This post could also be subtitled - Letting the bad news drip out ....
I find the current situation with the banks and their toxic loans as analogous to bad projects (and, for that matter, bad company results generally). Looking at the banks, their managers and analysts know the potential depth of the problems with their toxic loans and derivatives, but when senior management add up all the bad news they arrive at a number that is unacceptably large – announcing it would be disastrous for the bank and its balance sheet – and even more so for the bank’s directors and managers.
This is why the concept of a “bad bank” has failed to get off the ground. Banks would have to agree a valuation of each toxic asset (and the Government – once bitten twice shy – with taxpayers in mind, would insist on a worst case valuation, or close to it); those valuations would be disastrous and so this option would inevitably lead to full nationalisation, and the demise of many senior bank staff. So let’s not value the assets but talk about risk levels and insurance premiums – that will let us off the hook for a few more months and, perhaps, we can get the Government/taxpayer to take on responsibility for some of the worst assets at a limited cost to the bank....
Bad projects tend to have the same problem, with the bad news dripping out – rather than the true depth of the problems being revealed in one major announcement. A lot of this is down to human nature – hoping against all odds that a miracle will happen on the project to turn it around – rather than biting the bullet, truly identifying and evaluating all risks, extrapolating current progress and coming up with realistic timetables and budgets to complete the project.
A good Project Manager will do this when he takes a project on board – the equivalent of “due diligence” on the project. Unfortunately, a good PM frequently comes into conflict with the director or senior manager that employed him to sort the project out – the size of the problems identified, and the costs of the resolution can sometimes be unacceptable to the individual and/or his company. So a plan is derived to let the bad news drip out – keeping the customer and company, hopefully, happy and sufficiently locked into the project to accept regular but small increase in budget and timetable. Until, possibly after months or years, the true depth of the problem is recognised publicly.
As many of you will know, one of my roles is as “fire fighter” on problem projects (advert – give me a call if you’d like an initial, free consultation). I’ve seen several where senior directors/managers find themselves unable to accept the truth/depth of the problems they’re in – and yet in many cases, were they to admit the truth, and do something about it whilst there is time, in the longer term they will come out of it better off. Curing the problem with surgery and a spell in intensive care can be a better than applying lots of sticking plasters and hoping that the core problem will go away.
With three of the “fire fighting” projects I’ve dealt with, I’ve recommended that the projects be halted, most of the work to date thrown away, and a new approach adopted to complete the project. Only one company took my recommendation, went to their customer with the truth – and was surprised that the customer already suspected the depth of the problems, was pleased that the company had come to him both with a full statement of the problems and a proposed new solution – and agreed to the new solution.
Needless to say, both the companies that carried on with the projects largely unchanged lost a great deal of money, time and respect with their customers. In the end, both incurred losses much greater than the option I recommended, and their businesses were irreparably damaged in their chosen markets – their project managers bore much of the blame - but the senior management survived....
So with the banks, how will it end up?
As I predicted last year, and repeated earlier this year, full nationalisation seems inevitable. I predict that the banks will be unable to agree risks and premiums with Government for the toxic loans that are to be insured by the taxpayer. It will take a few weeks or months, but in the end Government will call a halt, and nationalisation will go through as the only solution (and it doesn’t require the banks nor the Government to fess up to the true size of the banking black hole created over the past ten years).