GrowthSurvey2008

INTELLIGENT DIALOGUE:

SPRING 2008PRIME ANGST

INTELLIGENT DIALOGUE: PRIME ANGST

INTRODUCTION

TTHHEERREE’’SS NNOO QQUUEESSTTIIOONN that money is amajor worry of the moment. Individualsare worried about prices going up andjobs disappearing. Businesses are worriedabout prices going up and the economiccycle going down. Banks and financialinstitutions are worried about the biglosses they’ve taken. And governmentsare worried about their financial systemsholding up under the strain.

In short, we know for sure that theworld is in the midst of an internationaleconomic crisis. But there are plenty ofthings we don’t know yet.

It may be that this is just anotherphase in the up-down, yin-yang cyclethat all economies go through. But it

could be a completely new combinationof factors that will change the financiallandscape beyond recognition.

Have globalization and high-speedinteractive technology made economiesmore robust and quicker to bounce back?Or have they made economies morevulnerable?

Financial authorities such as the U.S.Federal Reserve have intervened to staveoff a meltdown. Have they done enough?Do they have the tools and sufficient cashto shore up the system and restoreconfidence? Can they control events, orwill events end up controlling them?

We know that sentiment (business andconsumer confidence) is an important

factor in whether economies feel bullishor bearish. But we also know thatfinancial fundamentals are important. Somaybe current sentiment is a return tosober realism after a long spell ofpartying. Or is it exaggerating theproblem and becoming a self-fulfillingdoomsday prophesy?

We don’t claim to have any definitiveanswers to the questions asked here andthroughout this white paper. We are notspecialists in economics or finance. PorterNovelli’s expertise is in understanding thequestions that matter to our clients andtheir stakeholders; it’s in harnessing thesequestions to foster the dialogues thatbuild brands and their business.

AANNYYOONNEE WWIITTHH AANN EE--MMAAIILL account is alltoo familiar with spam announcing,“Refinance now!” and “Easy credit at lowrates.” But anyone paying attention hasprobably noticed that such messages havebecome rarer over recent months. Thereason is simple: The waves of cheap creditflooding the financial system have retreated.And they’ve left a tsunami’s worth ofdamage in their wake.

By now, we’ve all read countless articlesabout the “Subprime Bust,” the “CreditSqueeze” and the “Financial Crisis.” Butwhile the first victims were borrowers whotook out risky subprime mortgages, thecasualties now include a far greater swath ofthe population. The U.S. subprime crisis hasspawned a related, and scarier, prime crisis,in which people with traditional 30-year-fixed mortgages and even people who owntheir homes outright are feeling the pinch.Even among those who can still pay theirbills, economic anxiety is epidemic.

Things may get worse before they getbetter, and there’s no predicting what all theeffects will be. If parents can no longerborrow against the equity in their homesand students can’t get education loans, thencollege enrollments may fall and schoolsmay have to lay staff off. Once-gentrifyingareas with many repossessed homes could

revert into desolate, dangerous places. Firmsthat are just hanging on may go under ascredit lines and consumer demand dry up.

This white paper aims to provide abroad view of the factors that precipitatedthe crisis and raise five big questions, as wellas many secondary questions, about some ofits most resonant effects.

WHAT HAPPENED?IINN AA NNUUTTSSHHEELLLL, we stopped being thrifty.In the early 2000s, seduced by easy credit,low interest rates and a rapidly expandingreal estate bubble (which created the illusionof wealth), home buyers racked up enormousdebt by taking out the biggest mortgages theycould qualify for. Eager to capitalize on thistrend, lending institutions began marketingunorthodox loan products—adjustable-ratemortgages whose rates would adjust rapidlyupward, interest-only mortgages that wouldleave homeowners with no equity—andoffering them to buyers with poor credit whowouldn’t have qualified for a mortgage at alljust a few years earlier.

Predicated on the belief that theeconomy would continue growing andhousing prices would keep going up, thesewere big risks—and a radical departurefrom the way the mortgage industry used towork. Traditionally, lending capacity was

limited by two factors: finding borrowerswho could be trusted to repay what theyborrowed, and adhering to a regulatorysafeguard that ensured financial institutionshave enough capital to cover the risk ofborrowers defaulting. By internationalagreement, their capital had to be at least8% of their assets.

