The Nature of Value

While value has many definitions, the one most commonly associated with it in MBA programs and economics courses involves measuring the gap between perceived and actual benefits and perceived and actual costs. This quantification of value as “utility,” even with provisions for such items as the ceiling of the Sistine Chapel and “Layla,” is woefully inadequate and has unfortunately resulted in the rise of labor unions, outsourcing, civil strife, and war.

The idea that “value is added” reflects a bottom-up mentality that would be the envy of Sir Mix-A-Lot. It is an extension of the zero-sum game mindset where Win-Win is what you call your Chinese houseboy, not a modus operandi for achieving grand visions and creating wealth in all its forms. The concept of adding value assumes that a void of value is an inherent base state and further implies with mathematical certainty the limitations of creation.

Contrary to popular belief, value is not some increment of work applied to an input and in successive stages of development until a product pops out into the world, screaming for its superior profitability. Value is the voltage of human potential, waiting to be arced in an electric cascade of social, civil, or commercial beneficence. How effectively value is transmitted past resistance and capacitance into the free-flowing circuits of a business is the determining factor.

Properly designed business processes turn the key in the rusted iron shackles of bureaucracy, redundancy, and the fear of losing control – all constraints devised by humans to be inflicted on humans. But those will only serve the sergeants of effectiveness and efficiency. True value-sourced current requires innovation – the connection between local and nonlocal consciousness - as its fuel. Innovation that is continuous, shape shifting, and game changing, and this can only occur when the human brain is given a suitable environment for connecting beyond the ego.

Productivity is only a measurement of circuit design, not the goal let alone the vision. And value is unleashed, not added. When these concepts are firmly rooted, the next great enterprise has gestated and is ready for birth.

Why We Earn

My time in an MBA program was intellectually invigorating, physically exhausting, and emotionally turbulent, and I'm a better person because of that long march toward a deeper understanding of the capitalist schema in which I worked for over 15 years. At the same time, my mother's childhood admonition to "question authority" was never put to better use than in a graduate business school.

In courses ranging from finance to marketing to strategy we were told that the primary purpose, the moral imperative of every business is to generate an above-average profit. Superior profitability is the reason for existence, the end of the rainbow and The Goal for commercial organizations. To those professors who so righteously proclaimed this dictum I say (in the fashion of my friends from the isles of Great Britain), "bollocks!"

This misguided guidance can be traced as the root of the greatest acts of corporate malfeasance in this new century and much of the last one. Focusing on earnings with a purity of thought is by nature a mathematical endeavor, and as is the case with such undertakings, the numbers become more meaningful than the work or the world they represent. Andrew Fastow, Enron's CFO, was clearly a venal and mendacious criminal, but he achieved The Goal through the classification of loans as revenue and debt as assets - just moving numbers from one column to another. From the perspective of a mathematician, Fastow performed arithmetic functions with Deep Thought accuracy, even if the accounting rules were stretched to a diaphanous veneer that ultimately showed the naked shriveled, and scabrous body that was Enron. This single-minded concentration on profitability was more recently the affliction at Dell, who paid a $100 million fine as a company, and Michael Dell, it's founder, who was relieved of $4 million personally for classifying anti-competitive kickbacks loyalty payments from Intel as revenue.

For both Enron and Dell (and many others), the real creativity offered became that of satisfying The Goal instead of The Customer. Befriending equity analysts is certainly better than beheading them, but not by much when they are confused as the means to create real economic prosperity.

And therein we find the true purpose of the capitalist organization - creating prosperity is to create value. Value creation is the moral imperative, the primary objective, and with it comes customers, markets, analysts, and superior profitability. Want more profits? Create more value. Need more customers? Offer more value. Need to expand your markets? Expand your value. Not only does this concept overturn the stare decisis of the tenured class, it can reverse the concept of marketing itself.

What determines market size, revenue potential, growth curves, and all the other metrics of the modern marketing-driven product company? Value, or the gulf between returns and costs, is the source of these measurements. Widen this gulf and you will expand your market; deepen this ravine and you will accelerate growth. Value is like the baseball field in Field of Dreams - "if you build it, they will come."

Lions and Tigers and Bears, Dubai!

Fresh off Thanksgiving, still stuffed with Butterball and Wild Turkey and familial angst, a ragged collection of hardcore traders shuffled into the shortened Friday session squeezing rubber balls and oozing tryptophan from their eyeballs. This mutant collection of veiny, red-faced Orcs, those who yell "Buy" and "Sell" in their sleep, were looking for a reason to belch reverberating echoes across the hallowed halls of the NYSE and they found one in the desert of Dubai.

