More on the Euro Crisis: Greece Teeters on the Edge

By Maureen Aylward

With Greece on the brink of new elections, and the possibility of Greece leaving the Euro inching forward, we asked our Zintro experts how a Greek exit from the euro currency would effect the economies of Europe and impact global markets.
Edward Marsh, an expert in international business development, says that it is almost immaterial if the actual Grexit occurs at this point. “Of course there will be some vexing and traumatic machinations which will be required to fulfill the transition, and reverberations will be broad, but, the important lessons are clear to those with the inclination and strategic perspective to acknowledge them,” he says. “Although borders, and certainly passports are relatively recent constructs, groups with common cultures are natural and longstanding. Partnerships based on trade and prosperity will complement cultural identities. Autonomous with a distinct identity and simultaneously an economically collaborative – that is the only sustainable model for economic integration. It’s the key to Germany’s success and the principle behind US Department of Commerce ‘Peace through Commerce’ initiative to animate American integration throughout ASEAN.”

Marsh points out that companies, just like countries, need to diversify interests among international markets with favorable demographic, commercial, and policy trajectories. ‘Strategically selecting optimal markets transcends chasing headlines and requires the application of rigorous research and comprehensive metrics addressing numerous diverse factors from demographics to political risk,” he says.
Bryan Allworthy, an investment analyst, thinks that a Greece exit from the euro will not be a Lehman Brothers moment for the euro zone. “The biggest impact on Greece leaving the euro will be felt in Greece. There is likely to be a lot of financial pain and behavior gain. The financial pain could well be shorter than the work out plan from Brussels. The behavior gain could be longer. A conceptual example might be found in the UK exit from the ERM: devaluation, reflation, competitive advantage,” he says.

As for the political situation in Greece, All worthy thinks that leaving the euro is best left to the Greek Central Bank. “Forget the politics until Greek politicians can claim credibility. If the Greek nation embraces the chance to benefit then transparency improves, FDI flows, and a new middle class prosperity emerges. It is not a trade but it could be an investment opportunity – not just portfolio investment but a real option for businesses too,” he says.

What do you think?

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Goldman Sachs resignation

By Maureen Aylward

Greg Smith, now a former Goldman Sachs executive director, made a very public resignation in the New York Times recently. It raises the question of the right and wrong ways to quit or resign from a position. We asked our Zintro experts for their take on whether this type of resignation will help or hinder Smith and if there is any short and long-term fall out for Goldman Sachs.

Phyllis at Strategic Support, an expert in ethics, diversity, and management, says that we can all probably agree that with a few minor changes to the text, Smith’s letter could be used by many employees engaged in ethical activities for companies that appear to have a clear mission yet practice unconscionable methods. “But, once you make up your mind to leave an organization, the first question is when and how you will leave. If you’re in the middle of a Greg Smith situation, you need to move on as soon as possible and do it in a less public manner,” says Phyllis. “Ethics are important and personal. Quitting means you choose the best option for yourself, but this should not include blasting your employer.”

Phyllis states that specifically in the Smith case one has to assess Smith’s personal and financial situation. “Some of us are willing to stand up to the conflicting morals and values even in the face of economic hardship. Albeit Greg Smith will have to face possible moral attacks by Goldman Sachs and being shunned by his colleagues and personal friends,” she says. “The fallout for Goldman Sachs could be in several forms. For example, it is now subject to loss of goodwill in the financial community and unyielding attempts by regulators and criminal authorities seeking validation to the accusations, either voluntary or through compulsory subpoenas. In either case, both parties will face a grueling road ahead.”

Rakesh Chopra, a banking and management professional, thinks that this is not the appropriate way to resign. “Greg Smith, however, has a special reference and context. He has acted like a whistleblower. He has exposed the investment banking culture that keeps a customer-centric face but actually uses the customer for its own gain,” he says.  “Looting customers by deliberately fooling, deceiving, or criminally conniving against them is the real ethical problem facing the investment banking industry.”

Chopra thinks that Smith deserves some credit for coming out with his story. “His resignation was a public one and he did it consciously. He deserves some credit for that,” he says. “The investment banking world has to answer to the investing people, regulators, and the world at large. Goldman Sachs and other top investment banks may have a hard time convincing the world that they are ethical and customer centric. And, this incident may bring in more transparency, more regulations, and more apparent discipline.”

C. DaSilva, an expert in international finance and trade, thinks that Greg Smith’s public resignation will ruin his career. “He will be forever blacklisted from the banking sector. Wall Street detests a snitch or whistleblower,” he says. “The sad reality is that the banks have total control of Wall Street. The much bigger problem is that the public is slowly starting to wake up and realize that Wall Street has been shafting them for years. Investors must learn that they have to be responsible for their own investments. They have to have a closer relationship with their invested funds than just handing it over to an investment manager and hoping that he will manage the funds correctly.”

