Accelerating out of the Great Recession: How to Win in a Slow-Growth Economy (BUSINESS BOOKS) - Hardcover

Rhodes, David; Stelter, Daniel

Hardcover

ISBN 10: 0071718141 ISBN 13: 9780071718141

Verlag: McGraw Hill, 2010

Inhaltsangabe

"What better opportunity than now to strengthen your business and come out of the recession even stronger? David Rhodes and Daniel Stelter provide an easy-to-understand perspective on the current economic environment, and some practical strategies to help readers come out ahead. A timely read for all who care about their business."
―Paul Polman, CEO, Unilever

"This is the most comprehensive assessment of the global economy that I've seen and is a must-read for any business, economic, or governmental-related leader".
Jeff M. Fettig, Chairman & CEO, Whirlpool Corporation

“A fascinating account of the causal factors of the meltdown and what we can do to avoid repetition.”
Sanjay Khosla, Executive Vice President and President, International for Kraft Foods

"This book combines brilliant analysis and strategic insight with a clear message: Companies that want to play a role in tomorrow's markets must act immediately. There's no place for complacency. The opportunities in the post-crisis world are good--and better than many might think."
Dr. Jürgen Hambrecht, CEO, BASF

"The lessons from companies that came out winners during past recessions are invaluable in the current context. Rhodes and Stelter strike a welcome note of optimism in today's tough times by showing that companies can do a lot to thrive when the global economy is struggling."
Dr. Dieter Zetsche, CEO, Daimler

"There are great lessons for today's chief executives: well-managed companies can prosper in the downturn and accelerate faster than their competitors in the upturn. Rhodes and Stelter have dug deep into history to vividly show how companies can do it."
Dr. Martin C. Halusa, CEO, Apax Partners Worldwide LLP

From the world's leading business strategy consultancy comes this essential guide to prospering in the aftermath of what is being called the Great Recession

Accelerating Out of the Great Recession, by The Boston Consulting Group's David Rhodes and Daniel Stelter, is a call to action for today's executives. It shows how companies can win in a slow-growth economy by seizing the initiative--differentiating themselves from less fleet-footed rivals and executing their strategies with single-minded determination.

It combines comprehensive and big-picture analysis of the global economic meltdown with smart management advice on how to win in an era of greater competition. The book is underpinned by a historical review of great companies that survived and thrived in past downturns, along with two new surveys of top executives and insights drawn from discussions with corporate leaders around the world. As such, it offers the clearest, most authoritative assessment yet of some present-day trends and "new realities"--and what they mean for business.

Accelerating Out of the Great Recession shows today's executives how to:

• Learn from the decisive actions taken by companies such as General Electric, IBM, and Proctor & Gamble in order to accelerate out of past downturns
• Take the fight to your competitors--diversify and expand now, while other businesses are affected by the downtown
• Shake off conventional wisdom to protect and grow your market share
• Develop a new managerial mindset for today's tough times

Backed by exceptional research and outstanding, up-to-the-minute advice, Accelerating Out of the Great Recession explains the magnitude and enduring nature of changes that have taken place in the global economy and how you can outperform today to create and sustain an advantage over your competitors for the long haul.

Über diesen Titel

Über die Autorin bzw. den Autor

David Rhodes is a senior partner and managing director of the London office of The Boston Consulting Group and the global leader of the Financial Institutions practice.

Daniel Stelter is a senior partner and managing director of the firm’s Berlin office and the global leader of the Corporate Development practice.

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ACCELERATING OUT of the GREAT RECESSION

How to Win in a Slow-Growth Economy

By David Rhodes, Daniel Stelter

The McGraw-Hill Companies, Inc.

Copyright © 2010 The Boston Consulting Group, Inc.
All rights reserved.