But as the U.S. subprime market gainedmomentum, financial institutions made loansat higher rates—but often with artificially low“teaser” rates that would jump up after a fewyears—to people with poor credit, thenbundled these loans into debt obligationscalled mortgage-backed securities (MBSs),which they sold to investment banks. Banks,in turn, packaged MBSs with higher-ratedinvestment bonds into collateralized debtobligations (CDOs) and sold them to hedgefunds. And hedge funds borrowed moneyusing the CDOs as collateral.

This created huge profits as long as realestate prices rose. But when subprimeborrowers started defaulting on their loans,prices fell. So did the value of CDOs, andlending institutions got worried and startedcalling in their loans. Suddenly, nobodywanted to buy CDOs, and balance sheet(capital) valuations plummeted. Theramifications have been pronounced, fromWall Street on down to Main Street.

WHERE HAS ALL THE MONEY GONE? - - >


ID

OOWWNNIINNGG AA HHOOMMEE has long been acornerstone of the American Dream, andfor Britons, it’s also seen as an essentialexpression of personal autonomy—in fact,former prime minister Margaret Thatchermade property ownership a central tenet ofher political philosophy. Now, even innominally Communist China, the risingmiddle class is keen to own their homes.

In recent decades, throughout thedeveloped world and beyond, buying ahome has come to be seen as a smartinvestment. The more demand there was,the higher prices rose and the “richer”homeowners felt—even if that wealth wasillusory. As long as the real estate marketremained fizzy, consumers could count onselling easily and at a handsome profit, orelse borrowing cheaply (i.e., refinancing)against the increased value of their property.

Financial institutions were all too happyto help. Home buyers could qualify for 90%and even 100% financing, enabling them tobuy homes with nothing down. Refinancingwas as easy as pie. Banks loaned tens ofthousands of dollars at a time with propertyas collateral. They were no longer fundingsound property investments but inflating abubble of asset speculation.

It’s an immutable law of economics thatbubbles burst. From the Dutch tulip maniaof the 1630s to the dot-com boom of thelate 1990s, the good times don’t last. Andsure enough, this property bubble is burstingfar and wide, especially where it’s blown upthe biggest and fastest, the United States,the United Kingdom, Spain, theNetherlands and Ireland. What makes thisbubble distinctive is just how manyconsumers are involved and how much they

What happens whenborrowers can’t repay their loans, and how does this affect everyone else?

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WHEN ONEHOMEOWNER HASTROUBLE SELLING, IT’SAN INDIVIDUALPROBLEM. WHEN MANYHOMEOWNERS (ORBANKS) ARE FORCED TOSELL, IT BECOMES ASOCIAL PROBLEM.


BIG QUESTION 1

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all counted on their property to fundcurrent and future plans.

What happens whenborrowers can’t pay? TTHHEE TTEERRMMSS VVAARRYY from country to country,but in general, when borrowers miss threeconsecutive payments, the lender has toassign the whole debt to its Tier 1 capital.This amounts to a big loss. If the lender isleveraged at 7:1, a $70,000 debt default willcost it almost half a million dollars in lostlending capacity. Lenders may force the saleof the assets (i.e., foreclose) to recover thedebt. Delinquent homeowners get kickedout. In the U.S., some struggling borrowersdon’t even wait for the hassle ofrepossession; they move out, put the keys inan envelope, drop them off at the lender’soffice (“tinkle mail”) and disappear.

Nearly 3 million U.S. homeowners (6.3%)were behind on their payments in the fourthquarter of 2007, and more than a millionmore (a record 2% of loans) were inforeclosure. In some areas, the statistics areeven worse: Around 4.9% of households inthe Detroit metro area were in some stage offoreclosure during 2007; 4.8% in Stockton,California; and 4.2% in the Las Vegas metroarea. Whole neighborhoods that were fueledby subprime borrowing are now beinghollowed out by defaults and repossessions.

Even in communities where thenumbers aren’t this high, the repercussionsare powerful. With banks trying to sell offthe houses they’ve repossessed andovermortgaged homeowners trying to sellrather than default on their loans, themarket has become flooded. In thisuncertain climate, would-be buyers areskittish about taking on debt, and lendinginstitutions have tightened up their rules.Demand has gone down at the same timesupply has gone way up, and home pricesare tumbling.

