new dog old trick

Michael Lewis on the financial crisis

I just finished reading Michael Lewis' new book on the financial crisis: The Big Short. I thought I had understood generally what went on with mortgages and mortgage-based derivatives but once I read Lewis I realized that my knowledge was incomplete. This is far from a complete history of all aspects of the recent financial melt-down but it does a great job explaining the mortgage-based financial instruments, and the ways in which they were traded, that helped to create the whole crisis. Lewis understands Wall Street and the trader mentality well and writes about it better than anyone else that I can think of.

I thought that I was cynical enough about Wall Street after experiencing a small slice of its amorality, arrogance, and greed during the process of taking a company public and then running a public company during the end of the high-tech bubble of the 1990s. After reading Lewis I realize that I was nowhere near cynical enough. If you aren't angry after reading this book, you aren't paying attention. If Bernie Ebbers and Jeff Skilling belong in jail for their misdeeds in the late 90s then there are dozens of executives at Goldman Sachs, Lehman Brothers, Bear Stearns, Merrill Lynch, Citigroup, and on and on that also belong in jail. The damage these greedy, stupid, immoral, and/or amoral shits inflicted and were allowed to inflict on our economy is far worse than anything anyone did in the late 90s. And this book doesn't even begin to touch on the other amoral, stupid, greedy folks at Fannie and Freddie and Congress and the Fed and the SEC that also have fingerprints all over other dimensions of the crisis. Nor, for that matter, does it touch on all of us that leveraged ourselves way beyond our ability to pay and our responsibility towards the crisis as well.

Getting to Plan B - a book review

Getting to Plan B: Breaking Through to a Better Business Model, by John Mullins and Randy Komisar, is a very good new book for both entrepreneurs and those running more established businesses. It's an important book because it fills what had been a major hole in the literature on entrepreneurship, business planning and strategy. Too much of the literature of entrepreneurship treats successful start-ups as ideas that sprang full-formed from the brow of a brilliant and insightful founder or founding team. The reality is that the majority of start-ups go through much searching and experimentation before finding the combination of business model factors that allow them to be successful. Getting to Plan B talks about that process of experimentation, exploration and learning that leads entrepreneurs from their unworkable Plan A to the Plan B (or C, or D, ... or Z) that allow their start-up to become successful.

The book has several strengths. One is that each chapter has several mini-case studies of companies that had to find their own Plan B - ranging from well-known high tech start-ups like Google to not-for-profits like GlobalGiving to airlines like Ryanair and beyond. Some of the examples are well known and others are much more obscure but all illustrate key elements of the authors' approach to experimenting to find a workable Plan B.

Another strength of the book is the way it points out that it's not just brand-new start-ups that need to evolve to Plan B - in today's "big shift" driven global market even established companies cannot milk a successful business model for an extended period of time without taking major risks. Every established organization should be continuously testing its overall business model and/or the business models of the individual lines of business, products, services, etc. that make up the business.

But how to test the model? How do you know if you're closing in on a workable or better Plan B? That leads to the two major contributions of the book. The first is providing a structured, repeatable process or model for how to test a business model to determine if it will work. Essentially, Mullins and Komisar propose treating the entire exercise as a structured, iterative experimental process. They provide a model for the conditions to be tested (their business model framework) and some tools by which to do the testing. The most important tool is the dashboard on which the elements to be tested are listed and the results of the test(s) are recorded.

Finally, Mullins and Komisar define what a business model is and define how to test the various components of the model. Their business model definition is solely quantitative and focused on five components:

• revenue model
• gross margin model
• operating model
• working capital model
• investment model

Each component is defined in a separate chapter and supported by examples of two or three companies and how that particular element of the business model contains a key to the company's success. All the discussions are good - the one on the working capital model is particularly useful (you can never stress too often that "cash is king").

It's funny that given how much we all use the term "business model" that there doesn't seem to be a widely recognized definition for the term. I love that Mullins and Komisar establish a firm definition and then show how to test a business model to determine if it's going to work. I think this may turn out to be the most important contribution of the book.

It's slightly disappointing that Mullins and Komisar didn't acknowledge or cite the similarity between their approach to testing a business model and the assumption-driven planning approach called discovery-driven planning developed by McGrath and MacMillan. Also, the process of structured experimentation that the book discusses is very similar in intent to the Lean Start-up approach advocated by Eric Ries and discussed in an earlier post on this blog.

