The Ripple Effect is Accelerating the Downturn

This is the fifth of a six part series, running this week, on why you can expect that the downturn will be deeper and longer than currently expected by most. Each day, I will post about one of the six reasons why I have come to this conclusion. Here is Reason #5.

I spend much of my working time out in the market(s) assessing developments for my clients. In recent months, I am witnessing that industry after industry is being impacted by the initial problems in the housing industry. Like ripples emanating from a pebble entering the water, or dominoes tumbling the next, industry after industry is being impacted.

The housing problem has devastated the financial industry. The problems of the financial industry has in turn squeezed consumers with the result being retail, tourism, automotive industries, and many others are being adversely impacted. Now, these problems are spreading to a wide variety of manufacturing industries. And now they are spreading to service business where companies in all kinds of industries are demanding significant price concessions from service providers. In the U.S., we now have a multitude of industries in deep pain…many more industries than in recent recessions. Which is why I believe that this downturn will be deeper and longer than currently expected by most.

Up Next: The final of the six reasons for pessimism about the duration and depth of the downturn; The U.S. Recession Shows Signs of Becoming a Truly Global Recession. Follow this series all week as I layout one of the six reasons every day. And, remember that although I believe that these are tough times, I believe that…with the right actions…the agile can prosper. Stay tuned to next week when each daily post will address specific ways businesses can prosper in these tough times.

Problems Causing the Recession Are Complex

This is the fourth of a six part series, running this week, on why you can expect that the downturn will be deeper and longer than currently expected by most. Each day, I will post about one of the six reasons why I have come to this conclusion. Here is Reason #4.

Many prognosticators on the likely depth and duration of the downturn hypothesize that the downturn cannot reach the depths of the Great Depression because of all the tools that the government now has to slow the downturn. Well, as covered in my last post, I am not encouraged by the results of the turnaround efforts to-date.

My pessimism as to the likely depth and duration of the downturn…or should I say my “realism”…is based, in part, on what I believe to be the complexity of this downturn. Let’s take just one problem, of the many problems, as an example: How do we fix the housing problem?

Does the government just indemnify the holders of toxic paper. If so, what about those who have lost money along the line from this toxic paper, i.e, past holders of the toxic paper? Or, is this to be like musical chairs and whomever has the problem when the government finally acts, gets bailed out?

Or, go down a level and focus on the challenges of dealing with the ultimate borrowers. David Leonhardt of the NYTimes wrote a very thoughtful article on the conundrum of dealing with this group in his October 22 piece. His construct for analyzing the problem is to divide those with housing loan (mortgage) problems into two groups: (1) those who may not be able make payments, and (2) those who have the cash flow to make payments but question the sanity of continuing to make payments on a property where the mortgage debt far exceeds the fair market value of the property. Do both deserve to be bailed out? What do we do with those who have recently lost their homes? Do we just say “sorry, you weren’t in the chair when the music stopped.”

After studying just this one problem, i.e., that of the housing market, Leonhardt ends his analysis and article with this sage conclusion:

“But this financial crisis is not going to be solved by a magic bullet. It is going to require a smorgasbord of programs – some aimed at homeowners in trouble, some aimed at the credit market, some aimed at the job market – as well as a whole lot of time and patience.” (emphasis added)

The more the federal government involves themselves in direct bailouts, whether at the company level or the individual level, the more the risk of disparate treatment. Disparate treatment means debate, and lobbying, and other actions that introduce more risk of yet more delay and more unfairness.

And, this is true in many other industries beyond housing. Already there are screams from some financial institutions that the bailout efforts are favoring a chosen few. You have the auto industry clamoring for direct bailout of their industry. Are they really more deserving than say the restaurant industry? Or the appliance industry? Or???

The policy implications of the turnaround moves that need to be expeditiously made are immense. There will be fortunes made and lost based on the decisions made. And, where there is so much at stake, the risk for poor judgment, or even corrupted judgment, increases.

I am not an economist. I am not a social scientist. And, I am certainly not a politician. What I know is turnarounds. And, from my vantage point, this is the most difficult turnaround since the Great Depression. And that leads me to conclude that the downturn will be deep and relatively long in duration. And, I get absolutely no satisfaction in reaching that conclusion.

Up Next: The fifth of the six reasons for pessimism about the duration and depth of the downturn; The Ripple Effect is Acceleration the Downturn. Follow this series all week as I layout one of the six reasons every day. And, remember that although I believe that these are tough times, I believe that…with the right actions…the agile can prosper. Stay tuned to next week when each daily post will address specific ways businesses can prosper in these tough times.

The 2008 Election Break in Recession Turnaround Efforts

This is the third of a six part series, running this week, on why you can expect that the downturn will be deeper and longer than currently expected by most. Each day, I will post about one of the six reasons why I have come to this conclusion. Here is Reason #3.

