Posts filed under ‘MBA’
Listening (a reflection induced by a beacon)
Yesterday I took a few hours away off the hectic drumming of the new terminal to concentrate on a new project that I am leading: a new control system for the runways and taxiways lighting system for Barcelona’s airport, that happens to have the biggest beacon lighting system in Spain, bigger than Madrid’s.
This project has a very important difference to many other things I’m doing. It’s not focused on the big opening day but the completion date is one year later, in 2010. That means we can focus on understanding the problem, building a team, applying a methodology, generating buy-in with the final customer, expliciting the acquired knowledge and incorporating the best practices into the organisation.
We are also going to standardise the application. Coming from a bespoke application, it won’t be easy but my intention is to be able to build an standard that the organisation will be able to use in its 40-something airports. Closed applications are a thing of the past, we all know it but, instead of paying lip-service to it, this time we’re going to do it.
But, what was important is the personal reflection that arose after our working session. Just forgetting fire fighting for a while and listening to somebody that knew a great deal about the system and discussing various proposals of what we could be doing for our initial project viability analysis.
It felt so good. Listening, learning. I’ve been getting these kind of sensations thanks to my Henley MBA, but it was great to have the same sensation coming from an engineer’s discourse. Focusing in the input instead of the output as I’ve grown accustomed to be lately.
We all need to be able to take long perspectives into a project. Be able to plan, and consider alternatives. To flex our creative muscles and deploy our energies into constructing something new, more effective, something built constructively not on the unstable foundations of pressure.
We all need to sit back an listen, as humble as the boy (or girl) we all still carry inside, and learn something from people that know more than us. Be able to capture that elusive gist that will enrich each and everyone of us. Coming humble from humus, or ground in Latin, and humilis from lowly, every manager needs to be humilis habitu humilis et actu, that means humble in dressing (or garments) and in its way of behaving to be able to trascend the manager-administrator role into leading the project’s team to success.
Never say no to upper management (reality will do it for you anyway)
In many organisations, bad news just go one way, and that’s out the door. Managers try to keep their superiors happy, and you bet they do, just talking more about the good things than the bad things. Who can blame them for that?
Well, you should. As I like to say, reality is stubborn. As stubborn as reality can be, and that’s a lot. When you try to make your boss happy, you are making a good deed… unless there are deadlines.
How can huge companies make huge mistakes when everyone knew they were not ready? Well, the leaders didn’t. Upper management really thought they were in a sweetened version of reality. And then an airport fails to work as it should, or a supposedly great product is a flop, or a huge investment in satellites is simply converted into flying junk. Whatever.
This bears an important relationship to what John Kay, a brilliant British economist, labels as the architecture of an organisation. If we see the information as the blood that flows inside the organisation’s veins, a good architecture will ensure that it reaches wherever it needs to reach: the right information to the right people that can make the best use for it.
That won’t happen in sclerotic organisations where there is lack of clear purpose, weak leadership. stakeholder conflicts, where failure is severely punished and where hierarchy is very important. Managers won’t have holistic perspectives at all, but tunnel vision instead. They will make erratic and irrational decisions guided by personal interests, maybe defending their clans and silos. Problems will tend to be assigned to someone else, or simply dissoluted around.
And bad news won’t go upwards. Only downwards. Think of “Why should I bother telling them while it’s not my responsibility to tell? Someone will realise” or maybe “If I put the spotlight in this problem, it will be my problem. Mind into my business.”.
If you add a pinch of “That’s the way we do things around here”, the recipe is made for cooking the ultimate failure. With its executives doped with tons of saccharine, the organisation will start behaving recklessly. And down below cooperation will give way to antagonism, combined effort to abrasion and erosion. Through the confrontation, we will be collectively driving looking through the rear view mirror… or even, while figthing crises one after the other, looking at nowhere at all… it’s only a matter of time…
Banco Santander: a rising star (but not that bright)
If you’ve been reading in the news on how Banco Santander is covering its customers over Madoff’s losses, and how it’s been cherry picking some banks in distress, as well as not using the Spanish’s government toxic assets relief measures you’ll be thinking that they are a rising star. And they are, I won’t be the one to deny that, but maybe they are not rising as much as it might look like. In any case, in comparative terms, their are enjoying a privilleged position, especially because the rest of competitors are worse off. The star ain’t that bright.
