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Social Media Information

Social Media is evolving - from playful to strategic

Social Media is no longer the cool nice to have where people tweet a bid, have a nice profile and blog random thoughts. Social media gets strategically embedded in corporations. Cisco, IBM, Walmart, Wholefoods, Starbucks and others invest millions in their social web presence.

The investment is more on the resource side than systems. Those leaders get truly social. Social media leaders need to stay ahead of the curve as well.

The Social Media Academy Intro webinar provides some insights http://www.socialmedia-academy.com/html/introwebinar.cfm -

The impact of social media to businesses like Cisco, Walmart and others across all industries - Identifying the largest pool of business opportunities
- Assessment of a company's social ecosystem http://xeeurl.com/A0848 - Developing a comprehensive social media strategy
- Creating a social media plan
- Reporting and analytics in social media
- over 100 reporting tools
- ROI, resources and budget considerations
- Social media as a cross functional business accelerator
- Competing for mind,
- and market share
- Building a successful social media practice

Comunication to Effective Integration of Systems

7. Communication, Communication, Communication!

The leader must effectively communicate, because this how the delivery of organizational values, expectations/direction (alignment), and compelling vision is cascaded throughout the ranks. The leader must ensure proper strategic planning of vision and goals; the deployment of tactical plans that implement goals and objectives; and an information system that collects, analyzes, and reports data foe continuous improvement of the organization. Barriers to optimal performance within organizations primarily have their root communication ability or lack of. Communication is the primary way to engage, motivate and align people toward a compelling vision. Feedback loops ensure that senior management are fully informed and actively listen to all levels, which guards against hubris, and other destructive behaviors. One way to help launch an effective communication strategy is to use the basics of an Integrated Marketing Communication Planning. What are we trying to achieve – well we are marketing concepts and building a powerful brand – the compelling vision. Also the path way is described through strategic planning, which ensures that goal and objectives are clearly identified and the followers or stakeholders fully understand their part in the whole of achieving the vision. This can only be done with clear and careful communications.

Aristotle acknowledged 3 dimensions of communication – Ethos, Logos, and Pathos. All three are tied together in an inseparable interactive matrix of communicating a message. Communication is interactive and requires give and take to occur. To be effective in communication, one must be creditable, logical, and emotional. Only a coherent blend of all dimensions allow the message to be accepted, which results in the compelling vision to be shared and realized by the listeners/followers.

Why is it important? Gaps in communication result in misunderstanding or the stretching of present understanding to false/improper conclusions. People by nature hate gaps and will fill them with what ever suits them or what is close to them. This where fear, bias, personal agendas, etc start to creep in and becomes destructive. Let’s bring in Maslow’s third law of hierarchy – Socialization. People wish to be accepted and heard – being part of a group is very important to people. Communication achieves this powerful need and can dissipate fear and selfish agendas by properly communicating how each individual fits into the success of the big picture. Communication should help people understand what is being said and then why it is important to them on a personal level – invokes emotion. In turn, to facilitate this understanding – communication must be open so people can share their values and assumptions, which clarifies their understanding of the message.

Communication is highly interactive, it must become a process where everyone listens and everyone has a chance to voice their view. Titles must not matter as well as no attacking or vengeance on what is voiced by an individual. This goes to Deming’s principle to “drive out the fear.” Care must be taken so powerful agendas do not dominate and quell the less forceful voices. It may be these quiet and soft voices in the still wind that carry the optimal solution.

Fifth Level Leadership Needed

5. Develop comprehensive solutions for your opportunities that include people, process, and technology

9. Measure results, learn and refine approaches

10. Keep an attitude of experimentation - we do not have "right answers" we have hypotheses to be tested and refined

To address these 3 statements, I have decided to comment on the financial crisis that affects us all and how fifth level leadership coupled with system/integral thinking would have forecasted this crisis and mitigated the severity of it all globally.

What does the future hold? Can we competently forecast the future? The use of trend analysis and scouring the various environments globally will take higher levels of thinking and selfless visions. The current financial crisis has devastated all forecasts, corporately and across all government budgets. Alan Greenspan made an admission that he and the fed did not foresee the impact of securitizing and selling mortgages. No one saw the consequences of the inactions of government regulators, public rating agencies, etc. Alan Greenspan claims ignorance in his statement, “We’re not smart enough as people…. We just cannot see events that far in advance. There are always a lot of people raising issues, and half the time they’re wrong.”

So are these statements just ignorance and the inability to see that far in advance or just greed coupled with selfish egotistical pride and self-righteous? Alan Greenspan and the Fed chose to view these actions with only one lens and only narrow perspectives of self service. If they would have listened to the nay sayers and truly took the view that no one understood the risks of these securitized mortgages using integral and system thinking, the severity may have been avoided or at least mitigated to minimum damage. It has been said that if Alan Greenspan would have taken an integral approach and used risk assessment on a global scale, he may have been able to predict the future. There were numerous warning signs pointed out by futurist and other higher level thinkers in the financial community. Politicians and CEOs with large ego may conscious decisions to ignore these scenarios. Not knowing that you have blind spots, is that you responsibility? I would say yes! One must use higher levels of thinking – critical and system thinking – to acknowledge ones ignorance and blind spots. This takes a selfless and humble approach, which is fifth level leadership. So we could use simple cause and effect analysis to come up with a logical conclusion that our country as well as global environments severely lacks fifth level leadership among the ranks of financial and government institutions. Leadership is driven by selfish egos, pride and greed for power and money. The securitizing of mortgages was a pure choice of greed of money above integral thinking of the consequences that would occur if the mystical cornerstone evaporated into digital fantasy world created by the innovations of financial engineers of these products.

Some say that forecasting and predicting results if only feasible 3 to 4 months out, beyond that is only silly. Is this true? Or do we just not have the ability to think critically enough to take into account the complexity of the global interactions between the developed countries, emerging countries, and environmental disruptions? Will developing more fifth level leaders, which will be able to develop higher levels of integral thinking, create this necessary forecasting wisdom? Scenario planning appears to be increasing in popularity, which requires deep levels of integral thinking and a vey open mind (whole brain thinking – multiple lens/perspective approach).

What else is needed? Fifth level leaders should also be able to humbly listen to all and not be in denial or numb to inactions and undesirable results. Embracing and acting on decisions through PDSA cycles and other tools will facilitate a culture of continual learning and discovery. This will in turn eliminate blind spots and discover further knowledge that was not even known that was not known. It has been said that in the whole of knowledge we know about 1/10 of what we know we know. There is probably another 1/10 to 1/5 that we known that we do not know. So that leaves about 7/10 or 70% of the knowledge that is out there to be discovered that we do not even know exists yet.

So how do we start to get there? It is a journey and not a destination that will take cross-functional and selfless communication. Open discussion with active listening, humility, and no judgment, just civil debate that is respectful – full of conflict and discovery. It is also embracing that there is no right and there is no wrong – there just is. Beliefs and assumptions are the same – they are predicated on what is known at the time to help people understand why something happened, but may not be true at all. A superstition is just a belief so ingrained in a person mind or a culture that it is actual fact. One must have an open enough mind to accept new ideas and concepts, even if they are counter to current beliefs and assumptions. This allows for nimbleness and flexibility in planning and forecasting. As one becomes further enlightened or different scenario develop, one can then go back and change the forecast via reallocating resources and changing direction to support the end goal – the vision. Enlightenment will occur if one travels outside of current circle and embraces conflicting ideas from others. Hubris and ego must be guarded against, because they are barriers to this embracement. One must also accept that uncertainty and ambiguity will be normal companions in this journey. People, communication, technology (to facilitate knowledge transfer), and processes that integrate all of the functions and science together in order to increase the velocity of discovery will be needed for future survival. Remember to be nimble – for it is not the strongest that survive changes in the environments that we all live in, but the ones that are able to adapt and be flexible that survive as well as thrive in the ever-changing world.

Systems Thinking Converging with QMS/LSS through Leadership

After reading the 12 comments to the proposed question, I have decided to weigh with my opinion. The comments appear to be dancing around what system thinking really is and where it originated, etc. Also the misconceptions of what lean is and what six sigma is and the combination of Lean Six Sigma or LSS. So lets define lean as the elimination of all non-value added actions (waste has too narrow of a connotation). Six Sigma is defines as an organized way to leverage decade old tools in order to eliminate variability in processes. Lean DOES NOT improve quality or excellence of a product, service or organization. Six Sigma DOES NOT improve throughput or cycle time. LSS starts to go toward system thinking by combining the two together in order to derive synergistic effects not feasible with each set of tools individually in isolation.

Now let’s dive into Systems Thinking and the convergence with QMS and LSS. Systems’ thinking has been around since the beginning in time. Aristotle was one of the first to put into a philosophical dialogue. What is the ultimate synergy of system working in perfection? Well look at Earth’s ecological systems and also the human body. Systems’ thinking is man’s philosophical approach to try and understand these complex systems and how they interact with great positive value generation with effortless ease. Now let’s get back to how this relates to value generation for organization and mankind. Remember that organizations were created by man for the sole purpose to benefit man – not for the exploitations of man. Also there is symbiotic relationship that not exists between man and the environment – earth’s ecological systems – but also between each other the communities. Here is quote from an article I just read by Tito Conti, “Quality and Value: Convergence of Quality Management and Systems Thinking”. “Systems thinking is a way of thinking that STRIVES to UNDERSTAND the complexity of the reality we are immersed in, in the particular the reality of socio-cultural systems. … ever increasing complexity of man-made systems, the dynamics imposed by exponential growth of technology … we cannot escape the systems thinking challenge.’

