JACK MIXNER STRATEGY

www.mixnerstrategy.com

Jack Welch's "Differentiation Vitality Curve" says to praise the top twenty percent of your employees, watch the middle seventy percent of your employees, and ditch the bottom ten percent of your employees (Welch, 159). OK, I don't much like that, but I do understand what Welch is up to.

Let's just suppose, however, that you own a basketball team. You have a guard that can't (or doesn't) shoot, but, oh, can he guard. In fact, he is liable to go scoreless when he guards Kobe Bryant. Why is he on the floor? Because he holds Kobe - and folks like him - to their worst nights of their careers. So, he doesn't shoot much, but he guards spectacularly. Boos - or applause from the front office? There is only one answer - applause, big time. Guarding Kobe takes special analytical skills. The successful guard has to be where Kobe makes his best shots, forcing him into parts of the court where he makes the least number of shots over an evening.

We say pick your team very carefully. In this case, the front office picked Shane Battier for one reason - the teams he play on win (Lewis). Maybe some of their statistics aren't so hot. That may mean, however, that the player doesn't need changing. In fact, you may need a new record keeping system instead. In this case, the Houston Rockets didn't have money to hire a star as they already had two of them in Yao Ming and Tracy McGrady. They needed somebody who was cheap and who got the job done. But what job? Battier, "can't dribble, he's slow, and hasn't got much body control (Lewis)." The job Battier does is guard the best play on the opposing team. He's a guard. He's defensive. He keeps the opponents stats down while the rest of his team focuses on scoring.

Now, in business we talk about offense a lot. It might be in order to consider your defense as well. While you're at it, it might be in order to consider the statistics you are using. Those two tactics worked for the Rockets.

Lewis, Michael. The No-Stats All-Star. New York Times. 15 February 2009. http://www.nytimes.com/2009/02/15/magazine/15Battier-t.html?pagewanted=3&hp

Welch, Jack with John A. Byrne. Jack. Straight From the Gut. Warner Business Books.

Posted by jackmixner at 04:26 PM | Permalink

1+714.673.8578     www.mixnerstrategy.com

Goran Matijasevic is a Prof at UCI. He invites the community to sit in on his classes on entrepreneurship. It's a pretty cool class in that it seems that most of the students are at the graduate level, many of them PhD candidates. It's fun to watch for what they listen to, or don't listen to, as the case may be. He has a speaker, normally a CEO or C-level executive, every class. On the surface, the ones who garner the most attention have the coolest jobs. The coolest jobs aren't necessarily the ones you might think. Interestingly, the speaker who generated the most interest was a the President of NPI Services, Inc., Judy Greenspon. Not only is she a cool person (Peace Corps professional, entrepreneur, traveler, successful business woman) she runs an interesting company that makes prototype circuit boards for every major company in the high tech arena. Pretty cool. Just don't get her mad.

She was incensed that no one in the room had read The World Is Flat. Since I hadn't either, I couldn't smile smugly. So I got the book and have started to read it. It's thick, It's heavy. But it is a very good read.

After reading much of the book and reflecting a bit, I realize that Goran's students really don't need to read Friedman's book because they are the book. The basic premise is that the world is now a level playing field - it is flat. Opportunities abound all over the world, ripe for taking advantage of. When people in Goran's class ask questions, sometimes the speakers don't understand their accents. That's because they're from all over the world. They understand flatness because they are taking advantage of it. Also, what PhD candidate has had the time in the last four or so years (the book came out in 2005) to leisurely read a six hundred page book. These students certainly haven't. They've been publishing so they won't perish. That's my bet.

There is an economic development challenge here. In the past, we relied on the fact that students, first, wanted to come to America to study, and, second, that after they finished their studies, they would stay to staff our high technology companies. There's a breakdown going on here. Some of it is caused by the restrictions placed on immigration by 9/11. Some students aren't coming. Others are going home when they can't get a visa to stay.