Santander, a beautiful port city in the north of Spain
Let’s focus on the bank’s last announcement where they claim to be covering their customer’s losses. Let’s go deeper into the figures for some interesting hints.
The bank is including in its 2008 books an extraordinary expense of €500 million with that purpose. Wait! Weren’t they €1,680 million?
Okay. Here’s the trick. Santander is emitting new preferential shares, creatures born half-debt half-shares. Those, in 10 years will be worth €1,680 million less any increment of the initial fund deposit and the earnings to the present date of those funds (whatever that figure might be). What is insured is the initial investment, nothing else. It will be recovered not now, but in ten years. And with no actualisation at all.
For any investor that means bearing a couple of huge opportunity costs: the one already borne and the one that lays ahead. That’s how €1,680 million transform into 500€. The preferential shares will be liquid in ten year’s time. In the meantime yielding a mere 2% per year.
So, what should an investor do? Some will think about it, if its true that, when they invested, Santander was selling these funds as their own trademark, not referring to the real custodian behind. It’s great to sell something that works well solely under your name, as long as it keeps working well! And that entails a responsibility.
But many will simply sign this rebate deal and forget about it. And with the deal the compulsory renounce of any legal claims against Santander, and the curious obligation to keep working with them for the next decade. Not too bad for many considering the alternative of entering a judicial quagmire that will carry expenses for sure as uncertain the outcome may be.
And here comes the final reflection that, from my point of view, explains many things about the Spanish banks. People in Spain, unlike in the US, take their time to assume their losses. At the moment there’s not property market in Spain as people are not selling, waiting for hint of hope to recover what they paid for it. And, as long as there are no transactions, there are no prices.
With raising unemployment covered by benefits that won’t last forever, eventually, many people will have to face reality. So will the Spanish banks. If Santander is betting that, when this moment comes, the worst will be over and the economy will be going upwards, I’m really sorry to bet in the opposite direction.
The tipping point of the crisis (are we there yet?)
It’s easy to talk about something when it has already happened. The crisis seems so predictable now (it was predictable before as well if you browse to older posts). Now the trick is about spotting the tipping point. Have we already seen the worst or are we going into a depression this time?
If we all saw it coming, why didn’t we do anything about it? Why sometimes prospects seem so grim and then, suddenly, hope seems to be around the corner?
I’ve got a theory about the tipping point, or how we are going to turn this around. It’s related to what Keynes called the animal spirits, not those of the American natives, but of John Maynard Keynes. Those that sharpen the edges of the market, turning optimism into euphory sometimes, and dismaying in despair sometimes. They are moody and impulsive, and sometimes the distance between hope and fright is as thin as a hair for them.
But the animal spirits couldn’t do anything without bodies. Inadvertently, we lend them our bodies, energies and enthusiasm. They act through us, so we should know something about them. We should feel them about to act.
Let’s read around. Who are we blaming for the crisis? The govermnents mainly, some obscure financiers, some not so obscure cons, other countries, departing leaders, distant wars… in short, we look around and find somewhere else to look at.
But this couldn’t have happened without our acquiescence. This wouldn’t be here if we all had avoided some things that, looking backwards, feel like common sense to all of us now. We didn’t have a say, yes, but we all could have had.
And how is all this going to change? How are we going to turn it around?
I can’t answer that. I am writing about when. And the when is not here yet. Only when we look inward, think of what we should be doing to change it all, when we finish the blame game and we act on responsibility instead, only then, we will have touched the bottom.
Until then, our animal spirits will keep dragging us down…
Are we in a liquidity trap? (am I blind or is this another black swan?)
Liquidity traps are one of those obscure concepts hidden into macroeconomics books. Obscure enough to occupy some marginal comment only and disputed enough to be denied by the Austrian School of Economics. Ludwig von Mises would label them as myths. But, as mytical as a black swans that have recenty decided to come out of their closets and start teambuilding in the Thames, are we going to face this myth soon as well?