Very humbling to reflect. LSS can be a tool to create simplicity and then co-operations between departments, business units and thus human. Synergetic effects of social systems (which is work people!) has value generated that, if positive and aligned, is greater than the sum of the values individual units could generate in isolation. Quality is neutral and excellence is not quality, but has been misused often enough o be widely accepted by professionals. Excellence is just a product of the interactions among systems and not the sum of the actions of individual parts. We all understand that excellence of one individual unit does not translate into excellence for the entire organization, right? An organization culture and structure must be designed with system and integral thinking, which takes higher levels of critical thinking. LSS should only used for the sake of aligning the workforce toward a common goal and drive out fear and selfish agendas – ONLY LEADERSHIP can bring this together. Last thing – pay attention to Maslow’s laws on human, social interaction and behavior. The perceived gratification received by people, through motivation and engagement, is directly proportional to the value generated for the organization. This is leadership at the fifth level, which sees the interaction of systems through whole brain – 4-lens perspective of the global whole and breaks it down in simple forms for the alignment of people toward a common vision!

Business Continuity and Sustainability: The Convergence of QMS, SCM, and CRM

Tactical deployment of initiatives must be aligned with strategic targets and corporate goals in order to attain sustainability and continuity of a business in this emerging and dynamic global environment. Key performance indicators (KPIs) and balanced scorecards are tools that can effectively and proactively align customers (CRM), operations (QMS and MES), finance (SCF), and human capital (QMS and CRM) into sharp focus that supports continuity. Six Sigma is also a tool and is ever evolving and changing to meet the demands of global processes and systems. Six Sigma can not improve processes speed, but does ensure focus on doing the right activities correctly. Lean manufacturing (part of the six sigma tool belt) can not bring processes under statistical control or improve capabilities, but does ensure that the focus is on working on the right activities.

These tools support and allow a company to build a structure of sustainability. Business sustainability and continuity only truly happens when best practices (established through management’s commitment and dedication to Quality) becomes best habits of the entire workforce. This can be facilitated by

Making continuous improvement the way of conducting business.
Identifying primary inhibitors to process and system flows.
Exploiting optimization actions to forecast non-value added activities (wasteful steps and activities) and eliminating them.
Balancing top speed and efficiency in operations with the highest quality feasible with present process/system through strong focus on revenue generation, cost structures, and customer satisfaction.
Includes in all of the processes the necessity for receiving inspection, quality planning, and supplier surveillance (even internal suppliers).
Develop training programs and succession plans that are proactive and have the foresight to aggressively address future market demands and needs of customers.
Proactively addressing emerging trends on a strategic level will prepare a company for tomorrow’s tactical issues.

Product recalls negatively impact shareholder value (SHV) and erode the company’s and product branding efforts. This can be minimized by implementing continual improvements of Quality Management Systems (QMS), Manufacturing Execution Systems (MES), Supply Chain Management systems (SCM), and Customer Relationship Management systems (CRM) through

Reducing/eliminating the cost of poor quality.
Mitigating risks of recalls through aggressive risk assessments.
Ensuring compliance to regulatory and quality standards.
Dedication to improving consumer safety and satisfaction.

This brings what are the required actions and activities to achieve the means of sustainability, which include
Develop, establish, implement, and execute an effective Corrective Action Board (CAB) that has cross functional representation responsibilities for continuous process improvement as well as manage quality, tractability, and risk mitigation assessments at all levels and across all boundaries. Adopt and drive a QMS that facilitates a culture change.
Establish continual improvement QMS actions into real time reporting in order to increase visibility of product, process, and system information across all of the value chains. Eliminating silos of information and knowledge is a necessity of visibility, which supports business sustainability.
Ensure that traceability and threshold levels for non-conformance incidents are intertwined within every process and system. Automate collection of quality data from the manufacturing floor and suppliers.
Develop, establish, Implement, and execute and effective Continuous Improvement Team (CIT) that focuses on process traceability and non-conformance root causes across all boundaries.
Establish quality dashboards and supplier scorecards that ensure process data is exploited into actionable intelligence and knowledge for quicker decision-making.
Integrate process traceability data across all value chains that support visibility and performance across all boundaries.
Ensure all supply chains have integrated traceability and commitment of suppliers to traceability, especially the global suppliers.

This leads to the need to start measuring and improving on the metrics of

Percentage of Product in compliance, which is the percentage of product produced, that is in compliance to processes against total products is greater than 98 percent.
First Pass Yield, which is the share of finished product that goes through the process the first time without defects, is greater than 95 percent.
Response time to non-conforming shipments, which is product discovered to be out of compliance and the average time needed to locate and quarantined is less than one hour.
On-Time delivery, which is the ration of product delivered on-time (not early or late) to the total product delivered is greater than 95 percent.

Benchmark and improve performance in these key categories, which include

Process – through the standardization of processes across the organization.
Organization – through establishing ownership of executive management for the traceability and risk mitigation initiatives.
Knowledge Management – through delivery of process and system data into information that is turned into actionable intelligence for quicker decision making. Action intelligence is defined as delivering the right data to the right person in a usable format in real time so appropriate actions (decisions/judgments) are taken with a minimum of intermediaries or pushing the decision-making process down to the lowest level (establishing intent).
Technology – through exploiting technology that supports and drives compliance and traceability programs.
Performance Management – through abilities to measure business performance that drives continuous improvements proactively.

Traceability and genealogy programs are supported by QMS, SCM, CRM, and ERP systems. It is the use and exploitation of these tools that improve the visibility and functionality of processes and systems. This drives accessibility to relevant employees in real time – eliminating lag time – which increases responsiveness and focus on working on the right activities. The effectiveness of the structures implemented will be based on the existing technology. The benefit of continuous improvement programs will be aided by new technology adoption and integration into QMS, SCM, and CRM systems.

Leadership for the Future, A Supply Chain Management perspective

Future leadership will not only require, but demand higher levels of thinking. It will be necessary for combating the competitive and uncertain landscape of evolving business. Integrity coupled with the ability to learn and execute compelling business strategies will be needed to achieve success. Business agility to lead ahead of customer’s lifestyles and expectations through customer-enabling and engaging resources will allow this achievement and stay ahead of the competition. The accuracy of anticipation of the customer’s expectation will be essential to success. Additionally, embracing more inherent risk and uncertainty will allow innovations and the ability to stay calmly focused toward the end result.

Human capital will no longer exist as an asset, but as an essential tool for survival in the new world of global business. Customer and knowledge management systems will not only improve interactions and engagement, but allow opportunities to be exploited effectively. Real-time value between suppliers and customers (value chains) as well as corporate accountability and governance will be demanded by customers. Social responsibility will govern and direct innovations and sales. This will take planning, education, implementation, and execution of various initiatives. One vital aspect will be planning for risk and ensuring business continuity. Leadership must understand the interlocking and dependence of technology, processes, systems, security, energy sources, supply chains, customer logistics, and people for seamless business continuity.

The key to this interlocking dependence of interactions is the human capital residing within a company. The success of these interactions is directly related to the discipline of intent established and reinforced by the leadership of the company. Decision, made by people, make or break any situation. Slow decision-making causes handicaps in favor of your competition. The quicker and more effective decision-making processes are, then the less disruption occurs. People ensure business continuity, not machines. Business systems and strategies need to be flexible, agile, and adaptable to disruptive events of uncertainty created in the global business landscape.

One suggestion is to adjust to listening and focusing on the customer’s needs and expectations and to stop marketing in order to shape the customer to what the company wants the customer to want. Listening skills must be dramatically improved among all the employees and needs to start at the top and work down to the lowest level. Develop this skill throughout and disrupt the present and create the future. This is because there is a continuing of convergence of technologies occurring, which will include nanotechnologies, biotechnologies, information technology, cognitive science, and all other technologies.

There will be a great future demand for fluid markets, which rely on technology to provide a seamless flow of communication and money in a virtual creation that services the real world. This will create the need and opportunities for:

v Virtual Supply Chain Networks
o Super efficient and fluid
o Establishment of digital currency as the norm to increase market interactions
o Establish relationships and drive commerce for specific projects and timeframes
v Knowledge-Value Engineering Processes and Systems
o Virtual supply chains leveraging positions globally
o CRM and KM exploitation in a virtual interactive environment
v Security and Risk Management
o Business continuity
o Energy terrorism
o Leverage and exploit green technologies
v Food Production and Distribution
o Focusing on local suppliers
o Logistics used to maximum sourcing
o Virtual supply chain management
v Nanoenergy and Nanotechnology

Future business environment will have a much greater degree of complexity, fierce competition, and accelerated change. Innovations will be across all boundaries and will be disruptive technologies to the present norm. It will technology and peoples ability to exploit emerging technologies that will enable companies to increase their market share, profitability, competitive advantage, and survival rates. This will encompass supply chain management (SCM), supplier relationship management (SRM), and supply chain execution (SCE) interacting with manufacturing execution systems (MES) and transforming entire processes and systems through human assets. These supply chain transformations will be the beginning of virtual engagement. This evolution will include the convergence of finance, economics, manufacturing and procurement tasks into one fluid engagement, which will be essential for business. The movement of goods, services, transactions, and interactions from the manufacturer and the end customer must occur instantaneously or very fluid. Distribution channels currently driven by physical distribution will have to become virtual and digitized, which will drive these value chains into automatic engagements.