Disaster for America? I don't know. I did like President Obama's comments last evening (24 February 2009) in his speech to Congress about increasing the number of technology graduates in American universities to a level above that of any other nation - a huge, go-to-the-moon-like goal that feels good when you think about it. It's a good start.

I do know this much: I have enjoyed Goran's class and every one of the students I have been learning with. They're pretty cool. So is our flat world. It's all Goran's fault that I read this book. I am glad I did.

Friedman, Thomas L. The World Is Flat. A Brief History of the Twenty-First Century. Farrar, Straus and Giroux. 2005.

Posted by jackmixner at 09:07 PM | Permalink

1+714.673.8578     www.mixnerstrategy.com

That's a line - a chapter title actually - from Galbraith's classic The Great Crash 1929. In Goldman, Sachs We Trust. The idea of a trust was that a bunch of investors would pool their cash by buying stock in an investment company (Galbraith, 47). Not a bad idea on the surface. The investment company's management was supposed to be better at picking stocks than the average investor because, supposedly, they had better information. The trusts were initially big in England and Scotland (Galbraith, 48). Through the early twenties, there were very few trusts in the United States. That was to change, however.

The first trusts in America had rules. They'd tell you what stock they were going to purchase, place them in a real trust, and tell you what rules they were going to follow in managing the assets of the trust Galbraith, 48). You could trust them. Sounds pretty good, doesn't it? The rules didn't last.

Ultimately, the management of a trust sold you some sort of stock or bond representing ownership of a trust. You didn't know what they held. You just trusted management. There were "secrecy" reasons why they wouldn't tell you what they held - just like the South Sea Bubble stock funds, in fact (Galbraith, 49). Pretty interesting parallel if you think about it.

Then things got really interesting. You could now, for instance, buy five hundred dollars of stocks in a trust for two hundred dollars. You owed the owners of the trust three hundred dollars that you paid off over time (Galbraith, 53). This was genius. In a rising market, your money rose even faster. Markets always went up, didn't they? Well, for a time in the twenties, they sure did. People made a lot of money.

Then, things got even better. Trusts started new trusts. They didn't buy stocks in corporations. No, they bought stocks in other trusts. When you did that, you essentially leveraged your investment more. Now, when stocks went up, so did you trust holdings. But, and this is really neat, they went up even more than before. This was really neat.

It was all predicated on a rising market. When everything was going up, everyone made out. When things were going down, however, they really went down. That's what happened, essentially, in the fall of 1929. Things went really down - fast. A lot of people got hurt.

That's what unregulated leverage does. That's what it did in 1929. Why did I mention Goldman, Sachs in the title? While they entered the trust game late, they started one of these trust pyramids that lost a whole lot of people a whole lot of money. It took them more than thirty years to regain what had been a fine reputation.

Galbraith's summary lays out a lot of the problems and points to solutions (Galbraith, 177):

1. Incomes weren't equitably distributed. Some five per cent of the population received some thirty per cent of all the incomes. They had to spend it, first on consumerism, and then, on investments.
2. Businesses weren't run properly. They hosted "an exceptional number of promoters, grafters, swindlers, impostors, and frauds (Galbraith, 178)."
3. The banking structure was bad (Galbraith, 179). There were too many banking units. When one failed, runs began on others. Things dominoed. Not good.
4. Foreign nations owed a lot of money to the United States. Banks loaned a lot of money to them. There was graft. There were defaults (Galbraith, 182). Not good for U. S. banks.
5. Economic intelligence was flawed (Galbraith, 182) or non-existent. No one knew what companies or trusts were really doing. There was too much "trust". Bad idea.

The thing about this that bothers me, and ought to bother you, is this has continued to happen. Maybe it is not shocking so much as inevitable. There are answers. Unfortunately, we are having to live through a very similar marketplace and discover the answers all over again. Amazing.

Galbraith, John Kenneth. The Great Crash. 1929. A Mariner Book. Houghton Mifflin Company. 1954.

