American Madness

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Branding for the new economy

Posted by Josh Friedlander | 2 Comments

Another thriving economy until they cut down all the trees to haul their statues around. Sound familiar?

Another thriving economy until they cut down all the trees to haul their statues around. Sound familiar?

As I endlessly reword my Bernie Madoff story (surely the 8,756th of its kind written in the past month), I looked over at a folder on my desk labeled “Branding.” It refers to hedge fund branding, a feature story I planned to write six months ago in a different world.

How quaint it now seems. How ridiculous. Store brands versus house brands (e.g., old fashioned hedge funds vs. synthetic replication strategies), cultured vs. popular (e.g. high risk vs. slow burn strategies for wealthy vs. institutions), naming and imagery and publicity (hiring practices and charity and speeches and writing). All of it so very relevant and now, plainly irrelevant, because the best brands offered rock-ness (Citadel, Fortress) and failed to deliver anything of the sort.

(Oh, those firms are still standing, of course. They’ve so far proven great fortresses for their owners if not for their investors, who have taken deep baths in the moat.)

Even worse, and which never entered into anyone’s mind until recently: that a major point of differentiation would be liquidity, the ability for an investor to actually withdraw his money; this, the notion that it even IS his money and not – as is now so widely stated with, at best, paternalistic condescension or, at worst, outright disdain – somehow better that this money be locked in the fund for the “betterment of all the fund’s investors.” So that, going forward, either in legal agreements or in marketing or in both it will be up to he who would raise cash to actually promise to return it. No more ‘Welcome to the Hotel California.’

And this is only the beginning of it. Like a restaurant advertising that it has bathrooms available or that its staff uses soap to wash the dishes, the specter of financial boogieman Bernie Madoff will force money managers to gamely insist on presenting a checklist of the obvious: Yes, we use a prime broker. Yes, we have an auditing firm that employs more than 2 people (and none of them retired!). Yes, we’ll let your number crunchers actually look at the bank account where we store your money.

In the new economy (and this will be a new economy, unlike the glorious ‘new economy’ promised in the late 1990s), despite the politicians’ need to pretend we can remedy a problem of too much debt by spending more borrowed money, deleveraging will have to happen, and, with similarity, Wall Street will have to split and segment and unbundle and de-derivativize their activities until real people are doing real jobs looking at real risks and not relying on computer games that elevate nonsense ratios expressed as numbers and labeled with acronyms as a means of comforting the ignorant and those who lack common sense (chief among these, of course, was the value at risk calculation, or VaR, which banks employed to pretend that it was a great idea to lever balance sheets 30:1 and then buy bad debt with it despite VaR relying on limited historical data and having no predictive value).

We witness, for example, the death of the absurd notion of the financial supermarket, a place where you can get banking and insurance and brokerage. A place where you can concentrate all your risks with less-specialized and, therefore, less knowledgeable people and usually pay more in the bargain. Perhaps, one can hope, we will even see an unwinding of centralization, the yang to derivatization (in which we get further and further away from the risks we take, and so compound them). Centralization, chasing efficiencies, bundles together costs and so must also bundle risks.

A local coffee shop owner needs only feed himself and pay his staff. His failure has a limited impact. Starbucks has a widespread base of obnoxious stock holders (its other clients in effect) to please, so it underpays staff and overprices its goods and preferences its owners over its consumers, ultimately losing the latter and hurting the former. Its failure would have a large impact, but its success also has a large, and pernicious, impact.

Luckily for all of us, this moment is the one right before the credit tide finally goes out. As an aside, it’s probably wise to (right now) stock up on all the wonderful gadgets in oversupply, and heavily marked down, at about-to-be-bankrupt consumer temples before they begin to fold. Circuit City comes to mind. The failure of these beacons of centralization will reduce competition, decrease product stock and impart pricing power, once again, to producers. In the mid-term (3-5 years), it’s hard to see how flat screen TVs and other tech gadgets will get any cheaper.

In this new environment, some tricks will die hard: everyone will attempt to shrink packaging and service while keeping the same price, but ultimately it will be necessary to offer fully-priced goods with healthy profit margins and offer better service in return. In this, some chains can compete, but the loss of Standard-Oil-style price undercutting by centralized companies will allow for the return of local businesses charging similar prices but fighting back with better, more personal, more knowledgeable and more accountable service. Centralization will still have its economies of scale, but few private companies will ever be as socially pernicious as were the public corporations of the boom times. Those negative externalities will hopefully be diminished: wages that trailed inflation, jobs moved to other countries, the death of local businesses and the follow-on effect of attaching global trends to local concerns that came about when more people began to work for the same few companies and borrow from the same giant banks.

Assuming any of this thinking strikes you as better than insane, perhaps the best branding will now highlight basic competencies, simplicity, openness, local-ness. At hedge funds, I imagine we’ll see (within a few months from now) examples of new product offerings touting the benefits of external checks and controls: the litany of law firms and administrators and auditing firms who once appeared only in boiler plate materials or as an afterthought in the back pages of PowerPoint presentations might soon occupy choicer real estate. Simple and honest will ride again.

Comments

2 Responses to “Branding for the new economy”

  1. Matt Friedlander
    January 18th, 2009 @
  2. Joel Friedlander
    January 19th, 2009 @

    I had a favorite Uncle Julie, OHS, who had lived through the Depression and in fact had to leave school in the 8th grade to work to support his family, who never quite got over the experience. This is not to say that he didn’t make a lot of money, but he was never secure in what he had and was always cautious with expenditures. The same was generally true of most of his generation; those who had suffered through that period of time.

    Today, we have two generations in this country vying for power, the “Baby” Boomers, who have lived extravagantly, without savings, without caution, and are now faced with a sea change in the condition of the country, and we also have Generation X, those moving into the power structure. It is unlikely that the Boomers will ever really be able to change their perspective because they are too old. They will just have to live on their social security checks and whatever is left of their savings and complain about how they were taken by the past. They will hardly be likely to admit to their own frailties since they are a generation that is hardly introspective. If the stock market becomes viable again they will not have learned to moderate their desires and will jump right in again. They are truly a lost generation (sorry about that F. Scott!).

    If anyone changes their perspective of the world and modifies their behavior in the light of new realities it will be the Generation Xers. They have not really had the chance to develop profligate ways because under the Bush administration they haven’t had the chance to develop them. Although some of them started out during the Tech Boom, most of them suffered the very rapid decline in that period of prosperity. Except for those who worked in the Market in finance, most of the Xers have not enjoyed the great riches that flowed to the boomers at the end of the last century. The Xers have not developed the profligate ways that will tar them forever. When adaptation to the new economic system is made, it will be made by them.

    Now, this is not to say that the Generation Xers will not be the most prosperous generation of all time, but I believe, like Josh, that they will create a new type of society in America. Bypassing the obvious fact that it will be a less bigoted, more generously tolerant society, it will also be a more balanced society, because its members will have lived through hard times and will not take everything in America for granted. It may indeed come to pass that people here may start to save, that the local streets will brim with stores again run with people who know their neighbors and can cater to their real needs. It may be that we will be able to produce and sell our own products in this country and not have to rely upon Asian nations to keep our country solvent and supplied with goods. It may be that we will finally awake from our long period of stupidity. We will have to see if we reengage our common sense. But, as I say, we will have to count on the Generation Xers to do it, because the Boomers will spend all their time moaning and crying about how they were taken. Good luck to the future generation, that’s all I can say.

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