Challenging times to head an investment bank

Reading today's financial news, one article that struck me was http://www.reuters.com/article/marketsNews/idINN2839680920081028?rpc=44. The article was about a negation by Morgan Stanley (MS) of a rumor on its exposure to losses in Citadel Hedge Fund and Volkswagen. Similarly, about 2 - 3 weeks back, MS had to re-issue assurance statements on daily basis that its 21% sale of share in the company stock to Japan's largest bank Mitsubishi UFJ Financial Group was on. This was primarily to counter the rumors on the news boards and wall street that the Japanese bank would back out. The two together brings a thought to my mind on what managements can do in these highly volatile times.

These are undoubtedly challenging times for investment banks and their management. Largely abreast of the latest financial news, I started to see the value and challenge in the role of being a CEO of an investment bank in these un-ordinary times. The scope shift in the role where primary responsibilities shuffle around with market psychology, a dormant constituent in a normal situation moves up in the list; ensure rumors, speculators and suspicions do not play a detrimental role to the health of the company. The CEO and his team have to turn around quickly to the latest news and word on the wall street or main street and ensure the right message - be it negation or assertion, is communicated effectively and widely.

A lack of self-discipline and regulation in most of the banks in their rat race for greed, added to which was a regulation-free environment, has resulted in where we are today. The whole picture is so murky that large or small investors have little or no insight in the state and health of a bank, thus resulting in a lack of confidence in all the major investment banks. This in turn has resulted in an breeding environment for rumors, speculators and suspicion. To gain the confidence back in such an environment is going to be an uphill task for even the greatest of the management.

These are the times where CEO's have to prove their mettle in critically evaluating the situation on a daily basis. To enlist a set of actions, I started to imagine how a CEO in this role would spend his time and below is the list:

- cash reserves: cash is the most dearest asset in today's financial doldrums. Banks need to continuously evaluate if they have enough liquid cash to enable them meet their daily commitments to run the business. This would mean cash-to-debt ratio should be really healthy.

- means and sources to raise cash: contineously keep a tab on potential investors who can pump money into the company when required. Keep this channel open. What assets can be sold off to enable the company raise healthy cash. The analysis is critical here since sometimes the dearest and most profitable assets may have to be let go to raise cash in these time. Surely mortagage based asset would reap nothing for the company.

- government: Keep in touch with the Fed and Treasury on the state of the company and seek additional help as required from the government.

- mergers or sell-offs: Analyze into the forseeable future, if the conditions seem to go for the worse, seek mergers or sell 0ff the company as Meryll Lynch CEO John Thain did promptly. Today he is considered by the educators in management schools as an example of how a CEO can ensure the share holders money in the company is not totally lost, in contrary to the style of Lehman Brothers. There is a thin line between belief in the company and performance of the company.

- a feel of market psychology: the management may have little control over this but it must monitor the news, the word, the feel of the market and ensure any rumors or negative talk is effectively quashed. The management must also be abrest of the latest state of their industry, especially peer companies since the phenomenon of 'peer effect' is contagious and in bad times detrimental.

- evaluate the performance of assets: Continuously seek reports from the lower management on the health of existing asset. These assets need not be performing well or even if making losses is fine as long as their health is not depreciating exponentially. Well, any asset that is returning profits is a dear one. The management must have a record of the best performing and worst performing assets to continuously keep a tab on the profits and losses.

- international markets: evaluate the international operations and how the markets there are reacting to news and ensure all the above are followed too there.

Overall, these are times where every CEO is challenged on how he /she manage situations beyong their control and ensure best possible returns for the share holders of the company. It is these times that a CEO should be evaluated in terms of cost to the company and appropriately compensated. It is not necessary that he / she continues to be a CEO of the company at the end of this tumultous period but more in how much value add his share holders see in the company.
I am sure most of us will be here to see and judge the best of the managements. After all, challenging times are what bring out the best of humans.

I am not a financial expert and at the least not even in the financial industry. So please take all the above with a little more salt.