Economic dominance of a company or industry will depend on the degree of sophistication and complexity achievable in the SCM realm. The power and value of the supply chain vale chain will be the continuity proactive approach to inventory management and procurement. Processes and systems must become derived from models that have been developed for predicting the emergence of proactive actions that must be seized and executed in real-time. This will be facilitated by virtual cooperation and collaboration between companies and all of their values chains. This includes the reduction of inventories (improvement in the company’s cash flow) without worrying about delivery and price increases and an overall improvement in workflow. Information technology (IT) processes and systems (eProcurement and eLogistic) will be leveraged and exploited in order for a company to differentiate themselves in the future market from their competitors.

Paradigmatic shifts of supply chains must provide smart solutions and support real-time decision-making, which will facilitate the speed and accuracy of deliveries will be essential for the next generation. Companies will have to embrace and understand the limitless web-centric technologies, present and emerging, because these systems will become the foundations SCM. On-demand supply chains, business intelligence, and transparency will be the only way to develop, seize, and exploit opportunities. Companies must be able to leverage

v Proactive Predictive Forecasting
o Data mining for niche markets
o Anticipation of customer needs
o On-demand for customer demands
o Transforming information into the ability to drive on-demand decision-making into a business asset.
v Knowledge Management Systems
o Instantaneous cooperation and collaboration of human capital
o On-demand information and knowledge about competition, customers, value chains.
v On-Demand Service
o Driven by customer expectations and not cost or efficiency
o Flexible and agile where the customer’s wishes are anticipated with efficiency and low cost (defines the leader).
v Interconnection of Networks
o Interacting of knowledge across all systems via advanced IT systems.
o Value chain efficiency driven
v Electronic Markets
o Systems that allow all systems, networks to communicate – regardless of company, IT structure, or country.
o Elimination of manual or paper Accounts Payable (AP) systems and development of an electronic instantaneous transaction system.
o An interactive structure that allows customers to customize their degree of engagement.
v Smart IT Systems and Collaborative IT infrastructures
o Drilling down to transparency in transactions, communications, confirmations, and validation.
o Decision support structures with customers, suppliers, partners, and competitors.

This will be supported by the development and execution of artificial intelligence and knowledge management systems, which have embedded decision-support structures for improving the algorithms for predictive modeling and automatic logistics management.

Finance and banking infrastructure will be the tie in, but invisible to the value chain system. The strategic influence of procurement and its relationship with finance is needed for future success. The collaboration and alignment gap that currently exists needs to be closed in order to capitalized on present and future opportunities. On-demand and real-time data mining will drive decision making and the maximization of resources. Continual optimization through continual updating and improvements in data mining will fluidize the flow of the value chains. This will develop the futures and options markets, which will be based on virtual supply chain systems. This will consist of customer relationship forecasting and anticipating the customer needs. Purchasing interests in supplies before the customer realizes they even need them will be the measure of success. Eliminating lead times due to options trading of customers and hedging for investors. Inventory futures will be a portion of the supply chain and a means to earn money on residual cash or cash in transit.

There will be a reshaping or paradigm shifts in the value chains that include supportive linkages, alliances, and channels of distribution. Strategic planning must incorporate and take in consideration future business objectives, landscapes, and the evolving customer needs and demands. Transformations in education, training, financial systems, and manufacturing will occur and lead to their eventual convergence. The world will become reshaped through disruptive innovation where the irrational presence becomes the rational future and the reality of tomorrow.

Fierce battles for talent, intellectual property, capital expertise, and technical expertise will be waged in the near future. Proactive companies with strong leadership will stride through these times effortlessly and become the global leaders. Leaders will have to create order in the mist of chaos and provide fulfillment to the demands of employees and customers. Leaders will have to simultaneously plan for today and tomorrow. They will be the glue that holds the organization together. The most valuable asset will be the leader that has the ability to adapt and remain nimble throughout chaotic environments.

Supply chain relationships will need to be a strong focus. Sustainable competitive advantage in the global market will be through continuously innovating with supply chain partners. The partnership will have to be not only dynamic, but multifaceted and acknowledgement of the
v Benefits of a close-knit collaboration
v Supply chain processes and their improvements
v Technologies underlying in them and the emerging technologies
This will take global vision and focus will consist of
v Instantaneous expectations of delivery
v Necessity of quicker speed to market
v Continuous innovation of disruptive technologies
v Flexibility, agility, and nimbleness to react to change
This will be supported by a collaborative network which provides
v Strategic relationship focus on goals
v Supportive IT portals and visual platforms
v Forward thinking toward the end customer with a focus on outdated and cumbersome intermediate distribution channels.
v Demand-driven value chains which will become a must and not a nice to have.
v Real-time management of operations, inventory, finance, suppliers, and customers where decision making processes deliver instantaneous results that feedback into a continual loop.
v The convergence of sales, marketing, procurement, operations, and finance through interactive and supportive processes that move swiftly to proactively meet the customer’s demands.

These collaborative networks will be leveraged and designed to improve responsiveness and to reduce uncertainty. This allows engagement into collaborative efforts to become fluid and transparent. The key that allows any of this to function and operate is people and their interactive skills and talent. This will be facilitated by a standardization of IT structures and platforms. The interlinking of customer responses and reactions into scheduling, inventory and operational management systems will result in a powerfully effective knowledge management network. Standardization will be aided by an intermediate step of a web-centric platform, which will support various IT structures and allow them to freely interact. Financial planning and forecasting as well as value chain execution will help drive this end. Poor forecasting and excessive inventories will become a huge handicap in the SCM system. Proactive and predictive modeling through these knowledge management systems will support JIT inventories and eliminate these inefficiencies. This is all facilitated by supply chain intelligence (SCI), which is driven by
v Continual, focused, and disciplined evaluations
v Plan-Do-Act cycles
v Access to real-time data about global responses within the value chains
v Development of security plans that support business continuity and recovery plans

Inventories are money not earning interest and a waste of working capital’s potential, which is drain on net profits, shareholder value creation, and liquidity. Radio frequency identification device (RFID) is a growing technology that facilitates automatically and transparently receiving, storing, and shipping goods with minimal human interaction. This eliminates human error and speeds up the transactions. RFID allows for real-time interaction to occur between multiple parties simultaneously. The supply chain needs to be designed to
v Ensure continuous availability of goods and services.
v Provide the uninterrupted supply of materials at the highest quality (feasible).
v Allow for real-time engagement of Sales/Marketing data and information and customer trends.

Focusing in on working capital optimization helps improve financial performance as well as maintain and even improve customer satisfaction. This can be achieved through supply chain finance perspective and paradigm shifts in inventory management practices. Working capital improvement metrics include
v Reducing inventories (finished products, raw material, and work-in-process)
v Days Sales Outstanding (DSO)
v Measuring the effectiveness of the use of short-term financing
v Measuring the effectiveness of investing cash in the short-term
This can be driven by improving the accuracy of operational budgets, which reduces the need for cash-on-hand and increases the investment opportunities in the short-term. Improvement in cash management are driven by
v Accuracy of Operational budgets (including RM, Finished goods, etc.).
v Active and interactive cash management strategies.
v Improve the accuracy and functionality of cash flow forecasting and strive toward real-time cash flow balances.
v Active engagements of the Sales force to reduce DSOs.

Facilitating accurate real-time cash flow balances will allow for better cash management, lead to a reduction in costs of transactions (eInvoicing and A/P), and elimination of finance charges within the supply chain structure. You will not get extended payment terms from your suppliers. Actually to strengthen the supply chain and reduce your inventories and improve supplier reaction times is counter intuitive. Need to strive to reduce the payment terms and then demand JIT and other strategies from the supply chain in return. This will help drive all of the efficiencies out of the supply chain.

Corporate risk management also needs to be a strong focus. The complexity, uncertainty, and inherent risk in the global markets require continual monitoring of emerging problems and issues. Risk management involves
v Re-evaluating global strategies
v Strengthening of core competencies
v Becoming more risk-adverse by guarding against over-extension of resources.
This includes focusing and developing a strong SCM program that fully integrates the operational aspects of the business. These programs must be developed, implemented, and executed from a strategic and tactical perspective instead of the current basic operational perspective of today. This is because to do so may lead to
v Poorly engineered products and processes
v Products recalls
v Excess inventory costs, thus a drain on cash flows
v Unsellable inventory that must be reworked or scrapped
v Diminished levels of customer satisfaction
v Loss or erosion of market share and profitability
Long distance suppliers may have multiple intermediaries or steps which include
v Manufacturer to port and warehouses
v Transport and logistics providers
v Forwarders, stevedores, etc.
v Customs brokers, etc.
These are all information intensive transactions and include various complexities that must be recognized and dealt with, which include
v Dealing with custom agents and forwarders
v Monitoring of long distance suppliers
v Planning and forecasting for long transit times
v Addressing and adapting to cultural differences
v Financial issues such as currency exchange issues

There are means that companies can work with the US customs department to minimize some of these complexities and thus potential delays in deliveries to facilities. One program is the Customs – Trade Partnership Against Terrorism (C-TPAT). Companies bringing in goods from outside the US can register and become responsible for the security aspects of their supply chain. This allows goods to be quickly processed through customs and reduces the transit time as compared to competitors. Global trade will be dominated by those companies which can navigate the ever-changing custom requirements and regulations the best. Companies must focus and map out global transport and demand further efficiencies. Inefficiencies include poor port clearance documentation and poor duty payment coordination. Systems and processes must create a responsible and knowledgeable environment about containers and various shipments from cradle to grave. Companies will be required at any given time and step to
v Know the shipments contents
v What is in the container, packages, etc?
v Who has opened it?
v Who has moved it, loaded it, etc.?

