Lehmans' bothers...

(Blog n°7)

  

As presented in the documentary The last days of Lehman Brothers, common people hate bankers. The narrator tries to find a reason for that. He speaks about success, money, but finally cannot find an answer relevant enough. At first, because all those answers are right, and the reputation of arrogance and mediocrity can also be added on the list of those people’s defaults. At least, on the list established by the common sense.

The characters presented by this documentary-fiction do not contrast with that vision. Only, they introduce new aspects of this world. Strategy, such as presented by the “rescue” of Merrill Lynch by Bank of America, but most and foremost, lie. Lie and cheating funded the final bankruptcy of Lehman Brothers. By using debt repurchase agreement, LB hided his financial situation and blinded the market. When the actual gearing appeared, the market purely destroyed the share price of the organization.

This kind of behavior is perhaps why we, as student in finance, have a class dedicated to the understanding of companies’ annual reports… with an emphasis on impression management. The saddest is certainly that this is maybe one of the most relevant observation about finance world: as every business, money business is based on appearance and fool’s games.

For the market at least (considering a long-term point of view). However as said in the documentary, this financial crisis leaded to an economic, a political and a social crisis. Economic because it initiated a global recession. Political because a huge questioning about the financial structure and the role of the states has been raised. Social because millions of people lose their jobs during the recession. What happened in Iceland is perhaps one of the most impressive effects of that crisis.

In Latin the word fortuna has a meaning related to the idea of luck. During the crisis, when shareholders were losing their fortunes, people all around the world were losing their luck, and what was once the center of their lives. This only because a lack of ethic from some people.

Here is the center of the subject, in every crisis the lack of ethic of some people is pointed out. During the Tulipomania, the Great Depression, the Subprime crisis, the system found culprits. Finding them is easy, avoid the apparition of new ones is more difficult. It requires a questioning concerning the whole system, more rules, more verifications, more trials, more scandals.

However, one thing can be noticed. Just an idea, an historical data. Technically, bankers and financiers are merchants. Very simply, merchants were people buying goods where there were inexpensive and selling them where there were expensive. Imagine the caravans crossing deserts and forests, climbing mountains to move tons of materials from a place to another. They were people whose work was to make money by creating nothing, so considered as abject. Ironically, these merchants still do not produce anything but have the power to create and destroy value in a flash.

Dividends VS Life? (Part 2)

(Blog n°6)

  

Capitalism is defined by the private property of production means. In terms of fundamental economic, the capital is what is used to produce goods. This capital should be bought by the capitalist to allow him a property on the said capital. The goal of that ownership is to create value from raw materials by transforming them into finished or intermediate products. This value may have two uses: re-investment in new capital (in fundamental economic sense) or it can be kept by the capitalist as a personal revenue.

Roughly, these lines constitute a brief description of the functioning of an Idealtyp company. It tries to define its goals by considering the way it works from a financial point of view. Therefore, the principal aim of a company is to make money. Problematic: a company does not produce only money, at least not permanently. This statement would imply that on a short term point a view, a firm does not need to create wealth to exist. So, the criterion of value creation is not the only one that can define a firm.

Fundamentally, the most basic aspect of a company is that it has an activity. It could be goods production or services dispense, but any a firm is basically an organization that has a more or less profitable activity. Introducing the idea of activity in the conceptual definition of a firm implies to consider the people having an influence on that activity: the stakeholders. Suppliers, customers, governments, competitors… these entities must be considered when establishing a company strategy.

To keep the Whirlpool example taken in the previous part of that post, the employees in that case are important stakeholders, perhaps the most important ones. Firstly (and obviously), because they are the base of the company’s activities and production. Secondly, because they are ambassadors of the brand, of what they produce. By their employment, they are loyal to the company, especially if this loyalty in encouraged by the firm’s culture. Thirdly (finally and most importantly) they based their entire life on the company. A human life is also maid that if the foundations of it are removed, it collapses and has then nothing to lose, and people having nothing to lose is one of the worse publicity for a company.

This is why a company is not a place where goods are produced to make money, this is why dividends have a link with relocation of a factory. Of course, it is not relevant to implicate dividends in a human resources problem. However, the leader of an organization must consider all the influences of such a decision. The position held by the company at this moment is delicate and should take into account all the implications that it could have with any of the stakeholders, especially those able to have an influence on the image of the organization. The main idea here is that diplomacy and balance are in the very core of strategic and financial decisions. These can influence not only the fields of their applications but also the large scale of the whole company.

The Minion of Wall Street

(Blog n°5)

Even if the schedule imposes a slightly divergence in the planned subject, this blog will not lose its core subject: trying to understand the relationship between the human society and the financial society. The wolf of Wall Street by Martin Scorsese is really a perfect support to illustrate this relationship.

