@T: ALWAYS THE TWAIN

There’s an interesting interview with Owen Van Natta, the new CEO of MySpace, on the future for the social networking site of 130 million users:

* http://d7.allthingsd.com/20090527/d7-video-jon-miller-and-owen-van-natta/

* http://www.huffingtonpost.com/2009/05/28/owen-van-natta-myspace-ce_n_208526.html

Van Natta talks about “personalization” again which is a buzz theme inherited from Web 1.0, albeit then it was deployed as “customer-centric” and “tailored”.

I’m still waiting for the social networks to make the paradigm shift from personalization to PURPOSE and what I coined as “socially voiced co-creation” back in 2006. All of the social networks seem to be providing tools, apps and features which will encourage 90% of their audiences to be passive consumers (lurkers et al) whilst 10% are active contributors. That activity may not be the generation of original, innovative and/or substantial content (as in a slideshare presentation), but rather the relay of a link.

What we need are actually social networks with tools where not only political awareness groups can lobby and influence change, e.g.:

* the Presidential election 2008;

* Marks and Spencers climb down over the additional charge of GBP2 for bras over a certain size; and

* Wispa chocolate bars being sold in stores again,

we can also directly impact the inventories of product manufacturers so that they can reduce the likelihood of oversupplying the market. Instead, the social network can be harnessed to find out what products we really need and want AND we (as consumers) are involved in the creation process that will reduce the wastage of over-production.

Then we have a PURPOSE rather than simply be passive consumers of content and active passers-on of links.

On a smaller scale, some of that purposeful company-consumer collaboration is already happening when the likes of Walkers Crisps organize a competition inviting ordinary people to think up a crisp flavor and the winner earns a percentage of crisp revenues as well as a one-off prize of GBP50,000:

* http://www.walkers.co.uk/flavours/

Now we need the CEOs of the top social networks to ask themselves, “How can we get our millions of users to work together towards practical ways to tackle climate change and other big issues like over-production? What tools can we provide to help them indicate whether they’re going to buy a car / a pair of Nike / an iPod / any other goods within the next 3 months and this information is directly fed into the inventories of manufacturers so they don’t over-produce? Maybe we can charge the companies for providing this information. We all benefit because, collectively, we’ll be making supply and demand metrics more accurate. Plus customers will get to design the products they want and maybe share in the revenues generated in product sales.”

That, to me, would be applying positive PURPOSE to social networks and creating new business models in the process!

Last night I watched HARDtalk on BBC News 24, presented by Stephen Sackur, in which he interviewed Hector Sants, CEO of the UK Financial Services Authority (FSA). Here’s the link to BBC iPlayer if you’d like to watch the full interview:

· http://www.bbc.co.uk/iplayer/episode/b00kq2hy/HARDtalk_Hector_Sants_Chief_Executive_Financial_Services_Authority/

There were a number of questions posed by Sackur that reminded me of the dissonance gap between how the media perceives the global economic crisis and the blame attribution to bankers on a wholesale basis, and what collective measures can be pragmatically implemented to reduce the likelihood of a repeat of the global economic implosion we’ve all witnessed over the last 18 months.

Now, since I worked on corporate strategy projects within CEO-Chairman’s Office of a Tier 1 bank during the period when key decisions were taken about building businesses in mortgage CDOs, hedge funds, proprietary trading, prime brokerage and opportunities in US real estate markets due to government policy changes, and more recently tracking the bailout-regulation situation with interest and discussing it with finance sector friends, my insights may be more informed than those who don’t have direct experience of investment banking or how banks operate, create financial products and manage risk.

Yes, I am 100% au fait with the knowledge I did not contribute to the global economic crisis or to the bank’s subsequent US$ billions writedowns, losses and government bailouts because (without any *”I told you so”* on my part) I did present the strategic case that the bank should consider these options:

* develop the asset and wealth management business in BRICs countries (Brazil, Russia, India and China);

* build advisory expertise in Intellectual Property Securitization (to capitalize on developments in the renewable energy and digital content publishing sectors); and

* sanity-check the banking model by incorporating more independent metrics on potential revenue streams and risk diversification

rather than any overly ambitious and risky moves into the US mortgage market.

