Lack of Leadership in the USA

I’m amazed over the lack of leadership in the US right now. How can the leaders of the most powerful nation in the world behave so immaturely playing silly political games instead of acting as forceful leaders? It is outright shocking and a total lack of understanding of the seriousness of the situation. A few hundred politicians are jeopardizing the future of the people of the US of America and for the rest of us. They have awakened the fear that US will not pay its obligations. Rating is defined “as capacity and willingness to pay your obligations” according to the CRA. What is the capacity and willingness of the US leadership to solve this situation?

One could expect that in a situation like this the political leadership would unite – in good time – to find a solution. Now it is far overdue and therefore most of the collateral damage has occurred. And what has been won? If they finally solve this problem 1 minute to 12 it would anyway have created a doubt of the willingness of the US to pay its obligations. 

Cash Contingency Planning

In the May Peer Group meeting we discussed the risk of Greece or any of the other PIIGS countries defaulting. Drilling into the subject was daunting and presented a catch 22 situation, however you turn, you have to turn again. The demonstrations in Greece present not so much a financial risk per se, however they represent the mentality of the demonstrators. It is apparent that many of the Greek citizens don't comprehend that one can't spend more money than one has access to. I remember the same mentality from the Swedish meltdown in 1990-92, when Sweden quickly had to convert from a populist “I request – someone else shall pay” mentality until the people realized basic fundamentals. Sweden had built up a huge leveraged position both in the private and in the public sectors that collapsed when the asset prices plummeted at the end of 1989. In 1992 the peg to the EUR was dropped and O/N interest rates did hit 500% for a few days. Thereafter Sweden has had a 20 years highly disciplined fiscal regime. Now the Swedish government has small debt thanks to very high taxes and continuously reduced public services. The high tax rates force the population into high level of personal debt and mortgage, which is a huge transfer of wealth from the private to the public sector only sustained with high property prices. In such the Swedish economy has inherent risks but not in the magnitude of Greece. Since in Greece we see the opposite situation with low taxes, low personal debt, and the Greek state being on the brink of default, extremely leveraged.

How shall we device contingency plans for countries close to default? Step one is obviously to reduce all risk on the sovereign itself, and take out all cash from the country (which may be more easily said then done as most money funds do not immediately disclose holdings). Step two is to reduce capex and step three is to disinvest. This becomes a vicious circle that we experienced during the recurring Swedish crises from end of 70-ties to the huge 1990-92 crisis. All crises led to that most companies took cash out and avoided taking Swedish export revenues back over the border forcing depreciations. This is what happens in Greece now. The difference is that Sweden had its own currency so the simple remedy was depreciation. Can Greece take the Drachma back? Is that an option at all? The Swedish Krona (SEK) depreciated immensely in the period 1975-1995 to the Deutsche Mark (DEM) because bad policies and populism. See graph: 

Next sovereign to worry about now is the USA being heavily discussed in the media, here is one example.

How to place the cash? What are the alternatives? I would like to test the water for new solutions I have found in my research. For the below text I have therefore kindly asked assistance from Eric Lansky, Director StoneCastle Cash Management when listing alternatives for the cash holdings:

Money Funds gave us lots of problems in the previous crisis. Is the market better equipped this time to cater for a run on funds? However we do not yet know the impact of new regulation. A large part of the funds are kept by institutional investors and how do they act if rates rise and overnight rates present better value?

Treasuries used to be zero risk but what now? And the rate is not so compelling. 0.00% doesn’t increase ones returns, regardless of volume invested.

Direct Bank Deposits are state secured up only to a very modest amount. In the US there is a new offering launched, basically allowing treasurers with larger cash balances to receive expanded FDIC coverage (up to 20 MUSD per tax entity),  providing higher rates, daily transparency  and a single statement. FICA® is a network of hundreds of FDIC insured money market deposit accounts which are electronically linked together through a single, convenient account. All deposits are divided into several banks' deposits under the FDIC limit. The solution is called FICA® or the Federally Insured Cash Account. Another program similar to FICA, but places deposits in less liquid bank CD’s is CDARS. Any of you have any experience of FICA or CDARS, please share in Comments below. Thanks.

My conclusions

The alternatives basically remain the same as in 2008 but the cash holdings at corporations are so much larger this time since balance sheet improvements have been going on for the past 3 years. This does not decrease the financial risk since the cash cushions represent counterparty risk. We are therefore probably returning to a situation when we will focus on return OF cash instead of return ON cash. But this time it is the sovereigns defaulting and who will be the lender of last resort? And where did zero risk go? Oooops

During the credit crisis we in the Peer Group kept close contact discussing how to mitigate risk for individual banks and other deposit holders. We shared information and intelligence from the market and stayed on top of the situation. It was comforting and surely saved our employers’ money.