What happens to everyone else? WWHHEENN OONNEE HHOOMMEEOOWWNNEERR has troubleselling, it’s an individual problem. Whenmany homeowners (or banks) are forced tosell, it becomes a social problem. If townssee a lot of owners sell, their property-taxrevenues decline and they have to cut

services. If owners go back to being renters,they’re less likely to feel they have a stake inmaintaining their neighborhood. If peopleleave town altogether, local businesses suffer.Streets with vacant homes can quicklybecome dangerous.

On an individual level, the mortgagemess doesn’t just affect the subprimeborrowers who may have been greedy or ill-advised. It also hits a broad swath of primeborrowers who went by the book. A homethat was purchased for $300,000 two yearsago may have fallen by 15% in value,making it worth $255,000 today; an ownerwho put 10% down now has negativeequity—a mortgage bigger than the valueof the property. If he needs to move forwork or for financial reasons, and if hemanages to find a buyer at $255,000, he’llhave to say good-bye to the $30,000 downpayment and come up with another$15,000 to repay the mortgage. No wonderantsy homeowners are addicted to websitessuch as Zillow.com, where they can trackthe price of their homes on a daily basis.

People facing foreclosure have no choice.Others will have to decide between sellingand taking the loss, or staying put andrisking a further fall in value. This may notbe such a big deal in countries such asFrance, Germany and Italy, where peopletypically buy homes with the intention ofliving in them for the rest of their lives. It’slikely to come as a big shock to the morefidgety and flexible markets of the U.S. andUK, where consumers expect to buy and sellseveral times in their life, trading up as theireconomic status improves.

Are people withoutmortgages safe?EEVVEENN PPEEOOPPLLEE WWHHOO RREENNTT their homes orown them outright are confronted by theeffects of the prime crisis. As people defaulton loans and the financial sector stumbles,shock waves ripple through the economy. Inorder to cut costs, companies are doling outpink slips at an accelerating pace. In thefourth quarter of 2007, there were 1,619mass layoff events—defined as more than 50employees of one company filingunemployment claims in a five-week period—that affected 265,454 workers, according tothe U.S. Department of Labor’s Bureau ofLabor Statistics. There were almost as manyin March 2008 alone: 1,571 mass layoffs

involving 157,156 people—the highestnumbers for the month of March since 2003.And that doesn’t take into account thehundreds of thousands of employees whowere let go when their companies downsizedless drastically. In March 2008, the nationalunemployment rate hit 5.1%, up from 4.8%in February and from 4.4% a year earlier.

CNN HOST LARRY KING: “If

you’re losing your house

or your job, you’re in a

recession.”

GERRY WILLIS, CNN

PERSONAL FINANCE EDITOR:

“Two million Americans

have faced foreclosure

in the last year, and

more are expected to.”

KING: “They’re in a

recession.”

WILLIS: “They’re in a

recession, and they’re

feeling the pain. And

if you live near those

people, your home value

is going down, too. This

is a-you know, a domino

effect that’s going on

across the country.”

SMART TALK

-Larry King Live, January 17, 2008

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TTHHEERREE AARREE TTWWOO PPOOLLEESS of opinion onthe prime crisis. Some economists see it asa “hundred-year flood”—a rare anddevastating event that will completelychange everything. Others view it as justanother trough in the cycle of ups anddowns that all markets go through; somepeople get lucky on the ups, and others getunlucky on the downs. At the very least, itlooks like this is going to be a deep trough.

Globalization means that the effects ofthe bust are felt far beyond its epicenter inthe U.S. subprime market. Some of theworld’s biggest names in banking, such asSwitzerland’s UBS, have taken a big hit.The entire economy of Iceland, whichdepended heavily on internationalinvestors, is in such dire straits that NewYorker financial columnist James Surowiecki

recently wrote that it could “become the‘first national casualty’ of the ongoingcredit crunch.”

On a personal level, all around theworld, some of the most profound effectswill be felt at the beginning and end ofadulthood.

What happens whenfunding for school feesdries up?RRIISSIINNGG HHOOMMEE EEQQUUIITTYY and easy credithave enabled many families to stretch alittle bit further with education. After all,families with middle-class aspirations havealways looked to education as the way to abrighter future. And if that’s not worthtaking on a second mortgage, what is? As

Is today’s crisis a prelude toeven bigger disasters in other sectors,such as education and retirement?