Actively and proactively managing the supply chain has financial aspects that directly impact inventories and working capital. There are balance sheet implications include goods in-transit inventory, which start with purchase order issuances or master POs. This works further back into the chain and the development of Vendor Managed Inventory (VMI). There needs to be a trigger for the financing or payment when inventories are pulled and used in Production. This will be further facilitated by the trend to move away from traditional methods of payments (letters of credit, banker’s agreements, etc.) and move to more innovative open account SCM finance structures and systems.

Reflections about the current economy

The current shape of the yield curve suggests that interest rates are expected to increase in the future. This increases the demand for long-term funds by borrowers like Java and creates a downward pressure on the supply of long-term funds by investors or banks. Investors will increase the supply of short-term funds or a downward pressure on the demand for these short-term funds. The 3-month treasury has already dropped from 4 percent to 3.85 percent. The current spread between the 3-month and 6-month treasury is about 15 bps or less than 25 bps difference between notes and a revolver. The trade deficits and weak dollar will continue to pressure interest rates, due to the demand for compensation for the currency risk. The age of dollar dominance is about to end (as evident by the dollar weakening against all currencies), which will lead to higher interest rates within the USA. This also creates further upward pressure on inflation. Current treasury rates are unattractive to foreign investors and will be attracted to the higher rates abroad. As foreigners either shy away from treasuries or start selling off their current treasuries and do not purchase more, then higher rates will have to be offered to attract investors. The other risk is carry trade and a crowding out effect by foreign traders. Borrowing short-term funds from the USA and lending long-term funds outside of the USA will place upward pressures on interest rates. Higher taxes are expected due to Bush’s tax cut expiring and the Democrats winning both houses and the Presidency in 2008, which also increase the upward pressure on interest rates. Additionally, protectionism and increased government regulations will further weaken the dollar and spur inflation upwards. The context of the current macroeconomics equity is just too risky at this time. Any disappointments by the Federal Reserve will drive the equity markets down.

Read the article via this link about the weak dollar and reasons why.

http://articles.moneycentral.msn.com/Investing/JubaksJournal/WhyTheDollarKeepsDropping.aspx

MBA 821 - Reflections on Module 3 - Behavior of Stock Market??

Your responses should demonstrate reflective thought:

These reflections are about the equity markets being efficient or not and the three types of efficiency, Weak-form, Semi-Strong form, or Strong-form. This of course, based on comments from Robert Prechter, assumes that these equity markets follow the same logic and rational as economics or the theory of supply and demand. Prechter argues that movements in the equity markets are socionomic and not economic in nature and do not follow the supply and demand theory. If the market followed the supply and demand markets, then investors would sell stock at the top of the market instead of investing more money and buy at the bottom instead selling the stock. Investors follow the socionomic aspect of following the herd or crowd type psychology. Additionally, the supply of a stock is higher at low prices when compared to higher prices which is opposite of the supply and demand curves.

What form do you think is represented on the NYSE?

I would say if one had to chose one it would be weak-form efficiency. This is due to the fact that there is still insider information (i.e. managers knowing more than the market) and other information financial institutions know about the company that causes a stock to rise or fall. This is also due to the creativity that resides in the valuation of a stock. Certain measurements are deemed more valuable at certain time frames and less valuable in others. But assuming more transparency in financial statements, fundamental analysis of a company is a way to sift through and find value stocks or growth stocks that are still growing at acceptable rates. The investor must also be aware of the future economic condition predictions and the socionomic aspects of these predictions. The last thing is which industry the company resides in and if it is stable economic industry, a lagging or leading economic industry.

Do you think stock exchanges in emerging markets have a different level of efficiency?

NO not really. There is enough to argue that all of the market movements have nothing to do with efficiency and everything to do with how society views and assesses risk in the market. The mood of society dictates equity market movements. Emerging markets have a higher degree of risk associated with them due to more insider information and corruption within foreign countries and companies. Less regulation and different accounting regulation cause investors to assign risk.

Does this impact your view in regard to investing in common stocks? Explain.

A little. Shows that the long-term view is the best and has been touted by wealthy investors is right on the mark. Do not get caught up in the herd or crowd movements of speculation of equity markets. Fundamental analysis and holding a stock for a long-term is the best way to invest. If the investor truly believes in the stock and it is undervalued, then they should buy the stock on the downturns to strengthen their position and lower their cost per share and set a long-term price of the stock in which to sell. The socionomic aspect of the market is just riding the waves and chasing after the latest fade or trend.

MBA 821 - Reflections on Module 2

What is your view of one of the more popular tools associated with relative ratio analysis, the price to earnings ratio?

The P/E valuation tools is a great way to screen stocks. It is not perfect, but is easy to understand and apply. The investor will have to knowledge of the current market's P/E ratio and that of the sector that the stock in question resides in. No one tool for valuation is full proof, but the P/E tool is extremely easy to apply and can be done in ones head - which is valuable for quick analysis and potential decision making. Just like any tool, it is to used by the investor to aid in getting the job done and not as holy grail.

Do you think the measure of P/E is a valuable tool for stock analysis? Explain and justify your response.

As stated above, it is valuable tool for the investor. Quick and easy to apply is the power of this tool. The danger is solely relying on this tool as a catch all and the holy grail. The intent of tools is not to be this, but to aid the investor in finding their way through a maze - which direction should they go.

Are the current markets under, fairly, or over priced?
http://home.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&newsId=20070927005589&newsLang=en

This article suggests the market may be under to fairly priced, but there are several discussions in this article that suggest otherwise. It appears that maybe only a few select sectors fit this criteria and not the market as a whole.

The current market, in my opinion, is probably fairly to over-priced – depending on the sector and specific stock. P/Es are creeping up again and this is potentially dangerous sign. Many P/Es are greater than 15 and mainly close to 20. As the market valuation gets back to more basic fundamentals, the market is probably generally over-priced and will correct itself. Companies with high P/Es will have to justify this valuation through strong operational cash flow, strong and effective R&D budgets, low debt, and not be over leveraged.

Responses to the posted article about current “bullishness” in the market and also stated are other questions about the future markets. There are several statements that suggest that the present market is undervalued or fairly valued, but the prices projected in the future may not be so bullish. The financial engineering or the creation of innovative products has lead to discovery of their flaws, which has lead to the current crunch. As stated in the article, “the summer brought several troubling financial issues to the forefront” suggest that scionomics may be playing a part in the bullish attitude. The weak dollar is also helping the market coupled with the continued “bad news” about Chinese companies. The technology sector is currently bullish and the financial sector is bearish right now. The weak dollar is making our exports cheaper abroad and any imports more expensive. Companies with strong manufacturing presence in the USA are seeing an increase, so why are consumer discretionary and services sectors and materials and processing sectors bearish? Is this because of the outsourcing of the past couple of decades is a concern? The advantages of outsourcing manufacturing are no longer being realized due to the weak dollar?

The statements in the article “…call equity markets either fairly valued or undervalued, managers participating… there may be new reasons to begin considering fixed income investments..” does not sound like a bullish statement or that the present value of stocks are really under or fairly valued by these managers. The article goes on to say how “bullishness for corporate bonds more than doubled … US Treasuries recorded one of their highest bullish scores … Are these managers just playing a scionomic game and making sure investor/society confidence remains optimistic? There appears to be a “flight to safety and that managers fundamentally believe that the bigger opportunity still lies in the equity markets … it is true that risk is being repriced ..” by the market. This statement in the article suggests to me that the market may be overpriced, but no one knows until risk is revalued – no one knows what the risk premium on equity should be over treasuries. This suggests that stocks can not be adequately valued, so how can these managers comment on the market being under or fairly valued – when they do not even understand how to value the current market? Review the current yield curve, the 1 month rate was 3.40 % and the 6 month rate was 4.20% or a pretty steep upward sloping curve. Couple this with rising fears of a recession and oil reaching $100 per barrel – is the market overpriced? The article suggests that many managers are bracing themselves for inflationary pressures and looking for safe havens for periods of recession and inflation. The strong increases in gold and silver suggest inflation is looming.

The article finally tells us where the managers see under or fairly priced stocks and it is in large cap growth and not the market as a whole. The title is thus a little misleading and meant to draw the reader in. These companies are a safe haven probably due to low debt, great cash flow, and strong brand recognition. These companies have great credit and not a default risk. These companies also will remain very liquid, due to these reasons. They can continue to offer commercial paper and issue bonds without concerns from investors. These companies also need short-term debt instruments, where small cap etc may be after long-term debt instruments. Review of the yield curve reveals that the investors are not very interested in long-term bonds. They are having strong expectations of higher interest rates to come (based on the pure expectations theory).

One last note here, the links provided are about the Feds power and ability to control the overall market and economy. It suggests that the tools the Feds has are out dated and not effective anymore. The deregulation of the industry has dampened their power. Their tools are really for depository institutions and the market is not controlled by just depository institutions. This sub-prime mess was caused by non-depository institutions, so do we need to reevaluate how the Fed operates to correct the current issues at hand?

http://www.financialweek.com/apps/pbcs.dll/article?AID=/20070924/REG/70921012/1016/ECONOMY

http://www.financialweek.com/apps/pbcs.dll/article?AID=/20070924/REG/70921011/1016/ECONOMY

Further Reflections on Module 1 - Sub-Prime Shakeout

Financial innovation and the Global Liquidity Factory

Lets just raise the following: 1) When it is stated that derivative structures are “…virtual and not real” what does this suggest about the value of financial innovation, broadly defined as “…the act of creating and then popularizing new financial instruments as well as new financial technologies, institutions and markets” (Peter Tufano, Financial Innovation 2002 at http://www.people.hbs.edu/ptufano/fininnov_tufano_june2002.pdf).
2) Following up on the article (“Are we headed for an epic bear market?” at http://articles.moneycentral.msn.com/Investing/SuperModels/AreWeHeadedForAnEpicBearMarket.aspx?page=1) that states While you might think that the U.S. Federal Reserve can help prevent disaster by lowering interest rates dramatically, as they did Wednesday, the evidence is not at all clear. The problem, after all, is not the amount of money in the system but the fact that buyers are in the process of rejecting the entire new risk-transfer model and its associated leverage and counterparty risks.

