April 26, 2024

Economix Blog: From Lehman to Cyprus

FLOYD NORRIS

FLOYD NORRIS

Notions on high and low finance.

The European decision not to honor deposit insurance in Cyprus, by making all depositors contribute to the cost of a bailout, reminds me of the decision to let Lehman Brothers go under. Moral hazard is being avoided. The question is what that will cost.

In the case of Lehman, the cost turned out to be far greater than anyone expected. Suddenly the crisis was affecting money market funds. We learned to our discomfort just how interrelated the world’s markets were. I doubt anyone involved in making the decision thought about money market funds until they learned one had just blown up, thanks to the Lehman failure.

In the wake of all the bailouts that followed Lehman, something of a consensus has evolved — at least among non-central bankers — that those who fund bad banks should suffer. Bank bondholders are clearly at risk.

But Cyprus banks apparently don’t have many bonds. If someone is going to suffer, it will be the depositors. So the clever idea of a one-time tax on bank deposits was adopted. It did not help the cause of the depositors that a lot deposits seem to come from Russian moguls, not exactly a sympathetic group.

But Europe should have learned from Britain’s fiasco at Northern Rock that deposit insurance matters, particularly for relatively small accounts. If they can wipe out such insurance in Cyprus, why not Spain? Or Italy? Or even France?

There is a risk that a lot of money will flow out of troubled countries’ banks. Those flows had started to reverse last year, after the European Central Bank stepped up to print money and reassure investors in government bonds. Now, there is every reason for depositors to seek out banks in the safest countries — and that means Germany.

Europe stands to save $7 billion out of the $17 billion a Cyprus bailout would cost. How does that compare with the cost of a run on Italian banks? There is no evidence the Europeans weighed that. Just as there is no evidence that the United States Treasury had any idea at all just how disastrous it would be if Lehman were allowed to fail.

The time to avoid moral hazard is when there is none. How is it that Cyprus banks were allowed to have capital structures that meant depositors had to suffer? How was it that Lehman had no liquidity when it needed it? Bad regulation is the answer.

Markets are down on Monday, but not disastrously. Perhaps it will turn out my fears are overstated, and that depositors will not panic in other countries. Let’s hope so.

Article source: http://economix.blogs.nytimes.com/2013/03/18/from-lehman-to-cyprus/?partner=rss&emc=rss

Lowe’s Fourth-Quarter Earnings Beat Expectations

The results are a sign that people are beginning to feel better about spending money on their homes as the housing market slowly recovers.

Lowe’s chief executive, Robert A. Niblock, said the company was seeing a pickup in spending even in areas of the country hit hardest by the housing slump, like Florida, Arizona and California.

“Rising home values have given homeowners additional confidence in spending on their homes,” Mr. Niblock said in an interview.

Lowe’s net income fell 11 percent from the previous year’s quarter, which included an extra week of revenue. Its earnings forecast for the year was below expectations but its revenue projection beat the consensus.

Lowe’s has revamped its pricing structure, offering what it says are permanent low prices on many items across the store instead of fleeting discounts. It has also focused on hiring more workers and improving its inventory.

In a call with analysts, Lowe’s chief customer officer, Gregory M. Bridgeford, said the pricing strategy helped spur strong sales of cabinets and countertops, tools and outdoor power equipment.

Lowe’s reported net income totaled $288 million, or 26 cents per share, for the three months ended Feb. 1. That was down from $322 million, or 26 cents a share, a year earlier. Analysts expected 23 cents a share in the latest quarter, according to FactSet.

There were 11 percent fewer shares outstanding in the latest quarter than a year ago. An extra week in the quarter last year had increased year-earlier earnings by 5 cents a share.

Revenue fell 5 percent to $11.05 billion from $11.63 billion a year earlier. Analysts had expected sales of $10.85 billion. Revenue in stores open at least one year rose 1.9 percent. The measure is an important gauge of a retailer’s fiscal health because it excludes stores that open or close during the year.