ISBN: 978-0-07-171814-1

Contents

ACKNOWLEDGMENTS
INTRODUCTION In the Aftermath of the Great Recession
PART ONE What Happened and What Happens Next
CHAPTER 1
CHAPTER 2
PART TWO What To Do
CHAPTER 3
CHAPTER 4
CHAPTER 5
CHAPTER 6
APPENDIX A About Our Methodology and Sources
APPENDIX B About Our Surveys
NOTES
BIBLIOGRAPHY
INDEX

Excerpt

CHAPTER 1

The Damaged Economy

It is tempting to say that the crisis is over. The "Great Recession," as it isbeing called, did not turn into a second Great Depression. Unprecedentedintervention by central banks and governments averted worldwide economiccatastrophe.

And signs of stabilization have appeared: optimistic experts increasinglyoutnumber pessimistic experts, the slump has bottomed out, and pockets of growthhave emerged.

So why not declare an end to this gloomy chapter and get back to normal?

Because, unfortunately, the fundamental problems of the world economy have notyet been resolved. The dependence on heavy-spending consumers (particularly U.S.consumers) remains; many important banks are still weak, and it will take yearsbefore they return to full health; and the economic scoreboard shows a drop ineconomic activity not seen since World War II.

According to recent estimates from the International Monetary Fund (IMF), theworld economy shrank by 1.1 percent in 2009. The advanced economies (especiallythe exporting ones such as Germany, Japan, and Korea) suffered the most,shrinking by 3.4 percent during this period.

But even the emerging economies fared poorly—except China, whose growthrate (buoyed by fiscal stimulus) slowed to 8.5 percent in 2009 from 9.0 percentin 2008 and 13.0 percent in 2007. Russia contracted by 7.5 percent, having grownby 5.6 percent in 2008 and by 8.1 percent in 2007. Brazil fell by 0.7 percent,having enjoyed growth of 5.1 percent in 2008 and 5.7 percent in 2007. And Indiasaw growth of 5.4 percent, down from 7.3 percent in 2008 and 9.4 percent in2007.

The impact of the crisis on world economies would have been even worse withoutthe drastic measures taken by governments and central banks. Governmentsmobilized an unprecedented amount of money in an attempt to right their economicships. Estimates range from a massive $5 trillion to a truly staggering $18trillion to stabilize the financial sector and $2.5 trillion to stimulate demandin the "real economy"—where the production and consumption of goods andnonfinancial services takes place. The IMF puts the estimate at an impressive 29percent of 2008 gross domestic product for the advanced economies. Meanwhile,leading central banks have lowered interest rates and taken aggressive measuressuch as quantitative easing—the direct purchasing of financialassets such as government bonds. As a result, the balance sheets of the centralbanks have grown significantly since the crisis started in the summer of 2007.The U.S. Federal Reserve's balance sheet grew by 229 percent from July 2007 toJuly 2009.

These measures have arrested a slump that was, until the summer of 2009, lookingvery similar to the Great Depression of the 1930s. This was the picture paintedby Professors Barry Eichengreen of the University of California, Berkeley, andKevin H. O'Rourke of Trinity College in Dublin in their paper, "A Tale of TwoDepressions." Between 2007 and 2009, production and world trade dropped evenfaster than they did in the Great Depression. The major difference between thenand now has been the fiscal and monetary policy and the aggressive measurestaken to stabilize the global financial system. In making these moves,politicians and bankers did, in fact, heed the lessons of the Great Depressionand the Lost Decade in Japan. In so doing, they were acting on therecommendations of Depression-era economists such as Irving Fisher and JohnMaynard Keynes. Thanks to these coordinated efforts, a second Great Depressionwas avoided.

Even so, we need to recognize that the initiatives to "reflate" the globaleconomy amount to an unprecedented and historic experiment. Some of thesemeasures, although discussed theoretically, have not been put into practicebefore. So the big question remains: Is this the end of the crisis, or will thecrisis simply follow a different pattern?

To answer this question, we need to examine the background of the currentfinancial and economic upheaval since it burst into the public consciousness in2007.

How It Happened

We all know that a crash in U.S. property prices triggered a leverage crisis inthe subprime-mortgage securitization market. This, in turn, triggered a globalliquidity crisis, which itself contributed to a solvency crisis among some banksand an increase in the pressure to deleverage. When this led to a furtherdecline in asset prices, the whole cycle repeated itself.

