Monday, November 10, 2008

Midga aims his guns squarely at the finance industry in general

They've had a few squirts in passing as they happen to walk through my line of fire, but now they're going to get it and get it good. Lawyers, mosquitoes, professional dole bludgers, bloodsucking leeches, underworld crooks and the inventors of CD shrink wrapping just aren't in it. Politicians are getting close, but only the very worst of them and only in the way that Napoleon was close to being like Hitler.

(Anyone trying to invoke Godwin's Law will be heartily Bromaged - this is not a discussion forum so Godwin's Law doesn't apply. If you don't know what it feels like to be Bromaged, don't ask, you don't want to know either.)

As I said somewhere else, I don't have a problem with banks looking after our savings for us. It's way better than hiding them under the bed you know. I have a slight problem with the fees some banks put on that sort of thing, but hey, it's no skin off my nose, if you want to use Commonwealth instead of Maroondah Credit Union, it's your funeral. You pay your $5 a month and you get ATMs in every shopping centre.

I also don't have a problem with them lending that money to other people until I need it. Recent accusations of pushiness in encouraging people to take bigger loans than they can pay back may or may not be true, I don't know and I don't care, but whatever, every industry has its pushy salespeople and people need to get a fact or two and look behind the marketing soft soap.

What I hate with a passion about the finance industry is:
1. The over-inflation of prices with no real addition of value
It happens mainly in the stock market. What does the price of a certain share really mean? What someone is willing to pay for it. That's fine, it means the free market can value a company based on its perceived future worth rather than on something tangible like its last year's earnings - but it gets the wikipedia problem. Anyone can buy shares and affect the price. They might be right, they might not. If they're not, eventually the price will drop sharply and people who have paid over-inflated prices will effectively lose their money. If it happens in a large enough scale the shrapnel from the bursting of that bubble can fly around in all directions and burst other bubbles. Bad news for lots of people.

2. It takes up the attention of management
A company needs money to finance some expansion. What does it do? Walk up to a bank, ask for a loan. The bank wants to satisfy itself that the business model is sound and that the company will be in a position to make its repayments, but apart from that you get your money, do your project and then start paying it off.

But if the company thinks it's smart, it doesn't go to a bank and pay hefty interest. Instead it appoints a finance manager (who has a huge salary and a company car) who has the responsibility of selling shares in the company to raise capital - and making sure the share price stays up.

Now this finance manager has a duty to get as much as he possibly can for the company. He has to be a real salesman. How should management support a salesman? VERY well. He brings in the money that keeps the company afloat. All good companies should look after their salesmen.

But the finance manager can bring in a lot more in the short term - after all that's what he's there for, to bring in money on a scale that "ordinary" sales couldn't. So management will tend to look after finance more than they look after true sales. How will the stock market react to our announcement to expand the factory? How will the share owners treat us when we tell them we upgraded the air conditioning in the operations office and there's no money left to give them a bonus dividend?

Bob Ansett in his book "The Customer" postulates that businesses tend to think like the people that lend them money. But a bank can only deny a loan when you need it - a stock market can blow you out of the water on a whim.

3. It encourages ridiculous executive salaries
I don't usually take jealous swipes at people who earn more than I do, but with some of the salaries going around you have to ask questions. How can one person give $3 million of value to a company over a year? That works out to $10,000 a DAY! There is no way a CEO can create that much value in (say) encouraging the employees and inspiring them to bring in more customers, or personally overseeing the big expansion project and preventing cost blowouts, or revising internal processes to streamline the company.

The only way it can possibly be justified is that the appointment of a "big name" CEO will drive the price of stock up because people believe he will do wonderful things for the company - and that way the company's own stock increases in value and the paper loss they took last year will turn into a paper profit. To me, that just sounds like throwing good money after bad... or buying time to gamble on more sales later on with which to buy back what they're spending now.

