The downturn in IT company profitability

Not too long ago, information technology companies were assuring their investors that they would not be as affected by current economic conditions as others have been, citing large cash reserves, relatively infrequent borrowing and a strong, consistent customer base. Businesses rely on IT companies for innovative hardware and software packages that drive productivity, more than making up for the initial investment. Take a look at this quote from this quote in the Wall Street Journal on July 10th:

In a survey conducted last month in cooperation with the Securities Industry and Financial Markets Association, IBM found that 21% of those questioned were planning to increase IT spending by up to 10% this year, and 18% saw increases of more than 10%...The responses cover computer, software and services buying. Managers were asked to exclude staffing costs.

The article goes on to cite market researchers seeing a reduction in tech spending, but not a contraction (down to 4% from 7% previously). Now, another WSJ article posted on October 7th states that the trouble facing these IT companies may be more serious than what was accounted for; SAP stated that their third-quarter revenue would fall short of what they initially expected and had told investors.

The problem is coming from their revenue source: their customers. The financial giants on Wall Street--who were, at one point, some of their best customers--are imploding and strongly affecting the rest of the economy. Businesses large and small are no longer able to the finance integration of new hardware and software. The CIOs of large companies are facing budget cuts while small companies can't get a loan to make their business more competitive through tech solutions that companies like SAP offer.

Each job within the banking and finance industry supported between two and three other jobs, as said by Ken Goldstein, economist at the Conference Board in this WSJ article. These are the same industries that are suffering right now as the businesses within either collapse or swallow each other in desperation. Jim Jarman, President and Chief Operating Officer of computer-supply company E-Mediaplus has cited hundreds of thousands of dollars in losses since this began. Integra Software Systems has seen several of its customers disappear; they provided lending software solutions for the banking industry. The future is still uncertain for IT companies, but particularly troublesome for those that specialize in assisting the financial and banking institutions of America.

Reverse Reengineering of Risk

Reverse Reengineering of Risk
Bank Technology News Wednesday, October 1, 2008
By Clark Abrahams
http://www.americanbanker.com/printthis.html?id=20080929C4VN8N2E&btn=true

The article calls for use of comprehensive credit assessment framework (CCAF). This uses “advanced computing technology and a sound, safe model development and validation process. The CCAF approach naturally affords a sustainable and sensible segmentation based on all primary credit factors; providing ongoing monitoring of the impact of those actions in a comprehensive and efficient manner”. This increases qualification criteria, new actions for each segments and model possible scenarios.

Credit-risk scoring came into use in the banking industry in the 1970s which ended the judgmental and biased lending decisions that were used. The recent economic crisis exposed that the science of risk scoring is somewhat flawed analytics that made assumptions, like incomes don't matter and those who pay in cash are riskier bets. The current system has two fundamental problems such as weakened underwriting standards and degraded loan quality. The current credit scoring method has done a subpar job of assessing risk in dealing with the current subprime mortgage market. Most underwriting systems did not capture all of the risk factors that the current incarnation of the market faces.

This can be seen in particular when the conventional risk models were applied to non-conventional loan products. The lenders who depend on these credit-scoring systems are using the credit risk models inaccurately and incompletely for their daily business use. Secondly, there is a blind spot in underwriting practices that are used currently. There is too much dependence on quantitative models and automated underwriting systems employed today. In sort, the technology that is in place today is too over abundantly used and relied on to make judgment on risks when it comes to the lending of credit.

With the current use of technology and the current economic crisis there is a need for revamping the credit scoring system and how much faith is placed in technology. The key point is that as our technological capability and our economic means expand, we must update pass used measures. The credit scouring system has not changed as we have. The current system has not failed us, we have failed the system. We have failed to continually improve and adapt the system to ensure proper results.

With the creation of new forms of investments new measures must be put into place to change our old fundamentals of risk management in the credit community. More faith must be placed in our own physical means of business and not rely on old outdated methods. We must not totally rely on one method to determine credit risks, especially if the current means that we employ do not take into account the totally variables that exist in the market and person to person.

The technology and models that we employ is a great tool that we have ability to use. But we must not place absolute belief in them. We must ensure that as the investment opportunities change, we must change the way the tools are used. Hopefully, we can learn from the mistakes that have been made to ensure such crisis do not happen again.

IT spending amidst the Financial Crisis

Many banks and brokerages have been forced to lay off many workers due to the financial crisis, but according to the IBMC (International Business Machine Corp) 200 CIO’s have said they will increase spending in information technology. Along these lines IBM has said that in their studies 21% of companies plan on increasing spending for information technology by 10% while 18% of companies polled plan on increasing spending more than that. For the rest of the companies 20% said they will cut back on IT while the rest said they will keep it the same. These stats were for the 2008 year, for 2009 it is predicted that 41% of all companies information technology budgets will increase, 13% decrease, and the rest being unsure or keeping it the same. The poll was on the budget that they spend for computers, software, and IT services. A study by Goldman Sachs said that the largest 30% of firms do plan on cutting back IT expense.

