Richard Branson Wants a Bank

The Wall Street Journal is reporting that Virgin Money, a subsidiary of Richard Branson’s Virgin Group, is looking to become a bank.  The article is entitled, “Virgin Seeks Bank Role,” (10/26/09, Section C5).  Nicknamed “The Rebel Billionaire” by some, Richard Branson is known for taking chances.  According to the article, Virgin had tried to acquire a troubled British bank called Northern Rock in 2007, but was unsuccessful.  The British government eventually nationalized Northern Rock.  The article cites a spokesman for Virgin who has stated, “since Northern Rock, we’ve stated our ambition to become a bank.”  It is unclear whether Virgin will continue to pursue Northern Rock once the British government puts it on the market.  However, this appears to me to be the most likely scenario. 

            So why exactly would Virgin want to go into the banking industry?  I think there are several reasons.  Virgin, it must be remembered, is a company known for taking chances.  It started off as a record company, and then made a successful venture into the airline industry.  Virgin has since gone into the mobile business as well.  In fact, Virgin consists of over 400 companies.  The leadership has clearly demonstrated a desire for vast diversification.  I personally believe that Virgin, with its keen eye, sees great opportunities in the banking sector.  There are a variety of reasons for this.  If you are in the market to buy a bank, you can’t do much better than the times at hand.  Government takeovers yield terrific buying opportunities.  In the case of Northern Rock, the British government is spinning off the good parts of the company, and keeping the bad parts.  If Virgin were to buy this scrubbed-clean version of Northern Rock, and then slap its very well liked brand name on it, they could have an instant hit on their hands.  It is also a good time to become a bank owner because so many banks are struggling these days.  Starting fresh automatically gives you a leg up on almost everyone, as many banks are still coming to grips with troubled assets.  Lastly, Virgin would basically be starting off in the banking sector as a brand new entity—not as one those banks that almost caused the world economy to collapse.  I feel this would hold great appeal for customers who are upset with their current institutions.           

While many things are uncertain, it does appear to me that Virgin will likely be a bank owner someday.  I, for one, am interested to see how this will play out.  My only personal experience with Virgin was when I flew to London a couple of years ago on their airline.  I have to say, it was a most pleasurable flight.  They were obviously intent on providing excellent service, and keeping their customers as happy as possible on that long trip across the ocean.  If Virgin were to bring these same principles into the banking industry, I believe they would be wildly successful. 

Less People are Leaving Home Without It

American Express is doing better these days—a fact which might be signaling an end to the recession. Maybe. This issue is detailed in the Wall Street Journal article “AmEx Chief Sees Reason For Hope, Cautiously” (10/22/09, section C1). The hope is that the company’s recent earnings, which were less bad than expected, is signaling that the economy is turning around. The article reports that American Express is “a barometer of affluent consumer and corporate spending patterns.” This means that if rich people and businesses are reaching for their American Express cards more often then they must feel like their situation is improving. From a leadership perspective, American Express’ Chief Executive Kenneth Chenault seems to be encouraged. In a recent statement, Mr. Chenault reported: “While there is reason to be cautious…trends in card member spending are encouraging and there are signs that the recession may be approaching an end.” This is hopeful—not only to American Express, but to everyone who is looking for a recovery to occur sooner rather than later. Not so fast though, says Capital One, who is not as sanguine about the economy’s prospects. Capital One has “expressed wariness that early signs of stabilization translate to real trends at this point,” states the Journal. Capital One’s profits, however, are actually up over this time last year. So while credit card companies performance in general is better-than-expected, it may be too early to say it means anything. I am thankful that at least we have some good news. Of course, when you compare this article to its next-door-neighbor article, about how the one-hundredth bank failure of the year is approaching, you get an idea of why Capital One would want to be cautious. On the other hand, bold leadership may be called for in these troubled times. If American Express thinks the economy is turning around, but others don't, then it might be time to consider expanding market share while competitors are playing it safe.

The Indispensable Warren Buffett

Is it surprising to anyone when the Wall Street Journal writes: “By many measures, Warren Buffett had a good financial crisis” (“Finding value in Berkshire after Buffett,”10/9/09, Section C1).  No matter the market, Buffett seems to prevail.  Berkshire Hathaway, his company, “didn’t suffer major blows, (and) Mr. Buffett used his vast cash stockpile to scoop up bargains, including a $5 billion investment in Goldman Sachs,” reports the article.  However, “Berkshire shares tumbled in 2008 with the rest of the market, and are up just 4% this year compared with the 12% gain by the Dow Jones Industrial Average.”  So what gives?  Well, could it be that Mr. Buffett is 79 years old?  Such an iconic figure is hard to imagine as replaceable, in my opinion.  However, an expert quoted in the piece thought that Buffett the financial analyst is replaceable, but that his “iconic status isn’t.”  I take issue with this point of view.  There is a reason that Warren Buffett is, well, Warren Buffett.  It is because he has an uncanny knack for dissecting companies, determining their profitability, and knowing when to invest in them.  If others knew how to do this, there would be lots of Warren Buffett’s in the world—but there isn’t. 

            All of this brings me to the topic of leadership.  What kind of leader is Warren Buffett?  This is hard to say.  Unlike Bill Gates, a much younger man who has effectively stepped away from the helm at Microsoft, Mr. Buffett continues to dominate Berkshire Hathaway.  This has investors questioning what the future will be like without him.  “Looming large is the leadership plan,” reports the Journal.  It goes on to say that Mr. Buffett, “continues to hold an iron grip on Berkshire, (and) has kept his succession plan close to the vest.”  Looking at these facts, I think there is reason for concern.  Mr. Buffett will not live forever, but in terms of how he is leading his company, he seems to be acting like it.  I believe that Mr. Buffett should do more prepare his company for that eventual time when it will be without him.        

