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Monthly Archives: December 2009

This blog is in response to many readers comments about jobs moving overseas.

Example 1: A friend losing his job.
We have a friend here in Colorado who works for a services company. He has been asked by his American management to train his replacement in the Philippines and when that is completed he will be laid off. The conventional perspective is that many jobs are moving to India & China, but in this example my friend’s job is moving to the Philippines.

Lesson 1: The problem is with us. This example illustrates that the real problem is not the BRIC or other countries. It is that many American managers have found it easier to remain profitable by procuring cheaper overseas talent than expensive local talent.

Example 2: ICL in the 1970s.
Let me give another example. In the 70s, ICL was a very big computer company in the UK. They were losing money and brought in someone from Texas Instruments to turnaround the company. I forget his name. He did a good job and increased the profitability of the company, but in doing so he dropped ICL’s internally developed chip and replaced it with a Fujitsu chip.

After completion of the turnaround ICL shareholders wanted to sell the company. They found that even though the company was very profitable nobody but Fujitsu would consider buying the company. Why? Because ICL was dependent on Fujitsu chips, and from the perspective of value creation it was no long an independent company but an extension of Fujitsu.

Lesson 2: We are handicapping the value of our business: So all this outsourcing of talent is in reality working against the long term advantage of the shareholders, because who wants to buy a company with many expensive senior managers, many technology boxes and most of the talent 6,000 miles away? This in my opinion is short sightedness. But people have the right to make mistakes. Unfortunately these mistakes can be very expensive for other people, their employees.

Lesson 3: We cannot legislate good business decisions.

Example 3: Texas Instruments (TI) Daily Factory Starts (DFS) team in the 1990s.
I was the architect of Texas Instruments’ Daily Factory Starts (DFS) factory scheduling system. This program was TI’s worldwide top ranked project for 1991 and 1992. This system, built from scratch on a theoretical basis not found in other ERP systems, revolutionized capacity allocation in a 3,000 SKU factory capable of producing up to 6,000 SKUs. It reduced work-in-progress from 5 day to 3 days or a savings of $8.2 million for TI Malaysia and TI Philippines.

What happened? The only three people who designed, developed and implemented this project left within 12 months of completion. Imagine that! All 3 of us left. Needless to say even TI made some mistakes. TI did not sufficiently recognize any of us for the ingenuity & work we had put in. And because we reported to a third country management team, corporate had little say in the matter. I am told that the project was folded in 1994.

Lesson 4: Program discontinuity risk: One very substantially increases the risk of program discontinuity when talent is procured from third party companies, and even more so when procured from overseas. Unless you are a big company like Microsoft, GE, or IBM who can have multiple teams concurrently working on similar programs, procuring talent from outside the company is something you have to think through very carefully.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.

Contact: Ben Solomon, Managing Principal, QuantumRisk

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Here is another positive. My blog post TARP’s Possible Role in Jobs Growth was published by the syndicated news service RiskCenter.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.

Contact: Ben Solomon, Managing Principal, QuantumRisk

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I am very pleased to see that Michael Corkery of the Wall Street Journal’s Deal Journal has similar views to a blog I posted TARP’s Possible Role in Jobs Growth.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.

Contact: Ben Solomon, Managing Principal, QuantumRisk

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QuantumRisk is having a one-day event:

Event: Answer Your Business Questions
Topics: Strategy, Re-engineering, Financial & Risk Modeling
Price: No Charge
Date: December 14, 2009
Time: 9:00 am to 5:00 pm Mountain Standard Time
Venue: Over The Phone 303-618-2800

Email me (benjamin.t.solomon@QuantumRisk.com) your contact information and a brief summary prior to your call so that I have some idea of who you are and why you are calling.

If you don’t get through (lines are busy) and you have emailed your contact information, and I will call back on the next available business day.

We are doing this to celebrate the end of the recession, Christmas and New Year.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.

Contact: Ben Solomon, Managing Principal, QuantumRisk

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To get jobs growth going, maybe what is required is a business solution and not an economic solution.

The exceptions are people like Ben Bernake who did a marvelous job of reducing the severity of this recession. Even then Bloomberg reports (05/29/09) that Bernanke’s efforts to bring down borrowing costs to revive the housing market and help the economy are stalling.

