INTELLIGENT DIALOGUE:
PRIME ANGST
SPRING 2008

INTRODUCTION
factor in whether economies feel bullish
could be a completely new combination
THERE’S NO QUESTION that money is a or bearish. But we also know that
of factors that will change the financial
major worry of the moment. Individuals
financial fundamentals are important. So
landscape beyond recognition.
are worried about prices going up and
maybe current sentiment is a return to
jobs disappearing. Businesses are worried Have globalization and high-speed
sober realism after a long spell of
about prices going up and the economic interactive technology made economies
partying. Or is it exaggerating the
cycle going down. Banks and financial more robust and quicker to bounce back?
problem and becoming a self-fulfilling
institutions are worried about the big Or have they made economies more
doomsday prophesy?
losses they’ve taken. And governments vulnerable?
are worried about their financial systems We don’t claim to have any definitive
Financial authorities such as the U.S.
holding up under the strain. answers to the questions asked here and
Federal Reserve have intervened to stave
throughout this white paper. We are not
In short, we know for sure that the off a meltdown. Have they done enough?
specialists in economics or finance. Porter
world is in the midst of an international Do they have the tools and sufficient cash
Novelli’s expertise is in understanding the
economic crisis. But there are plenty of to shore up the system and restore
questions that matter to our clients and
things we don’t know yet. confidence? Can they control events, or
their stakeholders; it’s in harnessing these
will events end up controlling them?
It may be that this is just another questions to foster the dialogues that
phase in the up-down, yin-yang cycle build brands and their business.
We know that sentiment (business and
that all economies go through. But it consumer confidence) is an important
INTELLIGENT DIALOGUE: PRIME ANGST

WHERE HAS ALL THE MONEY GONE? - - >
revert into desolate, dangerous places. Firms limited by two factors: finding borrowers
ANYONE WITH AN E-MAIL account is all who could be trusted to repay what they
that are just hanging on may go under as
too familiar with spam announcing,
borrowed, and adhering to a regulatory
credit lines and consumer demand dry up.
“Refinance now!” and “Easy credit at low
safeguard that ensured financial institutions
This white paper aims to provide a
rates.” But anyone paying attention has
have enough capital to cover the risk of
broad view of the factors that precipitated
probably noticed that such messages have
borrowers defaulting. By international
the crisis and raise five big questions, as well
become rarer over recent months. The
agreement, their capital had to be at least
as many secondary questions, about some of
reason is simple: The waves of cheap credit
8% of their assets.
its most resonant effects.
flooding the financial system have retreated.
But as the U.S. subprime market gained
And they’ve left a tsunami’s worth of
WHAT HAPPENED? momentum, financial institutions made loans
damage in their wake.
at higher rates—but often with artificially low
By now, we’ve all read countless articles IN A NUTSHELL, we stopped being thrifty. “teaser” rates that would jump up after a few
about the “Subprime Bust,” the “Credit In the early 2000s, seduced by easy credit, years—to people with poor credit, then
Squeeze” and the “Financial Crisis.” But low interest rates and a rapidly expanding bundled these loans into debt obligations
while the first victims were borrowers who real estate bubble (which created the illusion called mortgage-backed securities (MBSs),
took out risky subprime mortgages, the of wealth), home buyers racked up enormous which they sold to investment banks. Banks,
casualties now include a far greater swath of debt by taking out the biggest mortgages they in turn, packaged MBSs with higher-rated
the population. The U.S. subprime crisis has could qualify for. Eager to capitalize on this investment bonds into collateralized debt
spawned a related, and scarier, prime crisis, trend, lending institutions began marketing obligations (CDOs) and sold them to hedge
in which people with traditional 30-year- unorthodox loan products—adjustable-rate funds. And hedge funds borrowed money
fixed mortgages and even people who own mortgages whose rates would adjust rapidly using the CDOs as collateral.
their homes outright are feeling the pinch. upward, interest-only mortgages that would This created huge profits as long as real
Even among those who can still pay their leave homeowners with no equity—and estate prices rose. But when subprime
bills, economic anxiety is epidemic. offering them to buyers with poor credit who borrowers started defaulting on their loans,
wouldn’t have qualified for a mortgage at all
Things may get worse before they get prices fell. So did the value of CDOs, and
just a few years earlier.