4. It turbocharges the ups and downs of the economy
In the absence of a finance industry, the economy consists of the sum total of what we produce. If we start producing something people want and can do it cheaper/better than the rest, we can make a profit. If costs blow out we make a loss. The way to stop making a loss is to fix the problems and look after the customers. Well and good. Stability. Customer service.

But for a company that exists on the stock exchange, a bit of bad news can spook the market and make a small loss into a massive one. Then that loss leads to a drop in confidence and a vicious circle of losses. Enough of that happening can cause companies to actually go bankrupt (which is where the real trouble starts because a paper loss turns into a real one).

And unfortunately it's not as if they're only losing what they had previously gained by getting onto the stock exchange. The only way to get back to being a privately owned company operating out of the back of a warehouse is to do a management buyout, and even then the debt levels might kill them.

5. They work business hours
OK, I'm *not* being serious here. Some months ago I had a rant on one of the various transport related forums about the problem of peak time. The people who cause peak congestion, I said, are the most useless people in the country. The kinds of people who do real work (nurses, transport workers, food processing factory workers, etc) almost invariably work different hours. In that rant I spoke of reducing peak time services to encourage these useless middle managers to do a real job, and got slapped down for it fairly hard. I probably deserved it somewhat. But anyway, get on any overcrowded tram at 5:30 and look around you - how many of those people shuffle paper in a large financial institution? A goodly number. Get a job which involves carrying people's groceries from the warehouse to the shops you lot, and leave the tram for me to get to my evening meetings.

Rant over, I'm being serious again.

6. They encourage people to get something for nothing
Gambling is a recognised social problem. Poker machines usually get a mention in political speeches, but what about the ads that say "Hey everyone, if you had invested $1000 three months ago we would have just mailed you a cheque for $130,000! Get on board today!"?

It may be true that under ideal circumstances people can make fairly vast amounts of money in the finance industry. But where does that money come from? Usually from the pockets of the people who have lost their investments. Or else from the increasing size of the bubble of hot air - which effectively means from the pockets of the people who will later lose their investments by being caught in the bursting of the bubble.

Get rich quick schemes, no matter how they're dressed up, are always a problem. King Solomon said in about 1000 BC that people who chase fantasies will always be hungry. Nothing has changed.

7. It encourages size rather than service
Takeovers make big news, they hit the headlines in the Financial Review and journos put direct quotes from the CEO into the article. That sort of thing drives the price of stock up.

Encouraging organic growth by changing recruitment policies to bring in people who will give outstanding customer service doesn't do anything of the sort. It might get a minor mention at the bottom of page 21 if it's a slow news day.

But which one actually does more for the country? Not the takeover, not by a long shot. That's why we have an ACCC to (supposedly) make sure takeovers only happen when it's not going to hurt the country. Currently it's a toothless tiger, but that's a separate issue.

I would really like to see at least a DOZEN major players in most fields. Supermarkets for instance - currently we have two major gorillas and two smaller but growing monkeys. Competition on price is there to a greater or lesser extent , competition on product range is almost nonexistent, competition on service is completely nonexistent.

Or what about banks - we currently have four big ones and a few smaller ones (I can't keep track of who's merged with who else) and that's protected by law. But if the Big Four were each split in half to become the size of the second tier ones, do you think they'd be passing on the entire interest rate cuts? Quite possible...

Transport I won't mention because I'd start using language that isn't appropriate for a public blog. Regular readers will know my views on the matter. Others may trawl through my Railpage posts from the time of the death of FCL.

So there you have it. Six and a half reasons why the finance industry is bad for Australia. If you're in it, get out. If you're looking for a job, don't get in. $45k a year and work/life balance in a simple office job is nothing compared to the regret you'll feel when you retire, look back on your career and realise all you've done in life is funnel money from one place to another in the hope that the numbers on one side will add up to more than the numbers on the other side.

Don't forget there are employment application forms at the Service Desk of every Officeworks store. A career in rescuing lovely maidens from having unprofessional looking party invitations is a career worth having.

No comments: