Castles of Cards
Posted By Rob Millard - 0 Comments -
Just a week into the new year and the danger signals are coming thick and fast about just how bad 2009 (and perhaps even a few years thereafter) might be in the United States and Europe.
In the New York Times today, we have President-elect Obama warning of a trillion dollar + deficit for years to come. Read this together with Bloomberg's assessment of $7.4 trillion being the total cost of the bailout / stimulus package.
Nouriel Roubini speculates that US Treasury Bills may be the next bubble to burst, which could have a devastating impact on the USA's ability to raise the sovereign debt that it needs to get its economy back on its feet:
"Given the level of extension in yields, it would not be difficult to generate losses of say 10% in the 10-year Treasury bond, and as much as 20-25% in the 30-year Treasury bond over a very short period of time"
Dennis Howlett comments in If all else fails on the possibility that fallout from the Madoff debacle could cause an Arthur Andersen style collapse of a major accounting firm. He lists the claims (pre-Madoff) that the largest six US accounting firms were facing as follows:
- 90 actions with damages claims in excess of $100 million
- 41 cases seeking damages in excess of $500 million
- 27 cases seeking damages in excess of $1 billion
- 7 cases seeking damages in excess of $10 billion
Finally, Martin Hutchison of Money Morning speculates about whether Citi Group will be allowed to slide into collapse:
"Obviously, if the government chooses to keep Citi afloat, U.S. taxpayers, as a group, are (just) rich enough to make that happen. But a sensible government will eventually realize that these expensive rescues are pointless. The financial services business - once an economic mainstay - is declining in importance in the U.S. economy, and is probably half its relative size compared to its historic levels from the 1970s. In such an environment, capacity needs to be lost and Citi is the capacity most obviously surplus."
If Citi is bailed out further than it has been already, Hutchison speculates on which US bank will be the next most likely bank roadkill in 2009:
"My bet would be Bank of America, which made a very foolish acquisition in Countrywide Financial Corp., at the beginning of 2008 and a very dangerous one (because of its size and over-leverage) in Merrill Lynch right at the end of the year. Countrywide was an enthusiastic participant in the worst excesses of the housing bubble, and hence will have a correspondingly large share of its detritus, while Merrill Lynch itself made what turned out to be a major misstep when it bought a major subprime mortgage lender, First Franklin, at the absolute peak of the bubble in 2006."
It's easy to get punch drunk with the deluge of negativity, but this is not a time for leaders of firms to lose focus. This time will pass. The firms that survive will be those that are brutally Darwinian and adapt unrelentingly as circumstances evolve.
By now, I'd imagine that most firms will have taken cost-cutting to the point where they are no longer cutting fat but slicing into meat. The next steps are:
1. A sober and objective assessment of which areas of the firm are likely to survive (say) another 10 - 20% drop in fee revenue and a strategy to separate those areas that will not and divert resources being consumed by them to areas that will. If this exercise threatens the overall viability of the firm: start considering merger partners well before you are forced to with your back to the wall.
2. An intense and highly aggressive focus on growing market share of the diminished pool of work available. This requires so much more than just reading another book about business development or attending a marketing course. To use a golfing analogy: your people need to be single digit handicap players in the area of developing and retaining business. Period!!! I would highly recommend Gerry Riskin's intense hands-on, behaviour based approach. The results that he has achieved in several law firms recently are nothing less than astounding.
3. Cash is king. Be fanatical about tracking your 13 week cash flow. Assess your clients ability to pay before accepting an engagement and if there is any doubt, require retainers up front. Relentlessly drive down your working capital requirements.
4. Assist your key people so far as this is possible to gear down their perosnal income requirements so that if (when?) incomes drop this year, the consequences though uncomfortable are not disastrous. You don't want key people in your firm to become less effective / ineffective because they are experiencing financial hardship or worse.
5. Seek external help from people that understand your firm's business and also what is really going on in the market, especially where brutal objectivity is required. There are many consulting services that can be dispensed with when times are as uncertain as now, but it is still critical that the strategic decisions that you take are soundly objective.
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