There is nothing like spending your summer vacation pondering the prospect of financial doom, which is what I did recently with a read of The Big Short by Michael Lewis. While I don’t offer a book review here, I do have a fresh perspective on the liquidity crisis, from which we have still not fully recovered.

The Big Short is a recap of “greed is good” Part II.  The book portrays Wall Street analysts, bankers and traders as arrogant, lazy and in many cases remarkably stupid.  And while that may not be a surprise, the details that have emerged that portray the recklessness of venerable firms (such as Lehman Brothers and Bear Sterns) are truly shocking. It appears as if the sharpest people on Wall Street had no idea what assets they owned or what risks they were taking in credit default swaps and collateralized debt obligations (CDO’s).  It is one thing to make a bet and lose but another thing not to know what bet you are making.  Most of us have accepted the burden of the past; but how will we approach the opportunities in the  future?   Lessons learned include:

1. One should never ignore something just because they don’t understand it. In this case, it turned out that the insurance (credit default swaps) that companies like AIG were selling had no limits. When the hen came home to roost, it nearly bankrupted the company and threatened the solvency of the U.S. government itself.
2. Ego can get the best of you. The CEO of AIG AF, Joe Cassano was a former Drexel Burnham  Lambert execute and ruled as a benevolent dictator. He simply did not listen to the reason of the people who tried to warn him of the magnitude of AIG’s exposure.  As reported by Lewis, his response to such warnings was, “it is my expletive money”.
3. Don’t become blinded by competition. According to Lewis, Moody’s and Standard and Poor maintained Tripe A ratings of sub-prime debt out of fear of losing business to other rating agencies.
4. Don’t take the easy way out. Mr. Lewis’ most pointed criticism was reserved for the people within the financial system who were responsible for assessing risk, but did not assess risk at all. Even the big Wall Street firms got sucked into a wave of commoditization, as internet stock trades bit into their fat profit margins. CDO’s were a shortcut to an easy profit.  When things are too good to be true, they almost always are (too good to be true).

If there are numbers on your financial statements that are vague, it is incumbent upon the executive to “seek to understand” (as Covey put it).  We all need to think for ourselves, and question the prevailing wisdom of economists, experts and politicians.  Let us be weary, be smart, and take the time to weigh the risks and rewards.

Here we go again. Suddenly, people are fleeing the stock market for the safety of muni’s and other low risk investments. The U.S. dollar is strong only because of the weakness of the Euro and other foreign currencies supported by extraordinary deficits.  Emerging markets such as China, India and Singapore are the only ones growing and even China’s forecasts are cooling. Some economists are calling all of this a dreaded double dip.  Is this spasm an overreaction?

I am not here to offer a prediction as much as some perspective. Historically, there have been two elements that have preceded U.S. recessions.  Typically, there has been a scandal such as the Savings and Loan Crisis, Michael Milken, Enron/Worldcom, and most recently the liquidity crises triggered by the likes of Goldman Sachs, AIG, Lehman Bros, and Bear Stearns, where someone has manipulated a market (most recently derivatives and credit default swaps).  Secondly, the recession usually follows a bubble (dot.com, real estate, etc).  In other words, our economy gets fat and happy, investors take advantage, and then the bubble bursts.

We certainly have not seen our economy swell over the last 12 months.  People have been so desperate for good news that we accepted what little there was as signs of a recovery.  The reality is that our economy grows at about 5% in times of prosperity, and 2% in times of stagnation.  Three percent swings us from optimism to pessimism, which reinforces the magnitude of emotions in our decision making. Fear is always the most powerful emotion and motivator, greater than love and all the others.

So how will the next few months play out? I don’t have a concrete answer for that but what I do know is that our reaction to the sound bites from economists and experts is quite personal. Our practice is thriving at the moment (in part due to the acceptance of the book) which is proof positive that the performance of an organization can be driven in part by one’s confidence and sheer will. Certainly, market forces are in play and in some businesses (like construction) you can still hear the giant sucking sound.  In others the business can best be described as mediocre and the entrepreneur must decide how much investment (in sales and marketing for example) is appropriate.  What I have seen from manufacturing clients is that are petrified of expanding their factories out of fear that they will not be able to dial back capacity.