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WILLIAM SCHNEIDER, CNN

SENIOR POLITICAL ANALYST:

“Most Americans believe

that this recession

that they see already

here is likely to last

at least for another

year. We are finding

that three-quarters of

Americans say they have

already cut back money

on leisure activities,

movies and going out to

dinner and clothing

purchases.”

SMART TALK

-CNN’s Your Money, March 23, 2008

TUDENTS ARE “TAKINGA YEAR OFF” BECAUSETHEIR FAMILIES CAN’TBORROW AGAINST THEIRHOME EQUITY FORTUITION. THE IVY LEAGUEWILL LIKELY WEATHERTHIS STORM, BUT THIRD-TIER COLLEGESMAY SUFFER BECAUSETHEIR ENROLLMENTSARE DOWN.

S


BIG QUESTION 2

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prosperity has grown in developedcountries, this has pushed up the demandfor education as well as the costs.

In the UK, for example, where public (state)education has been in turmoil for decades,parents have looked to private schools as away of giving their children the best possiblestart in life. One consequence has been thatthe fees for UK private schools have risentwice as fast as retail prices.

In the U.S., many homeowners countedon borrowing against the equity in theirhomes to pay their children’s school oruniversity tuition. But now, as propertyprices fall, many parents find themselvesunable to qualify for that second mortgage.And they can’t count on student loans tocover the gap, because the subprime messhas made lenders wary. Students are “takinga year off ” as their families regroup. TheIvy League will likely weather this storm,but third-tier colleges may suffer becausetheir enrollments are down. They may haveto lay off staff. In some “college town”cities, where the school is a prime employer,the effects could be felt far beyond thequad.

How will the primecrisis affect millennials?WWHHEETTHHEERR TTHHEEYY’’RREE IINN school, delayingtheir enrollment or already graduated andworking in an entry-level job, Americansand Europeans in their late teens and early20s are affected differently than their oldercounterparts. They grew up during thegreatest period of wealth creation in modernhistory. This is the first real economicdownturn they’ve seen—and it’s arriving justwhen they expected to be coming into realspending power and independence. Theirinflation-adjusted earnings are down, theirjob security is in doubt, and their studentloan debt is high. The economy is verymuch on their minds: In an October 2007Pew Research Center poll, 80% of votersages 18 to 29 cited the economy as a “veryimportant” concern, versus 61% whonamed the environment as a major issue.

As a blogger on mlive.com put it, “Now isindeed the time for millennials to pumpcash into their checking accounts to stay

afloat if their job disappears. For starters,experts say, they should learn to cook, get alibrary card and, perhaps, a skateboard tofill the hours they used to spend at themall.”

And whether because they’re delayingcollege or because they’ve “boomeranged”back home after graduating and havingtrouble paying the bills, more and more 20-somethings are living with their parents.

What happens to older people who werecounting on theirproperty investment? RREECCEENNTT DDEECCAADDEESS HHAAVVEE been a turbulenttime for pensions. Employees and formeremployees of big corporations can nolonger be confident that the company willstill be around to pay out their companypensions. Pension funds haveunderperformed or gone bust. Few peoplewith individual retirement accountsmanaged to save enough to cover the gap—especially as people are living many moreyears after retirement and often needingexpensive medical care in the process. Formany people, cashing in the equity in theirhome looked like the safest bet for theirretirement years.

However, the credit crisis and falling realestate prices will make that difficult if notimpossible for older homeowners who had beenhoping to withdraw equity from their home(known to the Dutch as “eating your houseup”). Others who had counted ondownsizing—selling their current home, buyinga cheaper one and living off the difference—may find that plan won’t work anymore.

Furthermore, in the United States, olderpeople in particular were victims ofpredatory lending—even “reversemortgages” that actually increased as timewent by. Some retirees are findingthemselves not only without home equitybut even without a home. The Americannuclear family is exploding as members ofthis generation move back in with theiradult children (and those children’s young-adult children, too).

Global demographics make this concernespecially acute. In most developedcountries, the population balance is tippingtoward the gray end of the scale, withmedian ages of 36.7 in the United States,39.9 in the UK, 39.2 in France, 43.4 inGermany and 43.8 in Japan. The big issuefor countries with aging populations isbalancing the books: As more people retireand need more health care, and fewerpeople enter the workforce and generatewealth, where will the money come from?

KIM KIYOSAKI, AUTHOR OF

RICH WOMEN: A BOOK ON

INVESTING: “I think

there is going to be a

recession coming. I

don’t think the

government has any way

to bail us out of this.