Posted by jackmixner at 08:06 PM | Permalink

1+714.673.8578.     www.mixnerstrategy.com

Formulaic books can be tricky. Follow these seven steps and succeed at innovation. Well, sometimes it doesn't work that way. So, how to decide whether Lafley's book is worth a read? How about this simple self-quiz from the back (Lafley, 280):

1. Do you set organic growth goals that cannot be accomplished without innovation?
2. How do you ensure that the consumer/customer is really the boss in the process of innovation?
3. How good are you at integrating the end-to-end process of innovation, within your area of responsibility?

There are more, seven other questions to be exact. P&G's results say that their process works for them. Their game-changing process relies on innovation in ways other firms are missing. If you need to rely more on innovation, both organic with incremental changes or disruptive with massive new changes, Lafley may be useful to you.

Reference

Lafley, A. G. and Ram Charan. The Game-Changer. How You Can Drive Revenue and Profit Growth With Innovation. Crown Business. 2008.

Posted by jackmixner at 12:12 PM | Permalink

1+714.673.8578     www.mixnerstrategy.com

Two people said it was time. Luckily, they were the ones who count.

Larry Page and Sergey Brin, the founders of Google, decided to have a look at their strategy. They really didn't like process that much, but the IPO forced their hands (Battelle, 231).

The Tablets

Page and Brin sat by themselves and came up with notes on a tablet that formed the basis for the Google strategic effort. Batelle says the included "high-level stuff" ... about ... "principles and values (Battelle, 231)."

Then, with the help of their resident strategist, Shona Brown, they began a longer process of examining all of Google's processes (Battelle, 231).

The result? A methodology to grow the company from three thousand employees pre-IPO to a company ten times that large in the future (Battelle, 231).

The impression I get from reading the press is that Google has a pretty centralized management structure. Maybe it hasn't really changed that much since the IPO. My bet, however, is that the structure allows individuals to take action based upon company values and principles in ways that will continue to support the growth of the firm.

In a few years, we'll have more evidence. For now, things seem to be working.

The point is that strategy makes sense even if things are firing on all the cylinders. If things have slowed, it makes even more sense.

Reference

Battelle, John. The Search. How Google and Its Rivals Rewrote the Rules of Business and Transformed Our Culture. Portfolio. 2005.

Posted by jackmixner at 11:57 AM | Permalink

1+714.673.8578.     www.mixnerstrategy.com

When you make inferences on the current state of the economy based upon someone's book, you have to realize that you're "looking through the rear view mirrow" in order to drive your car - or the economy, for that matter. If you're going to do that, you had better trust the information you're getting, and it had better be as current as possible.

Given those facts, here are simple recommendations based upon Paul Krugman's (Krugman, 186) analysis:

1. The $700 billion (it has since grown) won't be enough because it is too small relative to the economy. This is based upon the Japanese experience a decade ago.
2. There is a "shadow" banking system that is largely unregulated. That system is the one that needs the money most. It may not get what it needs.
3. The banks are likely to receive money from the feds and sit on it as opposed to handing it out in the form of loans. That doesn't do anyone any good. The Fed may actually have to make direct loans to business by buying commercial paper.
4. Eventually, we'll have to make the recapitalization wider and broader and become closer to a nationalization of the banking system, if only for a short time.

The bottom line seems to be there'll have to be more money to turn things around. You gotta trust someone. Krugman's advice might be a good next step.

Reference

Krugman, Paul. The Return of Depression Economics and the Crisis of 2008. W. W. Norton & Company. 2009.

Posted by jackmixner at 11:27 AM | Permalink

1+714.673.8578     www.mixnerstrategy.com

On Friday, 14 March 2008, Bear Stearns was worth $30 a share or thereabouts.  On Monday the 16th, it was worth $2 a share (Lewis, Panic, 341-342). No one had a clue.

Why (Lewis, Panic, 343-344)?

In good times, financial firms make too much money. In bad times, financial firms aren't worth anything.

