Build Trust By Staying Steady In Rocky Times

I just got off the phone with a bank that I work with on a number of companies we have an investment in.  They are in the category of banks that aren’t really impacted (at least not yet) by the current incarnation of the credit crisis because of where in the banking layer they play.

One of the things that came up was how I feel the macroeconomic issues impact things with certain companies.  I told them I have no real clue and am paying attention to sales trends, but that I’m not getting worked up about it.  As I saw the Q3 performance numbers roll in for our portfolio companies they looked how I generally expected them to; some of our companies blew away their numbers on the upside (hard to do in Q3 since it’s later in the yearly budget cycle), some missed, and some came in around where we expected them to.  There weren’t any huge surprises either direction since we are deeply involved in our companies and tend to have significant granularity on how they are doing. 

In our call, I told the folks I was talking to that I think they are generally, along with several of their peers, in a great position in the current environment.  When they asked me what I thought they should do differently, or what they should be careful not to do, I strongly suggested that they behave in the way they always have to their clients and VC partners – stay steady, transparent, clear, and direct. 

I have a deep philosophy that the time to build trust is during turbulent, confusing, and uncertain times (aka "now").  If the bank stays steady and rational, they’ll earn a lot of trust and goodwill from me, their clients, and others that will pay dividends for a long time.  If they start doing erratic things, like jacking companies around with harsh credit terms just because of fear on everyone’s part (and greed on theirs) they will trample good relationships and destroy long term goodwill.

I lived through this during the dotcom bubble.  There are some VCs and bankers that I’ll never work with again due to their totally irrational behavior when the chips were down.  Consistency of behavior and clarity of thought and purpose matters a lot all the time, but especially when things are confusing.

As we got off the phone, we all hypothesized that the root driver of all the noise (not the root cause of the problem, but the amplification of everything) is tightly coupled to the current US election cycle.  I’ve heard this hypothesis from others and wonder how much truth there is to it.  I’m not a political historian so I don’t have a long term view on this, but I sure do remember the "It’s the economy, stupid" for Bush vs. Clinton.  Hmmm.

  • Dave

    The amplification of the credit situation is clearly coming from a lack of trust – in the system, in debtors, in the government. At least one part of this comes from the progressive tendency for most people to spin or lie about everything. Politicians are the worst about this, to be sure, but business people do it as well. Ask a CEO how business is going and the answer is invariably “great!” Ask a VC how his portfolio is doing and the answer is always “great!” So when we hear a bank say “Our capital base is strong and our depositors are secure,” we don't believe a word of it! And of course it's completely meaningless when politicians say something like this, since (a) they lie all the time and (b) we know that they don't actually understand the situation anyway.

    So I agree completely with your point – trust is developed over a long time through consistent behavior. Those who behave in a trustworthy fashion in bad times are likely to remain reliable in good times. I think I would add that “trustworthy” in good times as well as bad means being open about what's not going well (as well as what is – i.e., being objective).

  • http://www.derekscruggs.com Derek Scruggs

    I think the election has a small role at best. $700 billion is a jaw-dropping amount of money, and Bush likely wouldn't do it if he could avoid it what with the political consequences. Also, it's not every day that Goldman Sachs elects to become a bank holding company.

    • http://www.marktomarket.typepad.com Mark

      I agree that the election plays little role, although it does have an impact. For everyone who says the problem is the result of W, you could also say it is the fault of a Dem Congress or the markets responding to the growing likelihood of an Obama presidency. I don't really think any of this plays a major role (<5%) but the point is that it goes both ways so people attempting to politicize the situation will get us nowhere. I disagree on the $700b amount. The Fed has pumped twice that amount into the markets as a lender of last resort over the past 3 weeks. And, it's a fraction of what we've lost in the declines over the past week. I wouldn't say jaw-dropping … tip of the iceberg is more like it. On the subject of the banks' role, the key is not just credibility alone (indeed, they are dealing with major credibility and time inconsistency challenges). They must also more effectively communicate with the public, shareholders and the markets. Likewise, the Fed must do a better job of influencing expectations. The only power left in the Fed's bag of tricks has a dollar sign in front of it and that shouldn't be the case.

      • http://www.derekscruggs.com Derek Scruggs

        Yes but the Fed's money is fiat currency, not taxpayer money. $700 billion is easily the single largest peacetime government expenditure in history. Though if it works, we'll likely get some of that back as with the Resolution Trust Corp in the late 80s and 90s.

  • Gigs

    I think the main influence of the election was Bernamke attempting to delay the bubble bursting until after November with his super-agressive monetarist policies. Any sane person would have let the rates rise a long time ago, instead of attempting to delay the inevitable with more money, more credit, and lower interest.

    Even still, they are cutting rates dumping more money in, deepening the coming hyperinflation crisis.

  • http://khontent.com Kevin

    Brad – As an Investment Analyst, it's been a challenge watching this market unfold with each new day. I tend to agree that the amplification of the noise is tied up with the election. I'm hopefully optimistic that we'll move past this madness early next year.