According to an article this is due to many companies outside of Wall Street having remarkably strong balance sheets so they are able to increase or flat line IT spending. This article talks about how an economic recession is a time to make investments in IT.

Having small to medium companies not in the top 30% largest companies that have solid balance sheets amidst this crisis have a huge advantage when this recession is over. The further ahead of the competition you become in the technology apartment the better off you are. Since the highest IT priority for big financial firms is systems for improving risk management having a company it is not necessarily a great business decision to be cutting back given the state of Wall Street at this point. Another huge part of their budget was systems to improve the analysis of customers and profitability. By cutting back in these areas they are not able to get as good of a picture of each customer and how to expand their business as those companies that may be smaller that have increased or kept IT spending to further themselves and compete more.

http://proquest.umi.com.proxyau.wrlc.org/pqdweb?index=0&did=1507967151&SrchMode=1&sid=1&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1223413527&clientId=31806”

“http://web.ebscohost.com.proxyau.wrlc.org/ehost/pdf?vid=10&hid=114&sid=d8151851-4cd2-43b3-babe-cdafc24340c6%40sessionmgr107

Government Backed Securities Only Helping the Well to Do

If you've been listening to the political economic talk in the last couple of weeks then you know that financial experts are telling the public not to worry about the possibility bank-runs. A bank run, in the old days of the depression, was cascading effect where in which many customers withdrew money in fear of the banks failure.

Since then the federal government has taken measures to insure bank customers up to 100,00 dollars so that people can feel confident in their financial institutions. Without that capital banks can't lend to businesses and take out mortgages.

An article written in The Disciplined Investor has risen a few good points about federally backed banks and banks that aren't completely insured. The jist of the problem is basically in the fact that individuals will spread out their assets to cover the amount of money the federal government will repay in the event of a catastrophe.

Recently the government has increased the amount of insured dollars to 250,000 dollars. It should be noted that this article was written about a month ago and the increase was only done a few weeks ago. Still the problem remains. People will still attempt to game the system and millionaires will spread out their assets to insure financial security, especially in these times.

Not every single bank is insured by the federal government. One of the biggest problems that poor people have is getting access to credit and homeless people rarely have bank accounts. The banking industry has used sub prime loans to bring in those lower paying people into the market.

My question is this: now that the financial market is in turmoil does the new 250,000 dollar insurance and 700 billion dollar bailout only ensure financial security for the well to do?

Mobile Banking: Success only with Security

As technology offers ways of doing virtually everything from your computer whether it be order groceries, buy furniture, and trade stocks its hard to think, what's next? Well, there's an answer. Doing everything from your phone. With the growing popularity of iPhones, Blackberrys, and other PDAs the newest and coolest technological abilities seem to be for the phone rather than for the computer. One of these technologies which is expected to "explode" in the coming years is mobile banking. According to the MarketWatch article, "Mobile Banking Poses Fraud and Money Laundering Threats for Financial Institutions" by 2012 the mobile banking channel is expected to over 42 million customers from a meager 1.1 million customers in 2007. Currently available in the US, South Korea, Hong Kong, and Brazil, mobile banking offers customers a range of services from making and sending payments to trading stocks. As financial institutions offer customers such innovative services the article highlights the importance of information system security and potential threats to such innovative technologies.

As mobile banking technologies are still in their beginning stages, there have not yet been major threats, scams, or security problems. However, just as with any new technology, as demand and use increase so does the potential for misuse and hackers. Before customers sign up and utilize technologies such as mobile banking, they must be confident that their transactions, identities and alike are secure. From the financial institution’s perspective, not only must they ensure that customers have enough confidence and trust to use the technology but they must also ensure that the services do not create loopholes for criminals to utilize for money laundering or fraud.

A common theme surrounding innovative technologies which seem to grasp the market and become the methods in which we conduct our daily lives is security. Whether it be the security of the servers that host the world's largest stock exchange, or the security of the Internet when we process our credit card for a purchase, it is vital to the success of technology.

Mobile banking is no different. In order for it to "explode" the proper security constraints and protection must be in place to ensure that the technology only makes business more efficient rather than more penetrable. "But with this new channel, banks must also shore up their defenses with appropriate technological and program controls to make sure they can offer these services effectively and safely."

When combining information technology with financial services it is imperative that a strong balance of utility and security is achieved in order for products and services to be reliable and successful.

"Mobile Banking Poses Fraud and Money Laundering Threats for Financial Institutions"
http://www.marketwatch.com/news/story/mobile-banking-poses-fraud-money/story.aspx?guid={B1148F77-FCF1-461F-AE47-944985DB0E85}&dist=hppr

The Land of Children that Never Grow Up

With current bailout plans being set into motion, it served as a reminder over the past few weeks what type of credit crunch the United States is in. George Cooper, a strategist at JPMorgan, dilutes the problem by saying that central banks are subscribing to an economic philosophy in an expanding economy and another when the economy is constricting. When things are going well, the central banks leave the market alone, but when the slightest predicament arises central bankers respond by cutting the interest rate to stimulate their economies, preventing asset prices from lowering.

