Wednesday, July 15, 2009

The story of two financial leaders

It's an amazing story of two firms who are the US financial leaders. Both repaid their TARP funds as quickly as possible, but that's where similarities end. Their culture and balance sheet structure couldn't be further apart.

During the financial crisis, Firm-1 helped (due to it's financial strength) the US government rescue two other large financial institutions that collapsed within several months. Firm-2 on the other hand was itself on the brink of collapse, and ended up getting an equity infusion from Warren Buffett.

Firm-1 was conservative, carefully deploying it's balance sheet and focusing on building up it's mortgage and credit card businesses. It ended up paying it's employees relatively little. Firm-2 took advantage of the wide spreads and cheap assets, loading up on risk and making markets where competition had all but disappeared. With it's profits soaring, Firm-2 will pay it's employees handsomely this year.

The market has rewarded Firm-2 dramatically more than Firm-1. Conservative approach, financial strength, and tight compensation policy are not the virtues that the market seems to care for. It may make folks in Washington and around the country angry, but it's reality.

For Firm-1 and it's employees this would be the time to shine, given they came out of this crisis on their own and in a reasonably good shape. But Firm-2 has stolen it's thunder and came out on top - at least in terms of rewarding employees and shareholders.

Firm-1 is JPMorgan, Firm-2 is Goldman, they are both market leaders, but their histories and outcomes could not have been more different.

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