Dubai World, a quasi state-owned investment entity, had asked its creditors for a moratorium on debt payments for six months - all $59 billion of its liabilities. When this news came across the wires, the flecks of spittle were flying as sell orders screeched like an osprey descending on a minnow in a tide pool. What started as beach break escalated into the north shore of Oahu as low volume combined with massive paranoia to drive the Dow onto the rocks. It would take a day or two for the Xanax, single malt, and Viagra to wear off, but when it did, a rational realization took hold of the situation by taking Dubai World (DW) in a proper perspective.

DW builds islands for the ultra-rich, erects hotels for the ultra-rich, invests in casinos for the ultra-rich, and operates ports for the goods being shipped by the ultra-rich. They financed all of this activity because Dubai doesn't have a lot of oil left; estimates are that it will run out in 20 years. So, in the midst of a global economic crisis, a company that caters to the ultra-rich and is built on a mountain of debt is having trouble? As the port operators in New Jersey would say, "fuggedaboutit."

Truly "Free Market" = Anarchy & Chaos

For those who believe that the "free market" is one without any government interference or pesky regulations, I'll let this AP story speak for itself:

LONDON -- Rogue employees at a major mobile phone company illegally sold millions of customer records to rival firms, Britain's information watchdog said Tuesday.

Christopher Graham, the information commissioner, said the case was a serious breach of data privacy, and he called for harsher punishments for offenders.

"The existing paltry fines ... are simply not enough to deter people from engaging in this lucrative criminal activity. The threat of jail, not fines, will prove a stronger deterrent," he said.

The mobile phone company -- which Mr. Graham said couldn't be identified because an investigation was ongoing -- alerted Mr. Graham's office after it found out about the suspected trade. Personal data, including customers' contract expiry dates, were sold to several rivals, which then used the material to cold-call customers to offer them an alternative deal, the office said.

"The number of records involved runs into the millions, and it appears that substantial amounts of money changed hands," the government body said in a document submitted to the Ministry of Justice.

Mr. Graham said his office was considering the evidence and preparing to prosecute those responsible.

The Data Protection Act prohibits the selling on of data without prior permission from the customer. Offenders could be fined thousands of pounds.

Copyright © 2009 Associated Press

Everything You Wanted To Know About CMBS

The history of mortgage-backed securities, from the RTC to the impending commercial real estate collapse, is available for reading online.

Rather than examine this uniquely detailed look at the commercial real estate market, I'll just put up a link instead.

The Lloyd's Prayer

Thanks to Richard Ambrose for this adaptation of the Lord's Prayer as spoken by the executives at Goldman Sachs. I found this at Barry Ritholtz's blog "The Big Picture," a site that every business student should bookmark immediately.

THE LLOYD’s Prayer

Our Chairman,
Who Art At Goldman,
Blankfein Be Thy Name.
The Rally’s Come. God’s Work Be Done
On Earth As There’s No Fear Of Correction.
Give Us This Day Our Daily Gains,
And Bankrupt Our Competitors
As You Taught Lehman and Bear Their Lessons.
And Bring Us Not Under Indictment.
For Thine Is The Treasury,
The House And The Senate
Forever and Ever.
Goldman.

Darkness Before the Storm

David Rosenberg, ex-chief economist for Bank of America-Merrill Lynch, has made some dire predictions concerning the economic outlook. He believes that we are headed for an unemployment rate, the exclusive U3, between 12-13%. This would place the U6, consisting of people who have given up looking for work and those who have taken part-time jobs, at around 20%. Compounding this prediction is Edward Harrison's belief - whose "Credit Writedowns" website is considered one of the top financial sites on the Internet - that we are now headed into a real depression.

Harrison's view is that debt is the underlying feature of this downturn, which coincides with Yale economist John Geanakoplos theory of collateral and the lack thereof that led to this global meltdown.

Harrison wrote, "When debt is the real issue underlying an economic downturn, the result is a period of stagnation and short business cycles as we have seen in Japan over the last two decades. This is what a modern-day depression looks like – a series of W’s where uneven economic growth is punctuated by fits of recession. A recession is merely a period of recalibration after businesses get ahead of themselves by overestimating consumption demand and are then forced to cut back by making staff redundant, paring back inventories and cutting capacity."

We all know that the subprime mortgage market in conjunction with pyramidal layers of derivative gambles contributed to this monetary malaise, but it is only the precursor of two more real estate implosions: 1) the prime loans that were made with 'exotic' conditions - these reset next March - and 2) commercial real estate, which is already starting to crumble.

Lest you think that I'm here to incite suicidal thoughts, my motive is quite the contrary; there is money to be made during crises, but the businesses have to be carefully chosen. Here is a list of recession-proof business ideas, and here is a compendium of career choices from which to focus your MBA and skills during bad economic times.


"The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger - but recognize the opportunity."

John F. Kennedy, Speech in Indianapolis, April 12, 1959