Two questions on the claims about a global liquidity factory:

I. What does the class think of this article’s claims?
A) Completely right
B) Somewhat right
C) Too pessimistic
D) Don’t know and II.

Based on your answer to the above, how should you allocate your assets?

Articles

Peter Tufano link . Below is another link to his paper + another one on the subject.

http://www.people.hbs.edu/ptufano/fininnov_tufano_june2002.pdf

http://www.hbs.edu/research/pdf/07-082.pdf

http://www.nyabe.org/fergusonspeech.pdf

http://hbswk.hbs.edu/item/5745.html

Comments and Reflections

Interesting comments and articles, so knowing what I know now – where would I place my assets? I think Mark hit it pretty close. Precious metals (gold) are not really one place where I would put any money. This is based on history. Even though the price of gold is high right now, it really just getting back to the 1980 price after a decline for many years. But commodities are probably a great place. Now we all know that past performance does not predict future performance, but wheat has more than doubled, oil continues to increase – as well as corn and sugar. But I also know these markets are better left to the experts and I am not an expert on the commodity markets. So that being said, I would keep my liquid assets in short-term Treasuries and long-term investment in large to mid-cap value companies like GE, PEP, MMM, GLW, MSFT, and stocks like this have low betas, low to zero debt and lots of cash. Currencies would have been a good investment, but the chances that there would collaboration among global banks are probably pretty good. Also cooperation and collaboration among government, the Federal Reserve, regulatory agencies, and financial institutions will have to work together to sift through this mess and minimize the global damage. I still think the stock market is solid for the most part, but growth stocks are in potential trouble – due to the credit crunch. Problems will probably loom for 10 years. The S&P Case-Schiller Home Prices Indexes predict falling house prices in certain markets for the next five years and these devaluations are 15 to 20% - not 1 to 5%.

All of these financial innovations or derivatives started in 1986. Numerous new derivatives products were placed in the market. This is probably why many people did not understand them exactly. Derivative had been around a long time and people understood them. My guess is that they all assumed that the new derivatives were just improvements on the older ones – more efficient, etc. The financial engineers knew that the sum of the pieces were greater than the value of the whole in tact. This was proven by the corporate raiders, etc. These financial innovators just had to figure a way around the laws and regulations in order to create this value. Getting around taxes and regulations has been the single greatest motivator for these financial innovations. Turning short-term gains into long-term gains to avoid paying higher taxes or basically greed was involved to increase their profitability and cash flows. Greenspan’s dropping the federal fund rate lead to a large amount of liquidity injected into the market. These financial innovations just applied a multiplier to this existing liquidity, which allowed to easy money. Everyone seemed to forget that derivatives were created to transfer credit risk – diversify the risk – and not to create virtual money and earn high interest rates. Mortgage rates where at the lowest rate in like 30 years. Loan originators were all making in excess of $100,000/year and brokers were probably in excess of $500,000/year. All of these people work basically on commission – no loans no paycheck. If the employees were making this kind of cash (you may have 10 to 15 LOs in one office) how much do you think the financial institutions were making? Also we can all see the motivation was not to be ethical or to work on the fine line of legal and ethical boundaries in order to close the most loans. A high risk – low credit score – so what just charge them 50 to 100 bps more, the interest is still low. Also this greed lead to the ARMS, etc. mortgage product innovations, which further aggravated this entire sub prime issue. This all lead to an explosion in the M3 money supply.

M3 – includes all of the time deposits, money fund balances, Eurodollars, and repos. All basically due to the “financial innovations” of derivatives by the financial engineers. Then the Fed decided to stop tracking and monitoring the M3 money supply in March of 2006. This seems to have left the system unchecked by anyone. Why did the Fed decide to stop monitoring M3? If they stopped tracking it because they could not get their arms around it, then they just decided to stick their heads in the sand and hope for the best.

Financial institutions could use the advances in technology to improve process and system efficiencies or use technology for product innovations and marketing schemes. It is obvious that is was easier to create money through product innovations and clever marketing and packaging schemes than it was to change their operations. The short-term immediate gain without any regard to consequences was chosen instead of a more long-term approach of improving processes and systems to control and eliminate risks.

MBA 821 Module 1 Reflections

Reflect on your exposure to bonds and bond pricing. Whether you have invested personally in corporate, government, or municipal bonds, certain key characteristics impact their value. One of the important factors is the risk associated with the issuing entity. Many people have purchased or received a U.S. government savings bond.

When would you consider investing in government bonds?

The answer is yet to come - we will have to sift through the comments below. What should we do is not academic anymore - so we will attempt to theoretically discuss the liquidity issue at hand created by the virtual and magical world of the financial institutions - what is real and what is virtual - problem as discussed is that

WE DON'T KNOW - do you agree with my statements and concerns??

The only time to invest in bonds may be just around the corner. You would purchase bonds if the stock market becomes bearish and the economy goes into a recession. This sub prime mess is being blamed on the wrong groups and the root cause must be acknowledged by the government, the regulators, the banks themselves, etc. This mess was created by the incredible greed of people - trying to turn debt into real money. Many people stood by and allowed all of this happen, which includes the regulators and the credit rating services. The analysis is as such:


Probably not a great time to invest in treasuries right now. This statement is due to the fed dropping the Fed Rate to 4.75%, a weak economy, and an even weaker dollar. Treasuries are becoming a bad investment, short-term, for foreign investors. The interest rates are dropping and the their currency is strengthening as the Fed drops the rate even further, all things staying even. Also think about foreign investor borrowing funds from the US, due to lower rates than their own countries. They could borrow at very low rates (would be willing to borrow at higher rates than Americans - due to currency exchange rates) and invest in their own countries bonds etc at much higher rates. This in turn could cause a global crowding out effect. This creates a liquidity issue potentially for the US Government - if no one wants to purchase treasuries. The fed could demand the banks to purchase them, but would tighten the money supply, etc. Round and round, but we get the picture.

The only time to buy in this market is of the foreign investors needed short-term money right now and could not get the money through borrowing. This would cause them to dump the treasuries on the open market, causing the prices of the these treasuries to drop or sold at a large discount - this in turn would cause the yields of these sharply discounted bonds to rapidly increase. Again an issue with global liquidity could cause dramatic events to take place.

Read a number of articles. A few dealt with Satyajit Das, an expert on the derivatives market and the entire CDO, CMO, and CLO magical financial instruments.

This whole mess is due to the allowance of financial engineers creating a "liquidity factory" built on underlying assets of mortgages, etc. They created instruments that over leveraged the "loop holes" and increased the money supply in a way not intended by anyone. They further increased the "money supply" or the multiplier of any monies injected into the economies. The regulators allowed it, all of investors (hedge funds, etc) did not understand them - just the high yields, and banks enjoyed all of this liquidity with their "off-balance sheet" transactions. They were lending out more money and basically getting around their reserve ratio requirements.

The yield curve was flat, which sharply reduced the spread and encouraged lenders to search for cash flow, etc. These lenders needed higher cash flows, due to lower spreads in order to fuel or meet their aggressive and greedy need for growth and acquisitions to fuel this growth. Since in acquisitions, the acquiring company basically pays a 20 to 40 % premium - this premium had to come from some place. So instead of Banks being traditional and underwriting as well as fund the loans - they just acted as originators of these loans. These loans were wrapped up into CMOs, CDOs, CLO, etc. This allowed the banks to take these "loans" off their balance sheets and then "magically" have more money to make further loans. They used debt - CDOs - as collateral to fund more loans.

Foreign investors, mutual and hedge funds, etc leveraged their investments by buying CDOs, etc. with their borrowed money. Basically had debt purchasing further debt on so on and so on - How deep does this rabbit hole really go? No one really knows!!

The credit rating services also either did not understand or chose not to dig deeper and understand, which placed everyone at great risk. No one wanted to be the whistle blower and end the gravy train that all the greedy were eating off of - at our expense. The credit rating services stuck by their out dated or irrelevant mathematical models and believed this output without full knowledge or understanding of the inputs. They chose not to challenge the flawed mathematical models of the financial engineers that created this magical instruments of wealth - these money creating machines! This all allowed the debt to move from heavily regulated institutions into less regulated instruments and institutions - and all with AAA ratings! This was further fueled by bankers "stripping" all apparent assets out of these instruments - further increasing the loan to value ratio in a sense. It is being said that a single dollar of capital or the true/real underlying asset was turned into $20 to $30 of debt or a highly leveraged scenario. Compare this to the reverse ratio requirement of being dropped to only 5 % or even 3.5% from the current 10 %!! This translates into a huge injection in the money supply, except it is all smoke a mirrors! No real money was actually there. Seems to be very similar to the margin calls of 10% during the 1920s that lead to the crash of 1929. Currently banks are fighting to ensure that these derivatives are not being sold at a discount because these being sold at a discount amplifies these discounts of the true underlying assets even further. This was also fueled by the stock market valuations through MBOs, LBOs, stock repurchases, takeovers, acquisitions, etc that have inflated the market somewhat - all that money came from these highly leveraged CDOs, etc instruments.