better, and there’s no predicting what all the lending institutions got worried and started
effects will be. If parents can no longer Predicated on the belief that the calling in their loans. Suddenly, nobody
borrow against the equity in their homes economy would continue growing and wanted to buy CDOs, and balance sheet
and students can’t get education loans, then housing prices would keep going up, these (capital) valuations plummeted. The
college enrollments may fall and schools were big risks—and a radical departure ramifications have been pronounced, from
may have to lay staff off. Once-gentrifying from the way the mortgage industry used to Wall Street on down to Main Street. ID
areas with many repossessed homes could work. Traditionally, lending capacity was
INTELLIGENT DIALOGUE: PRIME ANGST

1
BIG QUESTION
What happens when
borrowers can’t repay their loans,
and how does this affect everyone else?
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W HEN ONE
Financial institutions were all too happy
OWNING A HOME has long been a
to help. Home buyers could qualify for 90% HOMEOWNER HAS
cornerstone of the American Dream, and
and even 100% financing, enabling them to
for Britons, it’s also seen as an essential TROUBLE SELLING, IT’S
buy homes with nothing down. Refinancing
expression of personal autonomy—in fact,
was as easy as pie. Banks loaned tens of AN INDIVIDUAL
former prime minister Margaret Thatcher
thousands of dollars at a time with property
made property ownership a central tenet of PROBLEM. WHEN MANY
as collateral. They were no longer funding
her political philosophy. Now, even in
sound property investments but inflating a HOMEOWNERS (OR
nominally Communist China, the rising
bubble of asset speculation.
middle class is keen to own their homes. BANKS) ARE FORCED TO
It’s an immutable law of economics that
In recent decades, throughout the SELL, IT BECOMES A
bubbles burst. From the Dutch tulip mania
developed world and beyond, buying a
of the 1630s to the dot-com boom of the SOCIAL PROBLEM.
home has come to be seen as a smart
late 1990s, the good times don’t last. And
investment. The more demand there was,
sure enough, this property bubble is bursting
the higher prices rose and the “richer”
far and wide, especially where it’s blown up
homeowners felt—even if that wealth was
the biggest and fastest, the United States,
illusory. As long as the real estate market
the United Kingdom, Spain, the
remained fizzy, consumers could count on
Netherlands and Ireland. What makes this
selling easily and at a handsome profit, or
bubble distinctive is just how many
else borrowing cheaply (i.e., refinancing)
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consumers are involved and how much they
against the increased value of their property.
INTELLIGENT DIALOGUE: PRIME ANGST

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involving 157,156 people—the highest
services. If owners go back to being renters,
all counted on their property to fund
numbers for the month of March since 2003.
they’re less likely to feel they have a stake in
current and future plans.
And that doesn’t take into account the
maintaining their neighborhood. If people
What happens when hundreds of thousands of employees who
leave town altogether, local businesses suffer.
were let go when their companies downsized
Streets with vacant homes can quickly
borrowers can’t pay? less drastically. In March 2008, the national
become dangerous.
unemployment rate hit 5.1%, up from 4.8%
THE TERMS VARY from country to country, On an individual level, the mortgage
in February and from 4.4% a year earlier. ID
but in general, when borrowers miss three mess doesn’t just affect the subprime
consecutive payments, the lender has to borrowers who may have been greedy or ill-
advised. It also hits a broad swath of prime
assign the whole debt to its Tier 1 capital.
borrowers who went by the book. A home
This amounts to a big loss. If the lender is
that was purchased for $300,000 two years
leveraged at 7:1, a $70,000 debt default will
ago may have fallen by 15% in value,
cost it almost half a million dollars in lost
making it worth $255,000 today; an owner SMART TALK
lending capacity. Lenders may force the sale
who put 10% down now has negative
of the assets (i.e., foreclose) to recover the
equity—a mortgage bigger than the value
debt. Delinquent homeowners get kicked
of the property. If he needs to move for
out. In the U.S., some struggling borrowers
work or for financial reasons, and if he
don’t even wait for the hassle of
manages to find a buyer at $255,000, he’ll
repossession; they move out, put the keys in CNN HOST LARRY KING: “If
have to say good-bye to the $30,000 down
an envelope, drop them off at the lender’s
payment and come up with another you’re losing your house
office (“tinkle mail”) and disappear.