DaSilva believes that until individual investors wake up and fully understand that they must be the custodians of their money, Wall Street will keep playing the same game. “Many of my clients have given up on Wall Street and are doing smaller investment deals where they have greater control of the funds they invest. This to me is the new investment model for the future. Wall Street is broken and has to be abandoned.”

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Investment banking: a viable business model?

By Maureen Aylward

Investment banks have been in the news a lot lately — not in a good way. Increasing regulation and bad publicity related to excessive compensation are just the beginning of their issues.  What lies ahead for the banks in the coming years?  Is the investment banking  business model still viable?  We asked our Zintro investment banker experts to share their concerns & thoughts on the matter.

John Burget, a former VP in investment banking, says that there will always be a critical need for traditional investment banking which, broadly defined, is finding public or private capital to fund the growth of businesses of all sizes (except for very early stage venture capital). “At major investment banks, it is the senior managers who establish the close relationships and trust of business clients and whose connections with public and private capital sources provide the competitive edge to obtain funding for their clients on the best possible terms,” he explains. “It is true that over the last thirty years other parts of major firms like Goldman, Salomon, or Lehman (before its demise) became dominated by trading and lightly regulated private equity departments because those areas became more profitable in terms of fees and commissions on activities than the underwriting and management fees earned by traditional investment bankers.”

Burget says that many extremely important financial innovations were created by investment bankers, like Money Market Accounts, on which brokerage clients could write checks (Merrill Lynch in the 1970’s), and Collateralized Mortgage Obligations (the “good kind” at Salomon Brothers in the 1980’s) at a time when there was no large scale source of new mortgage financing outside of Fannie Mae and Freddie Mac.

“Even the notorious Michael Milken at Shearson Lehman in the 1970’s created a huge new market for non-investment grade (“junk”) bonds that for several years financed legitimate new high growth companies like MCI,” Burget says. “MCI took on risks during which the company incurred by taking on goliath AT&T in the long distance phone market. It could not obtain an investment grade bond rating. However, MCI and its successors ultimately provided every phone user in the US with huge cost reductions for long distance phone service.”

Unlike traders and private equity managers who have few moral obligations as long as they are dealing with institutional investors and wealthy individuals, Burget says, investment bankers (to survive in the long run) must serve the best interests of both the companies for which they raise capital and the investors who provide it.

Jeffery Sloane, an expert in corporate finance, says the investment banking business model is viable, although the “new normal” in the traditional service markets has required significant adjustment. “Not all investment banks have made or can make these adjustments,” he says. “They have been beset by the same overriding macro trends that has troubled so many businesses and banks: a weak economy, frothy equity markets, and constriction in the capital markets. Ironically, these same challenging trends have increased the need and demand for quality investment banking services because navigating a successful capital raise or acquisition requires a greater level of expertise. This is especially true in refinancings and growth capital raises for small and lower end middle market clients whose credit is not rated by the credit agencies. Underwriting standards vary widely from one capital resource to the next, and the quality of assets can become more critical than financial performance.” Sloane says today’s investment bankers are concerned about the increasing difficulty of consummating transactions and the resultant impact on their fees.

Spencer Beck, an expert in turnarounds and workouts, believes that investment banking is still a viable business model. “The economy, governments, and businesses (both big and small) need access to capital and the expertise to attain it. Up until the time of Michael Milken, capital was restricted and only obtained by the blue bloods of Wall Street. The club was small and the access and amount of cash even smaller. When Milken created a market for High Yield Bonds (better known as junk bonds), the opportunity to access capital and opportunities for mergers and acquisitions grew significantly,” he explains. “With the growing market for cash came new non-bank avenues for capital like private equity and hedge funds. Yet with the creation of all of this liquidity came new products derivatives, MBOs and CDOs that were created with little supervision and in many cases no regulations. Even today there is questionable value for some of these products, but because they are guided by such powerful entities, they are protected.”

Jeffery Feldman, an expert in investment management and advisory, says that while investment banking is viable, most investment banks are not. “Classical investment banking is about capital formation. Modern investment banking is about proprietary trading and arbitrage. There is a direct correlation between the lack of capital formation and the high unemployment rate,” he says.  “Investment banks (and investors) are obsessing about the elimination of risk from transaction. Risk, of course, is inherent in commerce and the concern should be about risk/reward: is the risk commensurate with the reward?”

Feldman points out that investment banks have been selling risk for years; it is historically cheap. “As the baby boomers age and leave their risk years  behind, there is a sense of intolerance of potential capital loss. At the same time, the children of the boomers (the Millennials born between 1976 and 1994) are coming of age. They have an appetite for risk. The oldest boomers turned 35 in 1981 followed by 75 million more over the next 18 years. Those were the glory days for investment banks. Now the oldest Millennials turn 35 this year, followed over the next 18 years by 75 million others. The appetite for risk will return and the investment banks will recognize this trend, restoring their role in capital formation,” he says.

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