It is also apparent that blame is going around like wild fire and who is the one who created the fantasy - but the Financial Accounting Standards Board (FASB) and their "level 3, under statement 157". This level 3 is a way for fair value to be measured using "unobservable inputs". What companies claim they can not see and these unseen items are assumed to change their fair values of their assets and liabilities - they are allowed to use their own subjective assumptions (make it up as they go in order to inflate their assets and liabilities). This level 3 treatment magically transforms subjective assumptions of make-believe into reality with a stoke of their own assumptions. Should not the FASB be pushing for conservative approaches and advocating against these off-balance sheet transactions? Also where are the regulators validating "these level 3 subjective assumptions?"

The world of structured credit is living in the make-to-model fantasy world and is being embraced by Financial Institutions and FASB. If you are over leveraged - so what, just use the level 3 magic wand and mark the debt as anything they wish through subjective (and self servicing) assumptions. They all now think they should be allowed to declare - Predict the future gains, based on past gains (even though every single mutual funds, broker etc states a declaimer that past results do not predict future results) and then amortize them into income. This makes the financial statements of financial institutions worthless and unbelievable. You have worthless financial income statements of these financial institutions - many running virtual S&Ls through a fantasy/virtual off-balance sheet entities.

Is this a video game or an excursion of the website second life? No it is and has happened. We have been warned numerous times about blurring reality and real life with the made-up, fantasy of the virtual world.

Why did no one see the mess coming? Off-balance sheet entities and their transactions are just that virtual. You can not see them - so how can you understand or any issues/problems of something you can not see??

Commercial paper - currently in an illiquid environment. Banks are holding over $300 billion of LBOs, etc that they have committed to finance. Assets based CPs - many of them need to be refinanced and no one right wants to touch the refinancing of these CPs. A big problem. Everyone is scared and watching out for the lesser rated tranches of commercial mortgage backed paper.

Now enter the world of Structured Investment Vehicles (SIV) and Special Purpose Investment Vehicles (SPIV). All of these are "Off-Balance" sheets and they operate in the virtual world with NO rules to govern their actions, etc and there is NO ONE to regulate what they are doing. The financial institutions are utilizing more leverage than legally allowed, but they are getting away with it. No one understands what they are doing and it seems that the regulators and FASB do not wish to dig deep and truly understand what they are doing.

MBA 820 Reflections on Module 6

What caused Congress and the President to ratify the Financial Services Modernization Act? Why?

The power of Citigroup pressured government to repeal the Glass-Steagall act and allow them to operate in all realms of financing. This also allowed the banks themselves to further diversify themselves and obtain more economies of scale and scope. This allows US Banks or financial institutions to compete in the global market. This ACT only occurred in 1999 - so a long time after the 1933 ACT.

Close to 10,000 U.S. banks failed following the restrictive federal legislation in the early 1930s. In contrast to the United States, Canadian banks (often referred to as "mega banks") were not limited by Glass-Steagall. Why did only one of the Canadian banks fail during the Great Depression?

The posted article explains why Canadian banks faired better than US banks during that time frame. Mainly due to the size and diversity of the banks. Also was the help the Canadian goverment played in ensuring there wer no runs on the banks and plenty of money to loan them. Government played a more active role in banking.

Financial Institutions: Failures, Insolvency, and Moral Hazard
Cliometric Sessions at 1990 ASSA Meeting--December 29, 8:00 AM
MARKET VALUE ACCOUNTING AND THE SOLVENCY OF THE CANADIAN BANKING SYSTEM, 1922-1940 Lawrence Kryzanowski*Professor of FinanceConcordia University
and
Gordon S. Roberts* Bank of Montreal Professor of Finance Dalhousie University
1. MARKET VALUE ACCOUNTING AND THE SOLVENCY OF THE CANADIAN BANKING SYSTEM, 1922 - 19401