$15,000 to repay the mortgage. No wonder or your job, you’re in a
Nearly 3 million U.S. homeowners (6.3%) antsy homeowners are addicted to websites
were behind on their payments in the fourth recession.”
such as Zillow.com, where they can track
quarter of 2007, and more than a million the price of their homes on a daily basis.
more (a record 2% of loans) were in
People facing foreclosure have no choice.
foreclosure. In some areas, the statistics are GERRY WILLIS, CNN
Others will have to decide between selling
even worse: Around 4.9% of households in PERSONAL FINANCE EDITOR:
and taking the loss, or staying put and
the Detroit metro area were in some stage of
risking a further fall in value. This may not “Two million Americans
foreclosure during 2007; 4.8% in Stockton,
be such a big deal in countries such as
California; and 4.2% in the Las Vegas metro have faced foreclosure
France, Germany and Italy, where people
area. Whole neighborhoods that were fueled in the last year, and
typically buy homes with the intention of
by subprime borrowing are now being
living in them for the rest of their lives. It’s more are expected to.”
hollowed out by defaults and repossessions.
likely to come as a big shock to the more
Even in communities where the fidgety and flexible markets of the U.S. and
numbers aren’t this high, the repercussions UK, where consumers expect to buy and sell KING: “They’re in a
are powerful. With banks trying to sell off several times in their life, trading up as their recession.”
the houses they’ve repossessed and economic status improves.
overmortgaged homeowners trying to sell
Are people without
rather than default on their loans, the WILLIS: “They’re in a
market has become flooded. In this
mortgages safe?
uncertain climate, would-be buyers are
recession, and they’re
skittish about taking on debt, and lending feeling the pain. And
EVEN PEOPLE WHO RENT their homes or
institutions have tightened up their rules.
own them outright are confronted by the if you live near those
Demand has gone down at the same time
effects of the prime crisis. As people default
supply has gone way up, and home prices people, your home value
on loans and the financial sector stumbles,
are tumbling.
shock waves ripple through the economy. In is going down, too. This
order to cut costs, companies are doling out
What happens
is a-you know, a domino
pink slips at an accelerating pace. In the
to everyone else?
effect that’s going on
fourth quarter of 2007, there were 1,619
mass layoff events—defined as more than 50 across the country.”
employees of one company filing
WHEN ONE HOMEOWNER has trouble
unemployment claims in a five-week period—
selling, it’s an individual problem. When
that affected 265,454 workers, according to
many homeowners (or banks) are forced to
the U.S. Department of Labor’s Bureau of
sell, it becomes a social problem. If towns
Labor Statistics. There were almost as many
see a lot of owners sell, their property-tax
in March 2008 alone: 1,571 mass layoffs
revenues decline and they have to cut
-Larry King Live, January 17, 2008
INTELLIGENT DIALOGUE: PRIME ANGST

2
BIG QUESTION
SMART TALK
WILLIAM SCHNEIDER, CNN
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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.”
Is today’s crisis a prelude to
-CNN’s Your Money, March 23, 2008
even bigger disasters in other sectors,
such as education and retirement?
recently wrote that it could “become the
S TUDENTS ARE “TAKING THERE ARE TWO POLES of opinion on ‘first national casualty’ of the ongoing
the prime crisis. Some economists see it as
credit crunch.”
a “hundred-year flood”—a rare and
A YEAR OFF” BECAUSE
devastating event that will completely On a personal level, all around the
THEIR FAMILIES CAN’T
change everything. Others view it as just world, some of the most profound effects
another trough in the cycle of ups and will be felt at the beginning and end of
BORROW AGAINST THEIR
downs that all markets go through; some adulthood.
