It’s Mardi Gras: You know, the Party before Penitence?

dscn0382I’m sitting here watching the kids get their costumes together for the big day of celebration called Fat Tuesday.  That’s the day when you pull out all the stops because you know lean days (no meat, no alcohol, no fun) starts tomorrow.  I guess I must be in hyper-metaphorical mode because it’s really striking me this year as a good fable.  Tonight at midnight, the Krewe of Klean will take to the streets of the French Quarter to shovel all the leftovers into the dump trucks. The police will ride their horses down Bourbon street and announce that the Party’s over.  They arrest anyone who want the party to continue at that point.  You can either spend Ash Wednesday doing penitence in your bed or the Parish Prison.

When I first got out of graduate school I went to work at a small bank.  I was soon lured to the biggest Savings and Loan in the middle of the country.   I’d been working on loan pricing models and arranging bank income statements into an exercise called spread management and asset-liability matching.   Big time company working for a big time CEO!

I have to admit, the only person that I really knew that was a CEO was my dad and he was great.  His employees loved him.  He gave them wonderful benefits and when they had sick children or they were gravely ill,  he gave them time off with pay.  His office manager was openly gay.  His mechanics and body technicians were a diverse group for small town Iowa.  Most of them worked for my dad the entire 30 years and loved him as much as I did. From the time he bought it when I was one, until he retired when I was in my 30s, the entire employee base was my extended family.  So, I entered the business world thinking this was the model for management and boy, was I wrong.

The first thing that opened up my eyes was how competitive each of the executive vice presidents were.  They would make decisions that benefited their function while destroying the rest of the company, including it’s balance sheet.  It took me at least my first six months to convince the board to stop listening to the executive vice president of marketing who was buying up all these small town savings and loans that were going belly up in the desire to be even bigger and have an even bigger market share  and big bonuses for him).  Every time I would consolidate one of these little disasters into our bigger spread sheet, they would drag down the performance of the entire company.  I would then hear, but we’ve got a bigger market we’re bringing in more cash and more deposits!  I would have to print out the spread sheet that also showed it was just speeding up the amount of losses that we had too.  More revenues and more market share is only good when it’s not attached to incrementally more costs.  But that’s not how these guys in marketing thought.  Since we were the biggest in like the six state FHLBs district , even our regulator and FSLIC were happy to oblige their merger intentions.

It took me nearly a year to go to all the different computer systems where the loans, deposits, and misc information was stored to put it together in a manner where I could put together scenarios for the bank’s budgeting and strategic planning session.  You have to remember this was the early 80s, I was about 23 years old, and a woman.  During this entire time I wore my requisite dress for success look to separate me from the secretaries.  I was struggling to be taken seriously against the old boys network as well as against the idea that I was just some young kid with fancy degrees and little else.

By the time I put the spreadsheets together, it was obvious to me it was Fat Tuesday.  The interest rates would have to return to unheard of lows at the time in order for this savings and loan to see 5 more years.  There was nothing ahead of them but bankruptcy.  They tried to put together an initial public offering in the early 80s.  They even found an underwriter, but it was pretty clear that no one at the time would buy their stock.dscn0393

I had absolutely no plans to buy their stock.  Then, the waves of layoffs started happening.   This is where I learned another lesson of business life.  Surviving rounds of layoffs is not something to celebrate.  It feels awful.  Especially, when you know who is going on the next round.  They brought in some new vice presidents that really didn’t add anything but costs, nastiness, and more control fights.  I got laid off in the third round, which was right before the institution got sold to an insurance company and turned into a bank.  They still exist as a bank, but they’re not really relevant in the market any more.   Most of the management got ‘retired’  when the insurance company bought them.   They were significantly downsized and rightly so.  In the process, they did a huge amount of damage to their employees and communities.

I’m bringing this up because this is what I found about 20 years later when I was nearly 40 and starting another career here in New Orleans.  The implosion lasted 6 months from about start to finish, and again, I was the one that showed them the numbers that stopped the bank from lending them any more money.  Again, thousands of employees and their communities were impacted by a bunch of really bonehead decisions, mostly in the name of getting bigger and expanding market potential without anything but wishful thinking and a bunch of ballsy executives with big mouths and salaries.

The deal is this, when you get into the fundamental financing of a dying institution, its investments and returns are basically locked in to the assets and liabilities they currently hold.   If things go south, the liabilities just start getting more expensive.  The assets usually don’t become any more valuable.  If you’re lucky, their returns stay fixed.  If you’re unlucky, their returns go down too.  Problems in the assets and liabilities do not correct themselves by simply adding capital or equity.  Unless something very fundamental changes, the institution will run through that equity just as it did the original equity and retained earnings.  It just takes more and more cash to feed the beast.

Even if you bring in new management, they are stuck with the balance sheet the old guys created.  You have to change the assets and the liabilities or things don’t get better.  Now, I don’t have fancy ivy league credentials.  I went to my states’ public universities because that’s what I could afford.  I’ve been in academia, consulting, regulators, and private industry.  Again, I was raised living and breathing a family owned business that went through its share of good and bad times.  What I have learned is that the old adage of throwing good money after bad still holds. You have to examine the fundamentals in the balance sheet and when they don’t work, bankruptcy is the way to rework the deal.  You have to peal off the assets and the liabilities and restructure the deal.  You cannot market, speechify, or recapitalize you’re way out of years of bad decision-making that leads to a fundamentally flawed balance sheet.

At the moment, there are a lot of people in power that see the taxpayer as having bottomless pockets to recapitalize banks, automobile manufacturing, and only the greater ethos knows what’s next.  Looming on the horizon is a situation where our public debt will become such a huge portion of our GDP that the US taxpayer will no longer be a good bet.  The Sovereign Wealth funds will not enable us any more.  (I just noticed that the UAE had to bail out Dubai and perhaps you’ve heard that the Chinese are apply a lot of fiscal spending to China right now.  They have other fish to fry right now.)

New Orleans is a really wonderful city.  It brings us Mardi Gras.  Its responsible for introducing coffee to the United States.  It also invented jazz, the cocktail, and poker.  Besides the metaphor of  Fat Tuesday and Ash Wednesday, let me bring up another old saying from a really stale old song.   To the Treasury Department and the Obama administration:  You gotta know when to hold them and know when to fold them.

Happy Mardi Gras every one from the Big Easy!   Laissez Les Bons Temps Roulez!  Mais, aujour’dhui seulment! Apres demain, nous sommes rembourser!