Today I will visit not so much ‘growth’ but what stifles growth, which these days is more likely to be a pin-striped financial spiv.
There is a guy called Rich Kinder. He used to be chief operating officer at a company called Enron, but left in 1996 when a guy called Jeff Skilling was identified as the next CEO of the company.
Kinder left and started his own pipeline company. The stock is now trading on the New York Stock Exchange at $US54.00 and the company has a market capitalisation of $US13 billion. Kinder stuck to what he knew best; pipelines and the transfer of energy.
That was what Enron was all about when he joined the company and he grew it around that basic unexciting product. Today, Enron’s shares are quoted at 0.3 cents and Skilling is in the slammer for 25 years.
Kinder stuck to what he knew best; the company has a loyal and growing customer base built on reliability and delivery of value.
Then there was a real darling of Wall St, Bernie Ebbers, and CEO of WorldCom. He got the company into trouble by pretending that acquiring 65 different companies over a short period of time was “growth” and hid the financial problems by cooking the books. WorldCom’s shares are now worthless and he is in the slammer for 25 years.
Today, there are a lot of pin-stripe suited young bankers walking around with millions in their pockets because they thought up a new way to “grow”, of making a fast buck, first for them and second for their bank.
The old boring business of making a profit on the spread between borrowing and lending costs needed a shake up. They saw a lot of suckers out there who dreamed of owning their own home but were so broke that they had to take out a loan to pay their petrol bill. So these smart bankers came up with the idea of lending them money so that the demand for housing would go through the roof and the value of the property purchased by these worthless mortgagors would go up and the banker’s money would be safe.
But that was only part of the deal. If they could get enough people out there in the market place to persuade these suckers to take out loans (“no docs”, which meant that the lender would turn a blind eye to the absence of credit checks) at interest rates that were much higher than those applicable to credit worthy borrowers, they could “bundle” these securities into multi-billion dollar assets and then sell them in the market place because of their high return.
The guys who bundled and dealt in the securities made millions. Everyone had a ball. Real estate people thought that the world would never come to an end; mortgage brokers took a commission on every sale of a mortgage; the lending institutions were making paper money like you can’t believe and their stock price went through the roof; the pin-stripe suited smart guys on Wall St who created a market in this bundling of securities that were less than credit worthy and therefore called “sub prime” (which really meant junk) made millions. A couple of guys at least topped the hundred million, depending on what currency we use.
Most people forgot one thing. The mugs who were stitched up with their home loans and who couldn’t afford the petrol for their car, which was facing repossession, couldn’t make the monthly payments on their mortgage. While money was still pouring out to many of these unfortunate individuals, just as many were feeling the pinch and selling their properties or defaulting on their payments with the result that the bank would take possession and sell the properties.
The flood gates opened and the housing market in the USA collapsed. There are millions of people who took out these “sub prime” loans who are now being scorched. People who can still afford to make their payments have found that their interest rate has gone up and the value of their property has gone down. Their disposable income has shrunk and the collective paper losses they are suffering are almost incomprehensible.
That is not to mention the people who own shares and have seen a world wide erosion of trillions of dollars of wealth. Just about everyone is taking the hit as a result of these brilliant financial guys, who are about the only ones who profited from the scandal.
The CEO of Merrill Lynch who saw the stock price fall from over $US90 to about $US54 walked away with $US179 million. The CEO of City Corp walked away with just under $US100 million. These guys, who put the world economy at risk, are living it up and probably using their ill-gotten rewards to buy up distressed assets.
So, what has this distressing story to do with growth? There are two immediate issues that emerge. The first is that businesses that stick to their knitting and do not get carried away with the “quick growth get rich” disease that infects those disposed to being greedy, will show the best returns in the long term.
The second and more immediate issue is the erosion of consumer equity in the US. If your house is worth less than it was and the payment on your mortgage is greater than it has been, your disposable income is less. Grade IV arithmetic! If the US consumer stops buying, that becomes a problem for growth around the world. China will sell less to the US, which means that China will buy less commodities from Australia, which means that the Australian economy may not grow as quickly as it has in the past, which means…..
Perhaps none of this will come to pass, but just at the moment, sticking to the knitting, having cash in the tin and being patient is not a bad prescription for long term growth.
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