Current research on the interaction between the monetary and real sectors discusses extensively the experience of the Great Depression. Although, economists have advanced different explanations for its severity, widespread banking failures play a key role in competing theories.2
To elicit evidence from the Great Depression, numerous researchers have focussed on an important contrast between the United States and Canada: the two economies faced similar declines in output, but, in contrast with the U.S., there were no bank runs and no banks failed in Canada. The common explanation, which has evolved into a "stylized fact", links Canada's more positive experience to its branching system which promoted the growth of a few large banks which (due to diversification) remained solvent throughout the Depression.
Based on a reexamination of this stylized fact, the present paper argues that the diversification benefits arising from national branching were not primarily responsible for the absence of bank failures in Canada in the 1930's. We use market-value accounting to restate Canadian bank balance sheets for the period 1922 - 1940. Our analysis reveals that nine of ten Canadian banks were technically insolvent during the Depression.
The superior performance of Canadian banks in avoiding explicit failure should be attributed to the Canadian government's policy of monitoring performance, standing ready to lend to banks and most importantly, forcing failing banks into mergers with healthy banks. This policy provided an implicit guarantee that, after a major bank failure in 1923, no other bank would be allowed to fail.3 The role of national branching was to make such a policy feasible by reducing the number of banks, and lessening the degree of competition.
The paper begins with a review of prior analysis of branching and failures. We next discuss key features of Canadian banking in the 1920s and 1930s and develop the argument that an implicit guarantee of all deposits was in place.4
The third part of the paper employs market value accounting to estimate the year-end market values of assets and liabilities for each of the ten Canadian banks in existence during the Depression. Our estimates take account of credit risk and interest rate risk by asset categories.5
Rejecting the "stylized fact", this research finds that Canadian banks were actually insolvent and remained in business only due to the forbearance of regulators coupled with an implicit guarantee of all deposits--much like the recent situation in the U.S. savings and loan industry.6
2. TRACING THE STYLIZED FACTIn a key passage which has made the Canadian experience during the Depression well known as an example in research, Friedman and Schwartz [(1963): 352-3] state that bank failures "...were the mechanism through which a drastic decline was produced in the stock of money." They argue that there was a larger increase in the currency ratio in the U.S. because "...the bank failures made deposits a much less satisfactory form in which to hold assets than they had been before in the United States or than they remained in Canada."
Friedman and Schwartz (1963) examine three reasons for the 1930 bank failures in the United States: the decline in asset values, inaction by the Federal Reserve, and runs which forced liquidation at firesale prices.
While they are silent on why no runs occurred in Canada, Friedman and Schwartz [(1963):ʳ52] began a tradition of linking the survival of Canadian banks (and implicitly, the absence of runs) with the branching system implying that diversification through national branching protected asset values as follows:
Canada had no bank failures at all during the depression; its ten banks with 3,000-odd branches throughout the country did not even experience any runs, although, presumably as a preventative measure, an eleventh chartered bank with a small number of branches was merged with a larger bank in May 1931.7
Later writers, who extend or dispute the conclusions of Friedman and Schwartz, continue the tradition of attributing the lack of runs to the branching system. In a chapter on export-driven economies, Kindleberger (1973), for example, cites Friedman and Schwartz as if the link were a well-known fact needing little elaboration.
The Canadian experience is also important to the advocates of privatizing deposit insurance.8 Ely (1988) discusses the experience of the 1920's as a backdrop to the 1930's. He argues that Canadian banks did better in both decades due to the advantages of unrestricted branching; namely, geographical diversification and greater operating efficiency. Specifically, Ely observes that:
The Canadian experience [in the 1930's], in which some banks operated hundreds of branches nationwide, demonstrates that widespread branching is especially safe and desirable during an era of severe price deflation.
The Canadian experience is also used by O'Driscoll [(1988):ʱ77] to support the argument for private deposit insurance: As the Canadian experience in the 1930's illustrates, a nationally branched banking system with diversified assets can withstand even severe shocks, both real and monetary.
Bernanke (1983) argues that the 1930's banking crisis caused U.S. bankers' fear of runs to be translated into a shift into safer loans which disrupted the intermediation process, and thus worsened the Depression. He subscribes to the theory that the system of a few large banks prevented runs in Canada and goes on to develop a detailed example showing that Canada had a debt crisis but not a banking crisis.9 The example is used to support his theory on the breakdown of intermediation.10
Haubrich (1989) extends Bernanke's conclusions to Canada. He finds that although Canadian banks closed branches in the Depression, closures are not a proxy for bank failures and that bank stocks did better than equities of other industries in this period. He concludes that ...Canada's superior organization of banking prevented a financial crisis...Other sectors did benefit from that superior structure...[ Haubrich (1989)]
Examining a series of financial crises in six different countries, Bordo (1988) shows that the accompanying monetary contractions were generally most severe in the United States. He identifies as a key factor branch banking which "represents a method of pooling risks which proved quite effective in guarding against the type of "`house of cards' effects common to the U.S....banking system" [(1988):ʲ30]. The second factor is that, unlike the other countries, the United States lacked an effective lender of last resort. Although Canada did not have a central bank before 1936, Bordo [(1988):ʲ30-1] argues that:
...the chartered banks had, by 1890, with the compliance of the Government, established an effective self-policing agency, the Canadian Bankers Association, which acting in loco parentis successfully helped insulate the Canadian banks from the deleterious effects of U.S. banking panics in 1893 and 1907. The existence of such a mechanism, whether provided by the Government or by the private market, once it proved effective would educate and instil a sense of confidence in the public sufficient to prevent incipient crises.
Bordo [(1988):ʲ30, fn. 28] notes that the activities of the Canadian Bankers Association included:
...quickly arranging mergers between sound and failing banks, by encouraging cooperation between strong and weaker banks in times of stringency.
Bordo's work is the closest antecedent to our own because he emphasizes the role of the Canadian Bankers Association and the government as factors separate from the advantages of a branch system in explaining the absence of banking failures in Canada during the 1930's. In the following section, an implicit government guarantee of bank solvency is identified, and it is shown that this guarantee stood behind the policy of forbearance which allowed insolvent banks to continue to operate without runs in the 1930's.
3. THE IMPLICIT GUARANTEEBetween Confederation in 1867 and 1940, twenty-seven banks failed in Canada and some depositors incurred losses. Of the thirty-six amalgamations, many involved troubled banks [Beckhart (1964)]. Neufeld [(1972):81] comments that "[t]he large number of failures is rather surprising in view of the Canadian banking system's reputation for solvency." This reputation is largely based on the timing of Canadian bank failures: none occurred between 1923 and 1985.
In 1923, a major failure occurred--- the Home Bank of Canada which had 70 (mainly urban) branches. Its directors were later charged with falsifying the accounting of the bank to cover up losses from bad loans. As a result of civil actions, the directors were required to pay damages for "misconduct, malfeasance and negligence..." [Jamieson (1953):ʶ0-61]. During 1923, several other banks announced losses and reduced dividends or were forced to seek mergers.
The provision of government funds to avert a bank failure appears to have been initiated by the Government of Quebec. The Quebec Government financially assisted the merger of the Bank Nationale with the Banque d'Hochelaga in 1923 as follows [Globe (1924): 6]: ... The arrangement between the Quebec Provincial Government and the Banque d'Hochelaga is a unique one. Whether the Quebec Government felt that it had a moral obligation to advance aid, or whether its motives were purely philanthropic is a most interesting question. So far as Ontario is concerned, it opens up the possibility that Home Bank creditors may press for similar consideration. Although the two cases are admittedly not parallel ones, the fact that a Provincial Government has come to the rescue in one case may suggest a line of action for interested parties in the other.
Partly based on this precedent, the depositors in the Home Bank petitioned the Canadian Government for compensation and received payment up to 35% of the value of their deposits.
After 1923, the Canadian government provided an implicit guarantee to the public that no chartered bank would be allowed to fail and cause depositor losses. This guarantee was implicit because it was never formally embodied in law, and it was equivalent to one hundred percent deposit insurance.11 Beckhart (1964) documents that government policy was to arrange forced mergers for insolvent banks. He argues that the impetus for mergers came primarily from smaller banks near failure and from government.
Evidence exists that bank mergers were designed to avoid firesale insolvency for the merger of the Bank Nationale with the Banque d'Hochelaga in 1923 (discussed earlier) and the takeover of the Weyburn Bank by the Imperial Bank in 1931.
While the impetus for mergers may not have come primarily from larger banks seeking to expand, they were willing participants and there was considerable "behind-the-scenes" manoeuvering by the larger banks to absorb each new target bank. "I think it a pity," said another banker, "that the opportunity [Merchants Bank] was not offered to the other banks to participate in the business of the Merchants, and thus distribute the assets and the load, whatever its nature may be." [Globe (1921a):ʱ].
With regard to the role of regulators, primary evidence for the existence of an implicit guarantee comes from parliamentary documents and the popular press during the 1920's. A report in the Globe [(1921c):ʱ] described the rationale for the Federal Government's approval of the merger of the Merchants Bank with the Bank of Montreal: "The merger is the only way out." That is the considered opinion of Sir Henry Drayton, Minister of Finance, when asked if some other method could not have been found of meeting the crisis brought about by the troubles in the Merchants Bank .... Sir Henry Drayton said that a merger was only justified when the rest of a bank had been wiped out, its capital impaired and the affairs of the bank in such a position that the interests of the depositors themselves required to be guaranteed. It is assumed here that that must be the position of the Merchants Bank.
"What would happen if you had not given the preliminary consent to such a merger?" Sir Henry was asked.
"The only alternative is insolvency, with a consequent loss to depositors," was the reply. "That is my answer to criticisms of the Government's action in permitting the merger."
Although a proposal in 1914 to merge the Bank of Hamilton with the Royal was not approved by the then Minister of Finance, Sir Thomas White, a proposal to merge the then ailing Bank of Hamilton with the Bank of Commerce in 1923 was readily approved. [The Financial Post (1923a): 1, 16]
Similar sentiments were expressed during 1923 and 1924 when the failure of the Home Bank was scrutinized. A former Minister of Finance, Sir Thomas White, stated Government policy in favor of forced mergers to bank failures as follows:
Under no circumstances would I have allowed a bank to fail during the period in questionʮ..ʉf it had appeared to me that the bank was not able to meet its public obligations, I should have taken steps to have it taken over by some other bank or banks, or failing that, would have given it necessary assistance under the Finance Act, 1914. [McKeown Commission (Aprilʲ4, 1924, Vol.ʵ): 324].
If I had believed that the Home Bank at that time was in danger of failing, closing its doors, was insolvent, I should have gone to The Bankers' Association and told them to take over that bank. Either to one bank or more banks .... I would have made them do it. When I say that I had no legal power, but nevertheless I feel confident that I could have got them to do it..." [McKeown Commission (Aprilʲ5, 1924, Vol.ʶ): 359].
The Federal Government's support for the merger of the Sterling Bank with the Standard Bank in 1924 was described in the press [FP (1924):ʹ] as follows:
... The government is determined that there shall be no more bank failures, if reasonable action on its part will obviate them. Accordingly, once it was demonstrated to the acting minister of finance that the proposed merger would strengthen the banks interested, there was no doubt about permission being granted.
Thus, the "forced" mergers of several small with large banks and the Home Bank failure led to a federal government policy placing a safety net under chartered banks. This view of government policy from the early 1920's forward is reflected in newspaper articles on the need to guarantee bank deposits. One editorial writer even assured the public that such a guarantee was in place in statutory form. [The Financial Post (Commons Debates, Aprilʹ, 1924):ʱ195]
This opinion was also reflected in the Home Bank depositors' petition as follows:
(10) Yon Petitioners therefore submit that whether rightly or wrongly the depositors of the Home Bank of Canada were largely of the opinion that the Finance Department of the Government of Canada exercised such supervision over chartered Banks that it was impossible for a depositor to lose their savings entrusted to such a Bank, the charter of which had been renewed from time to time by Parliament and it is further submitted that the confidence of the people as a whole would be greatly restored if adequate relief were granted to these depositors. [Commons Sessional Papers 100B (Thursday, Marchʲ4, 1924)].
