In Celebration of Bloggers

Sometimes I get to certain conclusions and recommendations long before mainstream pundits do. I like to think that, when this happens, it helps cement the credibility of this alternate media torrent we call blogging.

For instance, in Wednesday's Wall Street Journal, James Glassman and William Nolan took about half a page to come to the stunning conclusion that financial services giants took excessive risks about the time they ceased being partnerships, and began to bet other people's money.

No kidding.

Back about five months ago, I wrote this post, in which I observed,

"3. In the 1970s, many of Wall Street's formerly-private investment banks and retail wire houses- First Boston, Morgan Stanley, EF Hutton, to name a few- go public, reaping windfalls and subtly transferring formerly partner-shouldered risks of the firm's positions and businesses to thousands of retail and institutional investors."

And in this post, from July of last year, I observed,

"Only in financial services, the 'wheel' is between publicly- and privately-held concentrations of capital and risk management. Again, viewed from afar over decades, the story of commercial and investment banking for the past forty years has been a gradual selling of transactions, asset and risk management businesses at their 'tops,' as formerly-private banks of both stripes went public, followed by managerial ineptitude, decline in risk management, and excesses in pursuit of growth via more risk."

Or how about this post, from October, 2007, in which I noted,

"In short, it's risk management that brings down large, diversified financial service firms every time. More than anemic growth, excessive growth in one or two businesses inevitably leads to excessive risks, which are typically hidden from the credit and audit functions, as well as senior management. After all, the executives are playing with the firm's money, so it's a win/win or lose/win proposition for them. Either way, their firm takes any losses.

The days of smallish Wall Street partnerships in which risks were well-understood, acknowledged, and managed, because the partners owned the risk, are long gone now. Instead, diversified financial mega-firms such as Merrill and BofA own many business units, in which managers play a risky game to advance their careers.

Thus, the entire complexion of financial service businesses, markets, and the risks inherent in them, have changed irrevocably, as a function of the sector's current organization. That's why you can expect something like the current Merrill writedowns and firings every few years at one or more diversified financial giants."

And, back in August of 2006, in this post, I made the same point for the first time in this blog,

"As capital and capital markets activity began to mushroom unexpectedly in the early 1980s, investment banks scaled up massively to take advantage of the deal/money flow, and not be left behind as market share midgets. Not only did old wire houses end up as public entities, but so did firms like Salomon Brothers. As this type of growth accelerated, senior partners took their one-time windfall and went public, culminating with Goldman some years ago. In the consulting world, the same thing happened with the old "Big 8." Andersen Consulting eventually became the publicly-held Accenture.

Since public companies can't really have private partners, that model went out the window. And with it, the ability of the firms to internally manage through soft periods with their own plentiful capital. So, welcome to the world of management by objectives, or, as the author phrases it, "short-term greedy."

In short, just because something is published as an editorial on the pages of the Journal doesn't mean it's a fresh idea. Some of us working away quietly via daily blogs get to the same ideas much sooner.

Then we come to yesterday's Wall Street Journal. One Peter J. Wallison, of the American Enterprise Institute, waxed for half a page on how to thread the needle of valuation of toxic securities on bank balance sheets.

Funny how I came to a similar conclusion almost exactly a year ago, in this post, when I wrote,

"Why should a firm be forced to keep its balance sheet on a 'breakup' valuation basis? If the firm doesn't plan to sell itself or liquidate, why must every scrap of every asset be current-valued?

What about industry sectors in which substantial investment is required in assets whose value will grow with time, such as cable, mining, or technology? Or commercial banks which legitimately desire to be portfolio lenders to the housing sector, and, thus, are not affected by performing loans whose values are temporarily depressed due to market or credit conditions?

It's one thing to force market valuations on assets which are purposefully traded frequently, such as bond or equity funds. But forcing firms which own significant amounts of assets that are not intended to be liquid seems silly, especially if the 'market' for those assets temporarily dissolves, creating an apparent value of zero."

Since then, I wrote several other pieces arguing for, not a suspension, but a modification of 'mark-to-market' valuation to explicitly consider economic value, as measured by cash flows.

Again, it didn't take an AEI fellow to come up with this notion, either. Anyone with a background in commercial bank treatment of bad loans, reserve accounting, and 'workouts,' is already familiar with the notion of non-market, economic-value approaches to the valuation of instruments on balance sheets.

What does it portend for business idea generation when just a single blogger- me- can lead the Wall Street Journal on editorial topics of such import as these by as much as an entire year? I'm sure there are many other examples of talented business people writing informed, paradigm-breaking pieces well in advance of editorials in major media publications which echo the same ideas.