Daily Archives: 02/27/2012

GEOFF COLVIN – Can Wall Street Thrive Again?

February 27, 2012 in geoff colvin

Geoff Colvin Speaker & Author

The financial industry is besieged by protesters. It’s also facing a slow-growth world and a wave of new regulation. To flourish again, the big firms must change in painful ways.

By Geoff Colvin, senior editor-at-large

FORTUNE — The brighter side of financial cataclysm wasn’t easy to see in late 2008 — the crisis was at its most acute, and no one knew if Armageddon lay ahead — but Barney Frank was upbeat. He told a consumer lobbying group, “Next year will be, I believe, the best year for public policy since the New Deal.”

For anyone on Wall Street, that cheery forecast from the proudly big-government chairman of the House Financial Services Committee was not good news.

Frank was wrong only on the timing: It took until 2010 to enact the Dodd-Frank law, the most sweeping regulation of Wall Street since the New Deal. (With his crowning achievement in place, Frank recently announced he won’t seek reelection next year.) The new law is so vast that it nearly equals all federal regulation of financial services from the previous 75 years.

That alone would have transformed the industry, but it’s only part one of a double whammy. The other element is an awful economic environment — slow growth in the U.S., slowing growth in Asia, and a European crisis so severe that, for all we know, Armageddon could be creeping up on us again.

Combine those forces, and Wall Street is a deeply different place from what it was three years ago. The changes are a mixed bag for investors and even for customers, who were supposed to benefit from the massive regulatory overhaul. Though the new rules are far from complete, Wall Street is already becoming smaller and less adventurous.

It’s also despised. The Occupiers may have begun to disperse, but the fury that fueled them hasn’t. The latest Trust Barometer compiled by Edelman, a communications firm, finds that the three least trusted industries in the world are insurance, banking, and financial services — Wall Street.

10 best stocks for 2012

The industry’s most immediate problem, worse even than its lousy reputation, is the terrible business climate. “The big firms are overextended, bloated in regions that are shrinking,” says Meredith Whitney, the analyst who forecast the subprime disaster in 2007. “In past years, 70% to 80% of Wall Street revenue has come from the U.S. and Europe. Both continents are in the process of multiyear deleveraging. The firms have gale-force headwinds against them.”

Today’s ultralow interest rates are another headache — a fact that surprises many people. Some think the Fed is keeping rates low in order to rescue the banks by enabling them to obtain funds at low cost. Trouble is, the rates at which banks lend those funds are also hitting record lows. The spread between rates produces what bankers call net interest income, and “it’s very hard to come by in this environment,” says a former top bank executive. That’s especially painful because “it goes straight to the bottom line.” Many Wall Streeters would actually love to see long-term rates rise.

Regulatory upheaval, meanwhile, is only getting started. Dodd-Frank requires hundreds of new rules to be written, and Washington is way behind schedule — partly because Wall Street is lobbying aggressively to shape those rules. Expect another two to five years before they’re finished. To see what’s taking so long, and why Wall Street is nervous about what’s coming, consider the new regulation with the highest profile of them all, the momentous Volcker Rule.

In concept it can be stated in one short sentence: Banks can’t trade for their own account. In practice, the current draft is 288 pages and includes over 1,000 questions to which banks and anyone else may respond. The Federal Deposit Insurance Corp. will announce a final rule sometime next year. Then the banks and the FDIC can start arguing over what it means.

As currently drafted, the Volcker Rule is “a complete game changer,” says Whitney. Beyond the ban on proprietary trading, for example, banks may no longer hold securities in inventory on the chance that a customer might want them; a customer must first state an intention to buy them. “I can’t have anything in the dairy case. When you order, I’ve got to go out and find the cow,” says Whitney. And that “slows the business down dramatically.”

So will other new rules, especially the higher capital requirements that regulators are imposing. The effects of entirely new regulatory bodies created by Dodd-Frank are still mostly unknown. The Financial Stability Oversight Council is just getting started. The Consumer Financial Protection Bureau doesn’t yet have a director. They, and the hundreds of new rules still to be written, will shorten Wall Street’s reach and hinder its speed. That’s what they’re meant to do.

