Saturday, September 20, 2008

Where Have All the Leaders Gone?

This is also a title of the latest book from Lee Iacocca.Looking at the financial mess our country is in, I can't agree any less to the above statement. I think we have for a long time disguised effective managers as leaders and in that process brought disgrace to the true leaders to name a few-Mahatma Gandhi.

What is a difference between an effective manager and a leader.

An effective manager knows how to climb the ladder efficiently and effectively and a leader is a person who has to ensure that the ladder is leaning against the right wall. Well you can see from this analogy we really do not have an leader of quality emerging out of this Wall Street mess.

Let's take an example of the AIG mess.

AIG was one of the pioneer's in the insurance industry ( notice my past tense)They really did well in all types of insurance namely property,life,airplanes,industrial, you name it and they were there.What is the underlying premise or business model in an insurance company.Let's take an example of say property insurance ( the one you take for your own house)
The insurance companies charge you a premium and they have say 100 customers who pay premium. The underwriters of the insurance policy figure out Ok what is the probability of all houses getting gutted in fire, well that can't happen physically so they estimate maybe 2-5 houses might get gutted and they might have to pay the home owners from the premium collected from the other 95 customers. A good model for a business at the same time providing a good coverage to individuals.

Now look at the new product AIG got into.
They wanted to start insuring the bonds ( so called toxic bonds) issued by the bond agency, well some dumb person ( let's say greedy) thought , if we are the best people in insurance why can't we do this insurance also and try to make more money, so they got into this but little that they realise that in this type of market when one house catches fires all houses are in trouble. There you go...

SO moral of the story, AIG had all the best effective managers they had, but not one could see this coming. The excuse given is no one in WallStreet understood these products, well I will ask a simple question will any one of those guys in their personal portfolio undertake a risk of this magnitude with a product not understood at all. This is plain greediness.

Well what can i say, we common investors are getting hit from all sides, on one side we get penalised for holding these stocks ( let's call them toxic stocks) and on the other hand the government bails out the same companies from the tax we pay.

I am always a big fan of capitalism but at the same time I am practical. These events should definitely make us think about how we manage our markets. I am sure we will continue to have issues like this and we will keep coming up with solutions after the fact , let's not forget Enron.

The point is are there any leader worth his/her salt in this situation.

Comments are welcome.


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