It was inevitable that such enormous financial dislocation would lead tosignificant collateral damage to the real economy. Falling asset prices and theprospect of an economic slowdown dented consumer confidence. Lower demand and ashortage of credit—because of the liquidity squeeze—combined todrive companies toward conserving cash, reducing output, lowering capitalexpenditure, and laying off workers. Small and medium-sized enterprises wereparticularly affected as banks cut back their lending in an effort to stabilizetheir balance sheets, which, in turn, made a bad situation worse and drove somecompanies into bankruptcy.

The bottom line: the subprime crisis led to a solvency crisis in the financialsector. This, in turn, led to a recession in the real economy, which furtheramplified the problems for the financial sector as credit losses increased. Andas losses continue to increase and credit tightens, the constraints in thefinancial system collide with an increasing number of personal and corporateloan defaults that naturally follow when economic conditions deteriorate. Thetwo cycles feed off each other.

If there is one phenomenon that best characterizes the irrational behavior thatunderpins the crisis, it is the history of home values in the United States. AsRobert Shiller, an economics professor at Yale University, has demonstrated,U.S. house prices in any given year up to 1997 had virtually always been withinabout 15 percent of house prices in 1890, when adjusted for inflation (the onlyexception being the 25 percent drop between the two world wars). In 1997,though, U.S. house prices started to rise dramatically. In just 10 years, theinflation-adjusted price of a U.S. house doubled. In 2006, at the peak of thebubble, Shiller's index reached 202.9 (in 1890, the index stood at 100).

The increase in U.S. house prices was underpinned by the ready availability ofdebt, particularly after interest rates were cut to 1 percent in order tostimulate a faltering economy in the wake of the 9/11 terrorist attacks. From2005 to 2007, additional impetus was provided, first, in the form of aggressiverisk taking by highly leveraged financial institutions that funded theunsustainable rise in house prices and, second, by the promotion of artificiallylow-priced adjustable-rate mortgages. With high risk came high reward, at leastinitially. As returns from mortgage lending increased, banks came to rely onthem to drive up their profits. In essence, this turned banks from agents intoprincipals: rather than fulfilling demand in the market, banks were driving thesupply of easy credit.

Underlying all this were three widely held assumptions: that thecreditworthiness of borrowers was strong, that investors were sophisticated, andthat credit risk was widely distributed.

Unfortunately, these assumptions were seriously wrong.

The Creditworthiness of Borrowers Was Lower Than Expected

The first assumption—that borrowers' creditworthiness was strong—wasbased on the knowledge that credit losses had, in fact, been relatively limitedfor years. There was, however, a dangerous circularity to this logic. Thebelief—held by both lenders and investors—in the creditworthiness ofhomeowners drove spreads lower. This, in turn, caused marginal borrowers toappear more financially attractive than they really were and made it easier forlenders to justify giving them loans.

Many lenders also believed that the more financially constrained borrowers wouldnot be a problem because they would be sheltered by ever-rising home prices. Theintroduction of home-equity release products enabled many borrowers to treattheir homes as if they were ATMs (automated teller machines).

For those who wanted to look, the information about what was really happeningwas readily available: the doubling of U.S. house prices in real terms over just10 years, the fact that consumer debt doubled as a percentage of GDP between1974 and 2007, and the collapse in U.S. savings rates from around 11 percent inthe late 1980s to below zero in 2005.

But lenders insisted on lending to people who could not afford the homes theywere buying or who were increasing their debt as house prices rose—leadingto rapid growth in the innocuously named subprime market.

The Sophistication of Investors Was Also Low

The second assumption—that investors were sophisticated—providedfurther false comfort. Because they had unprecedented access to data andanalytics, lenders and investors were assumed to be exceptionally adept.Advanced financial technology meant that risk could be finely tailored to theirspecific needs. Bolstered by credit insurance and endorsed by rating agencies,this risk was assumed to be negligible.

