Panic on Wall Street - A Brand Perspective

I'm working on a presentation that I'll be delivering to the American Society of Appraisers in January. I was invited to be the speaker by a member of the Society who knows me and who felt that the recent panic on Wall Street should be addressed by someone outside of the usual speakers that the Society has. I thought it was interesting that someone with no professional financial background would be chosen as speaker in a time of financial crisis. Apparently, the Society is interested in an interpretation of the current crisis from a brand point-of-view. (Or, they're simply desperate for a speaker.)

Here are the major points I'll be making:[1]
1. Most CEO's and senior executives define a brand as a logo, name, tag line, or 'what the folks in marcom do.' This is necessary, but not sufficient.

2. A brand is a promise. A promise is based on expectations on the part of stakeholders that they will receive value (defined as benefits (or rewards) less costs (or risks))

3. Many financial brands used high levels of leverage to generate record returns, and to enjoy record compensation. Executive compensation plans were designed to reward ever higher levels of profitability – without a clear understanding of the risks being undertaken to achieve those results.

4. Stakeholder expectations were raised. In order to deliver on those expectations, the financial sector engaged in financial innovations that decoupled risks from rewards. Co-complicit in this ‘decoupling’ were mortgage brokers and real estate appraisers who used ‘liar’ loans, and sub-prime loans often coupled with inflated appraisals to feed this leveraging process.

5. The 'decoupling' of risk from reward was masked by imprudent (if not fraudulent) rating agencies, who incorrectly assigned AAA ratings to these CDS’s/SIV's/CDO's, etc.

6. Many regulators were ‘asleep at the switch’ as this happened.

7. Congressional oversight was clouded by the political expediency to expand “affordable housing for all” (which, rather ironically, created demand which resulted in housing price inflation, thus making homes more expensive) coupled with the desire of the securities industry to create new sources for their fees and commissions – resulting in the repeal of the Glass-Steagall Act, originally designed after the Great Depression to separate the banking business from the securities business. (History does repeat itself!)

8. When key stakeholders (investors/customers) realized the true nature of these investments as sub-prime mortgage default rates rose, trust evaporated and confidence collapsed.
This was compounded by the difficulty in separating 'good' assets from 'toxic' assets, due to their 'co-mingling.’

9. “Mark to Market” rules instituted by the SEC in 2007, forced banks to devalue assets further (since no one could quickly figure out what the underlying assets were really worth) triggering reserve requirements, and pushed many banks towards insolvency – at least on paper

10. This led to a collapse of credit markets, a downward spiral in asset values, the destruction of trillions of dollars in value, and the destruction of many formerly leading brands, not just in finance and banking, but in many other areas.

11. The financial collapse has spread to the 'real' economy as the higher cost of credit destroys Main street businesses and jobs.

12. Brand equity is comprised of intangible, emotional attributes/values - a core one being trust. (BV=TA+BE-P where BV is Brand Value, TA is Tangible Assets, BE is brand equity based on emotional, emotive attributes, and P is price paid.) Many appraisers regard 'emotion-based values' as soft, unreliable indicators of value - if they think of them at all. Just the opposite is true.

13. Brand equity and its component emotional-based attributes can be measured at the corporate, product and service levels – and has real value that can be estimated as the market cap of a corporate brand asset less its adjusted book value. Brand equity is a key component of brand value, which, in turn, is a key component of overall market value. (MC=BV-IAXP/E where MC is Market Cap, BV is Real Assets less Liabilities, IA is Intangible Assets to include Brands, Relationships, and other Intellectual Property, multiplied by an estimation of future free cash flows compared to competitors.)

14. These measurements can serve as an 'early-warning' system.

The point I'll be making is that everyone was looking at value (a perception of worth based on benefits received minus costs paid) as the key metric. This is what appraisers look at. They should also have been looking at the intangible assets (ideals, beliefs and principles) of the key companies and their executives, and whether they were in alignment with their stakeholders so as to create rather than destroy value. Obviously, values like trust, integrity and honesty were violated. The golden rule ('treat others as you would like to be treated') was violated. What's needed is a realization that brands can serve as the framework for every organization, combining both value and values to create sustainable, long-term economic-value-added outcomes.

When brand values get out of alignment, when the interests of some stakeholders are put above the legitimate interests of others, as when the creation of fee income becomes more important than the delivery of value to those from whom that fee income is derived, then the piper will be paid, sooner or later. In this case a ‘perfect storm’ of micro and macro mismanagement created a catastrophe.

My closing point to the ASA members will be that they now have an opportunity to marry value to values, and to balance both in how they appraise the true value of a firm.

Any comments on this approach? Does it make any sense?


[1] Many of these points are drawn from “Value Creation: The Power of Brand Equity’ co-published in 2008 by Cengage Learning and the American Marketing Association, co-authored by Bill Neal and Ron Strauss.