Turnarounds are all tough stuff. And the turnaround of the U.S. economy, faced by our government, is as large and complex as I have ever seen. By far!

To stop the snowball effect of any distressed situation takes an intense effort by a group experienced and skilled in the nuances of turnarounds. The intensity of the effort needed for success cannot be overstated. Because of the snowball effect, the natural pattern is for more and more things to go wrong.

Well, speaking of going wrong….here we are at full crisis mode and voila we interrupt this for an election. An election that will result in a new President, many changes in Congress, and a whole new administration.

Even if some of the key turnaround players are retained in an unusual bi-partisan collaborative effort, our federal government is, through no one’s fault, about to have a massive change of players.

So here we have a turnaround effort that is already struggling to get traction about to enter into a period of change of hands. Ouch!

The "hands" scheduled to leave Washington in January have to be focused on their own personal situation especially with job prospects so generally poor. The incoming hands will be looking to get situated and can be expected to be cautious about making decisions for which they can later be criticized. That is a lot of focus on other than the economic crisis. More ouch!

Now, there is no one to blame for this situation. It is not anybody’s fault that the economic crisis coincided with a Presidential election. This is just the circumstance. And, a circumstance that must be factored into any assessment as to how deep and how long this downturn will be.

Turnarounds seldom, if ever, happen in a perfect situation. That is, in part, why they are so difficult to effect. That is why the snowball of problems so often continues to pick up speed notwithstanding well intentioned efforts by executives, and restructuring professionals.

And, that is why this long time restructuring professional believes the downturn will, regretfully, be deeper than most currently expect and longer in duration. I wish it were not so…and I truly hope to be wrong. Very wrong.

Up Next: The fourth of the six reasons for pessimism about the duration and depth of the downturn; Problems Causing the Recession Are Complex. Follow this series all week as I layout one of the six reasons every day. And, remember that although I believe that these are tough times, I believe that…with the right actions…the agile can prosper. Stay tuned to next week when each daily post will address specific ways businesses can prosper in these tough times.

Recession Turnaround Efforts Not Yet Getting Real Traction

This is the second of a six part series, running this week, on why you can expect that the downturn will be deeper and longer than currently expected by most. Each day, I will post about one of the six reasons why I have come to this conclusion. Here is Reason #2.

For 20+ years, I was on the front lines of restructuring companies of all sizes, in a plethora of industries. And, for the last 10+ years, I have counseled leaders in the Restructuring industry as they have worked to restructure companies throughout the country. I have seen 100’s of restructurings, up close and as they say “personal” from all different positions. I have been a lender, represented creditors, assisted trustees, and even been the executive in the hot seat making the operating decisions. And, if there is one thing of which I am certain as a result of all this experience with restructurings is that

turnaround’s are very, very difficult!

The problems facing our economy are many, many times more complex than the largest of my restructuring assignments. And, so I have to conclude that this turnaround will be difficult and protracted.

Turnarounds are difficult for many reasons, not the least of which is the snowball effect. Notwithstanding the best of efforts, more often than not the snowball of problems picks up speed before it can be stopped, or even significantly slowed .

I want to believe the Federal Reserve and the Treasury Department are making progress. And, I am sure they are. But from my vantage point…and that certainly isn’t on the very front lines…it sure seems like the snowball is picking up speed.

Turnarounds call for decisive action, and implementing new processes by the government is almost, by definition, likely to be slow. Treasury won congressional approval for the $700 million rescue plan on October 3. But three weeks later, an asset manager has not yet been put in place. Certainly not slow by government standards. But, in the world of turnarounds, this is glacial speed, even as the snowball just keeps rolling faster downhill.

My pessimism about the likely duration and depth of the economic downturn is, in part, based on my conclusion that to date, the turnaround efforts are not yet getting real traction.

That doesn’t mean that those on the front lines are doing a bad job. Or will not eventually get traction. But, after three months of intensive action, it certainly appears that the snowball is still gathering speed.

Now, I have been on the front lines where adrenalin has you hoping and expecting that your actions will soon take hold. Many a turnaround professional has dreamed of the quick turnaround. But, seldom…very seldom…is that what happens. Turnarounds are tough stuff! And, this may well turn out to be one of the toughest of all time!!

Up Next: The third of the six reasons for pessimism about the duration and depth of the downturn; The 2008 Election Break in Recession Turnaround Efforts . Follow this series all week as I layout one of the six reasons every day. And, remember that although I believe that these are tough times, I believe that…with the right actions…the agile can prosper. Stay tuned to next week when each daily post will address specific ways businesses can prosper in these tough times.