Consequently, the capital applied against the perceived negligible risk wasminimized, and this allowed for a rapid expansion of this asset class. Thismodus operandi ignored both the poor quality of the underlying collateral andthe enormous increase in bank leverage needed to make money from a business withincreasingly thin margins.

Risk Was More Concentrated Than Was Widely Believed

The third assumption was that risk was widely distributed among globalinvestors. Even if credit worsened and analytics failed, so the logic went, theabsence of concentrated risk would prevent systemic problems. This belief, morethan any other factor, explains why—instead of being wary of a marketbubble—people were under the impression that this time things were, andwould continue to be, different. What seems so surprising is that thisbubble came hot on the heels of—only seven years after—the burstingof the dot-com bubble.

Unfortunately, not only was homeowner credit suspect, the market too had misreadthe risk. In the ensuing panic and resulting liquidity crisis, the safety net ofrisk analytics and ratings was revealed to be an illusion. When investorsrealized that the risk was largely concentrated in bank balance sheets, theirconfidence in the financial system eroded rapidly.

How Global Markets Absorbed So Much Risky Borrowing

A critical and related question now begs to be asked: Why did global capitalmarkets grow as fast as they did, and how were they able to absorb so muchborrowing that appeared to be—in retrospect anyway—so risky?

The answer lies as much in the banks' economics and investor demand forapparently low-risk fixed-income securities that offered good returns as it doesin the insatiable appetite of consumers for debt to fuel their spending.

That the banks had become principals, as opposed to merely agents, played animportant role in this bubble dynamic. This is so because they (particularlyinvestment banks) were using the profits from their leveraged investments inthese risky assets to mask the deteriorating profitability in their coretraditional businesses.

In the early part of the decade, with U.S. Treasury bonds offering low returnsfor the foreseeable future, Wall Street met investors' demand for newinstruments by packaging higher-yielding mortgage debt into (apparently) AAA-ratedsecurities. But the incentives driving the mortgage originators andsecurities distributors created a moral hazard: their rewards were not alignedwith sound credit-underwriting principles or the distribution of assets backedby sound collateral. Credit was granted to noncreditworthy individuals, packagedinto securities, and pushed out into the market. And seemingly unlimitedinvestor demand inflated the bubble further.

The impact of this bubble on the profitability of the financial sector wasimpressive: if discretionary bonuses are added back, the financial sector'sshare of total profits of the U.S. corporate sector rose to close to 50 percentin 2007—up from levels of between 20 and 30 percent in the late 1990s.

When the asset bubble burst, broker-dealers and many banks found themselves witha significant exposure to assets that they thought were sitting off the balancesheet in special-purpose vehicles. Having leveraged up some 30 to 40 times oncheap debt in order to make the numbers work on thin profit margins, they hadminimal equity cover for the significant (unrealized) losses caused by markingthe investments down to market value. Counterparty alarm set in, and moneymarkets froze as banks panicked about creditworthiness and liquidity exposures.This led to a race to deleverage, reduce exposures to the interbank markets, andsafeguard balance sheets. While banks were the original victims, the contagionspread to the corporate finance markets.

Of course, some observers saw the crisis coming. But however loudly theyshouted, their voices were not heard because of the coalition of interests thatrelied on believing in the continuation of the bubble. We all know about theproblems of asymmetry between the employees of the banks—who wrote thebusiness and were well remunerated—and the banks that carried the risk; weknow about the mortgage brokers who originated business and did not care aboutits viability; we know about naive (or greedy) consumers, pushy investorsseeking enhanced returns, compromised rating agencies, and shareholders who didnot hold management to account; and we also know about governments and centralbanks that were only too happy to see a long-lived expansion of the economy withlow inflation and high employment.

But the opportunity to make money seemed too good to miss—or simply onefor which banks felt obliged to keep up with the competition. As formerCitigroup CEO Chuck Prince put it in the summer of 2007, "As long as the musicis playing, you've got to get up and dance."