When Sir John Hicks thought of the IS-LM model, he already thought of liquidity traps somehow, but it was the first Baron Keynes (also known as John Maynard Keynes) who shaped the concept (did Ludwig von Mises need a better reason to label them as myths?).
The idea is simple. With the IS-LM model, cutting the interest rate is the scape from any recession, as we make more money available into the system to boost growth and employment. But, does more available money always equate more growth?
There’s a obvious limit to this: interest rates cannot be negative (hmmm, let’s leave it like this for a minute…) so there’s obviously a limit to monetary policies, that is when rates reach zero. Are we there yet? Well, the following table borrowed from Bloomberg can help:
Regardless of the fact that we are getting there, what if the rate where monetary policy became ineffective was not zero but higher? That’s in fact the idea behind liquidity traps. What if the banks and the firms -in short, people- became risk averse enough that they preferred the liquidity of cash to offering it to others at low rates?
In other words, what happens if the free-risk situation is no longer perceived as risk-free? How should this extra aversion to lending be rewarded?
The conclusion from Keynes was that there would be a point where monetary policies would be ineffective and the economy would remain trapped in recession. Then only fiscal policy, that would be a lot of government spending, would do the trick. But are we psicologically prepared for this extra spending and increased budget deficit and debt? Will the debt attract enough financing? Will the solution even deepen the liquidity trap by substracting even more money from the private sector?
There’s still a way to have negative interest rates and that’s thanks to inflation. After all with inflation our money inside the sock loses value every day. And an expansive monetary policy should raise inflation. (hmmm, look at inflation dropping and that other scary, even mytical word too: deflation) Even though, with a low enough interest rate, and with the current global scare, many people may choose to still leave it there.
Yes, a liquidity trap is a rare think. It may have happened in Japan long ago, even in the US in the previous recession (Krugman would say, and Reisman deny). May we already be into one?
Back from Switzerland (and missing it already)
Back from Switzerland and missing it already. One week of skiing and cheese eating is not enough. I’m going to miss those great valleys, the Geneva Lake, the snow: Champery, Avoriaz, Morgins, Torgon, Chatel, the people, the order, the commitment to having the roads and the trains ready regardless of the weather (in Barcelona our distant-managed-from-the-capital trains just stop when it snows too much). Yes, I’m missing Switzerland already.
To my amazement I’ve discovered I speak an peu du French. We Catalonians are born bilinguals, breathing both Catalan and Spanish since we are born, so learning a third language is not that difficult as we are already wired for it. In my case my third language is English, which I am proud to say I am able to use it effectively. But when I was a kid, and TV channels were still a scarce resource, we lived close enough to the French border to watch French TV and Jean Paul Belmondo’s great action movies. (Catalonia spans a bit further north into France, cut by nation-states seeking natural limits, cutting that only a few countries survived: Switzerland is the most prominent example).
Sorry for the mental rambling. The fact is that I could understand French very well, and even managed to communicate. At the end of the week I even dared to make my first jokes in French 
Now, I have decided to improve my French. More things to do, still the same time. Business as usual for an MBA student. 
The great view is from Torgon, in the top of the Jorette piste. If you looked backwards you could see the Mont Blanc not that far aways, if you look down you can see the Genève (or Leman) Lake. The picture was not mine as mine wasn’t that good. On the other hand we had a lot more snow.
Now, time to work again. An airport and an MBA are waiting, so is my soon-to-improve French.
Crowding out time (more wood from the forced lenders)
Yes, right now the governments are pouring a lot of money into the system. Is it working? Can it work? Ain’t we trying to extinguish this fire the same way it started?
A well known effect in macroeconomics is the multiplicator accelerator model: there is a multiplicative effect when new investments are introduced in the economy and the economy grows in a higher rate. The other way can happen too, as the resources leave the economy and the slump is also accelerated. We are suffering this effect now, catalysed with instruments such as banks that are monetary multiplicators per se.
If we wanted to stop and reverse this effect, introducing new resources into the system, how can we do that?
The first temptation is, of course, to substitute this private money lenders for some other lenders that have no choice: the forced lenders. Yes, you guessed well. We are the tax payers. We are the forced lenders. Where private investors need trust to decide to participate, we simply have no choice.