In summary, historical evidence shows that beginning in 1923, an implicit guarantee from the Canadian government (amounting to 100% implicit insurance) stood behind all domestic bank deposits. The government actively promoted mergers to avoid firesale insolvency and successfuly created public confidence that no banks would be allowed to fail.12
Further historical evidence of the implicit guarantee of deposits is obtained by applying market-value accounting techniques to bank balance sheets of 1922-1940. Our analysis uses information available at the time to show that all major banks were insolvent at market values from 1930- 1935 at a minimum. Despite such widespread insolvency, no bank runs occurred providing strong support for the existence of an implicit guarantee of deposits.
4. MARKET VALUE MODELThe present analysis adjusts loans; made up of current loans and call and short-term loans, to market values.13 The analysis uses a set of bond indices and a stock index to value collateral securities held for short/call loans, and an activity index and a bad loan account to value current loans. Other assets and securities, along with all liabilities and capital are assumed at par. Banking practice called for valuing securities at the lower of book or market value yet the reported figures are likely optimistic for this period.14
There are two major categories of loans. Call and short term loans represent short-term lending (up to 30 days) to investment dealers secured by inventories of securities. Stated banking practice in the late 1930's was to lend up to 80% of the market value of securities (20% margin) and to update margins with shifts in market conditions [Patterson (1947:45)]. In earlier years, even more generous margins prevailed. In addition, some securities were illiquid and market prices were sometimes outdated due to thin trading. Further, some underwriters experienced difficulties [Neufeld (1972:509)]. Accordingly, the analysis that follows sets margins at 10%.
To obtain the market value of call and short term loans, we develop a securities index to adjust the collateral to market value.15 The bond indices are based on price quotes and new issue prices paid for Dominion, provincial, municipal, and industrial bonds on the Montreal Stock Exchange drawn from The Monetary Times. Close quotes are used if given, else High/Low or Bid/Ask are averaged. In general fifteen issues, if available, are used to arrive at an average price.
The result for each class of bond is an average year-end price. This price divided by the base year price yields the index for that class.16
The common stock index is drawn from Total Common Stock Price (series J494) in [Urquhart and Buckley (1983)] - an aggregate of Bank, Industrial, and Utility common stock indices.
Market value of call and short-term loans is the lesser of book value or the market value of the collateral. To obtain the market value of the collateral, the index is adjusted to reflect a 10% margin and this margin- adjusted index is multiplied by the book value of call and short-term loans to produce their market value.17
Current loans to be market valued are made up of "other current loans and discounts in Canada, other current loans and discounts elsewhere than in Canada after making full provision for bad and doubtful debts, loans to provincial governments, and loans to cities, towns, municipalities and school districts." Cashflows and market values of these loans varied with economic conditions.18 Loans to the federal government are assumed default free.
With the exception of unreserved bad loans, all loans are assumed to mature after one year.19 The interest rate on bank loans is assumed to equal the yield on Canadian corporate bonds at the beginning of the year. The yields are taken from [Neufeld (1972: 565)] and range from 4% to just under 10%.20
It is assumed that the probability of default on current loans is driven by the change in economic activity as measured by relative changes in a broadly based activity index.21 The model treats banks as not providing adequate reserves for "bad" or "doubtful" loans. A new account is created to cumulate this shortfall---"unreserved bad loans".
With a deterioration in economic activity, the unreserved bad loans account increases with new bad loans while an improvement in the economy triggers a decrease in cumulative bad loans as recoveries occur.
The activity index is a weighted average of indices of national manufacturing production, national retail sales, and national wheat gross value.22 The weights used in the activity index are based on an average aggregate breakdown of total banking loans in Canada from 1934 to 1940 in [Bank of Canada (1946:18-19)].
To implement the model, we first find the new current loans at the beginning of the year and outstanding at the end of the year by eliminating the cumulative bad loans outstanding from the book value of current loans. The next step is to find cumulative bad loans at the end of the year. If this year's activity index declined, some new loans default and bad loans increase. If activity increased, some bad loans are recovered. New current loans, unlike bad loans, pay principal and interest at year end. If economic activity decreased, payment is scaled down by the percentage change in the activity index. With an improvement in economic activity, the full promised payment is received.
We discount the market value of the payment to the beginning of the year to give the market value of new loans at the end of the prior year. By employing the corporate bond yield at the end of the year as the discount rate, interest-rate risk is incorporated into the model.
The market value of current loans is the market value of the new current loans plus the book value of loans to the federal government. The market value of the complete loan portfolio is the market value of current loans plus the market value of call and short loans minus the loan loss provision on the bank's books.
To measure solvency, the market value of the total loan portfolio is subtracted from the corresponding book value and the bank's capital reduced by any positive difference.
The four components of capital are dividends declared and unpaid, rest and reserve fund, capital paid up and the profit and loss surplus. These four items are totaled and reduced by the amount written down on loans. If the writedown is more than 100% of the value of the capital then the bank is insolvent. Another component of capital is inner or hidden reserves which did not apppear on the balance sheet. Although they cannot be quantified systematically, inner reserves were of insignificant magnitude compared to bad loans.23 5. RESULTS AND SENSITIVITY ANALYSIS
Nine of ten Canadian chartered banks experienced asset writedowns in excess of their shareholder's capital (insolvency) at least from 1930 to 1935, and frequently for longer periods.24
Sensitivity analysis recasts critical assumptions employed in the valuation of call and short term and current loans. To test the robustness of our major finding, we vary selected assumptions in the direction which mitigates insolvency. In no case, is our major conclusion altered - nine of ten banks remain insolvent from 1930 through 1935.
6. CONCLUSIONSContrary to the "stylized fact", diversification benefits arising from national branching were not primarily responsible for the absence of bank runs and failures in Canada during the 1930's when no legal deposit insurance system was in place. Restating loan portfolios using market value accounting shows that nine of ten Canadian banks were insolvent at market values for each year from 1930 - 1935 inclusive. Sensitivity analysis demonstrates the robustness of these results.
The better failure performance of banks in Canada as compared to the United States should be attributed to the Canadian government policy of forcing failing banks into mergers with healthy banks. As documented above, this policy provided an implicit guarantee that, after a major bank failure in 1923 and several "forced" mergers of "failing" banks in 1921- 1923, no other bank would be allowed to fail. National branching made such a policy feasible by reducing the number of banks.
Our analysis suggests caution in extrapolating Canadian experience during the Great Depression to the current U.S. banking scene. In particular, it is an oversimplification of Canadian experience to argue that larger, more diversified banks are less likely to fail without recognizing the critical role of regulators in arranging mergers, closing troubled banks before they become insolvent as well as in providing an implicit guarantee of bank solvency.
Our reinterpretation of the Canadian experience reinforces the lesson of the savings and loan disaster --- it is dangerous for regulators to think that larger, faster growing financial institutions are necessarily more solvent [Kane (1989)]. Our results are evidence in favor of proposals by Benston (1986) and Benston and Kaufman (1986), among other for risk- adjusted capital and early closure of troubled institutions.
* We thank George Kaufman for enunciating our major hypothesis. Financial support for this research was provided by Fonds pour la formation de chercheurs et l'aide " la recherche (FCAR), the Social Sciences and Humanities Research Council of Canada (SSHRC), and the Center for International Business Studies, Dalhousie University. The authors acknowledge the capable efforts of Jonathan Dean along with those of Ken Bowen, Twila Mae Logan, Andrew Munn and Michael O'Grady in providing research assistance. They benefitted from comments by Michael Bordo and Kevin Huebner and from suggestions on earlier versions from audiences at the Bank Structure Conference, Federal Reserve Bank of Chicago and the Northern Finance Association, 1989 Meeting. Comments are welcomed.
1 This paper is based on a longer, more detailed version available on request from the authors.
2 Friedman and Schwartz (1963) argue that banking failures caused important contractions in liquidity and the money supply. Bernanke (1983) holds that banking failures forced a contraction in financial intermediation services which caused real contraction. Also see Gertler (1988).
3 Thus Canadian policy provided an early precendent for the "too large to fail" approach prevalent in the U.S. (and Canada) today according to Kaufman (1989).
4 Sections 2, 3 and 4 draw on Kryzanowski and Roberts (1989a and 1989b).
5 Our treatment of market value accounting for financial institutions draws on Bennett, Lundstrom and Simonson (1986), Kane (1985) and Kane and Foster (1986) and Benston et al (1986) among others.
6 In the framework of Kane, Unal and Demirguc-Kunt (1990), the implicit, off-balance sheet guarantee constituted a major asset of Canadian banks in the Depression.
7 Schwartz (1987) restates this comparison between the U.S. and Canada.
8 Government deposit insurance was not introduced in Canada until 1967.
9 Specifically, [Bernanke (1983: 259)] notes that: "The U.S. system, made up as it was primarily of small, independent, banks, had always been particularly vulnerable. Countries with only a few large banks, such as Britain, France and Canada, never had banking difficulties on the American scale.
10 Consistent with Bernanke's argument, [Safarian (1959:163, fn.180] states: "There appears to have been some pressure by the banks to reduce credit in the downswing."
11 This is similar to the current day implicit guarantee of FSLIC as discussed in Kane [(1987): 83-84].
12 Our interpretation of the historical evidence is also supported by Neufield[(1972): 98].
13 Logit estimates for Canadian banks were calculated on book values using the coefficients obtained by White (1984). The model was able to identify all except one of the weak banks that underwent mergers in the period 1922-1940. All the banks showed lower values hovering near the insolvency point for the early 1930s.
14 On Spetember 21, 1931, financial markets were unstable after Britain went off the gold standard, Canadian banks and stock exchanges set floor prices for equities in place through mid 1932. The next month, an Order in Council authorized banks to value securities, stock and bonds, at the lower of book value or market price on Aug. 31, 1931 effectively setting a floor under market values. [Joseph Schull and J. Douglas Givson, The Scotia Bank Story, A History of the Bank of Nova Scotia, 1823-1982, MacMillian of Canada, 1982:152] Sensitivity analysis sets securities to market values. 15 The mix of collateral securities is assumed to be equally distributed over Dominion, provincial, municipal and industrial bonds and common stock.
16 Since the bond indices were constructed from quotes available in each year they reflect a survivorship bias. While it is possible to construct more refined indices, this was not done as the survivorship bias works against our hypothesis of insolvency.
17 An upper bound of unity is placed on the margin adjusted index.
18 Default risk on provincial and municipal loans was significant. "From 1936 to 1945, Alberta defaulted on the principal of its maturing issues and paid interest at only one-half the coupon rate...Saskatchewan's credit rating also suffered in te 1930s" [Neufeld (1972: 5670] Municipal defaults were also common [Jamieson (1953: 78)].
19 Loans by the banks are consistently described as short term. Trade bills, a mojor component, averaged six weeks in maturity [Patterson (1947: 46)]. Commercial loans and loans in general are consistently described as short term and farm loans in 1933 were made for 3 to 4 month but were usually not repaid for 6 to 12 months [Royal Commission on Banking Currency (1933: 72)].
20 While bank loans likely had greater default risk than corporate bonds, they were shorter term. According to the Royal Commission (1933: 32-33)] the rate on good commercial loans was 6% ranging up to 10% for small loans and in small branches. Higher effective rates resulted from discounting and compounding cnventions. Agricultural loan rates ranged from 6% in the East to 7% in the West.
21 Haubrich (1989) provides a strong precedent for linking the strength of Canadian banks with economic indicators. The probability of default is take as the same for principal and interest.
22 The indices are, respectively, series Q8, series T53, and series M251 all from [Urquhart and Buckley (1983)].
23 In 1937 chartered banks were requested by the Government to bolster their inner reserves. The Royal Bank transferred $15 million from the published reserve account and reversed the transaction in 1946. [Ince (1969: 48)]. According to our analysis, cumulative bad loans for the Royal Bank were over $115 million in 1937.
24 The exception, Barclay's, was formed in 1929 under the control of the British parent institution [Jamieson (1953; 70)].


How are interest rates determined? What impact do interest rates have on your personal life? Your business organization?
Interest rates are controlled by the supply and demand of funds in the global markets, which is influenced by the monetary policies of the various governments. The Federal Reverse mainly controls the interests rates through manipulation of the money supply. Also through the setting of the Federal funds rate and discount rate.