Lowe’s, which operates 1,754 stores in the United States, Canada and Mexico, expects fiscal 2013 net income of $2.05 a share. Analysts expect $2.10 a share.

The company expects revenue to rise 4 percent, implying revenue of $52.54 billion. Analysts expect $51.69 billion.

Article source: http://www.nytimes.com/2013/02/26/business/lowes-fourth-quarter-earnings-beat-expectations.html?partner=rss&emc=rss

Corner Office | Geoffrey Canada: Geoffrey Canada of Harlem Children’s Zone, on Remembering Basics

Q. What were some early management challenges for you?

A. At a school in Massachusetts where I once worked, we managed early on through consensus. Which sounds wonderful, but it was just a very, very difficult way to sort of manage anything, because convincing everybody to do one particular thing, especially if it was hard, was almost impossible.

Q. How big a group was this?

A. There were about 25 teachers and instructors and others. And very quickly I went from being this wonderful person, “Geoff is just so nice, he’s just such a great guy,” to: “I cannot stand that guy. He just thinks he’s in charge and he wants to do things his way.” And it was a real eye-opener for me because I was trying to change something that everybody was comfortable with. I don’t think we were doing a great job with the kids, and I thought we could perform at a higher level.

It was my first realization that people liking you and your being a good manager sometimes have nothing to do with one another. And I really like people to like me. I was always the kind of person who was a team player. Then I found out that that worked in theory just fine, but it made no sense when you were trying to do difficult things.

Managing under those circumstances became difficult because I think it’s one thing to manage when people are rooting for you. It’s different when people really aren’t rooting for you, and they want your plan not to work to prove that they were right and you were wrong.

Q. What other takeaways did you get from that experience?

A. Convincing people to give your way a try will work if you neutralize — and sometimes you have to cauterize — the ones who really are against change. They’re the kind of person who, if you tell them it’s raining outside, they’ll fight you tooth and nail. You take them outside in the rain, and they’ll say, “But it wasn’t raining five seconds ago.”

I spent a year trying to convince those people to change and give me a chance. Then I realized that was a wasted year. I’d have been much better just to simply say O.K., thank you, difference of opinion. Go do something else with your life. Let me work with this group of folks and move forward. And then you can rebuild that relatively quickly.

Q. And so, your approach now?

A. Now I am very clear with people that I will respect your opinion, and I will listen to the range of issues on the table, but once a decision is made, even if you don’t agree with it, it is your job to make me right. That’s just how it goes. Then, in the end, if it turns out that we’ve worked as hard as possible and I’m wrong, I’ll just say, ”O.K., so let’s change.” I’ve also been convinced of some paths we should go down when people make a reasonable case. You want to encourage the kind of risk-taking behavior that keeps organizations moving forward.

You have to drive folks to innovate. The tendency in lots of large organizations is to try and find a comfortable place where you think you can get measured rewards for measured work. In other words, they say to themselves, “I know how much I’m going to get if I do this much, and then my life is in balance.” I just don’t think you get a lot of innovation under those circumstances. You want people to figure out how to do things better, to figure out a smarter way. When that’s a constant process, you start seeing things innovate. It’s not because someone comes up with some brand-new idea where you say, “Oh, no one’s ever thought about this before.”

Q. Other thoughts on innovation?

A. Innovation sticks for about 18 months. So let’s say you put a great innovative program in place. You put the right people on it, you get everything organized, and then if you don’t come back and do anything with it for 18 months, that program’s half as good as when you started it. They just start decaying.

And I think one of the challenges for us in this business, in management generally, is that nobody wants to keep going back and doing the same thing over and over. Everybody wants to get this brand-new idea and really get it going, instead of paying attention to the other things that are fundamental to our business. If you don’t go back and check on a regular basis, those things begin to decay, and you end up constantly having to reinvent something that you already did. Getting a team of people who really understand how essential that is to staying great is one of the real challenges.

Q. What are some other leadership challenges that you deal with?

Article source: http://www.nytimes.com/2011/12/18/business/geoffrey-canada-of-harlem-childrens-zone-on-remembering-basics.html?partner=rss&emc=rss