Chaos: Opportunities and Threats

By Scott Gerschwer, Megaspirea

“There has never been a time that is more appropriate for communicating effectively on transactional documents…”

Chaos

Remember this one: a butterfly spreads its wings in China and we feel a breeze in New York City. Chaos theory was once very much in vogue in certain circles to explain the haphazard interconnectedness of life.

Now try this one: a middle-class fireman in Jupiter, Florida defaults on a loan for one of the three houses he bought on speculation during the housing boom---because now the real estate bubble popped and Florida McMansions are no longer a hot commodity---and in a $12 million, forty-room home in Greenwich, Connecticut, the CEO of AIG feels the cold wind of reality as he understands that his company is going under and needs to be bailed out by the Federal Government.

And now try this one: a print/mail manager in a large financial services operation loses his job because his bank has bought another bank and they are consolidating their print/mail operation.

So he cancels his lawn care service and his gardener is unable to pay his mortgage. Another loan defaults. Another cold breeze is felt in Greenwich.

Threat

I’d never heard of “credit default swaps” until last Sunday night, when 60 Minutes ran a segment on the subject. Until that show I wasn’t really frightened of the financial crisis. But now, after watching it, I’m really scared cecause the problem is deeper and darker and more expensive than previously thought.

The following is paraphrased from that show, just in case you missed it.

Credit default swaps are private, unregulated and largely undisclosed contracts that many mortgage investors entered into to protect themselves against losses if their investments went bad. It’s like insurance, but they've been very careful not to call it that because if it were insurance, it would be regulated. So they substitute a magic word---they call it a 'swap'---which means, by virtue of federal law, that they are unregulated. Worse yet, if it was called insurance, which it really is, the person who sold the policy would have to have capital reserves in order to be able to pay up in the case the insurance policy was triggered. But because it is a “swap” and not insurance, there are no requirements for adequate capital reserves.

So when some six percent of homeowners began defaulting on their mortgages, Wall Street's high-risk mortgage backed securities began to fail because the big investment houses and insurance companies who sold the credit default swaps---which includes (but is not limited to) Bear Sterns, AIG, Merrill Lynch, Lehman Brothers and CitiGroup----hadn't set aside the money they needed to pay off their obligations.

And so:

• Bear Stearns went bust.
• And then Lehman Brothers declared bankruptcy.
• And then AIG, the nation's largest insurer, couldn't cover its bad debts,
• So the government stepped in with an $85 billion rescue.

They said we had to do it to stop more chaos from ensuing. But then,

• A week or so later, the Treasury Secretary was on one knee in front of Nancy Pelosi, begging for a $700 billion taxpayer-financed bailout. 
• After adding $150 billion in “inducements” the bill passed in both houses. President Bush quickly signed the bill, called the Emergency Economic Stabilization Act, on Oct. 3.

This is the scary part: Do you know how much capital is currently invested in these non-regulated, not-backed-by-anything-but-a-prayer swaps? No one knows for sure, but according to reasonably optimistic estimates the market is in the range of $50,000,0000,0000,000 to $60, 000,0000,0000,000 (trillion). That's five or six times the size of the entire national debt. Which means that no amount of government intervention or bailout package is going to fix this problem. Not unless we all start learning how to speak Chinese.

Since this is an election year, it is worth noting another line from 60 Minutes, which at another time may have gone unheeded. Again, I’m paraphrasing: These are the very same companies that created the vast shadow market, lobbied to keep it unregulated, and are now drowning because of unanticipated risks. Which means that lawmakers in Washington, D.C. are complicit in the crime.

In a sense, it’s a fitting end to an era of government that bet every time on the most optimistic outcomes and found itself with worse-case scenarios time and time again. From 9/11 to WMD to Katrina to Wall Street, the hubris of the Bush administration has cost this nation its soul, its heart and now its guts. Now it’s investors that are huddled in their caves.

In the Vice Presidential debate, Sarah Palin stated twice that Barack Obama would raise taxes and the result would be that jobs would be lost. The next morning came the news that 159,000 jobs were lost in September, the ninth straight month of job loss totaling three-quarters of a million jobs gone in 2008. Not even the news later that same day, which reported that the $700 billion Wall Street bailout was passed and quickly signed into law, could shake investors out of the shock and awe that they were in.

Opportunity

During WWII in Great Britain the catch phrase of the day was “doing my bit.” Whether you were a Spitfire pilot or a schoolgirl collecting scrap metal everyone was sure to do their bit. My mother, who as a child was evacuated from Glasgow during the Blitz, did her bit volunteering with the Red Cross as her old neighborhood was reduced to rubble. Sometimes it’s all you can do. 

The financial crisis is creating a great many changes in our world, meaning the world of print and mail, and with these changes comes new threats and---if you are attentive---new opportunities to do your bit. For example, there may never be a time that is more appropriate for communicating effectively on transactional documents, as those documents by themselves do not paint a particularly positive picture, and the need to calm nerves and massage relationships with existing customers has never been stronger.

End of quarter 401K statements are already in the mail and the reaction to them may drive the next step in the Transpromo revolution. In this case what you are promo-ing is not goods and services but good will, encouragement and any message that can potentially ease the pain.

I’m not suggesting that print managers can mitigate the enormous crises caused by the incompetence and greed of their colleagues upstairs, or avert any further damage. But there is a clear need to communicate concisely and carefully and the place to begin that dialogue may be on the statement that is going to deliver the body blow that an investment is either going or already gone. Empathy and advice are two much-needed virtues in a crisis, and may be all we can do to do our bit.

Even as operations are consolidated, jobs lost, opportunities for new infrastructure, equipment and technology lost, we can make use of what we have to tell a comforting story, ensure our clients that we are working with them, and working through the problem as best we can.

Chaos is accompanied by both threats and opportunities; one thing is for sure: it’s never boring. Go do your bit and we’ll get through this---maybe better than we were before.

Care to offer your thoughts? E-mail us at press@OutputLinks.com.