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Weekly Column

Off With Their Heads!: How Jack Welch would solve the banking crisis.

Status: [CLOSED] comments (97)
By Robert X. Cringely
bob@cringely.com

My promised column on threads will appear in this space on Friday. It would have appeared here today but the crumbling global financial system suddenly seemed a more appropriate topic.

We're in trouble and by "we" I mean the whole darned planet. What started as a mortgage problem in the U.S. has blown into global financial paralysis that threatens us all with recession and maybe even with depression. I know I'm feeling depressed, how about you? The crisis seems immune to any and all efforts to fix or end it. NOT passing a $700 billion mortgage bailout can send Wall Street into a tailspin, for example, but then finally passing the bailout didn't seem to improve things, either. The Federal Reserve and Treasury Department are running out of tools and time yet still the system flirts with suicide. So I say it is time to take a completely different view of the problem and to look to a new leader to solve it, in this case Jack Welch.

Jack Welch is the retired chairman and CEO of General Electric who took the company during his 23-year tenure from being worth about $14 billion to about $410 billion by really MANAGING the business and concentrating on creative use of capital. I've written columns and columns deriding managers as a profession but none of that applies to Jack Welch and GE, where managers really manage -- they manage the heck out of the place and to generally good effect. Jack Welch built that system, he has time on his hands, I say let's give him a new job.

There is very little difference, in fact, between the global financial system and General Electric. Welch saw GE entirely in terms of cash flows and the application of capital to those parts of the business where it would do the most good. Welch also thought in terms of continuous quality improvement, which is virtually unknown on Wall Street OR in Washington, where such things aren't even talked about, much less measured.

I've been thinking about this crisis and a lot of it comes down, I believe, to a fear of failure especially on the part of the banks. There is no credit available to anyone, anywhere, no matter what the credit rating or score. This is because the banks are frozen by fear to the point where they won't even lend to each other much less to customers. This fear of failure seems to be pretty much guaranteeing failure. And the regulators are now throwing what will soon be trillions of dollars at trying to break these bankers out of their paralysis. But I think there is a better way: use this very fear of failure as a motivator.

Before we get to Jack let's deconstruct this current psychological crisis on the part of the banks. They aren't lending money because they are afraid it won't be repaid. They won't lend even to each other because banks seem to be failing all over yet there hasn't been an instance yet when an overnight loan has resulted in default. So what's the problem? More properly, what is the outcome the banks fear?

They fear going out of business either through honest failure or through being forced to merge or having their deposits taken away by the Federal Deposit Insurance Corporation (FDIC). In short it comes down to fear of losing their licenses, because as a highly regulated industry the banks can only do business at all with the permission of government. Right now they are totally fixated on the idea that if they lend money and it isn't repaid the government will pull their licenses. Yet the government has made it clear that the most important thing is to LEND MONEY, breaking this credit paralysis. All the banks know this but none of them want to be the first to take the big risk of lending money.

You do it! No, you!!

Enough of this crap. What if Jack Welch was the U.S. banking czar? We know the result of all such crises these days in the U.S. is the appointment of a czar -- a new government official drawn from industry and charged with cutting across agency lines and streamlining an ultimate solution. We did it in energy and terrorism and I'm sure we'll do the same thing now so let's just think ahead a bit. Let's assume that's the case here and that whatever President is in office names Welch. What would Jack Welch do?

If Welch ran the U.S. banking system like he ran GE, he'd kill the bottom 10 percent of banks every year and fire the lowest 10 percent of bankers.

What impact would that have on the system? Would it make it better or worse? Well it couldn't be worse, could it?

Doctors have a way of measuring pain. It seems our brains can only focus on one pain source at a time, so if you have a pain in your gut you really don't notice the pain in your ankle. So there is a device called a palpometer that goes on your arm or leg and is calibrated to produce standardized and replicable levels of pain. Put this gizmo on, turn up the pain, and when you get to the point where the patient suddenly goes from saying, "My head hurts," to "My leg hurts," then you know how much pain they are in.

This was all pre-waterboarding mind you.

Right now all the bankers are afraid to lend money because they are afraid of failure. As the new banking czar Jack would much rather have them be afraid of HIM. If the bottom 10 percent of bankers were fired every year and the bottom 10 percent of banks had their branches and deposits redistributed, wouldn't they be more afraid of THAT than of making bad loans? Their motivation would still be to make GOOD loans, but the penalty for making NO loans would be there, too.

Our problem then is that we're throwing money at something we should be handling using a different regulatory tool -- licensing.

U.S. bank regulators should go to all the banks this afternoon and say, "You aren't making loans, which is part of the definition of what it is to be a bank. If you aren't acting like a bank by tomorrow we'll take away your banking license and transfer your deposits to another bank that WILL make loans."

Problem solved overnight.

It's only one part of the problem, of course, but this solution will cost a lot less than $700 billion. It will cost nothing.

And if you think it won't work, then you don't know Jack.

Comments from the Tribe

Status: [CLOSED] read all comments (97)

Jack explains why all my GE products stop working before the warranty period is over, but it cost less to replace them fight to get the warranty enforced.
sprint instituted Jack's employee rating system. See how well it worked for them. Sprint is nearly all IT and details of how it works are only in the minds of it's workers. Lose 10% of the details of how the business works every year and soon the business doesn't work any more. Can you see that happening to the banks, and what do you do when they are all doing what you want? Kill'em any way! And Jack wouldn't the ones not loaning money but the ones not making money. So the ones with good lending practices would die first.

Karl | Oct 19, 2008 | 12:30AM

Jack Welch, like Alan Greensapn, still supports the reregulation (usually called "deregulation") that drove this debacle.

Greg wrote:

"The thing that baffles me is the complete lack of reporting/commentary on how politics has driven this whole crisis. It's obvious that Paulson saw this coming a mile away but the Rupub admin gave him orders to keep smiling until after Nov 5. Thing is, it blew up before the election."

Word.

Janus Daniels | Oct 19, 2008 | 4:58AM

It took Treasury a couple of weeks to catch up to the Cringely, but Paulson obviously read this column ...

Paulson tells banks to lend (http://www.marketwatch.com/news/story/treasurys-paulson-tells-banks-lend/story.aspx?guid=%7B375D24E5%2DC639%2D44BD%2D8AC3%2D3316D80A1D3F%7D)

quixote | Oct 20, 2008 | 2:07PM