Yes, you get the idea, our money, government’s money, gets poured down regardless the amount of trust present in the system. And the investors trust governments because they are backed by us: forced lenders.
But what happens when we pour all this money into the system? There’s another less known effect in macroeconomics, the crowding out effect. Government’s spending will substitute private initiative and occupy an even higher proportion of the economy. If the flow of money goes the way of the state, it won’t go the way of the private investors.
But then, being the state the lender and the backer of many securities, amidst this global scare, why should anyone not forced to invest in riskier assets? Investors will end up financing the treasury instead, and leaving the financial markets.
Where will the money come from to finance public companies? What will happen to suffering capital markets further short-circuited from the money flow? They might as well keeping go down the slope for a long time.
Yes, I am aware that to explain this crowding up effect, the IS/LM introduced by Sir John Hicks and Alvin Hansen needs higher interest rates that affect the unwillingness to invest to the private sector through an increased cost of capital. In the present situation, with lower costs of capital, the crowding out effect lacks the mechanism to happen.
But what if the present scare of capital turns into a similar mechanism to the increased cost of capital? What of the negative animal spirits? Can they make us disinvest from profitable companies and make them inviable? Couldn’t that make a crowding out effect too?
Meanwhile, but let me express my reservations about this stocking-more-wood process. More wood in the hands of the government, lower interest rates: more wood everywhere. Seems dangerous to my little me. Maybe our firemen should think of other options.
Blogging from the Opera (blogging with Figaro)
Less than two weeks into an important milestone for the airport’s operational readiness and less than three weeks from my marketing and business environment exam, I find myself blogging from el Liceu, Barcelona’s opera house. Amidst this quagmire that my daily job has been turning into, I still could scape to enjoy Mozart’s The Marriage of Figaro. It really sounds strange in English instead of Italian’s: Le nozze di Figaro, ossia la folle giornata.
Yes, the second name for the opera is “the day of madness”. That’s how I live my days at work now. Trying to cope with unmatching requirements, trying to sync reality with political requirements. But, as I like to say, reality is too stubborn for that. And we always end up crashing with a concrete wall which we could have avoided. But that’s second nature to us, humans. Why is it that reality ends up resembling just another opera buffa?
Yet here I am. Everyone needs a place to hide. And that’s mine today. I even could open my computer in the bar in the basement, use my HSDPA connection and write this lines while sipping a coffee. Watch the old ladies ingest huge quantities of sugar and chocolate in different shapes and colours. Isn’t life nice after all?
The thing is that when I began the MBA I promised to reflect. And these latter days have been so amazing. So many different things happening from a global perspective, at work and even a personal perspective. And I don’t want to feel that the many things that flow around me just do that: flow. I need to capture some of them. I need to retain, absorb, think, grow.
They say that experience is everything, that you actually learn by doing. And that is a blatant lie. Well, you learn, true, but only in a mechanical way. As Figaro doesn’t actually learn about Almaviva until he actually sees him fishing in his waters, or Almaviva doesn’t learn about behaving until his infidelity is publicly exposed. The aristocracy depicted, ridiculised here didn’t learn on time to change. Until it was too late. Pierre Beaumarchais saw his play censored in France, only to be played in 1778, with the French Revolution almost at the doors…
You learn when you think about what you live. When you think of improving what you’ve already learnt to do mechanically. When you make it grow inside of you. When you go one step further to accepting what is already established, what is already known. When you apply something more than common sense. When you’re not scared of rethinking something that is already working (apparently).
When I give project management classes, I always stress how important is the “post-mortem” analysis at the end of the project to clarify not only what we have done well but also what we could have done better and what we have learnt from the experience. Now I feel that the end is too far, too late. It must be done now and again, in a continuous process of taking a step back, getting perspective, digesting, and then going in again with regained strengths that will not hold us back from stepping out of the comfort zone. Every manager should take some time to learn now and then.