HOME EQUITY FOR people get lucky on the ups, and others get
What happens when
unlucky on the downs. At the very least, it
TUITION. THE IVY LEAGUE
looks like this is going to be a deep trough.
funding for school fees
WILL LIKELY WEATHER
Globalization means that the effects of
dries up?
THIS STORM, BUT the bust are felt far beyond its epicenter in
the U.S. subprime market. Some of the RISING HOME EQUITY and easy credit
THIRD-TIER COLLEGES
world’s biggest names in banking, such as have enabled many families to stretch a
Switzerland’s UBS, have taken a big hit.
MAY SUFFER BECAUSE little bit further with education. After all,
The entire economy of Iceland, which families with middle-class aspirations have
THEIR ENROLLMENTS
depended heavily on international always looked to education as the way to a
investors, is in such dire straits that New
ARE DOWN. brighter future. And if that’s not worth
Yorker financial columnist James Surowiecki taking on a second mortgage, what is? As
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INTELLIGENT DIALOGUE: PRIME ANGST

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What happens to
afloat if their job disappears. For starters,
prosperity has grown in developed
older people who were
experts say, they should learn to cook, get a
countries, this has pushed up the demand
for education as well as the costs. library card and, perhaps, a skateboard to
counting on their
fill the hours they used to spend at the
property investment?
In the UK, for example, where public (state)
mall.”
education has been in turmoil for decades,
parents have looked to private schools as a RECENT DECADES HAVE been a turbulent
way of giving their children the best possible time for pensions. Employees and former
SMART TALK
start in life. One consequence has been that employees of big corporations can no
the fees for UK private schools have risen longer be confident that the company will
twice as fast as retail prices. still be around to pay out their company
pensions. Pension funds have
In the U.S., many homeowners counted
underperformed or gone bust. Few people
KIM KIYOSAKI, AUTHOR OF
on borrowing against the equity in their
with individual retirement accounts
homes to pay their children’s school or RICH WOMEN: A BOOK ON
managed to save enough to cover the gap—
university tuition. But now, as property
especially as people are living many more
INVESTING: “I think
prices fall, many parents find themselves
years after retirement and often needing
unable to qualify for that second mortgage. there is going to be a
expensive medical care in the process. For
And they can’t count on student loans to
many people, cashing in the equity in their
recession coming. I
cover the gap, because the subprime mess
home looked like the safest bet for their
has made lenders wary. Students are “taking don’t think the
retirement years.
a year off ” as their families regroup. The government has any way
Ivy League will likely weather this storm, However, the credit crisis and falling real
but third-tier colleges may suffer because estate prices will make that difficult if not
to bail us out of this.
their enrollments are down. They may have impossible for older homeowners who had been
I really think it’s a
to lay off staff. In some “college town” hoping to withdraw equity from their home
cities, where the school is a prime employer, (known to the Dutch as “eating your house
perfect storm of oil
the effects could be felt far beyond the up”). Others who had counted on
prices-energy prices-
quad. downsizing—selling their current home, buying
a cheaper one and living off the difference—
going up, the whole
How will the prime may find that plan won’t work anymore.
subprime mess, the
crisis affect millennials? Furthermore, in the United States, older
weakening dollar,
people in particular were victims of
WHETHER THEY’RE IN school, delaying
predatory lending—even “reverse
unemployment going up,
their enrollment or already graduated and
mortgages” that actually increased as time
the retail sales are
working in an entry-level job, Americans
went by. Some retirees are finding
and Europeans in their late teens and early
themselves not only without home equity
dropping. . . . And it’s a
20s are affected differently than their older
but even without a home. The American
global problem, not
counterparts. They grew up during the
nuclear family is exploding as members of
greatest period of wealth creation in modern
this generation move back in with their
just a U.S. problem.”
history. This is the first real economic
adult children (and those children’s young-
downturn they’ve seen—and it’s arriving just
adult children, too).