In a universe where most are passive, there is more opportunity for the aggressors.  I read of one recent investor who bought BP and shorted Apple, a counter strategy that clearly made him a lot of money. While I am not dispensing any investment advice, I am suggesting that we all must make individual choices on the level of risk we are willing to accept. In an age when things are uncertain, there is as much evidence that we will continue along a modest recovery path as there is that the bottom will fall out, and I have made the choice to stay on course. If you are not comfortable with the status quo, it may be time to find new product, services, channels or sectors because there does not appear to be a hockey stick coming any time soon.

I have the opportunity to work with hundreds of executives every year.  I hear it all, from the upbeat to the melancholy. Quite regularly I hear a group whine: why don’t we do have controls for this, or why don’t we have a strategy for that.

The reality is that organizations on their face are dysfunctional.  To have perfect systems, processes, communication and human capital requires a tradeoff between investment in the long term, and profit in the short term. It is easy for organizations to fall into a trap where organizational priorities can become confusing or clouded.

I often compare the prototypical U.S. corporation to capitalism itself: it is not a perfect system, but it is the best one we have. Corporations are built around functional departments, such as accounting, sales, engineering and operations.  It is typical for such departments to have naturally occurring silos and it is easy for a silo mentality to create aggravation and despair.  But it doesn’t have to be that way. Once one recognizes that silos are a function of structure and not of people, one can chose to fight through the bureaucracy, and divergent objectives and lead people to find solutions.  It really comes down to challenging your own paradigm about the natural order of things.

If you work in accounting and you don’t think the sales team gets it in regards to receivables or collecting valid information from customers, it is incumbent upon you to understand their business requirements, and to educate them on the importance of your procedures. Whining is easy, but solving problems requires managerial courage, often in the form of making difficult decisions.

This structural dysfunction often manifests within non-profits which have the same organizational problems, but lack the resources to address them. Volunteers cannot provide the same level of focus as full time employees.

Whether you are working within a for-profit or non-profit organization, the answers lie within you. If you are the leader and your people are not getting along, it is your responsibility to find harmony. If you have a member of your staff who cannot play nice with others, it is time to wish him the best of luck in his next position, wherever that might be.

The publication of my first book, “Intended Consequences” has opened many doors for me.  The book is a manifesto on strategic planning and explains in some detail “how to” go about the formation of strategy. In effect, I gave away all my secrets for a mere $17.95, and our business is thriving.

I often hear objections from clients that they fear that their strategy could fall into the hands of competitors. They become tight lipped about their intentions, even with their own employees. 

I remember fondly the Lakers of the 1980’s. Magic Johnson would dribble the ball down the court, and throw a high pass to Kareem Abdul-Jabbar on the right block, and he would take a hook shot, time after time. The opponents, their coaches, the radio commentators, and the fans all knew it was coming, yet no one could stop it.

Extraordinary companies exhibit superior execution. The irony is that those organizations who take the time to explain their objectives in detail to employees and vendors are the ones most likely to achieve superior results. Being clandestine about a strategy can limit its effectiveness.

Competitors eventually figure out what others are doing, but they may or may not have the talent, cost structure, technology or acumen to emulate it, or execute with the same level of quality or rigor. On balance, customers want information, and providing detailed information in the form of white papers, marketing materials or specifications in an easily digestible format provides value. In most cases the incremental value created by giving away information to customers outweighs the risks.

I am not for a minute advocating that you publish your strategic plan. I am suggesting that the more people on your team who are committed to it and accountable for your initiatives the greater the likelihood you will realize your objectives. It wouldn’t hurt to have a Magic Johnson dishing it out to your team.