    I assume that the bank you're referring to is Silicon Valley Bank. If it is, I think they're a great company that is well managed and transparent. Their CEO, Ken Wilcox was quoted in a NY Times article last week about the credit crisis and VC funding. Here's a link if you missed it – http://tinyurl.com/3h4rzw

  • Steve Bergstein

    I think that there's a worthwhile general point in this post: you earn the most trust and respect when you demonstrate trustworthiness and respectable behavior in times of crisis. This would seem to be akin to how the best presidents are war-time presidents (e.g. Lincoln and Washington). Some of the worst have been war-time presidents though . . .

    Frankly, the people who earn the best reputation for customer service are only those who demonstrate good service after something goes wrong. If everything goes right to begin with, they don't even have the opportunity to demonstrate they'll go above and beyond when necessary.

    Similarly, not everyone gets the opportunity to demonstrate how they'll behave in a crisis. One wonders whether some manufacture crises so that they can be seen to respond well within them.

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  • Dave

    The amplification of the credit situation is clearly coming from a lack of trust – in the system, in debtors, in the government. At least one part of this comes from the progressive tendency for most people to spin or lie about everything. Politicians are the worst about this, to be sure, but business people do it as well. Ask a CEO how business is going and the answer is invariably "great!" Ask a VC how his portfolio is doing and the answer is always "great!" So when we hear a bank say "Our capital base is strong and our depositors are secure," we don't believe a word of it! And of course it's completely meaningless when politicians say something like this, since (a) they lie all the time and (b) we know that they don't actually understand the situation anyway.

    So I agree completely with your point – trust is developed over a long time through consistent behavior. Those who behave in a trustworthy fashion in bad times are likely to remain reliable in good times. I think I would add that "trustworthy" in good times as well as bad means being open about what's not going well (as well as what is – i.e., being objective).

  • Gigs

    I think the main influence of the election was Bernamke attempting to delay the bubble bursting until after November with his super-agressive monetarist policies. Any sane person would have let the rates rise a long time ago, instead of attempting to delay the inevitable with more money, more credit, and lower interest.

    Even still, they are cutting rates dumping more money in, deepening the coming hyperinflation crisis.

  • Kevin

    Brad – As an Investment Analyst, it's been a challenge watching this market unfold with each new day. I tend to agree that the amplification of the noise is tied up with the election. I'm hopefully optimistic that we'll move past this madness early next year.

    I assume that the bank you're referring to is Silicon Valley Bank. If it is, I think they're a great company that is well managed and transparent. Their CEO, Ken Wilcox was quoted in a NY Times article last week about the credit crisis and VC funding. Here's a link if you missed it – http://tinyurl.com/3h4rzw

  • http://intensedebate.com/people/derek_scrug1878 derek_scrug1878

    I think the election has a small role at best. $700 billion is a jaw-dropping amount of money, and Bush likely wouldn't do it if he could avoid it what with the political consequences. Also, it's not every day that Goldman Sachs elects to become a bank holding company.

  • Mark

    I agree that the election plays little role, although it does have an impact. For everyone who says the problem is the result of W, you could also say it is the fault of a Dem Congress or the markets responding to the growing likelihood of an Obama presidency. I don't really think any of this plays a major role (<5%) but the point is that it goes both ways so people attempting to politicize the situation will get us nowhere. I disagree on the $700b amount. The Fed has pumped twice that amount into the markets as a lender of last resort over the past 3 weeks. And, it's a fraction of what we've lost in the declines over the past week. I wouldn't say jaw-dropping … tip of the iceberg is more like it. On the subject of the banks' role, the key is not just credibility alone (indeed, they are dealing with major credibility and time inconsistency challenges). They must also more effectively communicate with the public, shareholders and the markets. Likewise, the Fed must do a better job of influencing expectations. The only power left in the Fed's bag of tricks has a dollar sign in front of it and that shouldn't be the case.

  • http://intensedebate.com/people/derek_scrug1878 derek_scrug1878

    Yes but the Fed's money is fiat currency, not taxpayer money. $700 billion is easily the single largest peacetime government expenditure in history. Though if it works, we'll likely get some of that back as with the Resolution Trust Corp in the late 80s and 90s.

  • http://intensedebate.com/people/steve_bergs2127 steve_bergs2127

    I think that there's a worthwhile general point in this post: you earn the most trust and respect when you demonstrate trustworthiness and respectable behavior in times of crisis. This would seem to be akin to how the best presidents are war-time presidents (e.g. Lincoln and Washington). Some of the worst have been war-time presidents though . . .

    Frankly, the people who earn the best reputation for customer service are only those who demonstrate good service after something goes wrong. If everything goes right to begin with, they don't even have the opportunity to demonstrate they'll go above and beyond when necessary.

    Similarly, not everyone gets the opportunity to demonstrate how they'll behave in a crisis. One wonders whether some manufacture crises so that they can be seen to respond well within them.