The best and worst of Wall Street 2012

What is Wall Street’s business model in a world like that? The phrase you keep hearing is “back to the future” — making money on fees for underwriting, M&A advice, and investment management rather than on highly leveraged proprietary trading. Good news for high-net-worth individuals: You’ll be feeling lots more love. “Each of these firms is looking at wealth management,” says a former top executive at one of them. No wonder: It’s a high-return, low-volatility business. But building it is hard because those well-off clients are far more attached to their advisers than to the firms those advisers represent. Recruiting and developing an army of top-quality advisers take time.

A bigger challenge for Wall Street is that its turf is no longer the center of the financial universe. In 2005, five of the world’s 10 most valuable banks were American, including four of the top five, led by No. 1 Citigroup (C) and No. 2 Bank of America (BAC); none of the top 10 were Chinese. Today four of the top 10 are Chinese, led by No. 1 Industrial & Commercial Bank of China and No. 2 China Construction Bank. Only four are American, the most valuable of which, Wells Fargo (WFC), is No. 4. David Rubenstein, managing director of the giant Carlyle Group private equity firm, poses the key questions: “Is the U.S. still able to dominate global financial markets? We were 46% of the world’s GDP in 1960. Now we’re 21%. Can we still have virtually 100% of the world’s investment banks?”

The answer — no — is obvious. More broadly, Wall Street has to change in painful ways. The major firms, gloriously profitable just a few years ago, are not earning their cost of capital. They’re failing, and everyone seems to agree on their near-term future: lower returns and lower profits. The firms have to get smaller, cut expenses, live less large, pay people less. The glory days are over.

But hold on. Wall Street’s glory days are over every 10 years, like clockwork. They were over at the end of the ’70s, after a decade of market stagnation; again at the end of the ’80s, when takeovers and LBOs faded; at the end of the ’90s, with the dotcom bust; and now with the subprime disaster. Every time, Wall Street comes back in new ways that no one imagined.

That pattern is hopeful for the firms. For Barney Frank and the legions of new regulators he helped to create, it’s worrisome.

This article is from the December 26, 2011 issue of Fortune.

Tags: , , , , , , ,
Comments Off

JAMES MAPES on The Paradox of Paradigms

February 27, 2012 in James Mapes

Click here to learn more about James Mapes Speaker and Author

Blockbuster, Eastman Kodak, and Borders – what do they all have in common?  All these business giants failed, but why?  Like many analysts, you could come up with a number of logical reasons for their plight – they did not create new products that kept them competitive, failed to embrace the power of the Internet or were not willing to take bigger risks.  But, the bottom line is they were unable to recognize and overcome the underlying paradigms that sabotaged them from quickly recognizing opportunities and quickly adapting to the changing marketplace.

What is a paradigm?

The word “Paradigm” comes from the Greek “paradeigma” which means model, pattern or example.”  Thomas S. Kuhn, a scientific historian and author of “The Structure of Scientific Revolutions” (1962) first brought the concept to the scientific world.

Adam Smith defines paradigm in his book, “The Powers of the Mind” as “A shared set of assumptions.  The paradigm is the way we perceive the world; water to the fish.  The paradigm explains the world to us and helps us to predict its behavior.”

There are cultural paradigms or unstated, deeply entrenched rules underlying or guiding our behavior.  Stephen R. Covey, the author of “The 7 Habits of Highly Effective People” wrote, “We see the world, not as it is, but as we are – or, as we are conditioned to see it.”

It might be helpful to view paradigms as the internal “maps” we carry with us.  They predict how we see the world, the way we believe things “should be.”  These maps provide us with our reality and create our “judgments.”

Our paradigms are formed by our early experiences including the belief systems of our parents, family and culture.   They form a set of rules, mind-sets, regulations or procedures that create boundaries or limitations and tell you how to conduct your behavior (make your choices) within those boundaries or limitations in order to meet with success.

A perfect example is a game of chess.  You cannot suddenly take your pawn and start jumping over the other chess pieces as if you were playing a game of checkers.  You must stay within the rules to play the game.  In fact, all games are paradigms and these paradigms regulate our actions.  This is positive when the rules support us to live as a coherent society.  But, as with Blockbuster, Kodak, Borders, as well as many individual failures, that is not always the case.  Sometimes we stay within these invisible boundaries even when the boundaries and rules are self-defeating.

