Events are happening pretty quickly in the financial markets:
- Bear Stearns is bought for a measly $2 a share by JP Morgan Chase — including a $30 billion guarantee by the Federal Reserve against illiquid investments. Or, profits are private, but losses are social.
- The Federal Reserve lowered their interest rates — on a Sunday, something I have not seen before. Supposedly, this was to assure the Asian markets on their Monday opening. It didn’t help.
- The Federal Reserve is widely expected to lower their interest rate by another full percentage points — the second time in just a few months — to try and get the economy back on track.
- The Federal Reserve also opened the borrowing window to additional investment banks. Previously, only commercial banks — such as WaMu, Chase, Bank of America, etc. — were able to borrow from the Fed’s window. Now other firms — such as Lehman Brothers, Merrill Lynch and even Countrywide — are able to do so. This should help their liquidity — but the borrowing is all hidden from the market. The Fed doesn’t say who takes out loans.
It should be noted that, while the problems have been with Bear Stearns for a while, the liquidity dropped out in the last two weeks. I had a manager once that said that you can lose money for years, but stay in business as long as your inventory is turning. But, don’t turn your inventory and you’ll be out of business in a month. Well, the banks inventory is money. And it’s not turning.
While the focus of all of this financial news tends to be financial, there are a big effects on those of us who work in cubes. Some serious consequences:
- Hiring will most likely be reduced. The greater the uncertainty in the financial markets, the more conservative management will become.
- Return on investment will need to be higher and risk lower. Companies will only invest their limited capital — at higher interest rates if they borrow the money — on projects that they know will succeed and they desperately need. This limits the work done by employees — which could lead to more layoffs.
- Raises will become leaner and bonuses lower (unless you are one of the 3,000 officers of WaMu). Cash flow — the inventory turnover of money for financial institutions — becomes critical. Salaries and bonuses, obviously, require cash.
- Budgets will be carefully looked at — and cut.
Some extraordinary times are ahead this year as a result of the investments made based upon sub-prime mortgages. Expect rational management to come out well in this period of intense change and risk. Expect irrational management to make decisions that make no sense, including their decisions affecting their employees.
Hopefully, you’re part of the former, not the latter.