Wharton Asks: Do the Answers to Our Current Financial Woes Lie in the Past?

October 4, 2008

Theories abound on which financial crisis of the past is most similar to the one we are currently living through (The Panic of 1873 and the Subsequent ‘Long Depression’?  Or perhaps it’s the Panic of 1907?  Then again maybe we need to go back to the Mississippi Bubble of the early 18th century?).  Of course the truth is that every panic is unique and someday the Credit Crunch will be a measuring board against which future turmoils will be compared.  Nonetheless much can be learned from these past events as the situations in which they arise remain eerily familiar (the more financial tools change, the more they stay the same!).

Here the good people at Wharton keep the comparisons a bit more recent and look at major banking issues that have struck the world in the past couple of decades.  Financial Historians must be estatic as they are living through times that are far more valuable than all the possible research material they could dig up in an archive.


Revised Bailout Bill is Passed and Signed into Law

October 3, 2008

H.R. 1424, the Emergency Economic Stabilization Act of 2008, aka “The Great American Bailout Bill of 2008”, has passed both the House and Senate and has been signed into law by President Bush. The Senate had approved the plan on Wednesday night by a vote of 74 to 25, while the vote in the House was 263 in favor versus 171 against.

This bill won’t act as a quick fix and it probably won’t be the final action taken by the U.S. government to offset the current financial crisis. An economic stimulus package will almost certainly be brought up by whomever is the next President, as well as either further additions to this bill or even an Emergency Economic Stabilization Act of 2009 (for what it’s worth I don’t think it’ll be as big as the $700 million of this one).

As far as Private Equity is concerned, don’t look for the debt markets to rebound anytime soon just because this was passed. It’ll be quite some time before things loosen up.

Lessons For Today’s Bankers from 1863

September 26, 2008

Simple, sound advice often stands the tests of time.  Financial history is full of such examples.  The following has been sourced from Daring Opinion by Elie Elhadj.

In December 1863, Hugh McCulloch, then newly appointed U.S. Comptroller of the Currency and later the U.S. Secretary of the Treasury, wrote a letter to American banking institutions. Here are some excerpted highlights:

  • Let no loans be made that are not secured beyond a reasonable contingency. Do nothing to encourage speculation. Give facilities only to legitimate and prudent transactions.
  • Distribute your loans rather than concentrate them in a few hands. Large loans to a single individual or firm, although sometimes proper and necessary, are generally injudicious, and frequently unsafe. Large borrowers are apt to control the bank.
  • If you doubt the propriety of discounting an offering, give the bank the benefit of the doubt and decline it. If you have reasons to distrust the integrity of a customer, close his account. Never deal with a rascal under the impression that you can prevent him from cheating you.
  • Pay your officers such salaries as will enable them to live comfortably and respectably without stealing; and require of them their entire services. If an officer lives beyond his income, dismiss him; even if his excess of expenditures can be explained consistently with his integrity, still dismiss him. Extravagance, if not a crime, very naturally leads to crime.
  • The capital of a bank should be reality, not a fiction; and it should be owned by those who have money to lend, and not by borrowers.
  • Pursue a straightforward, upright, legitimate banking business. ‘Splendid financing’ is not legitimate banking, and ‘splendid financiers’ in banking are generally either humbugs or rascals.

Well said.

The End is Nigh for Venture Capital, circa 1986

August 19, 2008

Here’s some more alternative investing nostalgia, this time jetting us back to the summer of 1986. As 1978 (and then 1981) saw substantial cuts to the capital gains tax, a subsequent boom in venture capital and private equity occurred. 1986 saw congress increase capital gains and VC’s across America cried foul. It’s not terribly difficult to connect that the benefits that a lower capital gains tax presents to venture capitalists will benefit entrepreneurship and emerging sectors, while any changes to the corporate tax rate will most significantly impact more mature companies.

Many people in finance, or finance related industries, fail to view their businesses with any adequate historical perspective. In my experience investment bankers are probably the most guilty of this offense. There have been banking crises as long as there’s been a banking industry, yet the same binge and purge tactics prevail amongst the banks. The dilemma is often exacerbated by business journalists trying to turn every story that goes to print into instant history. For all the writers that penned that the credit crunch would kill private equity, they were simply rehashing the same drivel they wrote when the junk bond market collapsed two decades before. It’s simply another chapter for the industry.