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| Volume 8, Issue 9 |
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In This Issue:
 How bad will it get on Wall Street?
Welcome to the frozen economy
Collecting money in a bad economy
 What keeps CFOs up at night?
Industry-hopping CFOs gain an edge
Don't mess with the IRS
 Turnaround time: [4] ways to jump out of a slump
 Winning in a downturn: Six actions to take now
 The 7 toughest questions (and how to handle them)
 Creating a positive professional image
 If you’re open to growth, you tend to grow
Lessons in love, by way of economics
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How bad will it get on Wall Street?
It has been a year since the global credit markets first seized up, and four months since the dismantling of Bear Stearns.
Yet bad things keep happening, from the failure of IndyMac and the stock routs of Lehman Brothers and others to the market's collective yawn at the Treasury Dept.'s plan to bolster mortgage giants Fannie Mae and Freddie Mac. Once again, the optimists
who thought the crisis was over have been proven wrong. "People underestimated how bad things were last summer," says Frank Partnoy, a former Wall Street derivatives trader turned professor at the University of San Diego Law School. Did they ever. July's
rat-a-tat-tat of dismal news suggests that the scope of the credit crunch is much broader than most people thought. Traders, investors, bankers, and economists are waking up to the possibility that Wall Street's recovery from the worst financial
disaster since the Great Depression could grind on for years. And they're realizing that while the debacle was of Wall Street's making, its aftermath will weigh on banks, other companies, and consumers alike. One thing is for sure: The new normal won't be
as fun as the recent past. Banks will be smaller and fewer. Capital will be harder to get for some consumers and companies. And more of that capital will be parceled out by lightly regulated hedge funds and private equity firms, for better or worse, as the
balance of power on Wall Street shifts. Why hasn't the healing begun? The answer lies in the mechanics of leverage, or borrowed money, which banks not only provide to customers but also use themselves. [The next few years promise to be especially rough,
judging from the numbers so far. Banks cut back on credit in the three months through mid-June at a 9% annualized rate, the worst contraction in 35 years of data, according to Leigh Skene of Lombard Street Research. Issuance of mortgage-backed securities and
corporate junk bonds this year is down 87% and 63%, respectively, according to research firm Dealogic. A recent study projected that losses resulting just from mortgage-related lending would sap $1 trillion of credit from the U.S. economy. Banks
"have to shrink," says the University of Chicago's Anil K. Kashyap, one of the authors...]
Read the article. Back to top
Welcome to the frozen economy
Not since the Depression have financial difficulties so immobilized spending and credit. Listen to the talk at a diner in Maine.
The polar ice cap may be melting, but the U.S. economy is frozen, starting right here in my small town. Gradually rising levels of dismay at the gas pump and in the supermarket gave way to paralytic shock last week when "lock-in" notices from the
local fuel company arrived. This year's advance price for home heating oil is nearly twice what people paid last year. A collective gasp of disbelief from my tough, resourceful Maine neighbors echoed across the meadows and up the rocky coast. Many
claimed they would never sign the contract. "What's your alternative?" I asked a friend. "I don't have one," he muttered. In the days that followed, a new quality of dread settled over the place like soot, as people weighed their options. Heat or food?
Gas or electricity? Medicine or mortgage payments? What to give up? What to cut back? The conversations were everywhere. In the supermarket, I heard one man tell another: "When I was a kid, you woke up, went into the bathroom, and broke up the ice in the
toilet. Now my kids will have to do the same. America is moving backward." My neighbors are like deer caught in the headlights: frozen in fear as something sinister, implacable, and wholly unanticipated lurches toward them. A reckoning has
begun to unfurl like a dark flower, slowly at first, then gathering urgency and force. This is not a short detour after all, but an untraveled road to an unknown place from which there is no return, no escape…and we are not prepared. The economic crisis has
been triggered by what economists call "structural shifts" in the global supply and demand for commodities, coupled with the meltdown in the mortgage markets and the ensuing credit squeeze. But this crisis is now moving into a whole new gear, creating
a new set of economic conditions that have yet to be named. Call it "the frozen economy." As pain reaches deep into the daily lives of ordinary Americans—irrespective
of their creditworthiness—it will trigger unforeseen consequences for every corner of the marketplace. Nearly two-thirds of Americans already say they are cutting back on...
Read the article. Back to top
Collecting money in a bad economy
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When you have someone fill out that credit application, it lets them know that you're serious about your business and you're not just handing out credit," Dunn says.
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How do you get customers to pay on time? What do you do if they don't? And how do you determine if you'll spend more time and money tracking down a debtor than the payment is actually worth?