And now, let’s enjoy this opera
Hallowed are the American taxpayers…
Hallowed are the American taxpayers
as they are the ones that will pay this huge bill,
Hallowed is the American Treasury
as it will acquire junk assets in the name of the Americans,
Hallowed are the international creditors
cos they will get increased risk premiums from a riskier debt,
Hallowed are the Feds
pushing forward a plan they don’t know if will suffice,
Hallowed is the growing debt
it will at least double in the forthcoming years,
Hallowed is the forgotten Laffer Curve
now supposed to work better if turned downwards,
Hallowed is the non-interventionist state
that implements socialist ideas in times of distress,
Hallowed are the big investment banks
allowed to merge to hide their shortcomings and ignominies,
Hallowed are the plunging assets
as they will be allowed to survive with their old values in the balance sheets,
Hallowed are the short sellers
sinners never repented from what they did in 1929,
no longer allowed to arbitrate or cover risks,
Hallowed are the politics
for they will still adore the taxes,
Hallowed are we all
for we will long feel the ripple effect of short-sighted politicians and unelected officials.
Sorry for the mental rambling, forgive me my rantings, but it’s been a hell of a week… time to change the subject though…
Lehman’s fall (or the necessary and dangerous road back to rationality and who will pay the bill)
Yes, you already know it. Lehman Brothers one and a half century of reign has ended ominously. As every corpse, it needs a hole in the ground to be buried. The problem here is that this hole is $600 billion big.
On my last post I was writing about the twins and their attempted rescue. Now we are seeing a glimpse of the real problem, that won’t stop here. AIG, brutally exposed to credit fault swaps, is going to be the next one. Who said this was going to be brief? One year of crisis, and we are still going down. The echos of ’29 are beginning to ring into the monetary authorities’ ears. But that’s another matter…
Remember when I wrote about the end of cheap money fifteen months ago? There was a graph there worth rescuing now.
Just a quick reference: M2 and M3 are common metrics or measures for money. M2 referred to domestic economies, M3 included the money that had been refuelling the economy, making stocks soar, gone into funds, hedge funds, private equity or debt. Money that, let’s say, was not 100% based on real needs of the economy but bets over bets over bets, all of them based in the perpetuation of the economy growth. Well, it didn’t.
Let’s say it another way: there was an excess of financial products relative to demand. Call it excess of offer, overcapacity, inflation, yet another bubble… Some of the products were simply traded between themselves, a huge casino where they grew interconnected, multiplied their correlated risk, while the real investors did not have a say, while the real investments were non-existent. The blue curve went too far from the red curve.
Now that the party is over agents will have to adjust accordingly. If they must be evaluated again based on the real price of their assets, things will get very ugly, very very ugly. Valuations might as well halve, employment in the financial sector will drastically be reduced as well.
What about the hero and saviour here? Well, it has been mangling with the system, saving the twins… sorry their creditors at the expense of their shareholders, never realising the road ahead was too bumpy. They have now… and it’s too late.
The great thing about capitalism is the freedom to do whatever you want with your money. When things are fine you deregulate, explore new skies, advocate for a minimum involvement from the state. I never saw any of them coming to society and saying… “wait, we want to contribute more, we want to raise that tax 20%, as our benefits have soared thrice, and give back some of our benefits to the society that has made it possible”. Nope at all. Instead it was all thanks to them. They gave us some lectures about corporate social responsibility, spent a lot of money in green branding, spent some more on carbon footprint rhetorical, and simply took the money away.
But when things get grim, the same capitalists and economic liberals are no liberals any more. The benefits were private, the losses socialised. Overnight, those same successful liberals become advocates of communism and claim that it’s not their fault: that the context is bad, the cojunture unmanageable, that volatility is impredictable, uncertainty more uncertain than ever and that the complexity that they proudly created should have been regulated from the first day. Sad, very sad.
Notwithstanding the evidence against them, we are out of options. It’s the taxpayers the ones that will have to pay the price of the party, and remember: the wealthy, those who have been irrationaly and exhuberantly gaining in this game, are the ones whose fiscal charges were reduced because they were creating growth, benefits and employment. How is that for assimetry and moral hazard?
After all this, and the suffering that will entail, there’s still hope: it’s called the survival of the fittest. But I’ll write about it another day…
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