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Posted at 4:47 PM ET, 01/25/2011

Introduction: Trust Meltdown II report

By Roland Schatz

Read the Trust Meltdown II report

Everybody in the financial sector expected 2009 to be rough; the headlines following the Lehman collapse were frank. But at the same time, the chief executives of the finance sector speculated that the media would calm down in 2010 as better results proved that Wall Street was no longer losing money.

Now, in 2011, the picture is clear: Yes, the financial results presented in 2010 were much better than expected. Yet the headlines remained the same. From a reputation standpoint, there has been no recovery, as the media on Wall Street and Main Street keep asking the same questions: What have you learned from the crisis? And what was implemented in 2009 and 2010 to make sure another meltdown will not happen?

The first Trust Meltdown report made it clear that the banking industry had not caught a mere cold, as much as it had been hit by a fundamental crisis that raised questions regarding its license to operate. Making money out of money was no longer a convincing story for the opinion-leading media. The bottom line in 2009: The media reputation of the finance sector has gone south, so much so that it was ranked worse than the tobacco industry.

Did 2010 help it to improve? No, the media reputation actually worsened, even while the pure economic figures improved. Obviously, Wall Street’s hope in this regard turned out to be counterproductive. And hiding away was no solution. Neither was trying to play the blame game that pretended that “sub-prime” had been a natural catastrophe. The only nature to be blamed here is the nature of mankind; it is human nature to do less good when no control mechanisms are in place.

No company can exist for two consecutive years reporting that its own business, products and, above all, its management are time and again associated with massive accusations from the judiciary, politics and society. Correspondingly, the ratings recorded by Interbrand for selected financial institutions all point toward the negative. This development was particularly shocking for Citibank or UBS, which, after the halving of their brand value in 2009, now also had to suffer a further loss of 13 percent in 2010. Others such as HSBC or Morgan Stanley had, in particular, learned their lessons from their communication mistakes in 2008 and 2009, and in 2010 were rewarded with a balanced media image. This also paid off in the brand value index: Although the losses from the prior year could not yet be compensated for, the trend was at least upward.

Similarly to the tobacco industry, the banks, with their communication behavior prior to and in particular after the financial crisis in autumn 2008, maneuvered themselves into a position which made individual differentiation difficult. The fundamental loss of reputation became less due to the images from the respective hearings in Washington, London or Berlin in which the banks’ directors were optically perceived similarly to those accused in the tobacco industry. Far more fatal for the entire industry was the lack of clear communication by the individual banks regarding the repeatedly posed questions:

1. Why did you portray the products as being secure when you must have and could have known in advance that they did not comply with the usual requirements?
2. What have you done to prevent this in the future?

The answers given in 2009 were then rejected as unconvincing by the opinion-leading media. The tactic employed by those responsible of not learning the lessons from this in the following 12 months, and instead convincing the skeptics through repetition, may have worked in the 20th century. However, in the wake of Enron, etc., as well as the experiences from the unforgettable value-destroying machine, the Internet bubble, in which the banks also played their part in the first instance, it no longer works to replace sound argument with good clothes and expensive appearances.

One chart in the report spells out the unchanged destructive result: Concrete banks and concrete bank directors are, on average, negatively presented in the opinion-leading media – but if the same media mention “banker,” the criticism doubles: Every second statement is negative, even though the actual business data were again positive in 2010 – from Citi through to UBS. The fundamental rejection of the financial institutions and their representatives can clearly no longer be justified by saying that the people were dissatisfied with their financial performance. Goldman Sachs or Deutsche Bank are earning money again, but the wording of the headline by the Financial Times on GS, “The bank we love to hate most,” was not dictated by the mood of just one day.

This is not just due to the conduct of bank representatives since the banking crisis. The information on their actual business also did not improve and the products remain untrusted. Even though the banks may themselves be under the impression that their customers are “satisfied,” they derive this “satisfaction” solely from the fact that their customers have not closed their accounts. This, however, appears to be more for a lack of alternatives than consensus amongst banks’ customers, taking into account the fact that they are getting an interest rate of maybe 3 or 4 percent from their bank for keeping their money at their bank -- in some regions it remains unchanged at less than 2 percent -- while the banks’ top management are themselves again talking about profits of over the 20 percent mark in the media.