I really think it’s a

perfect storm of oil

prices-energy prices-

going up, the whole

subprime mess, the

weakening dollar,

unemployment going up,

the retail sales are

dropping. . . . And it’s a

global problem, not

just a U.S. problem.”

SMART TALK

-Larry King Live, January 17, 2008

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IINN TTHHEE UU..SS..,, at least, it looks likely that it will. The country is undergoing a health care crisis in which 47 millionAmericans are uninsured and their ranksare growing. Time magazine recentlyreported that “As the economy spiralsdownward, a series of recent reportsforecasts that the country’s health-carecrisis is about to get worse, particularly forchildren.” The article cites a studyconducted at Cincinnati Children’s HospitalMedical Center that found that “kids whodid not have continuous health insurancewere 14 times less likely to have regularvisits with a pediatrician than those who

did. They were also three times less likely tofill prescriptions for necessary medication.‘These unmet medical needs directly put achild’s health at risk,’” said a researcher atCincinnati Children’s.

The crisis affects adults, too: “Leadinghealth researchers at the Urban Institute onApril 29 warned that each percentage-pointrise in unemployment would result in anadditional 1.1 million people losing healthinsurance,” the same Time article reported.Even people who still have jobs andemployer-funded health plans arestruggling: Premiums have shot upward at arate ten times greater than incomes.

Does the prime crisishave health implications?

ANDREW KOHUT, PRESIDENT,

PEW RESEARCH CENTER:

“It is not a pretty

story. Every month-

January, February, and

March-we get a more

negative reading on the

national economy. Only

11% are telling us in

the recent poll that the

national economy is

either excellent or good.

We have to go back all

the way to the recession

of the mid-’90s to get

such a negative

appraisal from the

American public.”

SMART TALK

-The NewsHour with Jim Lehrer, March 27, 2008- - >


BIG QUESTION 3

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Forced to choose between buying insuranceand making mortgage payments, a growingnumber of people is opting out of healthplans.

Whatever the reason, families areforgoing medical attention. Time reportedthat in a poll conducted by the KaiserFamily Foundation in April, 29% ofrespondents said they’d postponed necessarycare, 24% had put off a test or treatmentand 23% had chosen not to fill aprescription.

Furthermore, research has shown thatunemployment is itself detrimental tohealth. According to a review published in

the journal Public Health, unemployed menand their families had an increasedincidence of mortality, particularly fromsuicide and lung cancer; they were morelikely to use general practitioner andhospital services and receive moreprescribed medicines; and their use oftobacco and alcohol increased after theonset of unemployment.

The mental health effects will likely beeven worse. The prime crisis has hit theU.S. at a time when the nation was alreadyin a pretty glum frame of mind, thanks to9/11, the war in Iraq and alarming reportsabout climate change. It goes without sayingthat mortgage angst, worries about job

security and anxiety about the financialfuture have not cheered anyone up.

Recent research bears that out. A studypublished in the journal DevelopmentPsychology found that “a reduction indisposable family income constitutes a riskfor child mental health through increasedeconomic pressure and negative changes inparental mental health, marital interaction,and parenting quality.” MSNBC.comreported that “divorces and reports of abuseare rising as families burdened byimpending foreclosure take their stress outon one another.”

SCOTT GURVEY, Nightly

Business Report

CORRESPONDENT: “For

seven years, the

American consumer has

been the hero, spending

with abandon in spite

of market turmoil,

geopolitical threat

and natural disaster,

until now. There is

now no question

that the consumer is

pulling back.”

DAVID WYSS, CHIEF

ECONOMIST, STANDARD &

POOR’S: “People are

scared. . . . What they

are scared about is the

future. Their

expectations for the

future are at the

lowest levels we have

seen, well, in 15 years

on these reports, 35

years on the numbers

earlier this week from

the Conference Board.”

DEAN MAKI, CHIEF U.S.

ECONOMIST, BARCLAYS

CAPITAL: “There does seem

to be something of a

media effect, as well.

Consumers say they’re

hearing worse news on

the economy than any

time in the last 50

years. . . . So that does

seem to be playing some

role in addition to the

rise of inflation and

softer labor market.”

