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Saturday, November 22, 2008

Ahead of the Curve: Harvard Business School Book mixes with our government’s recent history

I just finished up Ahead of the Curve: Two Years at Harvard Business School by Philip Delves Broughton, a memoir about his recent experience as a graduate student at Harvard Business School, class of 2006. Considered by most as the pinnacle school to receive that prestigious MBA at, Broughton’s story (and the title aptly reflects) on what we should be considering during these difficult times, and on the people who make these decisions.
As a first aside, President George W. Bush (’75) and Treasury Secretary Henry Paulson graduated from Harvard Business. President-elect Barack Obama received his Juris Doctorate from Harvard. Michael Bloomberg, New York City mayor, amongst other things, is a MBA from Harvard. The always quick-to-be-proud of his business acumen, ex-presidential candidate, Mitt Romney, did his work at the Crimson. And today, on the 45th anniversary of his assassination, it should be noted Kennedy graduated from Harvard (cum laude) in 1940, majoring in government. (Thus the Kennedy School of Government.)

So indeed, being a Harvard grad has its potential perks and peaks of power.

Englishman Broughton wrote for a living before stepping into the hallowed foray that is Harvard. As a neophyte to the world of banking, finance, hedge funds and leverage buyouts, he got a crash course in what is the terminology, psychology and manipulations of business numbers, and where it would lead him even before he got started on his two-year trek. As he soon learned, there are no clear answers; just measurements of risk and reward, possibilities defined better, and the balance of what is important to know in business, and in life.

Relating to current financial malaise, a passage from the Ahead of the Curve:
“…I once asked a hedge fund manager in New York about the reckless way credit
was sold to people who could ill afford it. I said they would be ruined. They
would lose their homes and their possessions. Where were the checks on all of
this? What would happen to all these firms lending like crazy when people
stopped paying back their loans? The hedge fund manager looked at me like I was
a madman and said, ‘It’s just economic.’ He meant that over time these borrowers
would learn their lesson. The bankrupted lenders would be bought cheaply by
other investors and turned around. The economic wheel would keep turning, no
matter how many lives had been crushed against it…” (pgs. 232-233)

As we have seen with the demise of Lehman Brothers, Bear Stearnes, WaMu, IndyMac and others likely in the queue (GM, Chrysler, Lear), the economic wheel is spinning quite well as it has indeed crushed retirement funds, and stocks and put people out of work in droves. (Citigroup announcing 50,000+ in job cuts in one week.)

Our current leader, George W. Bush, seems to have adopted a technique not-as-yet-perfected when he attended Harvard, but discussed in Ahead of the Curve, the levering up through debt. This preferred technique, of financing a buyout mainly through debt, thus recording interest paid as an expense (on that debt), produces more return on equity, to equity stakeholders, thus making them extremely happy. It works if you produce a profit, can generate the cash to pay the interest payments, and can keep other expenses down, preferably through frugality to all other concerns. At some point, you take the enterprise public again with all the miscellaneous expenses cut, but likely only a real benefit to the LBO starters of the once-fat company. The actual company, the workers, are unlikely to have received any benefits.

(2nd aside) How this relates to our current government: During the Bush administration, we have ‘levered up’ the balance sheet of the United States. Taking on more debt, trying (but not succeeding) to trim other programs (those nasty entitlements) while keeping taxes on those multi-millionaires low, even giving a tax holiday to them for a decade. The low-interest rates that spurred out-of-control lending to the non-financially savvy, and the opportunists, that both got caught in the wheels of sub-prime and housing market free falls, has loaded up more debt on the U.S. Treasury balance sheet. We continue to make our interest payments on a $10,000,000,000,000 national debt, of at least $500,000,000,000. But when do we run out of fiat money? (At least if you don’t print and print, devaluing our currency to the point of worthlessness.)

But as we’ve also seen, the entities under the auspices of too much leverage have indeed failed when the cash flows stopped to these many, many banks, insurance companies, manufacturers, retailers, and now, oil entities. The deflation of the value of things is reminiscent of the Great Depression.

We are now Behind the Eight Ball: What Harvard Business School Did Not Teach President Bush.

With a new President, Obama will have to get well ahead of the curve in order to stave off the impending doomsday scenario discuss on more than one occasion here, and now, at many other media outlets.

As Broughton also learned, business is not solely the most important entity – as ex-CEO of GE Jack Welch had surmised, quite smugly – as the government too, has its place. For one, without a government in operation, a business cannot protect its interest via laws or the enforcement of contracts. (A business would have to act as a thug to accomplish contract enforcement. Essentially, become a government entity with enforcers and judges of people’s misdeeds.)
The argument made by Welch, that government generates no revenues, and business generates all the money, so we can ignore governance, leaves aside that a symbiotic relationship has always existed. Businesses can exist without government, but only for so long as people ascribe to obeying business edicts. Otherwise, chaos and revolt and failure soon comes. Governments can exist only if people are willing, and led to accept its rules, and abide under its control. And provides some benefit, else why have it. Neither operates in a vacuum.

The book presents Broughton engrossed in the whys of how he decided on Harvard B-School, only to not go immediately from there to a big corporate job, either as an marketing/product manager at Google, a hedge fund operator at Bain, an overworked, type-A financier on The Street, or a start-up city controller as he envisioned in one entrepreneurial leap-of-faith posited. Mr. Broughton’s book maybe a business school companion volume of One L by Scott Turow, the exploration of what it is to become a legal mind and those ramifications, but it truly reflects, that writers, are what they are: able to mirror, emote, characterize, judge and divine truth when at their best.

That somewhere on the curve, there is a path to another road, with another curve to come out ahead on.
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