The consequences of confusing alpha with beta

The consequences of confusing alpha with beta
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First Published: Thu, Jan 08 2009. 12 19 AM IST

Bad decisions? A 5 December photo of GM chairman and CEO Richard Wagoner, Chrysler CEO Robert Nardelli and Ford Motor president and CEO Alan Mulally testifying about a proposed government bailout plan
Bad decisions? A 5 December photo of GM chairman and CEO Richard Wagoner, Chrysler CEO Robert Nardelli and Ford Motor president and CEO Alan Mulally testifying about a proposed government bailout plan
Updated: Thu, Jan 08 2009. 12 19 AM IST
Government bailouts often choose companies over consumers and this is insulting, dated and shameless. Many companies confused alpha (skill) with beta (luck) in the last decade and must face the consequences.
Henry, Emanuel and Mayer Lehman must be cringing in their graves as the 2008 bankruptcy of the company they founded in 1850—Lehman Brothers Holdings Inc.—became the kitchen sink for most stupid decisions made over the last five years. Bob Nardelli of Chrysler Llc. forgets his company’s lack of interesting products when he says that letting Lehman fail shifted the crisis from Wall Street to Main Street. Bob Lutz of General Motors Corp. (GM) says it is stupid to believe that GM could have anticipated their problems. Both jointly received $17 billion (Rs82,620 crore) from the US government. A manager at crystal maker Wedgewood filed for bankruptcy citing the “crisis started by the Lehman bankruptcy”.
Bad decisions? A 5 December photo of GM chairman and CEO Richard Wagoner, Chrysler CEO Robert Nardelli and Ford Motor president and CEO Alan Mulally testifying about a proposed government bailout plan for the US auto industry at the House Financial Services Committee in Washington. Jonathan Ernst /Reuters
Luca Zaia, the Italian minister of agriculture defied logic by announcing a €50 million (Rs328.5 crore) bailout for parmigiano cheese makers because “there was a need for intervention, just as there was for banks”. Bailouts started with the “arteries of the economy” argument for banks but it’s a slippery slope. Where do you stop? Why not newspapers? Recently, the Los Angeles Times and Chicago Tribune filed for bankruptcy, Detroit’s biggest newspaper stopped home delivery, and The New York Times is mortgaging its headquarters to raise cash. Also, why punish smart managers and only help companies in trouble?
Closer to home, companies in the airline, real estate and textile business are busy amplifying and screaming about their job losses to get credit for fuel purchases, concessional loans for customers, lower taxes, and much else. A rough calculation of their “projected” job losses means that there is no organized employment left in India.
The two fiscal packages give sectoral help but do they deserve it? Should airlines be getting taxpayer-funded fuel credit when they did mergers in high tide that did not extinguish capacity before low tide? Does real estate deserve relief when the rates it demanded in the last few years made everything unviable? A top sporting multinational, a top fashion designer friend, a hospital client, and my educator wife all hesitated to open new outlets last year because rent confiscated an unsustainable proportion of their revenues. Should India’s realty boom have been built on higher prices or higher volume at lower prices? In the “fix the downturn” debate, should producer interests overwhelm?customer?interests?
But the bigger question for India is when does a fiscal stimulus become a fiscal bailout? How do you unpack economic stress caused from macroeconomic factors arising from stupid decisions?
One of my favourite professors during my MBA at Wharton was Bulent Gultekin. A former central banker and privatization minister, he warned that a fatal mistake in life, business and policymaking was confusing Alpha (skill) with Beta (luck). It is in the best of times that the worst of decisions are made because high tide lifts even the leaky boats. And many Indian companies, entrepreneurs and policymakers mistook luck for skill in this millennium.
By demanding fiscal relief, do managers realize or care about the damage they do to the legitimacy of markets when voters and politicians see private profits and socialized losses? All entrepreneurs make mistakes (God knows how much money and heartache I could have saved if I knew what I know now when I started out as an entrepreneur) and most swallow them as the “blessings of a skinned knee”. But of late, the notion of “too big to fail” and “the economy can’t handle it” allows the blatant repackaging of self-interest as national interest.
Bailouts often violate the basic economic principle that income for somebody is cost for somebody. This downturn is finally blunting the hyper inflation in real estate and employee costs that was making India a hostile habitat for entrepreneurship.
President Bush says he abandoned free market principles to save the free market system. But the important question for India is whether industry or company specific bailout packages undermine the legitimacy of an economic reform process that still has many difficult decisions left.
Big bailouts not only undermine the credibility of markets but few things corrode business efficiency more than the realization that it is more profitable to win the favour of politicians than the favour of customers.
Herbert Spencer the British philosopher said the ultimate result of shielding man from the effects of his folly is to people the world with fools. Bailouts such as GM are on the wrong side of history; the UK government spent $16 billion on British Leyland before they gave up.
Markets work when companies and individuals face the consequences of their actions. There can be no heaven without hell and people who confused luck with skill must bear the consequences of their decisions, leverage and hormonal imbalance.
Government bailouts of the private sector in India must be done with care because the Indian mind is instinctively left of centre and distrusts markets; it could easily have been an Indian rather than a Frenchman who said behind every great fortune lies a great crime. But whether private enterprise will play a key role in India’s journey out of its poverty of hunger and shelter will depend on its legitimacy in the eyes of voters. And that “soft power” will not be built by acting like a cry baby.
At the insistence of my colleague horrified by this article, he wanted to remind the government that if sectoral fiscal relief is based on employment intensity, who better than a staffing company like us which has hired someone every five minutes for the last five years? (Ah … the terrible temptations of using public policy as a substitute for strategy.)
The author is the chairman of Teamlease Services Pvt. Ltd.
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First Published: Thu, Jan 08 2009. 12 19 AM IST