SMART TALK

-Nightly Business Report, March 28, 2008

S THE ECONOMY SPIRALS DOWNWARD, A SERIES OF RECENTREPORTS FORECASTS THAT THE COUNTRY’S HEALTH-CARE CRISISIS ABOUT TO GET WORSE, PARTICULARLY FOR CHILDREN.”

“A

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TTOO PPUUTT IITT MMIILLDDLLYY, it’s unlikely that thebanking and finance industries will emergefrom this turbulent period with enhancedreputations. Executives who routinely enjoymultimillion-dollar remuneration for theirexpertise and risk-taking genius havepresided over huge losses and potentiallyhuger losses to come.

Those losses are staggering—more likethe GDP of some developing countries thana big bump in corporate accounts. Thebiggest so far (as of April 16, 2008) has beenSwiss-based UBS, with $37.4 billion ofwrite-downs, prompting the departure ofchairman Marcel Ospel. His successor, PeterKurer, told Financial Times, “We can’t pretend

that there has been no reputational damage.Experience says it goes away after two orthree years.”

Merrill Lynch CEO Stanley O’Neal bowedout in November 2007, and his successor, JohnA. Thain, is currently looking at $22 billion ofwrite-downs. The roll-call of big write-downscontinues with Citigroup ($21.1 billion),HSBC ($17.2 billion), Morgan Stanley ($9.4billion), Deutsche Bank ($7.1 billion), Bank ofAmerica ($5.3 billion), Bear Stearns ($3.2billion), JP Morgan Chase ($3.2 billion),BayernLB ($3.2 billion), Barclays ($2.6 billion),IKB ($2.6 billion), Royal Bank of Scotland($2.6 billion) and Credit Suisse ($2 billion).

If banking and financeare to blame, who will punish them and how?

LYLE GRAMLEY, FORMER

FEDERAL RESERVE

GOVERNOR: “I don’t think

any of us have any

cookie cutter solutions

to the problem. But we

need to begin thinking

outside the box, because

what we’re experiencing

now in financial markets

is unlike anything I

have seen in more than

50 years of looking at

the economy.”

SMART TALK

-CNN Newsroom, March 19, 2008

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BIG QUESTION 4

For ordinary consumers, the dentedreputations of high-rolling finance housesmay be of little lasting interest, even thoughtaxpayers’ money is being used to rescuesome from their own lack of judgment. Infact, “rogue trader” Jerome Kerviel hasbecome something of a folk hero in France,where he is being blamed for SocieteGenerale SA’s record 4.9 billion-euro ($7.7billion) trading loss. But for regulators,lawyers and financial authorities, it’s goingto be different matter.

Will it mean a return tostricter regulation forthe banking industry?FFOORR TTHHRREEEE DDEECCAADDEESS, the finance industryenjoyed increasingly loose regulation; banksand mortgage lenders have been allowedinto each other’s territories, andgeographical barriers to trade andownership have been dismantled. And theyengaged in lending practices that the U.S.Department of Housing and UrbanDevelopment has identified as predatory,including:

• “Loan flipping,” or refinancingborrowers’ loans repeatedly in a shortperiod, with high fees each time

• Excessive fees and “packing” that farexceeded what would be expected orjustified on economic grounds and“packed” into the loan amountwithout the borrower’s understanding

• Lending without regard to theborrower’s ability to repay, includingelderly people living on fixedincomes with monthly paymentsthat equaled or exceeded theirmonthly incomes

• Outright fraud and abuse, withdeceptive or high-pressure sales tactics,often against certain groups—theelderly, minorities and individuals withlower incomes and less education.

Loose regulation allowed the industry tomake a lot of money through the use ofcomplex new structures (such as CDOs) andto disguise risk through creative accounting.Going forward, it seems inevitable thatgovernments will get together to tightenregulation. On the other hand, as theEconomist commented recently, “The notionthat the world can just regulate its way out ofcrises is…an illusion. Rather, crisis is theprice of innovation, so governments face achoice. They can embrace new financialideas by keeping markets open. Regulation

will be light, but there will be busts. The statewill sometimes have to clear up andregulation must be about cure as well asprevention. Or governments can aim forsafety and opt for dumbed-down financialsystems that hobble their economies anddeprive their people of the benefits of fastergrowth. And even then a crisis may strike.”

In any event, look for lawyers to getinvolved, as there’s ample room for class-action lawsuits against predatory lenders.