Unfortunately, the powers-who-were decided to go with some other parties’ business case(s) and their drive towards the issuance and proprietary trading of mortgage CDOs. It wasn’t so much that the information about the potential risks of mortgage CDOs wasn’t publicly available and, therefore, the scale and depth of global economicl crisis avoidable or at least reducible, it was a case of the information being inappropriately interpreted by key decision-makers or, sometimes, vital pieces of analysis being put at the bottom of the pile because they were working towards their own political objectives (internal promotions, fiefdoms and controls of budgets). Mostly, it was a case of the volume and complexity of analysis and information available defeating the decision-makers. Moreover, the rapacious turn of events superseded their ability to properly manage and utilize available resources to prevent the wholesale collapse of their banks and the global meltdown.

When too much noise enters a system — be it a business model or too many chiefs in a senior management team — sense gets drowned out and decisions become confused rather than clear and coherent. That’s the nature and source of fallibility in human existence, alas.

In the HARDtalk interview, the head of the FSA provided an important lead and clear observation about the need to “assess risk concentration” properly rather than to adopt any kneejerk reactions about separating commercial retail lending from the investment banking business. He reminded us that the reason the wholesale or universal banking model developed (in laymen’s terms creating a banking behemoth such as the Citigroups / HSBCs / Deutsche Banks: Main Street banking plus asset management, corporate lending, brokerage services, investment banking — corporate finance advisory, equities, fixed income, irfx, secondaries, etc. — hedge funds and institutional sovereigns all operating under the bank’s brand umbrella) was in the interests of risk diversification and economies of scale.

In other words, don’t put all our eggs into the same basket and, at the same time, the economic principle that producing one egg at a time isn’t going to be as profitable as producing in batches and en masse.

It may also be helpful to think of a bank like a patient who needs surgery. Hacking off the patient’s limbs (aka separating each of the bank’s businesses) may not be helpful or life-saving if, actually, it’s his heart that’s clogged up and he needs a double bypass. It’s the heart where his health risks are accumulating and concentrating rather than his limbs, of and within themselves, which become immobilized or paralyzed by what his heart’s doing.

Again, this is why we need prognostic, diagnostic and remedial tools that are keenly calibrated and sense-making rather than blunt and off-radar/fuzzy logic.

As it stands, the FSA’s proposals to assess risk concentrations and to implement measures to alleviate them within the financial system and, specifically, on issues of risks covered by the Basel II accords seem sensible, progressive and practical. For anyone interested, here are some links to Basel II resources:

· http://www.bis.org/publ/bcbs128.pdf

· http://www.risk.net/public/showPage.html?page=665558

· http://www.ebrd.com/country/sector/fi/conference/willem.pdf

Few media interviews have examined Basel II and capital adequacy requirements to offset operational risk in any depth and most interviews have focused on economists’ forecasts and pronouncements (Nourbini, Krugman et al), but actually more representatives from these firms need to have their insights probed and shared by the media:

* strategy consultancies like McKinsey, Oliver Wyman and Greenwich Associates — how do they envisage the restructuring of the banks and ensuring otherwise silo information is suitably shared between the businesses (equities, fixed income, etc.);

* remuneration and headhunting agencies — what characteristics should and will future CEOs, senior management and board members have, to ensure the risk-reward dimensions are managed properly;

* ratings agencies — what are the measures to insure independence of ratings analysis from relationships with banks; and

* risk management technology providers — how can secure and commonly shared tech solutions be implemented which will allow banks to maintain the competitive advantage of their platforms (trading and intellectual capital) whilst also acting as a one-stop detector and manager of global banking system risk.

If we ask the right people the right questions, sooner or later we arrive at some sensible solutions.