Third-party debt collectors recovered $40.4 billion in 2007, according to a PricewaterhouseCoopers study commissioned by ACA International, a trade group for the collection industry. The study estimated that businesses wrote off $152.5 billion in
bad debt that year, based on IRS statistics. (The IRS would not confirm the estimate and said the actual data for 2007 would not be available until next year.) And delinquent debts are expected to increase in 2008 as the struggling economy leaves
more people and companies strapped for cash. "There probably will be more debt that will go out to collection, but it's going to be even more difficult to collect because people don't have the money," says John Nemo, ACA spokesman. Recent surveys of small
business owners show that delinquent accounts and bad debts remain concerns, although their relative importance has dropped over the last two decades, according to data from the National Federation of Independent Business. The group attributes the decline
to the increased use of credit cards, which shift the problem of late payments from small business owners to credit card companies. With the help of industry veterans, we
review tried-and-true practices and take a look at newer services, to offer a practical guide to collections...
Read the article. Back to top
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What keeps CFOs up at night?
For the first time, the cost of fuel climbs to the top of the list.
With oil prices hovering at around $140 a barrel, the cost of fuel has officially registered on finance executives' radar screens. In the most recent Duke University/CFO Global Business Outlook Survey, conducted in June, fuel costs reached a virtual tie with...
Read the article. Back to top
Industry-hopping CFOs gain an edge
To round out your résumé you don't have to go into operations or overseas. Another route: When you have one industry down, move to another. Repeat as needed.
Ask Blue Nile Inc. CFO Marc Stolzman what Frappuccinos, vegetable oil, and diamonds have in common, and he'll say himself. Stolzman's finance career has brought him to industries that are poles apart, serving as a divisional head of finance at Starbucks,
leading an initial public offering as CFO of biodiesel refinery Imperium Renewables, and now presiding over finance at the online jewelry retailer Blue Nile. While some finance executives opt for operational or overseas experience to add variety to their
résumés, others like Stolzman move from industry to industry, a strategy that not only gives them a unique strategic career advantage but also can be quite fun...
Read the article. Back to top
Don't mess with the IRS
The agency is taking companies to court more often, and winning. Is it time to rethink your tax position?
April, always the cruelest month for taxpayers, became more so this year when the Internal Revenue Service racked up yet another victory against a corporate tax shelter. At issue was a decade-old transaction between a U.S.-based financial holding
company, BB&T Corp., and a Swedish wood-pulp manufacturer, Sodra Cell. In 1997, BB&T leased a 22 percent interest in pulp-manufacturing equipment at one of Sodra's mills and immediately subleased it back to Sodra. That brought BB&T a nice deduction. And,
the IRS charged, not much else. To the agency, the deal was a prime example of an abusive tax shelter known as lease in, lease out (LILO). Although the transaction predated the 1999 tax code changes that shut down LILOs, the IRS challenged it and won
in 2007 — the first time such a shelter had been tested in court. Then, in April, a federal appeals court sided with the IRS. For BB&T, the verdicts meant an additional $1.2 billion paid in taxes and interest to clear its bill for Sodra and similar
transactions. The BB&T case is just one of several major tax-shelter cases won by the IRS in recent months. The shock waves from those victories are reverberating far and wide. Certainly, any of the hundreds of companies that have engaged in...
Read the article. Back to top
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Turnaround time: [4] ways to jump out of a slump
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No company welcomes a recession.
But bad times can actually provide the impetus for firms to significantly improve their positions and accelerate into the next up cycle. Our research in the US has shown that dramatic leaps forward in financial and strategic position are twice as
likely in a downturn as during other economic periods. Indeed, these are classic turnaround conditions. But you don’t always need an economic slump to find yourself in need of rapid performance improvement. When Warren Knowlton became CEO of the British
company Morgan Crucible in January 2003, for instance, Morgan was in serious trouble. Sales had declined in each of the previous three years. Profits had vanished. And the stock price had dropped 90 percent between 1997 and 2002. But Knowlton led a
remarkably quick transformation of this venerable industrial enterprise. By mid-2006, Morgan’s continuing businesses had registered 5 percent to 6 percent annual revenue growth for three years running. The share price had risen tenfold. Although Knowlton
was an exceptional CEO, performance breakthroughs of this sort are a lot more common than one might think, in our experience, and likely to be increasingly needed if the global economy worsens. The steps needed for rapid performance improvement fall into
the category of simple to conceive but not easy to do. Leaders of fast turnarounds first systematically diagnose the business’s current condition. This diagnosis, informed by the four fundamental laws of business discussed below, gives them a deep
understanding of their point of departure. They next map out a realistic point of arrival, again using those four laws, which shows where the business will be at the end of a specified period of time. Finally, they craft a small number of vital
initiatives that will get them where they want to go. One might call those initiatives the road to results. Let’s look at the journey’s steps...
Read the article. Back to top
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Winning in a downturn: Six actions to take now
According to many indicators, a recession is either looming or already here.
Yet because the business landscape has changed so much since the last recession, in 2001, the defensive and offensive tactics that worked then may not work as well this time around. For example, emerging low-cost competitors from China, India, and other
rapidly developing economies are now in a position to gain market share and acquire assets from cost-heavy incumbents. Moreover, many companies that were burned in the
last recession are savvier today, and their behavior may be tougher to predict in a new downturn. Now is the time to get ready...
