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Greed is Good

September 17, 2008

Lehman Brothers, Bear Stearns, Washington Mutual, Fannie and Freddie, Merrill Lynch, AIG…

If the consequences weren’t so tragic, this would probably make a good movie, perhaps a perfect reprise for Michael Douglas’ Gordon Gecko character from the 1987 film “Wall Street”.

There’s no escaping Gecko’s logic about greed…greed IS good. Its part of the reptilian brain. It spurs competition, innovation, evolution, revolution. Everybody understands greed, Americans understand it as do Canadians, even Swedes! Its probably a more universal language than math.

Greed is good, come on don’t be shy – say it with me, GREED IS GOOD.

So what went wrong?

Hundred’s of billions Trillions in lost shareholder wealth

Economies the world over circling the drain

Consumers out of work, loaded down with debt or bankrupt

Shaky confidence for those fortunate to escape relatively unscathed

Moving beyond the natural desire for some sort of eye-for-an-eye justice, how do we take these expensive lessons and turn some of this into a positive?

To quote Joseph Steiglitz, winner of the 2001 Nobel Economics prize, who weighed in on this issue in a recent CNN article:How to prevent the next Wall Street crisis ,

“…Finally, at the centre of the blame must be the financial institutions themselves. They and even more their executives had incentives that were not aligned with the needs of our economy and our society. They were amply rewarded, presumably for managing risk and allocating capital, which was supposed to improve the efficiency of the economy so much that it justified their generous compensation. But they misallocated capital; they mismanaged risk – they created risk. They did what their incentive structures were designed to do: focus on short-term profits and encourage excessive risk taking.”

Long ago I said a brand was a promise kept. A promise that is defined and agreed upon between the brand and the customer. A promise that can not exist without trust. A promise that helps chart a future course, evolving the relationship from a buyer to a customer to a partner. Anyone agreeing with this viewpoint will have no choice but to see the mortal “Dead Brand Walking” wound many of these premiere brands have inflicted upon themselves – not from marketers or customers, but from somewhere higher up the food chain, in places where ROI’s are calculated for breakfast.

The immediate loss these companies/brands have suffered is significant, but it pales in comparison to the ongoing loss they will experience from any remaining customers who rethink where to allocate their investment portfolios and from those making ready to bolt regardless of the “we-have-everything-under-control, we-know-how-to-fix-things-to-make-sure-it-never-happens-again’ messages.

The root problem is due to the greed of short-termism. The subsequent demands it places on publicly listed companies forces them to run the risk of value erosion. See: Is it time we fired our shareholders?

But rather than try to suppress greed, what if we channeled and amplified it, completely embraced it with renewed vigor. Unfettered greed expanding across the enterprise into every nook and cranny in pursuit of:

  • A greed for innovation.
  • A greed for profitable customers.
  • A greed for investors that share in a desire for long term value creation.
  • A greed for employees with a passion for customer centricity.
  • A greed for customers that act/think like partners.

Greed played a role in getting us into this situation and ironically only more greed will help us get out and stay out. This is a pivotal opportunity for businesses to stand, proclaim and pursue a long-term value focus, not unlike Google. See We prioritize the end user over the advertiser.

The alternative is no longer a (wise) option.

I look forward to the discussion.

For supplementary reading please refer to the below:

Subprime Mortgage Collapse: Why Bear Sterns is just the beginning – – Excellent review

Long-term Investing in a Short Term World – Legg Mason Capital Management – Excellent review

The Black Swan – The Impact of the Highly Improbable – Nassim Nicholas Taleb

The Wisdom of the Crowds – James Surowiecki

Wall Street’s next big problem – NY Times – Michale Levitt OpEd

Long Term Capital Management (LTCM)

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4 Comments leave one →
  1. Jeff Toth permalink
    September 23, 2008 11:34 am

    I must respectfully disagree with the fundamental premise that ‘greed is good’, but more specifically:

    ” Greed played a role in getting us into this situation and ironically only more greed will help us get out and stay out.”

    I agree with you when you suggest the crux of the problem has been the trend of short sighted profiteering on behalf of business executives. But I would argue that the root cause of this tendency is in the West’s highly individualistic, self centred perception of wealth creation. From a macro economic stand point this breeds a highly wasteful system of production that focuses on generating paper wealth, rather than maintaining the physical capital which is the basis of all income generation.

    If we are to appreciate the long term viability of any economic system there needs to be a sense prudence is resource consumption.
    Should a nation decide to target it’s industrial capacity to produce non-essential consumer goods, while importing the bare necessities and productive capital, I would ask if this pattern is in the best interest of long term goals.