The fact seems to be that in good times CEOs of firms like Bear have to ignore the fact that their most profitable products are very risky, because in bad time their firms hemorrhage money.

The average of the two, boom or bust, defines the market.

Something is about to give.

Lewis pointed out problems in March 2008 that, basically, still haven't been resolved. His analysis points to a problem CEO's in the industry have: Their best assets go down the elevator each evening. If they want to retain control of those folks, they have to let them do what they want, a formula that may lead to the boom/bust cycle. His point? If you regulate, it is in this environment that you have to start.

Reference

Lewis, Michael. Panic. The Story of Modern Financial Insanity. W. W. Norton & Company. 2009.

Lewis, Michael. What Wall Street's CEOs Don't Know Can Kill You. Bloomberg News. 26 March 2008. Also in Michael Lewis Panic.

Posted by jackmixner at 11:02 AM | Permalink

1+714.673.8578     www.mixnerstrategy.com

Here's how to create leverage in a hedge fund (Morris, 113):

1. Raise cash by selling partnership shares.
2. For every $1 invested, borrow $4 for equity investments. Leverage is now  5:1.
3. Buy $100 million in first loss bonds underpinning a $2 billion CDO, $20 million of hedge fund equity, $80 million in loans. This results in a 20:1 leverage.
4. Combine the 5:1 and 20:1 leverages and you end up with 100:1 leverage.

Now the good part, or maybe not so good: lose 1% on your CDO investment, wipe out the partner's equity.

That's what 100:1 leverage does. Miscalculate your investment, lose all your money - fast. Multiply your risk and now you have a real problem when the market turns against you. As we all know, the market will turn against you. If you don't have time to recover, you're wiped out. That happened to Long Term Capital Management in 1998. It happened to Bear Stearns in 2007 (Morris, 114).

Welcome to real world high finance.

Reference

Morris, Charles R. The Trillion Dollar Meltdown. Easy Money, High Rollers, and the Great Credit Crash. Public Affairs. 2008.

Posted by jackmixner at 06:41 AM | Permalink

1+714.673.8578     www.mixnerstrategy.com

In 1950, General Motor's management wanted to create a pension plan for their employees. They had two options for the kind of funds they created (Beatty, 157):

"Defined benefits" gave you a fixed portion of your last salary.  If the fund went up, GM paid less. The idea was that GM would pay less- forever.

"Defined contributions" did it differently. GM paid a fixed annual sum into the plan. The retiree either received a fixed stipend, or a variable one with the success of the fund.

Defined benefits won out after the Board finance committee reversed management's defined contribution recommendation. This did two things. It forced fund managers to focus on returns. It also built up enough funds in both the GM fund and all the other ones that followed it to stoke the buy-out boom of the 1980s (Beatty, 158).

Drucker pointed out that in a hostile take-over, the big pension funds supported the buy-outs because of a bribe they received. The raider bought some stock of a company and then offered to buy the company. The company refused as it believed it could manage things better. Then the raider offered to buy the stock of other stockholders for a premium over the current market. The seller here was usually a pension fund after that bigger return. The purchase of the stock was paid for with a huge loan. When the buy-out was successful, the new management loaded the company with new debt to pay off the huge loan.

All this started the miserable cycle of self-protection, including golden parachutes for senior management, later in the 1980s. Companies ran themselves to fend off a raider, not to be profitable. They ignored stockholders who then were only too happy to support the raider. Miserable is the correct word. The result was miserable, ultimately, for everyone.

Reference

Beatty, Jack. The World According to Peter Drucker. The Free Press. 1998.

Posted by jackmixner at 06:06 AM | Permalink

1+714.673.8578     www.mixnerstrategy.com

PC sales are forecast to recede 5.3 percent in 2009. Intel has to sell three netbook processors for the same profit as a notebook processor. Microsoft gets $13 for netbook software versus $50 for a notebook (Hamm).

Whoops. Somebody got hit by a disruptive technology. Enter the netbook. Smaller. Fewer features. Cheaper.

