No Wonder We're in Such Big Trouble

[Originally published March 5, 2009]

Yesterday, I read a corporate pitch for money to investors on the part of a strong, mid-cap Brazilian company. A major bank prepared the report. We all know the bank but I will spare people’s reputations by not naming it specifically. The report had the temerity or the stupidity to base its projections of the company’s performance in 2009 and 2010 in part on the claim that Brazilian GDP would grow at a rate in excess of 5 percent this year and a whopping 8.2 percent next year.

I had to catch my breath. What alternative universe was this brilliant banker living in? I’ve had some fun recently on Twitter with Finance Minister Mantega’s assertions of a 4 percent GDP increase this year and my last post was about the entire Lula Administration’s unreally optimistic perception that Brazil can avoid the worldwide slide. But, this from someone representing the elite of the financial services agencies. Industrial production down, unemployment up, demand down, ineffective government response to the crisis. The consensus among economists, bankers and investors with whom I’ve spoken is that Brazil may achieve positive growth this year, but probably won’t. If the country does manage a positive result, it will be more luck than design. Clearly, our genius wrote this report and his senior officers approved it before the crisis really took hold. But, to insist in March 2009 that the Brazil will grow at these healthy rates simply stunned me.

Michael Lewis’ Portfolio Magazine article in November/December about the collapse of Wall Street and its reputation for wisdom and/or street smarts rings ever truer today. (It’s a brilliant article and you should read it.) We place confidence in the names of these institutions, but the people who inhabit them today do not do justice to the firms’ reputation. My MBA students have a better feel of the market than our analyst here. I also have to wonder who is going to believe this claim and give a client of the bank financing when the projected results start with such an unrealistic assumption. In my Entrepreneurship class, I teach students that the usual resting place for business plans with such outrageous claims is the waste basket--unless the reader/investor wants to be fooled.

Estimates like these show that all these elite financial institutions need to be rebuilt from the core or replaced with others that have a realistic vision of how corporate finance in the post-crisis globalized world should be structured. Perhaps our bankers need to pay less attention to Sheryl Crow concerts and more attention to realistic econometric data about the situation we are living through. (1. No, my example is not from Northern Trust and 2. Read Maureen Dowd’s article in the New York Times about that bank’s last big wretched excess).

8.2 percent would be funny if it weren’t so sad a comment on the people we put in the driver’s seat of our economy.