Money. Firstly, a tool. Then a resource. Finally, a goal per se.

Money has this incredible power to fascinate humanity. Everybody seem to act as Eli Wallach in The Good the bad and the Ugly, during the anthological scene of the Ecstasy of gold, combing everywhere with crazy eyes, seeking for what we searched during, so many time. Of course, this vision is slightly caricatural in the actual world, nevertheless it would appear strange in the story of J. Belfort, the main character of Scorsese’s movie.

Drugs are equally with money a key element of the craziness of the wolf, until the point where a confusion appears. Money is for him a drug. At this exact moment the question of the possibility of such a behavior is raised: who let a wolf hunt among the lambs? By manipulating humble and unexperimented people to speculate on rubbish securities.

The most questionable aspect here is that M. Belfort sold dangerous stocks to people without any knowledge about what they were buying. The goal in those transactions was to earn money from the commissions, normal indeed. However, such commissions imply to force customers to buy shares, neglecting the risk presented by those shares, even lying on their actual potential. This behavior was never put into question, just because it was profitable for the company and for the broker. Making money without asking how it is maid, speculate on shares, sell them to increase the prices of the one owned by the seller himself, these are the basic financial manipulations described by the movie.

Based on a true story of an existing man. A man without ethic, without scruples, without any consideration for anything but money (and drug and prostitutes). Of course, the place of humanity is relegated in the background. Fundamentally, what is the scariest in that story is not the acts of M. Belfort, but rather the fascination he created. Such a madness needed the intervention of the state, of a superior authority to be stopped.

This statement leads to two major thoughts.

Firstly, and in contrary of the liberal ideas, every market needs a regulation. Indeed, in a long-term point of view, the market would have corrected the too huge difference between the market value of the shares and their actual values, but this would have implied a tremendous lost for all the people misled by the Wolf.

Secondly, the goal of finance is not always the optimization of shareholders wealth. Making easy money by speculating seems to be an excellent goal for the financial activities, this opinion is at least present in the most common mind. This opinion is not only casted by movies and stories like this one, but also by the reality of the financial history: crisis caused by speculative operations.

Dividends VS Life? (Part 1)

(Blog n°4)

  

In France, the unemployment rate reached 9,6% in the first semester 2017 (Institut National de la Statistique et des Etudes Economiques, 2017). Since the unemployment touches even more the unqualified parts of the population, every worker who loses his job will have difficulties to find a new place in the society. Therefore, when a factory closes for whatever reason, workers often organize strikes, afraid to lose their jobs. For example, this happened during the last presidential election: Whirlpool decided to relocate a washer factory from Amiens to Poland.

The relationship between this kind of event and the reflection around finance is determined by the mediatic cover. Indeed, when Whirlpool announced its decision, the press always reminds the turnover of the company and the benefits it made during the year before the relocation (Le Monde, 2017). The goal of this is to point out systematically the fact that a company destroys jobs in France even though it makes good money. Thus, the company is presented as the bad guy and the workers as the common people fighting for their jobs. From the point of view of people losing their revenue source and perhaps a huge part of their life for some of them, this vision is relevant and true: the money earned by the company can and must be used to keep their factory working.

The interest is that in that case ethics and human lives appear to be joggled by the financial history. However, the relevance of the comparison maid by French journalists must be discussed. Indeed, they seem to claim that a company that creates value must use it to keep its factories where there are (in that Whirlpool case at least).

From the company point of view, this relocation has no link with the profit maid or the turnover. Relocating is a cost management decision, not an accounting decision. The profit maid by a company cannot be an argument against such a relocation. Simply because if the organization does not optimize its costs, it will be eliminated in the long run.

To this can be argued that they could use the profit maid to compensate the loss implemented by the costs of the French factory. Additionally, the use the companies make of their earnings can seem unreal from a worker point of view. For example, Whirlpool paid 294 million of dollars to its shareholders in 2016. Such amounts of money not invested in the company can only anger the humble people losing their jobs. They worked to create this value for the company. But the organization decides to keep the money and to fire them because it is still not enough.

Beyond the dichotomic vision of the different stakeholders in that case, the questions of the core of a company’s goal is raised.

•  Le taux de chômage diminue de 0,4 point au premier trimestre 2017 (2017, May 18) Retrieved from : https://www.insee.fr/fr/statistiques/2851776#consulter
• Tout comprendre à la fermeture de l’usine Whirlpool à Amiens (2017, April 26) Retrieved from : http://www.lemonde.fr/emploi/article/2017/04/26/tout-comprendre-a-la-fermeture-de-l-usine-whirlpool-a-amiens_5118204_1698637.html