10 Years Later — 25 Lessons We Learned From The Financial Crisis
Dear Clients and Employee-Partners,
It has been 10 years since the nadir of the global financial crisis. In some ways this feels like ancient history that we can barely remember (nor want to). In other ways, it feels like it happened yesterday and the wounds are still open and painful. The world has changed tremendously this past decade and every one of us has learned, adapted, re-invented, and evolved as a result of living through this tumultuous period of history. We think the ten-year anniversary of such a globally devastating event is a good excuse to step back and reflect on the things that we learned from having a front row seat in the financial services industry throughout this period of time.
1. There is no such thing as a “slight liquidity crisis.” We have said this before and it sounds trite, but it is drop dead serious. It is always ideal to raise capital when you don’t need it and never when you must have it. It is very easy to forget when times are as good as they are today, but capital markets do close and funding does disappear. We are not talking about having to accept a higher coupon when issuing bonds or being forced to take a bigger discount on a stock deal. We are talking about the window being closed shut with no chance of it opening to raise capital. Do everything humanly possible to never allow yourself to be in the position of a margin call, whether personal or corporate. This means you must sacrifice some short term upside when things are good.
2. Culture does matter. You need to surround yourself with smart, high quality people who are aligned in motivation, have access to all relevant information and are empowered to raise questions, champion contrarian ideas, and challenge the status quo. Otherwise your odds of surviving when chaos hits are greatly diminished. If you insist on being the smartest person in the room and are looking for supplicants to remind you about how brilliant you are, it’s only a matter of time. Arrogance is the ingredient that guarantees eventual destruction.
3. When your competitors fall, it is not always a good thing. At first it may appear to be your good fortune when bad things happen to your competitors. The reality is that sometimes when your competitors are challenged, or in fact collapse, they can fall right on top of you. Contagion is real. The global ecosystem is important and healthy competition from well-funded and well managed companies allows for vibrant markets. It is not necessarily a zero sum game and healthy competition forces everyone to work harder, be smarter and avoid making big mistakes.
4. The world can act in a coordinated and mutually beneficial manner. One of the few benefits of the financial crisis is that we saw countries around the globe eventually act in a coordinated, intelligent and collaborative manner. It took bringing the world’s financial system to the brink, but at least we know we are capable of working together and putting our differences aside. Lately we worry that this symbiotic mindset has been badly frayed for a variety of reasons. Hopefully, it won’t take another massive global panic to cause us all to realize that we do need to work together to optimize our collective global opportunity.
5. Keep It Simple Stupid (KISS)! Anytime reasonably smart people can’t understand the complexity, nuance, volatility, or ramifications of new products or businesses---DANGER!!! It is great to be smart and clever, but you can be too smart and too clever, especially if you are not also governed by common sense and a sense of responsibility. If you can’t really fully understand something, it probably isn’t because you aren’t smart enough.
6. There are no secrets and news travels instantaneously. Good news travels fast and bad news travels faster. All the amazing technological advances that have made our lives so much better also mean our problems get virally transmitted in real time. The more serious the problem, the faster it is disseminated. Never forget this and always be prepared.
7. It’s all about the bonds. Today everyone only cares about stock prices and wealth creation. When things are calm, we worry about how we get more growth, profits, ROE and valuation. In good times few focus on bonds, covenants, liquidity, ratings or downside. This will change. If you pay attention to your bonds (in good times), you will be just fine when the painful periods return. Debt is not your money. You have to pay debt back. On time. Never forget that.
8. Momentum is a very hard thing to change. When there is wind at your back, the sailing is fast and fun. When it rains, it pours and pours and pours. There isn’t a lot to do to prepare proactively about this lesson. It is just important to always be aware how hard it is to change direction.
9. Don’t try to be anyone else. Many of the firms that had the hardest time in the financial crisis were firms that had brand envy of larger or more established competitors. If you are always looking ahead and the goal is to become someone else, shortcuts are often taken and then mistakes occur. Shortcuts include excess leverage, bad hires, ignoring culture, and a win at all costs attitude. Be the best firm you can be, not the best firm someone else already is.
10. It’s all about integrity. Your word is everything. In times of stress, people will give you the benefit of the doubt (for a while) if you have always told the truth. This means consistently under-promising and over-delivering. This means owning your mistakes and coming clean on a real time basis. This means you will publicly look like an idiot at times and people will question whether you are still competent. It means you probably won’t have any periods of time when you are considered brilliant. It does mean that over the long term, people may allow you the benefit of the doubt to keep building and doing your very best to create value. Never mislead, shade the truth, create false impressions, or lie. It’s kind of crazy we have to even list this as a lesson but just look at some of the current news stories if you think this is blatantly obvious.
11. Diversification may limit upside, but it allows for a long race which could/should eventually result in even more value creation. It’s not as much fun and may not be the quickest way to create value/wealth, but diversification is a good thing and increases the likelihood you can always stay in the game.