Avoiding a Dead-End Career

In one of my first treasury positions for a corporate I was regarded as an expert. Despite the company was a heavy machinery producer and I had recently graduated with a Master of Science in Mechanical Engineering. I had to accept that just because I did choose a financial career made me an expert in a field no one in management and succession planning understood properly. Being a treasurer therefore became a dead-end career path so I left.

Is this the treasurer's domain?
Fancy but outside of the main building

Another reason why many treasurers remain in treasury most of their careers, I believe, is that the step outside of treasury requires deep understanding of doing "ordinary" business. This means understanding business model generation, product development, marketing and sales etc. Or in other words being a business leader.

The crisis changed the way we regard treasury and the treasurers' role. During the crisis I met with treasurers finding themselves in the spotlight and confused over the expectations that they should explain how the business model needed to change from the financial crisis. We did discuss this at length in the Peer Group and I decided to make a survey to CEOs and board members asking them of their expectations on the treasurer. Basically it boiled down to that all the basic stuff (risk management, cash management and funding) was a given for treasury to manage. But a good treasurer should also participate actively in growing the top and bottom line. He or she should work together with the business unit to meet customers, suppliers and develop the company’s offerings and find cheaper ways to operate the basic business using the treasury skill sets. The treasurer was expected to increase competition and margins. These new expectations position the treasurer a as Business Leader instead of an expert. And it is much easier to make a career as a Business Leader. An expert usually remains in his or hers field.

I tell my two daughters that there are only two main skills you need to have: sales and communication. If you do not have the ability to communicate your worth and value adds you can not sell it. And then all your other skills are basically useless and you are dependent on someone else to promote you and your products. This I believe is true for treasurers as well. The basic skills of a Business Leader are communication and sales.

The Contrast of the Tradegy in Norway and the Death of Amy Winehouse

Sometimes you get reminded of what’s important in life. The tragedy in Norway is such an event. So sad for all involved and so completely unexpected and just horrible. Norway was the calmest country on earth. Oil rich and safe with beautiful nature and life. The last country where one would expect such a tragedy.

Our daily work many times makes us focus on short term gains and optimization. Being ambitious and hard working towards targets and personal goals lets life pass quickly and many valuable days go by without reflecting on what’s really important. I’ve been there. Lost in the hard strive to reach life goals that did not mean as much as I had expected.

A few years back I had an experience that made me better understand what’s really valuable in life. This made me make important prioritizations. Now I feel much better equipped to understand the sorrow that has taken a grip of Norway. Norway has lost its innocence. But even worse is to grasp the evilness in the person doing the crime. How can anyone be so vicious? And what formed him and why?

Today we also learnt of Amy Winehouse, 27. Amy, on the other side, never really appreciated life. She understood so many things visible in her artistry, but on the other hand she did not understand to take care of life as a gift. In contrast to Norway, where people were killed, she lived a life that would kill her too very young. What a contrast.

Being a good business leader requires you need to keep a mature, sound and balanced mind and physical stamina. You must be able to balance targets and goals with what really matters in life. The best way to really understand is to get hit hard, at least once, I believe. Loosing and failing sometimes is a blessing. “Do not count the times you fall, only count the times you get back up.”

7 Hot Topics in the Previous Peer Meeting in May 2011

These were the 7 hot topics in the previous peer meeting in May 2011 and how many per cent of the peers mentioning them.

Topic for meeting May 2011	% Peers Highlighting	Description
Systems	46%	SWIFTNet and moving away from banking terminals, implementation of SSC with payment and collection centers. STP and integration. Niche TMS versus ERP TMS. Introducing Business Intelligence (BI) tools benefitting from technology shift in that area
Revolving Credit Facilities	42%	Concern for bulk of rollovers in 2012 disappearing. Early renewals and improved pricing. Some uncertainties from banks on their strategies but mostly calm
Cash Management	42%	Enhancements of cash pooling solutions, implementations of in house bank solutions and SSC for AP and AR. Bank connectivity. Centralizations and cash concentration continues
Economic Conditions	29%	Major concerns on inflation, presently for commodities but also expecting to spread into other sectors. What will be the consequences for business models, funding and risk management? Another major concern is the EUR zone stability and mitigation plans if it breaks up. Developing models to adhere to unexpected and anticipated changes and liquidity in market conditions
Updating Hedge Accounting regulation	25%	New changes in HA will affect present models. Expectations on adopting feasible HA of commodities
Optimal Capital Structures	25%	How to spread the funding risks and shall we have an on-balance cash cushion or rely only on committed lines? US Private Placements presently popular “new” market for European treasurers. How shall the structure be to improve rating? Increased level of financial engineering
Organisation	21%	Increased treasury profile, cash focus and treasury integration to operating companies force changes to treasury organisation and processes. Improvements to become for efficient