All in all, this book is a major contribution to the literature on entrepreneurship and business planning. Strongly recommended.

Summer Reading

I have added a couple of recent books to my reading list in the right-hand column.  I've finished two books in the last couple of weeks that I highly recommend.

The first is Amity Shlaes excellent history of the great depression, The Forgotten Man.  This is very well written economic history, which sounds almost oxymoronic but it isn't in this case.  It's definitely revisionist history - FDR does not come off as the insightful economic savior that he is commonly viewed as.  It's amazing how feckless the political leadership of both parties was in dealing with a 10 year long crisis - and how much worse their actions made the crisis.  Lots of information that I had not been aware of.  Whether you agree with all of Shlaes conclusions or not I highly recommend this important book.

The second book is Walter Isaacson's biography of Albert Einstein.  Handles the science well for the general reader but even more so integrates the discussion of the science - and the scientist - into the whole person.  And Einstein was more than just the prototype of the absent-minded scientist.  Quite a bit of interesting information that was new to me - for example, did you realize that Einstein's Nobel Prize in Physics was not for his work on relativity?  I certainly didn't. 

The Smartest Guys in the Room

Over my driving vacation one of the books I finally got around to reading was The Smartest Guys in the Room. Bethany McLean and Peter Elkind did a great job pulling together the story of Enron up to the time of the bankruptcy. Even with all the time that has passed and all of the information that I have seen on Enron, it is almost sickening to read the story from beginning to end.

The focus of the story is really on Ken Lay, Jeff Skilling, and Andrew Fastow along with many other senior Enron executives. Lay comes across as appallingly disconnected from what's really going on inside the enterprise he helped to create and was supposed to be running during much of the 90s while Skilling is arrogance and hubris personified and Fastow is greed personified (not that there wasn't lots of arrogance, greed, and hubris shared among the entire executive team at Enron). I realize that I'm late to the party with this book, but it really is a book that anyone interested in corporate governance and ethics must read.

The one major player in the Enron tragedy that's not really focused on in the book is the Enron Board of Directors. These folks were supposed to be providing oversight and guidance and governance to the executive team at Enron. It's pretty clear from everything that happened that they were grossly (and maybe criminally) incompetent in carrying out these duties. I think there's another great book in the Enron story that's waiting to be written that gets inside of the operation of the Enron board and inside the interaction between the outside board members, the inside board members, and the rest of Enron management. While we're waiting for that book, you owe it to yourself to read this one.

Coming soon: Master and Commander

The ads have been all over television for the upcoming movie Master and Commander starring Russell Crowe. In anticipation, I have started re-reading the Patrick O'Brian novel of the same name.

Master and Commander is the first volume of O'Brian's Aubrey/Maturin series of historical novels set during the Napoleonic Wars. It's in the same tradition as Forester's Hornblower novels and Kent's Bolitho series of books covering naval warfare in the Napoleonic era, or Cornwell's Sharpe novels for that matter. (Why is it that the British do these series of historical fiction so much more and better than we do in America? Or is that my imagination?) O'Brian's books are in the same tradition - but they transcend the genre. They are far and away the best series of such historical fiction. They have fantastic historical detail. There are vivid characterizations. They are literate and well written, not mere melodrama like many such books. And there is plenty of swashing and buckling to keep propelling the stories forward.

I also just picked up a copy of The Making of Master and Commander: The Far Side of the World to learn a little more about the movie. I'm intrigued at the prospect of the movie but also more than a little concerned. I love the books and I'm wondering how well they will be translated to the screen. For starters, the titles of two of the books in the series are included in the full title of the movie: Master and Commander and The Far Side of the World. As noted, M&C is the first volume of the series and The Far Side of the World is the tenth. So is the movie based on one of the novels? Or is it a distillation of material from multiple books? Or...what? Hopefully The Making of... will answer all of my questions.

In addition, I wonder how the core of the book - the deep friendship between Jack Aubrey and Stephen Maturin - will manage the transition to the screen. Will it be the foundation of the movie as it is in the books, or will we lose it to the greater visual appeal of naval warfare? One potential warning signal is that Russell Crowe is playing naval officer Jack Aubrey, which seems a great choice. But there is no one of such stature or star power playing Stephen Maturin. Does the movie become The Excellent Adventures of Captain Jack Aubrey or do we get something that more closely adapts the books? All questions to be answered in mid-November and despite my concerns I'm looking forward to the movie.

As to why the British do historical fiction series better - we'll come back to that question in a later post.