All these factors notwithstanding, however, it is not clear that a crisis couldhave been averted even with a superior "systemic risk" regulator in place(unless that regulator could have reversed global trade imbalances anddemographic aging). At a certain point, the crisis was likelyinevitable—and, worryingly, as we discuss later, the underlying dynamicsremain in place. Financial market structure and regulatory reforms will not besufficient to address issues that emanate from the real economy. So there is avery real risk that the next bubble will build up and, in doing so, present arenewed danger for the real economy.

Furthermore, some of the underlying dynamics that contributed to the propertybubble remain. U.S. trade deficits created excess investable dollars incountries that ran a surplus, and much of it was allocated to fixed-incomeassets. At the same time, the baby boomers, approaching retirement, put agrowing proportion of their savings into fixed-income assets. Not surprisingly,these savings found their way (directly or indirectly) into the U.S. housingmarket, which was the rare market large enough to absorb the tsunami ofretirement dollars and provided duration and risk-return characteristicssuitable for these investors.

The Banking Sector Will Take Years to Recover

The latest estimate by the IMF puts total losses in mature credit marketsworldwide—primarily in Europe and the United States—at $3.4 trillionbetween 2007 and 2010. In the United States alone, write-offs of $2.0 trillionare expected—equal to about 17 percent of GDP in 2007. This damage isgreater than the losses of the Japanese banks from 1990 to 1999, which amountedto $750 billion (in 2007 prices), or 15 percent of Japanese GDP—and hasoccurred in a shorter time frame and on a global scale. Of the total write-downsthat the IMF forecasts will be incurred by banks, only 60 percent have beentaken thus far in the United States and only 40 percent in Europe.

As a result, banks have been scrambling to raise capital in order to meetminimum requirements for equity. Despite the substantial amount of capitalalready raised ($760 billion in the United States alone since early 2007), itseems inevitable that additional capital will be required to keep the banksalive. Even more will be needed if (as the consensus of the G-20 group oflargest economies indicates) higher equity rates are implemented as part of newregulations. Estimates by the IMF are grim for 2009–2010: after additionalwrite-offs, U.S. banks will have a net loss of $110 billion, and banks in eurozone countries (those belonging to the single European currency) and the UnitedKingdom will suffer a net loss of about $140 billion. To reach precrisisleverage levels (a 4 percent ratio of tangible common equity to tangibleassets), U.S. banks will need $130 billion in fresh capital, banks in euro zonecountries will need $310 billion, and U.K. banks will need $120 billion on topof what has already been raised.

However, if governments and regulators require capital requirements to matchthose that prevailed during the mid-1990s (a 6 percent ratio of tangible commonequity to tangible assets), then 50 percent more capital would be needed. In theUnited States and all of Europe, the IMF estimates that the demand for freshequity in banks amounts to more than $1 trillion, applying leverage levels ofthe 1990s.

In order to stabilize the banking system—which is as crucial for theeconomy as a whole as it is for the financial sector—a recapitalization isrequired. This could be achieved by the following actions:

1. Buying assets at inflated prices.

2. Direct capital injections.

3. Receivership and reorganization—the approach that the United Statesused in the savings and loan crisis in the 1980s and that Sweden used in itsbanking crisis in the 1990s.

Unfortunately, governments shy away from such direct interventions not onlybecause of the costs involved but also because the approaches—with theexception of the third—involve the transfer of taxpayer money to theshareholders and bondholders of the failing institutions. Only in the case ofreceivership do shareholders and bondholders lose (some part) of theirinvestment, and taxpayers get the option to claw back some of their money, aftersuccessful reorganization and reprivatization have taken place.

(Continues...)

(Continues...)

Excerpted from ACCELERATING OUT of the GREAT RECESSION by David Rhodes, Daniel Stelter. Copyright © 2010 by The Boston Consulting Group, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Details zur Ausgabe

• Verlag: McGraw Hill
• Erscheinungsdatum: 2010
• Sprache: Englisch
• ISBN 10: 0071718141
• ISBN 13: 9780071718141
• Einband: Tapa dura
• Anzahl der Seiten: 224
• Kontakt zum Hersteller: Nicht verfügbar
• Verantwortliche Person: Nicht verfügbar