Decreased Risk Aversion

I doubt we will see large excesses in risk taking during the next decades with the experiences we have had. But the risk aversion high readings in 2009 has subdued amongst corporates. Now we even start to discuss how to improve yield on our cash cushions. We have the three variables in our investment portfolios S = Security, L = Liquidity, and Y = Yield. SLY has been the prevailing order, now we receive expectations on the need for higher yields. The boards realize the effects of negative carry from the cash cushions but might forget them being an insurance premium. This tendency is a warning sign, I believe. Is it worth it to decrease S and L in favor of Y? 10-20 basis points extra? What is the price we will pay?

We are continuously reminded we might be in the eye of the storm. Greece, Italy, Spain, and bank stress tests failing (read Ireland).

When regulation forces banks to decrease risk in their portfolios, corporates should not increase it.

Are We In the Eye of the Storm?

During the past few peer group meetings we have been mostly focused on process improvements, and policies and such issues. The funding conditions have improved substantially and can be regarded as normal, I would say, and has therefore rendered little attention.

But with Italy starting to become a great concern after Greece and Portugal, is the next storm soon to come?

The calm we have seen is not normal but have given us the opportunity to prepare for our future challenges. Because that is what we have been doing. We have turned into business leaders, we have diversified our funding, and we have analyzed our risk positions (including implicit risks hidden in contracts and ledgers). We have gained a much better understanding from the board on financial risks and funding issues. The group KPI has a much improved cash flow perspective. So we are prepared for a storm. But what will ignite the storm this time? PIIGS? Or something else? What will be the Black Swan this time? Or will the central bank’s QE and high credit risk strategies postpone or even eliminate the next storm? Is pouring money into the system and adding regulation avoiding future storms?

Meeting With A Credit Agency

At one of the peer group events we met up with a Credit Rating Agency (CRA) to get their views on how banking business models will change as a consequence of new regulation and capital requirements. Some of the conclusions:

• Proprietary trading will become expensive and is shredded à lower liquidity in markets
• OTC will be very expensive and plain vanilla/exchange traded instruments cheaper
• Fee based banking requires very little capital
• Banks will be incentivized to lend short term

This in turn will lead to:

• We will probably not have any global banks providing a full product portfolio
• For the SME sector, well they can forget bank funding with reasonable collateral requirements

Basically the regulators want to further decrease bank lending to the corporate sector. Previously the venture capitalists and the hedge funds took on that risk (read more here). But who will assume the lending responsibility now? Or shall the corporate sector expect not having sufficient cash to build and grow?

It is definitely a problem that the bureaucrats and central bankers are creating the rules for the financial market. Many of them are hugely risk avert and believe that decreased risk in the banking sector will bring good to society. But who will bear the risk of funding corporates and SME? The basic problem is probably that most bureaucrats and politicians have no clue how welfare and societal value is created. It is in the corporate sector, stupid!

We also need to consider that the high taxation in Europe drains the corporates and SME on cash and that cash has to be replaced. A natural consequence of the reduced lending must therefore be to lower cost when employing by reducing taxes. Probably that is the way forward.

Returning To Take Up My Blog Again

One year goes very, very fast. I’ve have had lots to do. Started up new businesses and changed my life in many other ways. It feels like I’ve taken a lot of good decisions. It’s sometimes necessary to make a halt in life and evaluate which road to take. Meanwhile I had to move the blogging into a lower priority level.

Anyway the European Treasurers’ Peer Group has been doing very well this past year. We have had our meetings regularly and have improved our reach and taken opportunities to meet with central banks and other major players to make them aware of the corporates’ needs from the financial market. I’ve been surprised by how bank centric some of the central banks are. No wonder the Basel framework could be implemented in the previous form. I must say though that the central banks are more humble now and understand that regulation is not the answer to everything.

The corporate treasury industry is mostly experiencing a calm period, feels sometimes like we are in the eye of the storm. During 2008-09 we were definitely in full storm and we have now emerged with new roles in our companies and being much more business oriented than before. Previously the treasurer was more like a turbo accountant (read: “hedge accountant”). Now we have grown into business leaders.

As one of the peers so wisely put it: “Treasury is moving from transactional processing to a business partnering role”.

Glad to be back. See you soon.

/Magnus