There is going to be a shakeout, no question. It'll be interesting to see who gets left standing. Even Apple notebooks are selling one percent less than last year (Hamm). Interesting time.

Next step? New processor. New software. Not from Microsoft or Intel. Opportunity for new manufacturers, if they take the risk. 

Reference

Hamm, Steve. Why the PC Market Is Suddenly So Weak. BusinessWeek. 26 January 2009. 082. http://www.businessweek.com/magazine/content/09_04/b4117082616113.htm

Next Steps Checklist:

Practical Marketing. 7 Steps to Blast Through a Down Economy.  http://freshisgood.blogspot.com/2009/01/7-steps-to-blast-through-down-economy.html

Posted by jackmixner at 08:24 PM | Permalink

1+714.673.8578     www.mixnerstrategy.com

While ambassador in Europe, Thomas Jefferson had met with the ambassador of Tripoli. The topic was the treatment of American sailors in the Mediterranean. The ambassador offered "temporary peace" for one price, "perpetual peace" of another, higher, price (Hitchens, 128). Jefferson was angry, to say the least, and personally vowed to do something to stop the Muslim powers slaving activities (Hitchens, 128).

In 1800, the ruler of Tripoli threatened war on the United States if his demands weren't met. Jefferson's response now that he was president? He dispatched a squadron to the Mediterranean interests. He didn't bother to tell Congress. Over four years, the US pacified the region and, during incursions into the harbor at Tripoli, retrieved American hostages and fired captured shipping (Hitchens, 134). Finally, the Marines captured the town and raised the flag providing the words for the Marine anthem "From the halls of Montezuma to the shores of Tripoli (Hitchens, 134)."

So why rehash a story we all know about already? Hitchens call all this "an unalloyed triumph for peace, and the freedom of trade from blackmail, through the exercise of planned force (Hitchens, 135)." It also enhanced our reputation (Hitchens, 135).

We can't say this wasn't planned. Jefferson had been bothered for years by the ambassador's attitude years before. When president, he did something about it. He took action. Given today's environment, taking action without telling Congress would be problematic. So, the test becomes, "What's right in the current situation?" Then you try to do right. That's what Jefferson did.

Reference

Hitchens, Christopher. Thomas Jefferson. Author of America. Atlas Books. 2005.

Posted by jackmixner at 05:27 PM | Permalink

1+714.673.8578     www.mixnerstrategy.com

There are so many books on Obama's rise to power that it can get confusing. Mendell's book makes two points that are worth applying to political strategy, and perhaps personal strategy as well. Remember the role of education. Recognize that consultants do play a role.

"I just can't get things done here without a law degree. I've got to get a law degree to do anything against these guys because they've got their little loopholes and this and that. A law degree-that's the only way to work against these guys (Mendell, 82)." 

That's Obama speaking to one of his old friends from Hawaii during the period he was working as an organizer in Chicago. After three years of working organizing, Obama left for law school at Harvard. He was older and more experienced that his classmates. It showed. He worked at school, ran the Harvard Law Review, went back to Chicago, interned at a law firm, and began again. This time things worked better, and at a higher level.

In a way, Obama was lucky because in his Senate race he had a competitor who was rich and able to attract the best of consultants to talk about joining his race. Something went wrong, however. The strategist realized he didn't was to work for the rich candidate, really. He did want to work, however. Who would he work for? He chose Obama. The consultant? David Axelrod.

Axelrod's first advice went to Barack Obama - and Michelle Obama his closest advisor (Mendell, 179). The advice? "Visualize the people he had met and would be meeting on the campaign trail, to try to bring their stories to life (Mendell, 179)."

Obama wanted to succeed at the highest levels. He realized the need for more education. He leveraged the best advice he could get. Not bad strategies.

Reference

Mendell, David. Obama. From Promise to Power. Amistad. 2007.

Posted by jackmixner at 05:02 PM | Permalink

1+714.673.8578     www.mixnerstrategy.com

The Law of Unintended Consequences

Pass a law. Do good things.

