Thought Piece

It is not the financial loss which hurts, it is the betrayal.

That is why fraud has the potential to chill the blood. We assume that most people are reasonably honest — it is the only way to live out all aspects of our lives, including our commercial relationships. When our assumptions— that we could trust that business partner — are smashed, our normal expectations are subverted and we start to suspect everyone and everything, including our own judgement.

That is why the LIBOR scandal was so shocking. It is a decade ago - during the global financial crisis- that the alarm was raised that banks were deliberately submitting dishonestly low interbank rates. This was not some technicality, this was a global benchmark for interest rates on everything from credit cards to trillions of dollars in financial derivatives. LIBOR was an institution, part of the very fabric of the global market system. If you could not trust LIBOR then what was left to trust? Gold, the bond market, the foreign exchange market- all have been subject to claims that they have been manipulated at some time and in some way.

But perhaps personal betrayal is more painful than institutions letting us down. Corrupt bankers — helped by a so-called turnaround consultancy — deliberately loaded companies with unmanageable debt before taking control and stripping the assets, in a scheme that the judge in the court case said 'ripped apart' the victims. Strong words but hardly an exaggeration in trying to sum the damage that had been done not only to businesses but also to lives.

Banks are not charities. But they do calculate the lifetime value of the customer and they understand the reputational risk to themselves of the slash and burn exercises they are sometimes accused of.

That brings us to the role of the banks, so often the largest creditor and certainly the one with the most intimate knowledge of how a company is faring. We all love a stereotype and the heartless, faceless bank pulling the plug on sound businesses over a minor blip sits deep in the business consciousness. But not all banks fit this caricature. "We want to work with management of a business facing difficulties to help identify the issues and provide solutions to get them back on track," says a senior manager with a leading retail bank. "We can make the most impact when the problems are identified early. We are keen for management to be open with us."

Banks are not charities. But they do calculate the lifetime value of the customer and they understand the reputational risk to themselves of the slash and burn exercises they are sometimes accused of. Most solutions to business difficulties involve access to more funds and/or different products (hedging, leasing, factoring) and that all adds up to continued and profitable involvement for the bank.

A Repositioning Turnaround may mean divestment of a troublesome subsidiary. It may mean embarking on (yet another) cost-cutting exercise, including turning away revenue opportunities if they are not of a sufficiently high margin. It most certainly involves a first step of getting an impartial and pragmatic overview of what the problem actually is, from Turnaround Professionals who also know the kind of language with which to talk to banks. The moment you take this kind of decisive action, you're likely to discover that there's no crisis, no drama, only urgent action that must start now.

Peter Charles 2010