Today the U.S. Congress failed to pass a bail-out bill to buy up bad bank assets. Before the vote, the Dow Jones Industrial Average was down about 300 points. After the vote, the DJIA fell to close down about 700 points (read about the vote and market reaction on Marketwatch here.) So, is the end near – or is everything going to work out OK?
I’m reminded of the scene in It’s a Wonderful Life where George Bailey (played by Jimmy Stewart) is invited by the town patriarch, Mr. Potter, to take a job for Mr. Potter. As he starts the conversation Mr. Potter says something close to "George, back in the Depression when everyone lost their heads you and I kept ours. You ended up with the Building and Loan, and I ended up with everything else." The crisis happened, and lots of people got hurt. Some came out OK, and some did very well. On the other side of a crisis, there are winners. It’s just that often those winners are not the same people who were winners going into the crisis.
Over the last several months we’ve seen some big changes in financial services. We’re seeing some losers already. But we’re also seeing some plays being made that could become winners. It was the announced losses at Citibank, which led to the firing of their CEO Mr. Prince, that first alerted people to the reality of this crisis. Today, Citi announced it is buying Wachovia bank in its play to be a long-term winner. The new CEO says this is a rare opportunity for huge gain with almost no risk. It was JPMorganChase that first took a play to expand in this crisis with the acquisition of Bear Sterns, which many people at the time thought was done for a remarkably small amount of money. Later JPMC bought Washington Mutual for a fraction of its asset value. And Bank of America has moved aggressively, buying up the very troubled Countrywide Financial that was the first mortgage institution to fall, and later taking over Merrill Lynch the weekend when Lehman Brothers went bankrupt.
Will Jamie Dimon of JPMC be the next Mr. Potter, taking over control of his local market during a crisis? Some of these may become big winners. On the other hand, all 3 may falter.
What we know is that the demand for loans (the product that banks sell) is not going to disappear. That market may hiccup, but demand will continue to grow. Government, corporations and individuals all will continue to need loans. As the standard of living rises in China, India and elsewhere demand for loans will go up. And the winner will be the business that develops a solution to the future market need. You can’t judge the value of these actions by looking at how these businesses did in the past – because that past is gone. It’s all about the future. So, what should be the scenario for 2015?
- Will the dollar continue to be the world currency – the source of denominating oil and other commodities as well as most transactions? Or will we see a change to the Euro, or perhaps a basket of currencies put into some sort of as yet unavailable currency instrument?
- Will people continue to save their money in currencies, as deposits in banks, or will there be a re-emergence of keeping stores of value in silver, gold, and other commodities (in India, many people still carry their savings as jewelry on their arms).
- Will U.S. based companies dominate the equity markets, or will companies from the "emerging tiger" countries become relatively more powerful?
- Will the primary source of deposits be in the USA, Europe, China, India, or elsewhere?
- What rate of return will depositors require on their investments? Will this vary by region?
- Will real estate values in the USA, Britain, France, Germany, Japan, Brazil, Russia, Taiwan, Hong Kong, Singapore, Taiwan, China and India go down? Go up? Will there be big differences between regions? How will the differences vary?
- Where will deposits, regulations and legal devices converge to be the primary source of loan origination? The USA? Elsewhere?
Who wins depends on who has a good set of scenarios about the future. Not because they can predict, but because they are prepared for different potential outcomes, and they can shift to meet Challenges. And if you are an investor, your pick between the 3 mentioned – or possibly ICBC, HSBC, Banco Santander, Mitsubishi, ABN Amro, BNP Paribas, UBS or Royal Bank of Scotland? How will the big U.S. banks compare in a global market – and one that is less dominated by the USA?
Too many investors don’t have future scenarios when they invest. They buy equities, or make loans (buying bonds), on the basis of company history. But the value you receive for investing has nothing to do with what the company did in the past – it’s all dependent upon the future. When an industry crisis occurs, like the one in financial services today, those who survive – and those who thrive – do so because they have a good set of scenarios about the future. There is no doubt some will come out of this crisis as winners. They may be players who had nothing to do with the past – or they may be companies people in the USA know very poorly. But if you are going to invest in financial services, you better have a good set of scenarios – and you better watch closely to see how things develop.
Note: Looking at the 3 companies referred to here, one is acting quite differently than the others. While Citibank and Bank of America are moving fairly slowly to change, JPMC is moving very, very fast with its acquisitions. Within 3 months of buying Bear Sterns, JPMC had dismantled the company, consolidated its assets and let go its employees. After acquisition many companies spend months trying to work their way toward some sort of "merged" solution – only to spend huge quantities of cash and end up with higher costs and lower revenues. At JPMC we see one company forcing its Success Formula onto its acquisitions – no belabored effort. Rather fast moves taken to consolidate assets and keep the Success Formula in place. Whether the JPMC Success Formula is the right one for the future is yet to be seen. But the leader’s actions at JPMC are far more likely to be effective for shareholders than the actions being taken at the other institutions. Especially if JPMC is able to shift with the marketplace.
