Why Did We Get Lack of Confidence?

The Fair Value principle has definitely increased the write-offs compared to any other financial crisis. In the past the banks wrote-off none performing loans to different degrees related to how much none performing they actually were. With Fair Value even performing assets have had to be written-off if their market value decreased. The logic is that the market is always right. But what if the market isn’t right and the market maybe doesn’t exist anymore?

This Fair Value principle has no doubt increased the amounts of bank losses to unprecedented levels. The valuations are many times not at all related to any sane estimation of true losses.

Can it be that when the banks finalized calculating the losses from the sub-prime mortgages (and realized how much they needed to write-off) they realized that they were basically bankrupt? And they also realized that all the other banks must be in the same position and then they lost confidence in each other. It does not sound too farfetched does it?

Now the situation has accelerated further. The cash rich corporations are regarding the bank sector as too vulnerable for investing the cash surpluses. They even require the banks to supply collateral.

Maybe we shall try to focus on valuating the assets using more realistic assumptions based on old practices and scrap the Fair Value principle?

Who said regulation would prevent a global financial crisis? Well those who did were dead wrong.

North America vs. European Focus

In North America the treasury traditionally focuses on cash management and daily and intra-day cash positions. In Europe the focus has been on risk management of foreign exchange and other price risk. There are obvious reasons why the focus has differed:

- North America has had limited sufferings from foreign exchange fluctuations from local currencies
- Most American corporations are organized as a North American division and an International division keeping the foreign exchange management locally in Europe to a large degree
- Europe has a legacy of foreign exchange management, it was not until 1999 the French franc, Dutch guilder and Germany marks were replaced with EUR
- It is very difficult to develop an efficient cash management and daily cash positioning model with a fragmented bank landscape and country specific standards as in Europe

But in today’s market the focus are broadening on both sides of the Atlantic. There can hardly be any treasurer not concerned of both managing fluctuations in foreign exchange and keeping a strict control of where the cash is, optimizing the liquidity.

We will see more activity and investments in treasury technology and process development from the crisis.

Treasurer’s Changing Role

In the 80-ties the treasury profession was geared towards Controlling. A long with deregulation and the explosion of financial markets and instrument the treasurers required the skills of a Trader. Ten years ago the role of the treasurer started to become that of the Communicator. The requirements to be an excellent communicator together with understanding business modeling have become a necessity for the treasurer in today’s market.

Treasurers have never been more in the lime light than now. They suddenly find themselves participating in all board meetings and not marginally, the treasurer is the star of the meeting. And how prepared are you as a treasurer for that role? It requires training in communication and skills of translating how the market conditions force adjustments of the business model. One obvious consequence is that working capital improvements and enhanced cash flow management has to be part of the new business model. Gone are the days when growth and inefficiencies could be funded by treasury, it now has to be funded by internal cash generation and freeing locked up cash.

Communication is an art form and should not be underestimated. It is an acquired skill; what does the recipient expect? What message do you want to get through? How do you ensure the recipient understood the message as you aimed to convey it? Poor communication may end up in disastrous misunderstandings and decisions.

The treasurer needs to control the details, draw general conclusions on an aggregated level and translate and map that to the perspective of the board. How many treasurers are prepared for that role? And how do you become skilled at it?

The treasurer provides essential input into developing a sustainable business model. Companies will have to add cash focus to the earnings focus. What is the difference in doing business today as compared to six months ago? To answer that question the board needs to understand the financial degree of freedom they have. The treasurer has the answers and the treasurer is also required to have the skill sets to communicate it in a clear and concise way so the board understands.

Is the STP trend over and what’s next?

For a very long time the treasuries have had lot of attention on STP (Straight-Through-Processing). The STP has been focused on treasury’s internal integration and peer-to-peer connections to its counterparties. Over the years very much has been done in this area and there are not very much to discover anymore. This STP trend is coming to and end. It has opened the way to a new trend of business development using IT as an enabler of improved and faster analytics, reporting and communication. Business Intelligence is getting on the agenda integrating information from all over the enterprise.

The next STP trend is instead integrating treasury in the overall system infrastructure and the company’s business modeling. From treasury integration to integration of treasury in other words. The last few years have meant that treasury has become much more a part of the whole enterprise and taking on a cross-functional role. We have talked about treasury as driving the financial supply chain.

This is supported by the ERP treasury modules having improved dramatically and the vast majority of all large corporates adopting a one ERP installation strategy.

Right focus from world leaders

I get very pleased when I hear that in this financial crisis the world leaders give the banks financial support but not without requesting something back. In France Mr. Sarkozy expects that the banks expand the lending volumes otherwise they risk loosing the financial backing (FT.com). In Sweden the Ministry of Finance, Mr. Borg, screamed at the banks in fury that the interest rates to consumers and corporates had not decreased despite massive financial infusions and guarantees (DI.se). Borg questioned the purpose to support the banks if society did not benefit. The banks were taken by surprise. No doubt this is the first time world leaders actually does not see the prosperity of the financial sector as the objective. Instead it is only the means to create a prosperous society. The financial sector is just a tool - finally. Hopefully this perspective will spill over in the new regulatory framework developed from this turmoil.

There are a large amount of corporates with huge drops in sales. All financial support from governments and central banks need to come out into the real economy. And that must happen now. December might even be too late for some.