Tuesday, October 14, 2008

2. The Credit Crisis: Why is it Important? A Little History

History is a guide to navigation in perilous times. History is who we are and why we are the way we are.     - David C. McCullough

This is the part 2 of 4 looking at the credit crisis:

  1. The Credit Crisis: What Does it Mean for You and Your Company? - This will look at what’s currently happening and what it means.
  2. The Credit Crisis: Why It Is Important? - A Little History - To get some context, we’ll look at why companies were set up and why investors, like Carl Icahn are so outraged.
  3. The Credit Crisis: For Project Managers - What Does It Mean? - What are some things as project managers you should be doing.
  4. The Credit Crisis: For Project Managers - What should you Expect? - What are things to look for and think about.

A little background on business
To get some insight to this, let’s think about why businesses were really founded. The modern corporation came started in Britain in the early seventeenth century, when some very intelligent and presumably humble nobleman noticed that there’s no correlation between intelligence and wealth. In fact, there may even be an inverse correlation, but I’ll resist the urge to rant about Paris Hilton and spare you my other Hiltonesque urges. [Editor: Please do.]

What these noblemen realized was that if they gave up a portion of their capital and entrusted it to an organized group of intelligent, motivated and hungry workers, they could make themselves much wealthier. A side benefit to this was the incredible improvement in the standard of living for those working for them. This is the genesis of the modern corporation.

Why is this important? What these noblemen and now women realized was that they had to set up the appropriate structures and oversight so the intelligent, motivated and hungry workers didn’t keep all the profits for themselves.  Corporations were created for the benefit of the owners, not to make the workers wealthy.

What Does This Have to do with My Business?  Remember AIG

AIG stockholders, the people who own the company, invested in the expectation that they would earn returns, instead lost over 95% of their money.  While the details haven’t all come out, it appear AIG Financial Products, a 377 person unit brought down the 18th largest company in the world.

“Since 2001, compensation at the small unit ranged from $423 million to $616 million each year”, according to corporate filings.  AIG Financial Products took positions that were much more risky than their executives realized, they walked away with huge paychecks and their liabilities lead to AIG’s downfall.

“Debts are easy to fix, but liabilities the nightmare!”

Where was the transparency?  How come no one knew how much risk they had put the company under?  How much will this cost?  What will our returns be?  These are not only historical questions, these are questions you are likely to have to answer in this next budgeting cycle.

Know that these questions are coming.  Be ready to answer them and you will be a star.  That is what we will look at next in part 3: The Credit Crisis: For Project Managers - What Does It Mean?

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