This asymmetric monetary approach asserts a belief that in the efficient-market theory, prices will reflect all available information. Stating that prices will always be right and there are no bubbles, leaves us to think that central banks have no reason to intervene in these circumstances. Indeed, if the markets actually worked this efficient as some believe, why would economies need to have central banks catch them when they fall? Mr. Cooper’s observations about the depressed savings rate leaving the economy riskily positioned forced to deal with the adverse effects, is a no brainer. The United States has been careless in encouraging consumers to support the economy, and all the meddling to keep the banking sector together myopically unaffected by the consequences is now rising havoc. As for the rest of us, we have to put up with incompetent management that ventures on the belief of rewarding risky behaviors and evading the cautious financial management approach. If we remove an incentive to steal and not allow senior executives to bail out with their golden parachutes, problems that Lehman had will not happen.
Clearly, what people seem to forget is that this problem did not arrive yesterday.

Truth be told, it has been like this since 1913 when the FRB came into play. With social programming taking off and Nixon abandoning Bretton Woods, the gold standard gave politicians free range printing all the fiat money they wanted. Therefore, it is catching up to us and we have to pay for our reckless actions from the past 100 years all at once, attempting to make our economy golden once again. So, from a government regulated by capitalistic individualism, why is everyone acting on all of these impulses with a complete disregard of responsibility for their actions?

I believe the most straightforward way to fix this problem is for the Federal Reserve to raise interest rates to fight inflation by 50bp per FOMC. This will lead to a sharp extraction in credit and take money out of the economy. This should command to an increase in deposits in the banking systems, which would lead to an internally developed stability and theoretically lead to a rise in the American Dollar. This would allow all imports to be priced cheaper, leading to more deposits, as the falling price of imports would free up salaries and let people put them towards savings. This would allow the deposit transactional banks to imbue investor confidence by having more stability and a greater monetary value in the American Banking system.

Buttonwood. "Credit and Blame." Economist.com. 11 Sept. 2008. 30 Sept. 2008 http://www.economist.com/finance/displaystory.cfm?story_id=12209655.

Buffett's Financial Bet

The $700 billion government bailout had been finally passed and then the President Bush was too impatient to wait to let it went into effect. When Bush signed this most grand bailout act ever in American history, he said, we should take this adventurous act, in order the crisis happened in the Wall street would spread into the whole society and country.

After the discussion of whether or not to save the Wall Street, the focus of us turning to whether this largest and greatest bailout could retrieval the Financial Crisis, resume the confident of the investor and the ultimate result of this bailout should prevent the financial crisis turn into the economy crisis of whole country. However, no matter the market, investor and the analyst could not take much hope about the bailout. After the transitory went up of the stock market that day, three indexes has rounded to a new turn of went down.

Though the passage of the bailout is most significant as a statement of purpose that Washington is not going to let the financial system melts down, as far as I am concerned, this bailout could hardly change the expectation of the market and therefore, hardly serve the function as it should be. In essence, the bailout plan is nothing but peels off the Non-performing Financial Assets of the Financial Institution, stops the loss of the bank, resumes the liquidity of the credit market and when the liquidity is enough, the confident of market would be restored. However, the key problems of this issue is no one knows that how severity the crisis is, which direction the market would lead to and when the crisis would over. These three questions are far beyond the cognizance of common people, and no one could make an exact forecast of the market in the future. Therefore, obviously, the market is lack of confidence to the issue that whether the $700 billion bailout could plug up the “black hole” of the crisis. Based on the argument above, I think that the bailout could just alleviate the destruction of crisis, but has no use in stopping the financial crisis fundamentally. Moreover, this financial crisis has already impacted on the real economy which is the most important target of the American government to prevent. Now, lacking of the liquidity has already influence the outside of the financial system, first at first is the small- and medium-sized enterprises of American.

The economy output of the small- and medium-sized enterprises contains more than half of the GDP of the United State. However, due to the difficulty of borrowing the money from the financial institution, they faced difficult of financing. According to the data of the American government, the opportunity of employment excluding agriculture has been decreasing in the last eight month and the unemployment rate has been increased to 6.1%. Therefore, the responsibility of the so-called bailout is to build a firewall between the real economy and the virtual economy in order to prevent the crisis of virtual economy the spread onto the real economy. However, in my view, the stableness of the firewall could hardly protect the real economy from being disturbed.

Anyway, the bailout has been passed by the congress and then we’re wondering the how Hank Paulson would carry the bailout into execution. From the angle of the economy of globalizing, I hope the economy here could get out from under. But I think this bailout could only address symptoms but not root causes.

Posted by Feng Guo, the article comes from http://online.wsj.com/article/SB122307417911703781.html