12. Relationships do matter. At the end of the day, business is people. If you always treat people with respect, courtesy, and integrity, you can handle almost any crisis. If you take short cuts with people, you will pay the price. For some reason that price seems to always come when times get challenging. Everyone is with you when you are on top of the world. You only know who is truly with you when you are down in the dumps. If you are the type of person who is always there for people when they are in need--you have character, and thankfully the world always rewards true character.
13. Never disrespect experience. When you are a young, overly-ambitious, and a “damn the torpedoes,” “fireball” looking to make your mark on the world, it is really hard to deal with many of the older, set in their ways, parochial folks who seem to be obstacles to your success. Actual experience is one of the most valuable assets an individual can have and a great company can never have enough of these people in key positions. We wish we were nicer to people our current age when we were younger. We should have asked more questions and latched onto more of their wisdom.
14. History does repeat. Santayana was a genius. The only thing he may have missed is that if you forget history in the financial industry, you may not have the luxury of repeating it.
15. It’s amazing how much you can accomplish quickly when you have no choice. Many people worked non-stop in a frenetic, focused, and highly efficient manner during the crisis because there was no alternative. While that pace is not sustainable for prolonged periods of time, it does provide a glimpse of what we are truly capable of achieving when there is a vital sense of urgency.
16. Everything in life is fragile. Companies are living, breathing organisms that can thrive or die. Business rule #1: Don’t blow up your company. In addition to corporations, everything else in life is also delicate. Personal health is fragile. Families are fragile. Friendships are fragile. Never take anything for granted.
17. You can only play offense if your defense allows for it. Fortunes are made and lost in times of severe panic. If your company’s foundation is well thought out and you protect the fort from irrationality during the good times, you will then be in a position to truly take advantage of the bad times. One must also have the conviction and the backbone to actually play offense in the bad times. It is easier said than done and requires a long term perspective, confidence the sun will once again shine, and the strongest team possible to execute a contrarian plan.
18. Leading an organization is a privilege and a responsibility. Leaders work for everyone else. They have countless bosses. Clients, bondholders, shareholders, boards, rating agencies and employees are all higher up on the food chain than corporate leaders. If you don’t see it this way, you should not be in a position of authority.
19. Sometimes bad things happen to good people. There were so many innocent people who were honest, hardworking and dedicated to their companies, co-workers, and clients . . . and they still wound up losing a great deal in the financial crisis. People should not be asked/forced to invest a disproportionate amount of their net worth in the same company they rely on to support their family. Individuals can make informed choices and decide for themselves and the most senior people need to be “all in.” For others, skin in the game is valuable but excessive skin for prolonged periods should not be a requirement. In finite and unique periods, flexibility may be necessary. However, personal diversification is a good thing and not something to be admonished, judged, punished or frowned upon.
20. Stress tests are not theoretical exercises. Before the crisis, people went through the motions on the analytics of “what if” scenarios to basically “check the boxes.” The crisis taught us that these exercises are crucially important and while never perfect representations, can be the deciding fact between bankruptcy and living to fight for another day. Nobody should just “check the boxes” because these tests at times will become reality.
21. Carry trades work until they don’t. Whether it is funding inventory positions just to achieve a positive carry spread or having a mismatch in duration in the funding of your company to maximize profits, eventually there will be a problem. Don’t delude yourself otherwise. If you maintain proper cost of capital charges (which are never popular in good times), all the people who complain the loudest will still have jobs in bad times. An important corollary to this is: Never overly rely on unsecured funding--it is certain to disappear--but only at the time you need it the most!
22. Recurring revenue businesses with reasonable margins are much more valuable than highly profitable one-offs. This is one of the hardest things to achieve, especially in the financial services industry. It is easy to get seduced by people and businesses that have the ability to generate highly profitable “one off” events that act like a narcotic as everyone pushes to attain ever higher targets. All revenues and businesses are not created equally. The ones most sustainable and valuable are always the hardest to build.
23. Everything is liquid in good times and almost nothing is liquid in the worst of times. This is why you need excess cash, secured long term funding, a smart capital structure, dispersed debt maturities, business diversification, credibility with all of your constituencies, and a culture that will serve as the glue to hold everything together.
24. The world keeps turning. The hours turn into days, which in turn become weeks, and months, and years, and then even a decade(s). What was life and death for one period slowly becomes ancient history or even forgotten over time. We don’t want to get overly philosophical, but time does provide context to everything we do in life.
25. Priorities and perspective. All said, the final and most important lesson we would like to share from the financial crisis is what gave us the strength to power through an incredibly difficult period: The realization that at the end of the day life is about health, families, friendships, legacy, giving back, and being the best person one can be every day.
Thank you for taking the time to read our thoughts. We greatly appreciate every one of you.
Rich and Brian