Forming a new paradigm is extremely challenging.  In order to create a new game, whether it is marketing a product or shedding a negative habit, you must first identify and change a restricting paradigm.  Consider someone who takes on a system of rules to lose weight but continues to cheat on a diet or an individual commits to achieving a goal but procrastinates.  Something else is going on.  When an unacknowledged paradigm or rule goes against what we consciously choose to change, the subconscious rule will win.

The antidote is to create a “paradigm shift.” A paradigm shift is a radical change in underlying beliefs or theory.  The shift happens when a majority of people accept a changed belief, attitude or way of doing things.  Personally it is stepping “out of the box” and creating a new game with a new set of rules – a transformation.  It does not magically happen, but is driven by agents of change.

You can trace major paradigm shifts throughout history.  For example, primitive Indians existed for centuries roaming the earth, hunting and gathering.  The paradigm shifted.  By 2000 B.C., Middle America was transformed with a landscape of small villages surrounded with fields of corn and vegetables.

Scientific history is ripe with paradigm shifts.  A major paradigm shift in scientific theory happened when the Ptolemaic system (where the earth was seen as the center of the universe) shifted to the Copernican system (where the sun is at the center of the universe).  There was the paradigm shift from Newtonian physics to Relativity and Quantum Physics.

Culture was changed with the invention of the printing press.  Today both the personal computer and the Internet have created massive paradigm shifts in the flow of information.  We are still in the midst of transformation as we shift from a mechanistic, manufacturing, industrial society to an organic, service-based, information-centered society and increases in technology will continue to impact us globally.

Change is inevitable and it is the only true constant.  Although change is difficult and Human Beings resist change on a genetic level, growth and forward movement demands shifting self-restricting paradigms.  As Kuhn states, “Awareness is prerequisite to all acceptable changes of theory.”   It all begins in your mind by indentifying and changing limiting paradigms. There are three ways to identify a paradigm.

The easiest to identify and the most visible are the paradigms (rules) that are imposed on you that you disagree with.  Example: – talking on the cell phone while driving – knowing it is against the law.

The second easiest paradigms to identify are the paradigms (rules) imposed on yourself, by yourself – that you say you agree with, but actually disagree with – and – don’t follow.  Example: – dieting, exercising or stopping an addiction such as alcohol or tobacco.

The most difficult paradigms to identify and the ones that have the greatest impact are the ones you agree with.  In a sense, these paradigms are invisible because you believe your present reality is the way “things should be” and is the real “truth.”
 Joel Barker, the creator of The New Business of Paradigms, the first person to popularize the concept of paradigm shifts for the corporate world, wrote, “What may be perfectly clear and visible to one person is invisible to another because of differing paradigms. This is the Paradigm Effect.  Old paradigms block our ability to view new paradigms. What is obvious to one is not to another. Paradigm-enhancing innovations are easy to see, but paradigm-shifting innovations blind us because they don’t follow our paradigm. It just means we must trust others and put ours aside so we can see theirs.”

This is hard to do because it requires you to really listen to what other people say that may be the polar opposite of what you believe – without getting defensive. There is almost always more than one right answer. Both eliciting advice and listening to others allows for more perspectives. Two people see the same thing two different ways.   The other person may identify a limiting paradigm in your thinking or the collective thinking of a group.

Uncovering limiting paradigms to personal or professional growth is tricky.  You must become a “paradigm detective” using a stealth-like approach.  You must shake up your thinking by using your imagination and asking the right questions.  Only then can you uncover hidden paradigms.

Following are variations of two strategies that I have successfully used both in my private coaching and in business breakout sessions.  Play the game.  They work.

Strategy #1: What measure of performance FOR YOU, either personally or professionally, would be extraordinary, but virtually impossible to achieve?  Next, ask yourself: If I achieved that level a year from now, what did I do differently?  Write down the answers.  Don’t lay the change challenge on your company, your budget, the economy, or anything else outside your control. What could YOU be doing different to get to that level?  Finally, after each answer, write the phrase: “According to my paradigm.”

Strategy #2: Project 3 years in the future and imagine you, your team or your company has failed in achieving your goals.  Write a short article, no more than two paragraphs, as to why.  After you have completed your article, ask yourself, “Do I see any of these reasons for failure happening in my life now?”  If so, what action steps can you take to prevent failure from happening?

Uncover your limiting paradigms and you will enhance your ability to live an exceptional life.

James Mapes is the Author of Quantum Leap Thinking

Tags: , , , , , , , , , ,
Comments Off