Now the other part of the Sackur interview which made me LOL was when he suggested that there’s a conflict of interest for Hector Sants, Lord Adair Turner and David Walker who’ve all been appointed to senior roles at the FSA since they all either worked in banks or are closely associated with banks as board members (presently and previously). In the US, former Treasury Secretary Hank Paulson’s previous tenure as CEO of Goldman Sachs was also pointed to as a potential source of conflict of interest. In other words, that former bankers now working for government bodies would negotiate structures and terms of bailout and regulation which are more favorable to their former employers (the banks) than to their current employers (the public).

Employment contracts governing conduct in the interests of current employers may supersede and be more legally binding than any residual loyalties towards former employers — particularly since that contract of employment is terminated and no longer active and they’re not paying the mortgage / children’s schooling fees / employer pension contributions, perhaps.

In any case, after Sackur asked the question, I kept thinking: “Well, instead of former bankers who actually have direct experience of how banks operate and where the risks of financial cardiac arrests appear on-and-off balance sheets, would people prefer it if the heads of the SEC, FSA, Consob etc. were from the worlds of entertainment / leisure travel / cosmetics?

Instead of Hector Sants with his (supposed) conflicts of interest would the public and the media prefer it if the FSA appointed someone like Paris Hilton who’d have almost negligible conflict of interest since she’s never worked in a bank?!”

We can also think of the global economic system being like a car whose engine has stalled. Now, if your car breaks down do you call a car mechanic you know who’s got a few decades of judgment-experience working directly with cars and has several pieces of paper which say he’s passed the requisite exams, to try and help fix your car or do you call one of these people:

(i.) a used car salesman;

(ii.) a petrol station attendant;

(iii.) a cook working in the restaurant attached to the highway stop-off;

(iv.) a satnav retailer;

(v.) the model who sits next to the man driving the car in the ad;

(vi.) a motoring commentator such Jeremy Clarkson;

(vii.) Jenson Button / Mika Hakkinen / Lewis Hamilton;

(viii.) a best boy electric (aka lighting engineer who works in a TV / theater / film production unit);

(ix.) a cosmonaut who helped fix the Hubble space station; or

(x.) the CEO of General Motors / Chrysler.

Hmmmn………Personally, I’d get the qualified car mechanic in. I certainly wouldn’t jump to the “conflict of interest” connection just because he’d previously serviced my neighbor’s car, charged for his mechanical skills and made their car run more fuel efficiently per mile or more green than mine!

LOL.

On a serious note, it’s vitally important to check that conflicts of interests are at a minimal. We do want to ensure the bailouts and regulatory regimes are as objective, efficient and effective as possible and that all parties are working towards end goals that are beneficial to ordinary households. Nevertheless, the media can act as a check and balance about possible conflicts of interest in a more informed way.

A more interesting question to ask would have been, “Some people will be skeptical the FSA will be able to regulate and enforce policies in the City of London following the recent global meltdown and what look to be cowboy speculators running amok whilst the sheriffs were in the saloon, asleep. They may also feel uncomfortable about potential conflicts of interests since you previously worked at CSFB and ask themselves whether they have trust and confidence in a former banker now policing the banks — in a sense, poacher turned gamekeeper. So……..what would you say are the policy and risk management techniques you developed during your time in banking which can help repair the damage which has been done to the reputation of London and the global financial markets as a whole, and restore market confidence in the FSA?”

That’s a much more interesting question because it recognizes that mistakes were obviously made (with typical wry journalistic vernacular about cowboy speculators and sheriffs), the markets and its participants are wary, the interviewee has an opportunity to bring former experiences to bear in restructuring the system appropriately, and the way forward to solutions.

Solutions are what we need.

I TOLD YOU SO

Yes, sometimes some people don’t understand or appreciate my attempts to help them steer clear of icebergs and plot a path that’s more win-win for company-customer-collaborators alike; objective proposals which will result in their strategic health. Instead, they have some form of obsessive compulsive disorder, narrow myopia or ego insanity to play chicken with the iceberg.

Well, they can play chicken with the iceberg if they want.

I’ll be on the ship heading for open waters, new horizons and reachable destinations.