In an interview Oct. 8, 2010, the former soccer player Eric Cantona in passing remarked that “3 million protesters on the streets means nothing, but if these 3 million people would withdraw their money from the banks – that type of action would have some consequences.” The interview was published in the context of the riots in France. Belgian screenwriter Géraldine Feuillien, and a 24 year old actor, Yann Sarfati, then launched the campaign “Bankrun 2010” (www.bankrun.com) as well as the Facebook page “Stop Banque,” through which, on Dec. 7, 2010, they called for the public to withdraw their money from the banks. 33,000 French nationals publicly supported this campaign within 4 weeks. On the day itself, of course, little happened because the initiators had neglected to offer an alternative. This example, however, illustrates the explosive mood amongst the banks’ customers.

Reporting on the products of banks – and partly also of insurance companies – has in any case not stopped since the Lehman collapse. In principle, not one week passes without warnings against the “life insurance” product. Although these voices had come to be more vociferous in the ’90s, the intensity with which one of the cornerstones of people’s contact with the financial world was being questioned took on a new quality in 2010. All the more so as this product, contrary to the purchase of a car or a computer, is solely based on a customer’s trust in the credibility of the offerer: Year after year, customers keep on giving their money to a partner without getting something in return in order to hopefully receive more in total after some decades. Telling customers month after month in large letters (except by insurance companies and the banks who sell their products) that this, in principle, is not a good product, does not promote trust. In particular not in a context where people are now also being confronted with the term “toxic” in relation to products from the banking sector, a term which they only know from their experiences with environmental disasters. Another illustrates the connection in which the word “toxic” appears together with bank products in the Financial Times, Wall Street Journal and Barrons. Even though the intensity diminished during 2010, it remains striking that, even in 2011, the elite of the financial media used the term more frequently in connection with products in the financial industry than with products in the chemical, food or pharmaceutical industries.

Just as the media reporting on banks in general reflected, for instance, on the brand value of the various institutions, so the impact of a disastrous media reputation on their products was tangible: The flight to other assets such as gold or silver drove their prices to new record highs in 2010. Regional institutions experienced growth rates never seen before. Banks such as the GSL Bank doubled the money entrusted to them in a short time solely because they gave their customers the assurance that they would not act like Deutsche Bank or the representatives of Wall Street.

At the same time, complaints against individual bank representatives increased in both America and Europe: People were no longer prepared to simply return to business as usual and write off their losses while reading on a daily basis that bank representatives were again paying themselves bonuses.

And, together with the banks, another industry was coming under close scrutiny – the auditors. Their hopes for better conduct toward the public did not pay off – what had already been indicated in Trust Meltdown I became ever clearer in 2010: Whether PWC or Ernst & Young, their media reputation dropped dramatically in the past 12 months.

For this reason, Trust Meltdown II, after continuing the trend data on reputation, turns its focus to answering the question as to what extent the financial world used the year 2010 in order to implement the improvements required since the ’70s in respect of accounting as well as transparency. But even here the potential of all the participants remains virtually untapped: Chapter 2 shows that although the one-reporting initiative was able to make clear progress (behind this is an attempt to numerically record more than just material values on the balance sheet), the requirements for annual and quarterly reports are still far removed from reflecting at least 50 percent of the value of a company.

As long as nothing changes in respect to this fundamental wrong, banks will continue to make their decisions based on only slightly relevant data, and auditors will (not) audit their profitability, even though relevant criteria such as the duration and quality of customer contracts, the relevance of new products and the quality of employees, etc., are absent. And yet, these are the value drivers – not the number of company cars, the 30 percent paid off computer or the interest expense for loans of the 75th subsidiary. This is approximately equivalent to a patient whom a doctor diagnoses as being healthy or as having cancer based solely on measuring his blood pressure and listening to his chest. Everyone would change his doctor – but which bank and which auditor can companies turn to to have the full value of their activities audited if they themselves do not have the know-how or the willingness to record the overall values?

Trust Meltdown II highlights the trends and offers solutions on how to regain trust, starting with no longer hiding from the media and working to improve accounting standards. Without transparency, the industry’s license to operate is at risk.

By Roland Schatz  | January 25, 2011; 4:47 PM ET
Categories:  Roland Schatz  
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