Sunday, November 02, 2008

Loan Shark Economy

Last year Forbes ran an article that I found worthwhile reading. It dealt with the phenomena of *seller financing* and was titled: Loans "R" Us.

Definitely read the article. Over the last few years many companies hit *growth ceilings* and they responded in myriad ways. The banks lobbied for deregulation and increased leverage. Many other companies diversified into *finance*. The lead example in the Forbes article is Harley-Davidson who "finances half the hogs it sells." And, of course, also mentioned prominently is General Electric whose finance arm was reining in a full one third of its overall profits in 2007.

Also, Sony's finance arm was responsible for an astounding 82% of its profits last year.

The killer line in this piece was:

Frederick Hickey, author of newsletter High Tech Strategist, says companies tend to make loans to meet sales goals today, and worry about if they picked the right borrowers tomorrow.


I'd say that also sums up the recent demise of most American banks. Management was incented to push loan volume and reap hefty fees and bonuses in the present with absolutely no regard for the long term risks they were adding to the balance sheet.

There's not much that can be done about this inherent corporate flaw. After all, pro sports coaches are also always playing it safe, trying to win games today that they may have a job tomorrow. Develop the young talent? Hah, let the next guy do that. Ever see Hall of Fame NBA coach Larry Brown play a rookie?

So the burden falls on the owners of sports teams and the owners of companies - investors - to keep management's time horizon in sync with theirs.

Don't expect any help from crony-ridden boards of directors.


Anonymous said...

Did you see the article in the NY Times last Sunday regarding this *exact* topic? Crazy.

CaptiousNut said...

I did not.

In the NYT?

I am going to have to rethink my thesis then!