ERIK HURST, PROFESSOR,

UNIVERSITY OF CHICAGO

GRADUATE SCHOOL OF

BUSINESS: “U.S. consumers

today are scared. The

uncertainty in the

economy is spilling over

to the consumers.”

FASHION CONSULTANT AMY

SALINGER: “I’ve noticed

people have adjusted

their spending in terms

of how they’re spending

their money. They’re not

as frivolous as they were.”

HURST: “There’s more

uncertainty out there.

More uncertainty, less

spending. ‘I have to save

more because I might be

the one who loses my job

tomorrow.’”

SMART TALK

-NBC Nightly News, March 20, 2008

INANCIAL INSTITUTIONS’ LOSSES ARE STAGGERING—MORE LIKETHE GDP OF SOME DEVELOPING COUNTRIES THAN A BIG BUMP INCORPORATE ACCOUNTS.

F

MICHAEL KINSLEY, TIME

MAGAZINE COLUMNIST:

“Increasingly, the U.S.

government is borrowing

[money] abroad. It’s

borrowing it from other

governments. You know,

for us to be in debt to

the Chinese is a very sad

development-not that

there’s anything wrong

with the Chinese, but, you

know, the average income of

a Chinese citizen compared

to the average income of

an American citizen-the

idea that they are

financing our lifestyle,

it’s a little sad.”

PBS HOST CHARLIE ROSE:

“We’re borrowing money

from them so we can buy

their goods.”

SMART TALK

-The Charlie Rose Show, March 28, 2008

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TTHHEE EECCOONNOOMMIICCSS--TTEEXXTTBBOOOOKK reading ofthe prime crisis is that it’s an example ofhow markets reallocate capital and resourcesto those who can use them most efficiently.In human terms, it means boom times forinsolvency practitioners. There are buyingopportunities for eagle-eyed entrepreneurswith cash to buy repossessed houses andgoods at bargain prices. And as weakcompanies shed staff and contract, well-runcompanies that operate with spare cash canexpect to pick up talented new hires andexpand their business.

Which retail sectors canexpect to survive andthrive? WWHHAATTEEVVEERR IISS HHAAPPPPEENNIINNGG to the economy,people still have to eat. But where they eatchanges: Good-bye, restaurants and WholeFoods; hello, home kitchens and discount

supermarkets. Lower-price outlets of all sortsstand to do well as consumers look to stretchtheir reduced budgets. When money is asource of anxiety, a Starbucks latte may seemlike irresponsible indulgence whereas aDunkin’ Donuts coffee feels more like anaffordable comfort.

Who has the cash andwhat will they do with it? JJUUSSTT AATT TTHHEE TTIIMMEE the economies of theU.S. and Western Europe are foundering inthe credit crisis, the oil-fueled economies ofthe Persian Gulf and the trade-firedeconomies of Asia are flush with spendingcash. Fortunately for the West, at least in thenear term, they’re willing to invest some of itin Western markets. At the beginning of2008, the governments of Singapore, Kuwaitand South Korea provided a large chunk ofa $21 billion investment to prop upCitigroup and Merrill Lynch.

Who will benefitfrom the credit crunch?

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HAVE NO DOUBTTHAT POWER AND OWNERSHIPOF RESOURCESARE SHIFTINGEASTWARD. THIS RAISESQUESTIONSABOUTGOVERNANCEAND PRIORITIESTHAT NEED TO BE THOUGHTTHROUGHCAREFULLY.”

“I


BIG QUESTION 5

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The long-term effects, however, couldlead to painful adjustments as the U.S. loses,or at least shares, its economic superpowerstatus. Although the details are complex, thebig picture is simple: “I have no doubt thatpower and ownership of resources areshifting eastward,” explained Roger Martin-Fagg of Henley Management College in theUK. “This raises questions aboutgovernance and priorities that need to bethought through carefully. Among otherthings, the constituent membership of G9needs to change so that it reflects not onlythe productive power of countries but alsotheir financial power. The Gulf Stateswouldn’t even qualify for a G30 on the basisof their economies, but their financialpower is huge.”

As Emirates Business magazine put it,“Western banks are wilting and Americanhouse prices are in free fall; for the UAE,however, a recession in the United Statesoffers considerable opportunity.” Thepublication went on to say, “Anotherpositive benefit from the wider globaleconomic woes and dollar decline hasbeen to make the UAE an even moreattractive destination for foreign capital.…The US may be in trouble following thesub-prime mortgage crisis, but euro-zoneeconomies appear to be in a robust shape,despite dire numbers emanating from thecontinent’s banks.”