Let’s review TARP to find some answers. TARP, issued as preferred stock in the banks’ balance sheet, is tax payers’ public funds used to cushion private shareholders bank balance sheets so that the difference between the banks’ assets and liabilities does not fall below a specific value (at best) or go negative (at worst); because Assets – Liabilities = Equity.

As reported by the Washington Post (07/20/09), the special inspector general overseeing the government’s financial rescue program said that “many of the banks that got federal aid to support increased lending have instead used some of the money to make investments, repay debts or buy other banks”.

What TARP was meant to do was to give banks time to fix the Asset side of the Balance Sheet. If banks had to mark to market, my guess would be that their Assets were about 25% smaller than on July 2007. This suggests that at the worst period during the recession some banks would have had an insignificant or negative equity on the Balance Sheets.

With hind sight this inference makes sense for 2 reasons. (1) There was a huge outcry around April 2009 by the banking industry to move away from mark-to-market rule. (2) The special inspector general report mentioned earlier.

Therefore, we see that the role of TARP was to ensure that bank Equity would remain positive and above a specific Asset % and nothing more.

Now what the banks did with TARP makes business sense too, because TARP increased some banks’ Equity in such a manner that they needed to adjust the Asset – Liabilities side of the equation; that meant reducing Liabilities or “repay debts” and increasing Assets or “make investment” and “buy other banks”.

Could we blame the banks for making “good” business decisions to secure their own safety having received so much cheap money with no strings attached? Let’s flip sides, would you as a banker give free money to your customers?

Let’s think about this some more. The only way banks are going to stay profitable in an underperforming economy is to (1) shed more banking jobs, (2) close more branches, (3) foreclose more properties & (4) reduce risk of lending by reducing lending. All are undesirable outcomes. I suspect that even banks forget that they too need a functioning economy to be profitable.

It appears that the previous Treasury Secretary Paulson’s primary objective was to save the banking system, not the economy, and therefore did not attach any conditions to the TARP funds. I believe the thinking was that this was to be a financial transaction only, to save some banks.

By the time Secretary Geithner took over, some of the initial panic had subdued. There did not seem to be the need to push for more conditions. Even if one wanted, what additional conditions would one attach to the TARP funds? This was a new situation and everyone was learning on the job.

Looking back we can clearly see that TARP’s weakness lay in not aligning the banks’ interests with the tax payers’ interests. Banks are the primary source of credit for a functioning economy, and if after they were rescued, they continued to withdraw credit from the economy then something is amiss. Fed’s Non Revolving Credit Outstanding shows that until recently non-revolving credit had been shrinking. But the recent blimp could be due to the clunkers and other such programs and not so much a revival in bank lending.

Do you remember “what is good for GM is good for America”? We should not make that mistake with the banks either.  Now this is our challenge, aligning banks’ interest with America’s.

The banks’ balance sheets provide an answer as to how to align the banks’ interest with America’s interests. Monitor banks’ business loans and mortgage assets and implement an additional TARP condition that banks cannot return their TARP borrowings until their business loans and mortgage assets have increased by 25% (or some percentage the economist feel safe with). By this rule the government does not tell the banks how to run their business. It tells the banks that the government only recognizes that the banks are healthy functioning members of the economy when they have shown that they can increase these critical assets by 25%.

This rule will immediately stop banks from adjusting their balance sheets by raising capital without growing their business. Raising capital is equivalent to substituting TARP dollars for private money and does not prove that banks will avoid previous mistakes. This rule will (1) cause banks to focus on their critical role of credit provider for the economy. (2) Buoy home prices because spatial correlations dictate less foreclosures will put less downward pressure on neighboring home prices. (3) Facilitate a greater tolerance for mortgage delinquencies for those who have lost their jobs for reasons beyond their control, and therefore fewer foreclosures.

We need to take into consideration that most banking practices are derived from experience in a functioning economy, when everything else is going good. This recession is the exception to those practices and needs to be viewed in a different light.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.

Contact: Ben Solomon, Managing Principal, QuantumRisk

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Someone on LinkedIn brought this to our attention. Hope you enjoy it.

It is just amazing that there are so many ways to ‘calculate’ an answer in a consistent manner. Even the ‘wrong’ way provides a consistently ‘right’ answer, and therefore must be ‘right’? Makes you wonder what else are we doing wrong that looks right!

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.

Contact: Ben Solomon, Managing Principal, QuantumRisk

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