when they expected to be coming into real
Global demographics make this concern
spending power and independence. Their
especially acute. In most developed
inflation-adjusted earnings are down, their
countries, the population balance is tipping
job security is in doubt, and their student
toward the gray end of the scale, with
loan debt is high. The economy is very -Larry King Live, January 17, 2008
median ages of 36.7 in the United States,
much on their minds: In an October 2007
39.9 in the UK, 39.2 in France, 43.4 in
Pew Research Center poll, 80% of voters
Germany and 43.8 in Japan. The big issue
ages 18 to 29 cited the economy as a “very And whether because they’re delaying
for countries with aging populations is
important” concern, versus 61% who college or because they’ve “boomeranged”
balancing the books: As more people retire
named the environment as a major issue. back home after graduating and having
and need more health care, and fewer
trouble paying the bills, more and more 20-
As a blogger on mlive.com put it, “Now is
people enter the workforce and generate
somethings are living with their parents.
indeed the time for millennials to pump
wealth, where will the money come from? ID
cash into their checking accounts to stay
INTELLIGENT DIALOGUE: PRIME ANGST

3
BIG QUESTION
Does the prime crisis
have health implications?
SMART TALK
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.”
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did. They were also three times less likely to
IN THE U.S., at least, it looks likely that fill prescriptions for necessary medication.
it will. The country is undergoing a
‘These unmet medical needs directly put a
health care crisis in which 47 million
child’s health at risk,’” said a researcher at
Americans are uninsured and their ranks
Cincinnati Children’s.
are growing. Time magazine recently
reported that “As the economy spirals The crisis affects adults, too: “Leading
downward, a series of recent reports health researchers at the Urban Institute on
forecasts that the country’s health-care April 29 warned that each percentage-point
crisis is about to get worse, particularly for rise in unemployment would result in an
children.” The article cites a study additional 1.1 million people losing health
conducted at Cincinnati Children’s Hospital insurance,” the same Time article reported.
Medical Center that found that “kids who Even people who still have jobs and
did not have continuous health insurance employer-funded health plans are
were 14 times less likely to have regular struggling: Premiums have shot upward at a
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visits with a pediatrician than those who rate ten times greater than incomes.
INTELLIGENT DIALOGUE: PRIME ANGST

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“A S THE ECONOMY SPIRALS DOWNWARD, A SERIES OF RECENT
REPORTS FORECASTS THAT THE COUNTRY’S HEALTH-CARE CRISIS
IS ABOUT TO GET WORSE, PARTICULARLY FOR CHILDREN.”
the journal Public Health, unemployed men
Forced to choose between buying insurance security and anxiety about the financial
and making mortgage payments, a growing and their families had an increased future have not cheered anyone up.
number of people is opting out of health incidence of mortality, particularly from
Recent research bears that out. A study
plans. suicide and lung cancer; they were more
published in the journal Development
likely to use general practitioner and
Psychology found that “a reduction in
Whatever the reason, families are
hospital services and receive more
forgoing medical attention. Time reported disposable family income constitutes a risk
prescribed medicines; and their use of
that in a poll conducted by the Kaiser for child mental health through increased
tobacco and alcohol increased after the
Family Foundation in April, 29% of economic pressure and negative changes in
onset of unemployment.
respondents said they’d postponed necessary parental mental health, marital interaction,
care, 24% had put off a test or treatment The mental health effects will likely be and parenting quality.” MSNBC.com
and 23% had chosen not to fill a even worse. The prime crisis has hit the reported that “divorces and reports of abuse
prescription. U.S. at a time when the nation was already are rising as families burdened by
in a pretty glum frame of mind, thanks to impending foreclosure take their stress out
Furthermore, research has shown that
9/11, the war in Iraq and alarming reports on one another.” ID
unemployment is itself detrimental to
about climate change. It goes without saying
health. According to a review published in
that mortgage angst, worries about job
SMART TALK
SCOTT GURVEY, Nightly DAVID WYSS, CHIEF DEAN MAKI, CHIEF U.S.
Business Report ECONOMIST, STANDARD & ECONOMIST, BARCLAYS
CORRESPONDENT: “For POOR’S: “People are CAPITAL: “There does seem
seven years, the scared. . . . What they to be something of a
American consumer has are scared about is the media effect, as well.
been the hero, spending future. Their Consumers say they’re
with abandon in spite expectations for the hearing worse news on
of market turmoil, future are at the the economy than any
geopolitical threat lowest levels we have time in the last 50
and natural disaster, seen, well, in 15 years years. . . . So that does
until now. There is on these reports, 35 seem to be playing some
now no question years on the numbers role in addition to the
that the consumer is earlier this week from rise of inflation and
pulling back.” the Conference Board.” softer labor market.”
