Lehman: Hubris, followed by Nemesis?

Financial Times has a very good read on the state of Lehman Brothers, which grew to be among the top 4 investment banks in the world. It says how Richard Fuld's never-say-die attitude has saved it in the past and put it on a growth trajectory, but this time, perhaps, he held back far too long [link shared by Rave]:

Lehman’s collapse is worrying for financial markets and for Wall Street as a whole. It is also a tragedy for its 24,000 employees, who were drilled into unwavering loyalty and cohesion by Mr Fuld. Many held a lot of their wealth in Lehman shares, which have lost most of their value.

It is also a tragedy for Mr Fuld, in the classical Greek sense. He had devoted so much of his life and his personality into moulding the bank he could not accept its decline. If he had sold out earlier, Lehman might have survived but he was too proud. It was hubris, followed by nemesis.

I hope there is still a white knight somewhere who can save Lehman, because I wonder if its collapse will bring down the house of cards.

Why is FDI out of US more profitable than FDI into the US?

Mihir Desai of Harvard Business School says that portfolio investments into the US have been far more profitable than direct FDI investments. Inbound FDI into the US has averaged a return of 4.3% while outbound FDI from the US into other countries is about 12.1%. At the same time Wall Street went up more than any other markets in the world. Why is it so? Mainly because US companies traditionally invest in more controlled markets and have the advantage of getting cheaper cash and a better product and marketing portfolio (as a result of the controlled markets), while at the same time MNCs investing into the US have no such advantage of low-hanging fruit. [original article]

Why is it so difficult to make money as a direct investor in the
United States? Indeed, much of the rhetoric on investing environments
argues that the major destinations for U.S. outbound FDI—the developed
markets of Europe and Japan and the emerging markets of China and
India—are filled with capital controls and ownership restrictions. How
can the United States as a destination end up being so much less
attractive despite the relative absence of this usual litany of
investment obstacles?

Part of the answer may lie precisely in how these obstacles tilt the
playing field between local firms and multinational firms. In a series
of papers, [HBS associate professor] C. Fritz Foley, [University of
Michigan professor] James R. Hines Jr., and I have shown that distorted
environments are precisely where multinational firms have an advantage
relative to local firms. In countries with weak capital markets and
burdensome regulatory regimes, multinational firms can use their
internal capital and product markets to access global resources while
local firms can't. In effect, these distorted environments burden local
firms, create opportunities for institutional arbitrage for
multinational firms, and can lead to a successful set of foreign
activities for multinational firms.

The United States, in contrast, creates few such opportunities for
low-hanging fruit for foreign multinational firms relative to local
firms. As such, the conditions that may underpin the profitable
experience of U.S. firms as they expand abroad are not there for
foreign firms investing in the United States. More generally, the
presence of highly competitive local firms in the United States
undercuts efforts by foreign multinationals that don't have truly
differentiated capabilities. Simply replicating strategies that were
successful at home is likely to be insufficient in the United States.

The sub-prime crisis from K@W

Just discovered a great resource on YouTube -- Knowledge@Wharton has a channel there. See this video on the sub-prime crisis:



To add to the video, I have also heard that once the sub-prime crisis started making its presence felt, the prices of the homes the sub-prime borrowers had bought fell and they realized that the amount they would pay was lower than what they would get by selling the houses. That only precipitated the crisis.

There are more interesting videos on the channel, including this one -- an interview with Sunil Mittal where he talks about entrepreneurship and his beginnings in the bicycle industry.