The US Congress wanted more University research to be commercialized. It also wanted professors and the companies they started to get rich. The Bayh-Dole Act, passed in 1980, intended that federally funded research leave the public sector and enter the private sector. Ownership would transfer from public entities to private entities (Heller, 59). The un-intended consequence? Less business is getting done. Fewer inventions and discoveries are put to use because scientists are protecting their inventions instead of sharing them. Now, this isn't about keeping scientists from benefiting from their discoveries. It is about figuring out a way that they keep their discoveries and put them to use.

What to do? We learned how to proceed in this case in Kindergarten. Share. It is as simple as that.

 Let's say a new drug is envisioned by a pharmaceutical company. It includes tests that include thirty different genes, all patented by different organizations. Getting all thirty companies to agree to the pharmaceutical company's request for access for testing is just about impossible. Everyone wants to be the hold-out, the last one to agree, because theoretically, the last one to agree makes a lot more money than everyone else. The problem is, the musical chair like dance is so complex and time consuming, the drug company says "I'm getting out of the gene business" rather that complete the negotiations. Everyone loses, especially the poor person who has the disease, but doesn't have a drug to treat it because all those patent holders can't agree on how to work together.

We already said the word: Share. It looks to me like the law has to change. Now would be a good time.

Bill Gates' Creative Capitalism

Stanford professor creates unlimited supply of precursor to drugs that treat malaria. No one will support his research. Enter Bill Gates Foundation (Hamm). $42.6 million later, they're on the way to producing the drug. The Foundation acquired corporate support to figure out how to develop the active agent and get it ready for production.

That's quite a story. It could work in genomics. A third party acts as intermediary between all the owners of the different gene patents. They figure out how to work together. New treatments for diseases are created. Everyone makes money. No one makes a disproportionate profit. Mankind benefits. Everyone wins.

It could happen. 

Reference

Hamm, Steve. 'Creative Capitalism' Versus Malaria. BusinessWeek. 2 February 2009. 083. http://www.businessweek.com/innovate/next/archives/2009/01/the_world_vs_ma.html

Heller, Michael. The Gridlock Economy. How Too Much Ownership Wreaks Markets, Stops Innovation, and Cost Lives. Basic Books. 2008.

Posted by jackmixner at 03:54 PM | Permalink

1+714.673.8578     www.mixnerstrategy.com

The Author 

Over time, it appears that anyone who knows anything about Goldman Sachs has resisted the opportunity to write about the history of the firm. Charles Ellis, a strategic consultant to the financial industry worldwide, finally decided that he had important things to say. He wrote a long, in-depth history with strategic analysis of Goldman Sachs that is detailed, people focused, strategy focused, and results focused. It should be required reading for every managing partner and CEO of larger professional firms, no matter what their specialty.

Pick the Right People: Goldman Gets It Wrong

Unfortunately, Goldman Sachs had to learn the hard way about hiring the right people. Goldman had lost leadership and capital with the departure of Henry Goldman at the beginning of World War I. Henry Goldman had supported the Germans during the ramp-up to war. He left the firm when it began selling war bonds to finance the war (Ellis, 15). His departure hurt as he had supplied much of its capital and his deal making ability. That hurt, but what was to come next hurt even more.

Waddill Catchings joined the firm in 1918 (Ellis, 19). An "articulate optimist" he had two things going for him: early success, and leverage (Ellis, 19). Having held back from the speculation of the 1920s, Catchings finally enthusiastically plunged into the market with a $100 million investment trust which with mergers, emerges as a $244 million trust within three months after initial sales of stock to the public (Ellis 22-23). Ellis uses the word house of cards late in his description - the house fell when first one then another of the stocks held in the trust failed to pay a dividend (Ellis, 25). Shares in the trust ultimately fell from $326 to $1.75. Size (meaning lack of ability to respond to crisis) and leverage (meaning much of the money was borrowed and therefore subject to margin calls) ultimately burst of the trust (Ellis, 26) and the firm's investment.