Read the article. Back to top
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The 7 toughest questions (and how to handle them)
Managesmarter Classic: In the professional world, tough questions are as fundamental as paper clips and staples.
Starting with the employment interview and ranging through staff meetings, management reviews, informal briefings and formal presentations, almost every business encounter has the potential to draw dangerous crossfire. And in many circles, inquisitorial
grilling is as much a part of the business ritual as a handshake to seal a deal. Why do business people ask tough questions? Because they are mean-spirited? Perhaps. Because they want to test your mettle? Maybe. More likely it's because when you make a
presentation, you assume the role of a solicitor. In that role, you ask those you solicit (i.e., opposite parties, target audiences) to change. Most people are resistant to change and so they kick the tires. You are the tires. How then to avoid
damage from the kicks? How do you survive slings and arrows unleashed? How do you handle tough questions in the line of fire? The savage seven During my 40 years in the communication trade, which has ranged from control rooms in the CBS Broadcast Center
in Manhattan to the boardrooms of some of America's most prestigious corporations, I have heard — and have asked — tens of thousands of tough questions. But all of them
can be distilled into just seven types. [Here they are and here's how to handle them...]
Read the article. Back to top
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Creating a positive professional image
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Laura Morgan Roberts is an assistant professor in the Organizational Behavior unit at Harvard Business School. "Members of negatively stereotyped identity groups may experience an additional form of identity threat known as "devaluation." |
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"Most people use a variety of strategies for managing impressions of their social identities."
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As HBS professor Laura Morgan Roberts sees it, if you aren't managing your own professional image, others are.
"People are constantly observing your behavior and forming theories about your competence, character, and commitment, which are rapidly disseminated throughout your workplace," she says. "It is only wise to add your voice in framing others' theories
about who you are and what you can accomplish." There are plenty of books telling you how to "dress for success" and control your body language. But keeping on top of your personal traits is only part of the story of managing your professional image, says
Roberts. You also belong to a social identity group—African American male, working mother—that brings its own stereotyping from the people you work with, especially in today's diverse workplaces. You can put on a suit and cut your hair to improve your
appearance, but how do you manage something like skin color? Roberts will present her research, called "Changing Faces: Professional Image Construction in Diverse
Organizational Settings," in the October issue of the Academy of Management Review. [Here are some key findings in this HBS exclusive interview...
Q: What are the steps individuals should take to manage their professional image?
A: First, you must realize that if you aren't managing your own professional image, someone else is.
People are constantly observing your behavior and forming theories about your competence, character, and commitment, which are rapidly disseminated throughout your workplace. It is only wise to add your voice in framing others' theories about who you
are and what you can accomplish. Be the author of your own identity. Take a strategic, proactive approach to managing your image...]
Read the article. Back to top
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If you’re open to growth, you tend to grow
WHY do some people reach their creative potential in business while other equally talented peers don’t?
After three decades of painstaking research, the Stanford psychologist Carol Dweck believes that the answer to the puzzle lies in how people think about intelligence and talent. Those who believe they were born with all the smarts and gifts they’re ever
going to have approach life with what she calls a “fixed mind-set.” Those who believe that their own abilities can expand over time, however, live with a “growth mind-set.”Guess which ones prove to be most innovative over time.“Society is obsessed
with the idea of talent and genius and people who are ‘naturals’ with innate ability,” says Ms. Dweck, who is known for research that crosses the boundaries of personal, social and developmental psychology.“People who believe in the power of talent tend
not to fulfill their potential because they’re so concerned with looking smart and not making mistakes. But people who believe that talent can be developed are the ones who really push, stretch, confront their own mistakes and learn from them.”In this case,
nurture wins out over nature just about every time. While some managers apply these principles every day, too many others instead believe that hiring the best and the
brightest from top-flight schools guarantees corporate success. The problem is that...
Read the article. Back to top
Lessons in love, by way of economics
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AS my fine professor of economics at Columbia, C. Lowell Harriss (who just celebrated his 96th birthday) used to tell us, economics is the study of the
allocation of scarce goods and services. What could be scarcer or more precious than love? It is rare, hard to come by and often fragile.
My primary life study has been about love. Second comes economics, so here, in the form of a few rules, is a little amalgam of the two fields: the economics of love. (I last wrote about this subject 20 years or so ago, and it’s time to update it.) In
general, and with rare exceptions, the returns in love situations are roughly proportional to the amount of time and devotion invested. The amount of love you get from an investment in love is correlated, if only roughly, to the amount of yourself
you invest in the relationship. If you invest caring, patience and unselfishness, you get those things back. (This assumes, of course, that you are having a relationship with someone who loves you, and not a one-sided love affair with someone who isn’t
interested.) High-quality bonds consistently yield more return than junk, and so it is with high-quality love. As for the returns on bonds, I know that my comment will come as a surprise to people who have been brainwashed into thinking that junk bonds are
free money. They aren’t. The data from the maven of bond research, W. Braddock Hickman, shows that junk debt outperforms high quality only in rare situations,
because of the default risk. In love, the data is even clearer...
Read the article. Back to top
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