs? What were the FSA and other regulatory bodies doing …. anything? .. and if yes, what?

The blame of government, the finance and banking sector and some sectors of business, cannot be absolved. The economy as part of the global market was bouyed and carried along, surfing the high wave of  global business expansion and growth, maybe oiled by possible greed, or pushed on by just bad management. This was seemingly done without any regard to increasing debt, acceptable risk management or executive planning for a possible ‘bad day’, in the goal for increased market share, stakeholder wealth and ‘instant profits’. The dramatically overblown housing market was just one of the many fragile sectors that eventually caused the ‘domino effect’ to start, take hold and expose the horrors of bad management that are now evident to all.

I was working overseas six years ago and with a small network of business friends we kept predicting the end of the UK housing growth bubble and subsequent deflation. Why? Because it was unsustainable! Every year the gap between the average salary and the average house price was getting wider. (It didn’t happen). Every year the personal debt of individuals increased, excluding morgage contibutions. Every year retail sales were growing dramatically. I don’t have to say how all this was funded do I? Increased debt! Ridiculous. Unsecured loans were offered to the public, who juggled and rolled debt with the use of new credit cards, moving and increasing debt from one card to the next,  these cards offered and showered from the overcrowded banking and finance sector like confeitii - ‘write your own income statement for a loan’ to get on the housing market or to become an estate-letting mogul with sale-to-let financing. Ridiculous, very scary and beyond belief! Never must we get into this position again.

The financial sector has been made exceptionally complicated (the more complicated and intricate, the less it can be policed) and quite honestly I don’t think anybody knows how it really works as a living (or should I say dying) organism. Have you heard any so-called finance insider and expert - of which there are many so proclaimed - clearly state this is what is happening and this is the way to resolve the problem. A load of wobblies! Billions of dollars and pounds have been written-off by the financial and banking sector; but where are the lists of assets written down, on what basis and any explanations; but we still have ‘toxic debt’ what-ever that is when it’s identified, listed and quantified (don’t hold your breath); vital cash reserves have been used to buy back stock (whose benefited?); I won’t go into hedge funds and venture capital.

We haven’t been creating wealth; we’ve been creating and increasing debt, leverage and risk. We are now paying the price (to coin a phrase) and many of the population will suffer because of their excessive debt, increasing basic monthly living costs, inflation and for the unfortunate, unemployment at no real fault of there own and the incompetitence of many in positions and social and business responsibility.

Some of the major international names in the financial/banking business sector now need a massive injection of new capital to stay in business; what a mess and a travesty of justice. How the mighty are fallen - in some cases anyway. Thank goodness we have some financial institutions that are well managed and sound.

Obviously the over inflated stock market has been adversely affected and turmoil has rained affecting the assets and pensions of most of us. However, with the right applications by Governments as recently evidenced, a new era will soon be launched. This will however, be more restrained and managed - I hope!

So where do we go and what do we need? We need a new order and business model.  The UK Government and others have today started moving along that road. Really they had no other way to go, so no rocket science or extratarestial thinking there. However, this is the start with a long road ahead. We must learn from the past but more importantly, put in place a future, new and sustainable business model for the UK and world management of the financial and banking sectors and institutions. We need to start working on that business model now.

The world economic order has changed and we now have new economic giants in China, India, Russia, UAE and other emerging economies. The dominance of New York and London as financial world centres will I believe, be diluted, and new centres will soon emerge. It is important not to protect and build on the structure of the past but to look at the new world order and build a new and sustainable world financial business model around which rules, regulations and governance can be designed and promulgated. Will there be a world financial governing body? Will a new world ‘currency’ be devised? Will there be a means of stabillizing currency to currency fluctuations? Will commodities be controlled? What is our new world of values, trade and finance and should I table intrigue, going to be? All I know is that trade and finance has been regulated in regions and areas of the world as far back as a few millenia and more, and very well. Our present problems have demonstrated that the world is now a single entity and countries are interdependent.

Please let the new order be proposed, structured and implemented by those with vision for ours, the worlds, future needs and not by the old order, the ‘old boys network’ locally and internationally. The present incumbents have proved they are incapable. The speed of change has left them inept and floundering. Let a younger more mentally agile and technology equiped breed take us forward. They cannot do any worse and should have the opportunity to do better.

Finance and banking is common sense; it is people that have made it complicated, protected it for a few and made it difficult by it’s products and trading intrigues and lack of transparency. Now is the time for change.

‘Overtraded economy, financial and business sectors and bad management’ By Keith McCullough, Wyndham Hynds Ltd


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