-Nightly Business Report, March 28, 2008
INTELLIGENT DIALOGUE: PRIME ANGST

4
BIG QUESTION
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If banking and finance SMART TALK
are to blame, who will LYLE GRAMLEY, FORMER
FEDERAL RESERVE
punish them and how? GOVERNOR: “I don’t think
any of us have any
cookie cutter solutions
that there has been no reputational damage.
TO PUT IT MILDLY, it’s unlikely that the Experience says it goes away after two or to the problem. But we
banking and finance industries will emerge
three years.”
from this turbulent period with enhanced need to begin thinking
reputations. Executives who routinely enjoy Merrill Lynch CEO Stanley O’Neal bowed outside the box, because
multimillion-dollar remuneration for their out in November 2007, and his successor, John
expertise and risk-taking genius have
what we’re experiencing
A. Thain, is currently looking at $22 billion of
presided over huge losses and potentially write-downs. The roll-call of big write-downs now in financial markets
huger losses to come. continues with Citigroup ($21.1 billion), is unlike anything I
HSBC ($17.2 billion), Morgan Stanley ($9.4
Those losses are staggering—more like have seen in more than
billion), Deutsche Bank ($7.1 billion), Bank of
the GDP of some developing countries than
America ($5.3 billion), Bear Stearns ($3.2
a big bump in corporate accounts. The
50 years of looking at
billion), JP Morgan Chase ($3.2 billion),
biggest so far (as of April 16, 2008) has been the economy.”
BayernLB ($3.2 billion), Barclays ($2.6 billion),
Swiss-based UBS, with $37.4 billion of
IKB ($2.6 billion), Royal Bank of Scotland
write-downs, prompting the departure of
($2.6 billion) and Credit Suisse ($2 billion).
chairman Marcel Ospel. His successor, Peter -CNN Newsroom, March 19, 2008
Kurer, told Financial Times, “We can’t pretend
INTELLIGENT DIALOGUE: PRIME ANGST

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F INANCIAL INSTITUTIONS’ LOSSES ARE STAGGERING—MORE LIKE
THE GDP OF SOME DEVELOPING COUNTRIES THAN A BIG BUMP IN
CORPORATE ACCOUNTS.
Will it mean a return to
For ordinary consumers, the dented
stricter regulation for
SMART TALK
reputations of high-rolling finance houses
may be of little lasting interest, even though
the banking industry?
taxpayers’ money is being used to rescue MICHAEL KINSLEY, TIME
some from their own lack of judgment. In
FOR THREE DECADES, the finance industry MAGAZINE COLUMNIST:
fact, “rogue trader” Jerome Kerviel has
enjoyed increasingly loose regulation; banks
become something of a folk hero in France, “Increasingly, the U.S.
and mortgage lenders have been allowed
where he is being blamed for Societe government is borrowing
into each other’s territories, and
Generale SA’s record 4.9 billion-euro ($7.7 [money] abroad. It’s
geographical barriers to trade and
billion) trading loss. But for regulators,
ownership have been dismantled. And they
lawyers and financial authorities, it’s going
borrowing it from other
engaged in lending practices that the U.S.
to be different matter. governments. You know,
Department of Housing and Urban
Development has identified as predatory, for us to be in debt to
including: the Chinese is a very sad
SMART TALK
“Loan flipping,” or refinancing development-not that
•
borrowers’ loans repeatedly in a short there’s anything wrong
period, with high fees each time
ERIK HURST, PROFESSOR,
with the Chinese, but, you
UNIVERSITY OF CHICAGO
Excessive fees and “packing” that far know, the average income of
•
exceeded what would be expected or
GRADUATE SCHOOL OF a Chinese citizen compared
justified on economic grounds and
BUSINESS: “U.S. consumers to the average income of
“packed” into the loan amount
without the borrower’s understanding
today are scared. The an American citizen-the
uncertainty in the idea that they are
Lending without regard to the
•
borrower’s ability to repay, including financing our lifestyle,
economy is spilling over
elderly people living on fixed it’s a little sad.”