Let's remember why we're talking about the Goldman Sachs Trading Corporation. Waddill Catchings was hired to help expand the firm. His enthusiasm for investing in the late 20's, after a long period of conservative investing, proved disastrous. He made decisions on his own, even after being counseled to hold back (Ellis, 27), that almost brought Goldman Sachs to ruin.

Put Your Principles in Writing and Manage to Them: Goldman Gets It Right

On November 3, 1976, Gus Levy, the Managing Director of Goldman Sachs died. One of his largest accomplishments had been the creation of a large block-trading business that supported Goldman Sach' rise on Wall Street (Ellis, 180).

John Whitehead and John Weinberg succeeded Levy. Whitehead focused on high-level strategy, Weinberg focused on clients' operations (Ellis, 181). That's all great. Whitehead's contribution was to be long lasting. Now, remember we're reading a book written by Charles Ellis a strategist with long experience in the banking field. It was clear that he was thinking strategically when he wrote the chapter entitled "Principles." Whitehead, on a Sunday afternoon, filled a yellow pad with ten principles of the firm. Other partners suggested a few more for his list. What he ended up with is a simple list that they refer to in the annual report, in mailings to new employees at their homes (Ellis, 184) for everyone to see, and to, logically, their customers. They are on the Goldman Sachs website today.

You and I both know that Values and Principles are sometimes misused. Highly touted, rarely followed, or, maybe, ignored. Goldman Sachs seems to be different. Fiercely competitive, they drive their employees hard. They hire the best and expect the best from them. Try this: mention Goldman Sachs to friends of yours who know the investment community. See what they say. My experience shows that Goldman Sachs follows what they John Whitehead wrote back in the seventies. Teamwork, dedication, profits. It is all there. And - this is the big part - folks continue to live by the Goldman Sachs Principles today. Employees are expected to understand the Principles and use them in their decision making on a daily basis. They allow actions to take place in the fast-paced environment of a trading floor that reflect the views of senior leadership while allowing individuals great latitude in how they are applied (Ellis, 187).

Principles Applied - Jon Corzine: Goldman Sachs Lives By Its Principles

The Long Term Capital Management fiasco effected a group of senior firms on Wall Street because they had extended credit to LTCM that it used, in a highly leveraged environment, to build one of the largest hedge funds on Wall Street. The only problem was LTCM became too large and its bets too hard to un-ravel when the market began to turn bad. Yes, they could have waited for their bets to turn (as in fact they would turn) but the leveraged effects of their investments meant that margin calls almost forced them out of business. The Treasury Department forced a recapitalization of LTCM that called for Goldman Sachs to loan $300 million to LTCM, money that Jon Corzine, without authorization, invested (Ellis, 607).

That investment was "the straw that broke the camel's back" so to speak. Corzine, part of the six person senior management team, acted like the CEO he thought he was. He wasn't. The Goldman Principles said, basically, do the right thing, but remember the firm and your partners. He didn't and because of that, he had to leave the firm. The LTCM loan was just part of it. He was too "freewheeling" (Ellis, 609), and forgot that, while he was popular amongst the partners, he was ignoring the executive committee who called the shots. Wrong, un-Principled move. He left for a better opportunity as NJ Senator which ended up being a good move for everyone involved.

One final comment: If you read one book on strategy this year, read this one. It's long, yes. It is a well written book that you may apply to your firm - now and in the future. It shows how decisions you make now effect your firm for years and years, and delineates processes that are useful and applicable. It is no wonder that Goldman Sachs is so well regarded. Ellis brings that regard to light.

References

Ellis, Charles D. The Partnership. The Making of Goldman Sachs. The Penguin Press. 2008. [Other books by Ellis: Winning the Loser's Game, Capital and the biography of Joe Wilson.]

Goldman Sachs. Principles. http://www2.goldmansachs.com/our-firm/about-us/business-principles.html

Posted by jackmixner at 01:58 PM | Permalink