    The term ‘sustainability’ may come across as cliche, but this is the name of the game. Without taking a realistic inventory of productive capacity, and a nation’s ability to be self reliant in times of crisis, captains of industry are essentially building a house of cards waiting to be blown over.

    A fantasy world has indeed been created, illusions of indefinite growth fueled by reckless consumption, and idol worship of a lifestyle that is unable to fully grasp the challenges humanity faces in the 21st century.

    Meaningful change does not mean regulating current market structure, but a complete overhaul and recalculation of our patterns of production and consumption. Priority is to be given to key sectors that are crucial to meet the pressing new frontiers of a resource scarce future. As well we must shed the fat of a bloated, wasteful, and destructive economic order that continues to mortgage the fate of future generations so that it can cash in on the consumer frenzy.

    Such a massive under taking will not be driven by greed, individual wealth creation, or even competition. This will require co-operation from the grass roots, government officials, and business visionaries. Not appreciating the source of tension as a systemic problem, is to pigeon hole the real issue. It’s accepting that the current model has failed, pin pointing wasteful operations, and developing an economic development plan that will integrate principles of industrial ecology, and energy accounting as true measurements of productive capacity.

  2. September 23, 2008 12:39 pm

    thank you for your feedback Jeff
    let’s agree to disagree.

    The short answer to your question is that if one pursues the 5 areas I outlined
    customer centricity, innovation etc… from a long-term perspective, I can not foresee how it could lead to any negative outcomes.

    Long answer:
    Cooperation exists when there is a shared understanding in the value of the cooperation. just because money isn’t exchanged doesn’t mean a value currency isn’t exchanged.

    I think the most efficient means of redistributing resources is via individuals each ‘voting’ for what they find to be of value. The key change is that the time horizon is shifted from the immediate to something longer-term.

    Albeit simplistic, this isn’t a prescription just for financial institutions but for businesses in general, where being customer centric, innovative, profitable and value driven are the guiding principles.

    What is needed to complete this scenario are informed consumers that understand the relative merits.

    In the sub-prime example – clearly this didn’t exist.
    The naive thinking that one can buy beyond one’s means was in some cases driven by a fast-money house-flipping mentality. That the system should have prevented people from buying beyond their means – is the purview of the service provider and the risk they are prepared to take if the commercial exchange is in default.

    We need to ensure a free flow of information about the risks and benefits of choices and that those choices are cost reflective.

    Like you indicated, the problem isn’t that people didn’t appreciate the value – rather its because their focus was on the short-term that we have the problem.

    If stockholders sat back and asked why/how is this sustainable – money machines don’t exist, if the bonus compensation was tied to the future there wouldn’t have been the pressure/greed to max out for today, if homeowners would have been then told that they had to consider this a long-term investment that requires some financial plan, down payment etc…

    thanks again for the comment

  3. Jeff Toth permalink
    September 23, 2008 6:56 pm

    “Cooperation exists when there is a shared understanding in the value of the cooperation….

    I think the most efficient means of redistributing resources is via individuals each ‘voting’ for what they find to be of value. The key change is that the time horizon is shifted from the immediate to something longer-term.

    What is needed to complete this scenario are informed consumers that understand the relative merits.”

    You touch on some key points here, and I agree whole heartedly. I find it interesting that you use the term ‘voting’, and very appropriately applied. In those terms I consdier a system where the most socially just means of wealth distribution is an ‘economic democracy’.

    This is an important term that has been well researched by many scholars. By it’s definition it speaks of a system where individuals own stake in the economy as democratically empowered citizens. More than passive wage earners but real stakeholders in a community’s economic order.

    I see this role as requiring more than informed consumers, but also informed producers. I’d go so far as to say that the methods of production condition consumption patterns, and as long as supply is characterized by reckless and wasteful tendencies, so will the rates of consumption.

    My critique is of the structural nature of our current economic order, and that the crisis we are witnessing at present stems from innate characteristics of socially unjust and ecologically destructive modes of production.

  4. September 23, 2008 9:40 pm

    Hello Jeff

    your quote: “I see this role as requiring more than informed consumers, but also informed producers”

    Producers will be informed by nature of the system that has them seeking out innovation, profitable customers, and customers that think/act as partners.

    Haven’t spoken about the last point too much, but the essentially premise is that once there is a partnership mentality then an open dialogs can take place with regarding unmet needs/wants/improvements etc…

    Current economic order: Yes there are improvements to be had that would make you a little happier.

    But this post was really meant to spur a discussion for the underlying nature of marketing initiatives.
    This wasn’t meant to be a dissertation on economic models – a subject that is beyond my scope for meaningful discussion I’m afraid.

    thxs for commenting

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