IN CONCLUSIONTTHHEE PPRRIIMMEE CCRRIISSIISS raises countlessquestions–the starting points for a lively andfruitful exchange of Intelligent Dialogue.What really happened? Is anyone to blame,or was it just one of those things? What’shappening now? How much worse will itget before it gets better? How will we knowwhen it’s over? Engaging with any of thesequestions raises dozens more about what’scoming next for the global economy andindividual consumers.

No one can offer all the answers, andthere’s no such thing as a fail-safe strategyor no-risk investment. But for those of us

trying to make sense of the situation, thesmartest strategy will be to cultivate aninquisitive mind, to take nothing for grantedand to use these questions and others as thebasis for Intelligent Dialogue.

With all the angst it’s provoking, we seethe prime crisis as an opportunity tosharpen the skills needed for the sort ofdialogues that build reputations andrelationships. When the stakes are so high,details of tone, manner and intention arecrucial. Stakeholders are in a heightenedstate of alert. Organizations that make lightof the crisis and claim to be completely incontrol risk coming across as glib andinsincere; official responses to events such asSARS in China and Hurricane Katrina inthe U.S. have made people suspicious ofreassuring pronouncements. Organizationsthat speak of the crisis in apocalyptic, “endof the world as we know it” terms riskrerunning the Y2K scenario and beingdismissed as sensationalist scaremongers.

Whether the issue is the prime crisis,climate change, health care, GMOs or anyof the other big issues that concern peopleeverywhere, the challenge and theopportunity are similar: to earn stakeholders’trust through dialogue and to use it wisely.

In this cynical, media-savvy age, nobodyexpects organizations not to have vestedinterests; everybody has an angle, everybody“talks their book.” The imperative fororganizations is to talk about issues not justfrom their own perspective but also withawareness of and respect for otherperspectives, including those of implacablecritics. The imperative is for organizationsto focus on more than their own questionsabout an issue and to be aware of widerquestions that may be troubling immediatestakeholders, or the stakeholders of thosestakeholders.

Porter Novelli’s imperative is to stayaware of many perspectives on big issuesand to bring in wider questions that mayimpact our clients’ business.

JOURNALIST TONY JONES:

“If it is the worst

downturn since the

great depression, how

can the rest of the

world avoid being

dragged into the abyss

along with the United

States?”

ECONOMIST AND AUTHOR

JOE STIGLITZ: “Oh, I don’t

think it can. Right now

you are increasingly

hearing stories in

Europe that it looks

like one business

person, the skid marks

are on the road. It does

look like Europe will

be affected. . . . I think

that those countries

who’ve diversified

their markets and are

more dependent on

China are going to

probably weather the

storm far better.”

SMART TALK

-Lateline (Australia), May 5, 2008ID


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WHAT PORTER NOVELLI UNIQUELY offers can be

summed up in two words: Intelligent Influence. The basis for Intelligent

Influence is Intelligent Dialogue. As yesterday’s mass media morph into

today’s interactive media, people expect to talk back at journalists and

opinion leaders. Yesterday’s way was set-piece monologues broadcast to

passive audiences by powerful brands and media owners. Today’s way is

fluid, evolving dialogues conducted across multiple, linked channels.

Ongoing dialogue is now possible and is truly the best basis of dynamic

long-term relationships. Easy sound-bite answers are seductive; they give a

comforting but illusory sense of resolution. Instead, we need to cultivate

open, questioning minds that ask smart, creative questions. Smart questions

spark Intelligent Dialogue, open up thinking and tap into the power of

many minds.

The Porter NovelliINTELLIGENTDIALOGUEPrinciple

PORTER NOVELLI was founded in Washington, D.C., in 1972 and is a part of Omnicom GroupInc. (NYSE: OMC) (www.omnicomgroup.com). With 100 offices in 60 countries, we take a 360-degreeview of clients’ business to build powerful communications programs that resonate with criticalstakeholders. Our reputation is built on our foundation in strategic planning and insights generation andour ability to adopt a media-neutral approach. We ensure our clients achieve Intelligent Influence,systematically mapping the most effective interactions, making them happen and measuring theoutcome. Many minds. Singular results.

GrowthSurvey2008

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