The Credit Crisis Explained

I love this explaination.  Intuitive, understandable and accurate even at the level it's presented it.  Less is more.

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Firms Urged to Try and Keep Staff

This story from the BBC should give everyone cause to pause.  While it came out a couple weeks ago, it only recently came up as part of discussions with UK personal.  While the idea is well meaning, the reality is that firms have to operate within budgets.  If they are not generating enough revenue, they cannot carry staff.  While no one enjoys laying people off, if cash-flow cannot cover expenses, choices must be made.  Even if they are driven by short-term thinking, if you cannot meet obligations, there is not long term.

Redundancies should be a "last resort" as firms trim costs in the economic downturn, the Chartered Institute of Personnel and Development (CIPD) says.  Planning for recovery by keeping staff is a better approach, it added, saying an average redundancy costs employers £16,375 before any savings are made. 

The CIPD has put together a formula to estimate the financial cost of redundancy:
(n × r) + (x × h) + (x × t) + ny (h + t) + wz (p - n)
n = number of people made redundant
r = redundancy payments
x = number of people subsequently hired
h = hiring costs
y = percentage quitting post redundancy
t = induction/training cost
y = percentage quitting post redundancy
w= average monthly staff salary
z = percentage reduction in output per worker caused by lower morale
p = number of people employed prior to redundancies

Source: CIPD

Layoffs should be the last resort, but however compelling the equation is in theory, it doesn't change the difficult reality many firms face.  No one like making these types of decisions, but the decisions must be made.

1. The Credit Crisis: What Does it Mean for You and Your Company?

One of the biggest problems we face today is the egregious mismanagement and reckless incompetence of many American corporate boards which utterly fail to do their primary job of holding managements accountable.

- Carl Icahn, Oct 7, 2008

Don’t Be an Ostrich
Many people watch what is happening on Wall St hoping they will not be affected. Sooner or later, it will affect you. Rather than avoiding the issue and burying your head in the sand, let’s understand what’s happening, what it means and what you can do to get ahead of the curve.

We will do this in four posts:

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.  Understanding this is important to recognizing good opportunities.
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.

What’s Happening on Wall St?

A couple of things about this clip.  In addition to its humorously irreverent and more accurate than you might think description; it is also over a year old.  The credit crisis is not new.  It has been brewing for awhile and its resolution will take awhile.

Expect to Feel the Pain
Even if you’re not in financial services, expect to feel the pain. Consider that as of Friday Oct 8th 2008, US stock markets are down over 42%.  $8.2 Trillion dollars has been lost.  If there are 300M Americans, each is out $28,000. [Editor: This is worse than a divorce.  I lost half my money and I still have to put up with you!]

More concerning is that this is a credit crisis, not an equity crisis.  The stock market crash is the symptom, not the cause.  I won’t go into the details [Editor: Please don’t], but the cause is the credit crisis - banks unwillingness to lend to other banks and now businesses.

How this will work out is the real question.  Uncertainty leads to questions of confidence. How will the uncertainty be resolved? Transparency. What’s visible can be dealt with, it’s what isn’t currently visible that will drive people to want to know more.

Who will want to Know?
For public companies, executives and the board of directors will want to know.  Hence the Carl Icahn quote.  Consider this:

NEW YORK, Sept 15 (Reuters) - Shareholders sued Merrill Lynch & Co Inc Chief Executive John Thain and the company’s board of directors on Monday over the proposed buyout by Bank of America Corp, claiming the terms of the deal are unfair [to shareholders]. (Full Story)

What is important is that the suit is filed personally against John Thain and the board of directors. They are personally liable. The suit claims John Thain and the board “have clear and material conflicts of interest and are acting to better their own interests at the expense of Merrill public shareholders.”  There will not be enough D&O (Directors and Officers) Insurance to satisfy investors after all the money that’s been lost.

Nothing like the fear of a class action lawsuit to persuade you to get more transparency in your business.  Where is money going, how is it being spent, what returns are we getting from projects we invest in?

Private companies will answer similar questions from their own investors and executives. Furthermore, suppliers will want to be sure firms can pay. Vendors will want to be sure they can deliver. Banks will want to know how funds are being used.

We are heading into budgeting season.  Expect Ronald Reagan’s “Trust, but verify” to accompany the belt tightening.  Whether you call it transparency or regulatory oversight or SOX or corporate governance or [Editor: the following line was deleted, you can’t use that language.]; executives, directors and investors will want to know more.

Why Are Investors Like Icahn Using This Moment To Demand Change?
In addition to the reasons stated above, but there are historical reasons for wanting transparency. Understanding this will provide you insight to take advantage of the opportunities which will arise.  We will take that up in our second post: 2. The Credit Crisis: Why It Is Important - A Little History.

Have you started seeing changes?