to the consumers.”
incomes with monthly payments
that equaled or exceeded their
FASHION CONSULTANT AMY
monthly incomes
PBS HOST CHARLIE ROSE:
“We’re borrowing money
SALINGER: “I’ve noticed
Outright fraud and abuse, with
• from them so we can buy
people have adjusted
deceptive or high-pressure sales tactics,
often against certain groups—the their goods.”
their spending in terms
elderly, minorities and individuals with
of how they’re spending
lower incomes and less education.
their money. They’re not -The Charlie Rose Show, March 28, 2008
Loose regulation allowed the industry to
as frivolous as they were.”
make a lot of money through the use of will be light, but there will be busts. The state
complex new structures (such as CDOs) and will sometimes have to clear up and
to disguise risk through creative accounting.
HURST: “There’s more
regulation must be about cure as well as
Going forward, it seems inevitable that prevention. Or governments can aim for
uncertainty out there.
governments will get together to tighten safety and opt for dumbed-down financial
More uncertainty, less
regulation. On the other hand, as the systems that hobble their economies and
Economist commented recently, “The notion deprive their people of the benefits of faster
spending. ‘I have to save
that the world can just regulate its way out of growth. And even then a crisis may strike.”
more because I might be
crises is…an illusion. Rather, crisis is the
In any event, look for lawyers to get
price of innovation, so governments face a
the one who loses my job
involved, as there’s ample room for class-
choice. They can embrace new financial
tomorrow.’”
action lawsuits against predatory lenders. ID
ideas by keeping markets open. Regulation
-NBC Nightly News, March 20, 2008
INTELLIGENT DIALOGUE: PRIME ANGST

5
BIG QUESTION
Who will benefit
from the credit crunch?
“I HAVE NO DOUBT
THAT POWER
AND OWNERSHIP
--> OF RESOURCES
ARE SHIFTING
EASTWARD.
THIS RAISES
QUESTIONS
ABOUT
GOVERNANCE
AND PRIORITIES
THAT NEED TO
BE THOUGHT
THROUGH
CAREFULLY.”
supermarkets. Lower-price outlets of all sorts
THE ECONOMICS-TEXTBOOK reading of stand to do well as consumers look to stretch
the prime crisis is that it’s an example of
their reduced budgets. When money is a
how markets reallocate capital and resources
source of anxiety, a Starbucks latte may seem
to those who can use them most efficiently.
like irresponsible indulgence whereas a
In human terms, it means boom times for
Dunkin’ Donuts coffee feels more like an
insolvency practitioners. There are buying
affordable comfort.
opportunities for eagle-eyed entrepreneurs
with cash to buy repossessed houses and
Who has the cash and
goods at bargain prices. And as weak
what will they do with it?
companies shed staff and contract, well-run
companies that operate with spare cash can
expect to pick up talented new hires and JUST AT THE TIME the economies of the
expand their business. U.S. and Western Europe are foundering in
the credit crisis, the oil-fueled economies of
Which retail sectors can the Persian Gulf and the trade-fired
economies of Asia are flush with spending
expect to survive and cash. Fortunately for the West, at least in the
thrive? near term, they’re willing to invest some of it
in Western markets. At the beginning of
WHATEVER IS HAPPENING to the economy, 2008, the governments of Singapore, Kuwait
people still have to eat. But where they eat and South Korea provided a large chunk of
changes: Good-bye, restaurants and Whole a $21 billion investment to prop up
-->
Foods; hello, home kitchens and discount Citigroup and Merrill Lynch.
