Friday, February 27, 2009

CDOs vs. Gigabit Ethernet

The Economist compares crashes: banking vs telecoms. "Just like banks, telecoms had imperial bosses, kamikaze deals and incomprehensible jargon—if collateralised-debt obligations troubled you, try gigabit Ethernet routers. In telecoms leading firms were reduced to indebted objects of ridicule. The consequences were bankruptcies, huge job losses, fraud, trashed reputations and, eventually, a clean-up".

They draw the following lessons: gradualism will most likely fail, "back to basic" focus on core business may lead to disappointing acquisitions, a new culture needs to be fostered as bubbles corrupt firms' intellectual capital (away from exclusive focus on ROE, cost income ratio and from giving cheap capital to high-risk units) and conclude:
"For most others, the decade since the bubble has been a slog against competitors and reinvigorated regulators. That is the lot of most firms in most industries. They face a constant battle to protect pockets of high profits and have few chances to grow. For telecoms, the glamour and infamy were followed by mediocrity. Banks are still staggering about in the limelight, but the same fate surely awaits them."

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