Citigroup's Leadership and the FDIC

According to the Wall Street Journal, the Federal Deposit Insurance Corp (FDIC) thinks that something stinks with regard to its recent review of Citigroup’s management.  This is detailed in the article “Review of Citi Draws Wary FDIC Response” (10/6/09, Section C1).        

First, let me provide a little background information about Citigroup’s situation.  Citigroup is one of the largest banks in the world, and has to date taken about $50 billion dollars in government money in order to stay afloat in the wake of the financial crisis.  Citigroup was one of the largest players in the mortgage markets, as well as other risky dealings, which has led it to the brink of collapse.  Since 2007 both the value of Citigroup as well as its shares have lost over 90% of their value (this according to articles from the BBC and the New York Times which I found online).  Many people believe that Citigroup continues to be insolvent.  The problem is that Citigroup is so large that its collapse would almost certainly trigger another meltdown of the financial markets.  This is what worries the FDIC, who has to insure all of those bank accounts that Citigroup maintains.  Should Citigroup go under, the FDIC (with tax payer money) would be responsible to make investors whole with regard to their savings, and up to $250,000 each.  The FDIC naturally wants to make sure that the right people are in the right management positions at Citigroup so that a collapse can be averted, and Citigroup can eventually return to solvency.

What alarms the FDIC is not that the report about Citigroup’s management was so bad—it was that it was so good.  Some at the FDIC have “expressed doubts about the rigor of the report, which was based partly on interviews of Citigroup executives who were asked to rate the effectiveness of their colleagues,” states the Journal.  It is obvious that what troubles the FDIC is that this information may not be accurate because of the way it was collected.  The integrity of the data is clearly in dispute.  According to the article, “One person close to the agency described the outside report as ‘a total whitewashing.’”  A firm called Egon Zehnder was commissioned to do the study.  There are also now questions about the qualifications of that firm. 

This is a management dilemma that impacts not only Citigroup and the FDIC, but all of us taxpayers as well.  We have already invested billions into propping Citigroup up, and could be on the hook for billions more if something happens.  It is therefore incumbent upon the FDIC to make sure that right and proper studies are being done to adequately assess Citigroup’s leadership.

If Citigroup were truly interested in turning themselves around, they would be inclined to adequately assess of their own company.  Unfortunately, what is happening here smacks of corruption and underscores why the government should not be involved in these matters to begin with.  If true, free markets were being utilized Citigroup would no longer be in business.  The FDIC has swooped in, taken over, and dismantled hundreds of insolvent small banks in the wake of this crisis.  There must be significant frustration that they can’t do that here.  This is a real conundrum because basically the only people who can really fix this problem are the leaders of Citigroup—the very same leaders who is being questioned by the FDIC.  Citigroup’s management will one day truly need to assess their bank, without the whitewashing, if they ever want to get the government out of their hair.  

Gap's Founder and its Future

The Wall Street Journal recently reported that business leader Donald Fisher died of cancer on Sunday (“Don Fisher, Founder of Gap, Dies at 81,” Section B3, 9/28/09).  Mr. Fisher was the influential founder the Gap Inc.  According to the article “Gap became known as an iconic brand that made it the most popular clothier in the U.S. during the 1990s...(and) today…is one of the largest apparel retailers in the world, with 3,145 stores and $14.5 billion in sales last year.”  Gap Inc. also owns the Old Navy and Banana Republic brands.             

            Mr. Fisher was no longer running the show at Gap, having quit as chief executive in 1995, and then as chairman in 2004.  These days the company he created has suffered from declining sales for some time now.  “Total sales have fallen 11% in the last five years,” reports the Journal.  In fact, at a dinner party I recently attended, the subject came up, and a neighbor asked me if people even shopped at the Gap anymore.  I told her that they did, with some authority, standing there in my Gap jeans. 

            Gap is still one the retail’s giants, and their stores can be found at just about every mall in America.  Initially they appear fairly well diversified, with Old Navy serving cost-oriented consumers; Banana Republic serving the higher end; and Gap itself, naturally in the middle.  But it is always alarming when you see a trend that clearly indicates a company is sliding backward.  Gap is now in a position that many big companies find themselves—a dominant brand becoming less dominant by the day.  It will be up to the leadership to reverse this trend.  In my view this will probably take further emphasis on shoppers looking for bargains.  Gap sought to address this issue of value with its Old Navy brand, which it opened in the 90’s.  I recently went to Old Navy, and to Gap, knowing I would be writing this piece.  Upon my visit there I realized one thing—they’re basically the same store.  Old Navy is a little lower end, and obviously cheaper, but they basically sell identical clothing.  If shoppers find themselves alienated by the pop-trendiness of these stores then they will need to go elsewhere for their clothes.  Perhaps if Gap really wanted to grow, it would look to expand its customer base toward markets it is not currently servicing with another type of brand.  This would allow them to better diversify, and expand market share.

            Whatever they do, Gap will certainly need to figure out how to reverse their decline if they want to remain an industry leader far into the future.  Back in the 80’s, Donald Fisher found a way to reinvent Gap and turn it into a worldwide phenomenon.  Today’s leadership will need to do the same thing in order to keep it one.