INTELLIGENT DIALOGUE: PRIME ANGST

-->
SMART TALK The long-term effects, however, could trying to make sense of the situation, the
lead to painful adjustments as the U.S. loses, smartest strategy will be to cultivate an
or at least shares, its economic superpower inquisitive mind, to take nothing for granted
status. Although the details are complex, the and to use these questions and others as the
big picture is simple: “I have no doubt that basis for Intelligent Dialogue.
power and ownership of resources are
With all the angst it’s provoking, we see
JOURNALIST TONY JONES:
shifting eastward,” explained Roger Martin-
the prime crisis as an opportunity to
Fagg of Henley Management College in the
“If it is the worst
sharpen the skills needed for the sort of
UK. “This raises questions about
downturn since the
dialogues that build reputations and
governance and priorities that need to be
relationships. When the stakes are so high,
thought through carefully. Among other
great depression, how
details of tone, manner and intention are
things, the constituent membership of G9
can the rest of the
needs to change so that it reflects not only crucial. Stakeholders are in a heightened
the productive power of countries but also state of alert. Organizations that make light
world avoid being
their financial power. The Gulf States of the crisis and claim to be completely in
dragged into the abyss
wouldn’t even qualify for a G30 on the basis control risk coming across as glib and
of their economies, but their financial
along with the United
insincere; official responses to events such as
power is huge.” SARS in China and Hurricane Katrina in
States?”
the U.S. have made people suspicious of
As Emirates Business magazine put it, reassuring pronouncements. Organizations
“Western banks are wilting and American that speak of the crisis in apocalyptic, “end
ECONOMIST AND AUTHOR
house prices are in free fall; for the UAE,
of the world as we know it” terms risk
however, a recession in the United States
JOE STIGLITZ: “Oh, I don’t
rerunning the Y2K scenario and being
offers considerable opportunity.” The
dismissed as sensationalist scaremongers.
think it can. Right now
publication went on to say, “Another
positive benefit from the wider global
you are increasingly
Whether the issue is the prime crisis,
economic woes and dollar decline has climate change, health care, GMOs or any
hearing stories in
been to make the UAE an even more of the other big issues that concern people
Europe that it looks
attractive destination for foreign capital.… everywhere, the challenge and the
The US may be in trouble following the opportunity are similar: to earn stakeholders’
like one business
sub-prime mortgage crisis, but euro-zone trust through dialogue and to use it wisely.
person, the skid marks
economies appear to be in a robust shape,
despite dire numbers emanating from the In this cynical, media-savvy age, nobody
are on the road. It does
continent’s banks.” expects organizations not to have vested
look like Europe will
interests; everybody has an angle, everybody
be affected. . . . I think
“talks their book.” The imperative for
IN CONCLUSION organizations is to talk about issues not just
that those countries
from their own perspective but also with
THE PRIME CRISIS raises countless
who’ve diversified
awareness of and respect for other
questions–the starting points for a lively and
perspectives, including those of implacable
their markets and are
fruitful exchange of Intelligent Dialogue.
critics. The imperative is for organizations
What really happened? Is anyone to blame,
more dependent on
to focus on more than their own questions
or was it just one of those things? What’s
about an issue and to be aware of wider
China are going to
happening now? How much worse will it
questions that may be troubling immediate
get before it gets better? How will we know
probably weather the
stakeholders, or the stakeholders of those
when it’s over? Engaging with any of these
storm far better.”
stakeholders.
questions raises dozens more about what’s
coming next for the global economy and
Porter Novelli’s imperative is to stay
individual consumers.
aware of many perspectives on big issues
and to bring in wider questions that may
No one can offer all the answers, and
impact our clients’ business. ID
there’s no such thing as a fail-safe strategy
or no-risk investment. But for those of us
-Lateline (Australia), May 5, 2008
INTELLIGENT DIALOGUE: PRIME ANGST

The Porter Novelli
INTELLIGENTDIALOGUE
Principle
offers can be
WHAT PORTER NOVELLI UNIQUELY
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.
PORTER NOVELLI was founded in Washington, D.C., in 1972 and is a part of Omnicom Group
Inc. (NYSE: OMC) (www.omnicomgroup.com). With 100 offices in 60 countries, we take a 360-degree
view of clients’ business to build powerful communications programs that resonate with critical
stakeholders. Our reputation is built on our foundation in strategic planning and insights generation and
our 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 the
outcome. Many minds. Singular results.