Prime Angst

INTELLIGENT DIALOGUE:

PRIME ANGST MAY 2008

INTRODUCTION

THERE’S NO QUESTION that money is a major worry of the moment. Individuals are worried about prices going up and jobs disappearing. Businesses are worried about prices going up and the economic cycle going down. Banks and financial institutions are worried about the big losses they’ve taken. And governments are worried about their financial systems holding up under the strain. In short, we know for sure that the world is in the midst of an international economic crisis. But there are plenty of things we don’t know yet. It may be that this is just another phase in the up-down, yin-yang cycle that all economies go through. But it

could be a completely new combination of factors that will change the financial landscape beyond recognition. Have globalization and high-speed interactive technology made economies more robust and quicker to bounce back? Or have they made economies more vulnerable? Financial authorities such as the U.S. Federal Reserve have intervened to stave off a meltdown. Have they done enough? Do they have the tools and sufficient cash to shore up the system and restore confidence? Can they control events, or will events end up controlling them? We know that sentiment (business and consumer confidence) is an

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important factor in whether economies feel bullish or bearish. But we also know that financial fundamentals are important. So maybe current sentiment is a return to sober realism after a long spell of partying. Or is it exaggerating the problem and becoming a selffulfilling doomsday prophesy? We don’t claim to have any definitive answers to the questions asked here and throughout this white paper. We are not specialists in economics or finance. Porter Novelli’s expertise is in understanding the questions that matter to our clients and their stakeholders; it’s in harnessing these questions to foster the dialogues that build brands and their business.

WHERE HAS ALL THE MONEY GONE? - - >

ANYONE WITH AN E-MAIL account is all too familiar with spam announcing, “Refinance now!” and “Easy credit at low rates.” But anyone paying attention has probably noticed that such messages have become rarer over recent months. The reason is simple: The waves of cheap credit flooding the financial system have retreated. And they’ve left a tsunami’s worth of damage in their wake. By now, we’ve all read countless articles about the “Subprime Bust,” the “Credit Squeeze” and the “Financial Crisis.” But while the first victims were borrowers who took out risky subprime mortgages, the casualties now include a far greater swath of the population. The U.S. subprime crisis has spawned a related, and scarier, prime crisis, in which people with traditional 30year-fixed mortgages and even people who own their homes outright are feeling the pinch. Even among those who can still pay their bills, economic anxiety is epidemic. Things may get worse before they get better, and there’s no predicting what all the effects will be. If parents can no longer borrow against the equity in their homes and students can’t get education loans, then college enrollments may fall and schools may have to lay staff off. Oncegentrifying areas with many repossessed

homes could revert into desolate, dangerous places. Firms that are just hanging on may go under as credit lines and consumer demand dry up. This white paper aims to provide a broad view of the factors that precipitated the crisis and raise five big questions, as well as many secondary questions, about some of its most resonant effects.

WHAT HAPPEN ED? IN A NUTSHELL, we stopped being thrifty. In the early 2000s, seduced by easy credit, low interest rates and a rapidly expanding real estate bubble (which created the illusion of wealth), home buyers racked up enormous debt by taking out the biggest mortgages they could qualify for. Eager to capitalize on this trend, lending institutions began marketing unorthodox loan products—adjustable-rate mortgages whose rates would adjust rapidly upward, interest-only mortgages that would leave homeowners with no equity—and offering them to buyers with poor credit who wouldn’t have qualified for a mortgage at all just a few years earlier. Predicated on the belief that the economy would continue growing and housing prices would keep going up, these were big risks—and a radical departure from the way the mortgage industry used

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to work. Traditionally, lending capacity was limited by two factors: finding borrowers who could be trusted to repay what they borrowed, and adhering to a regulatory safeguard that ensured financial institutions have enough capital to cover the risk of borrowers defaulting. By international agreement, their capital had to be at least 8% of their assets. But as the U.S. subprime market gained momentum, financial institutions made loans at higher rates—but often with artificially low “teaser” rates that would jump up after a few years—to people with poor credit, then bundled these loans into debt obligations called mortgage-backed securities (MBSs), which they sold to investment banks. Banks, in turn, packaged MBSs with higher-rated investment bonds into collateralized debt obligations (CDOs) and sold them to hedge funds. And hedge funds borrowed money using the CDOs as collateral. This created huge profits as long as real estate prices rose. But when subprime borrowers started defaulting on their loans, prices fell. So did the value of CDOs, and lending institutions got worried and started calling in their loans. Suddenly, nobody wanted to buy CDOs, and balance sheet (capital) valuations plummeted. The ramifications have been pronounced, fromWall Street on down to Main Street. ID

BIG QUESTION

1

What happens when borrowers can’t repay their loans, and how does this affect everyone else?

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OWNING A HOME has long been a cornerstone of the American Dream, and for Britons, it’s also seen as an essential expression of personal autonomy—in fact, former prime minister Margaret Thatcher made property ownership a central tenet of her political philosophy. Now, even in nominally Communist China, the rising middle class is keen to own their homes.

Financial institutions were all too happy to help. Home buyers could qualify for 90% and even 100% financing, enabling them to buy homes with nothing down. Refinancing was as easy as pie. Banks loaned tens of thousands of dollars at a time with property as collateral. They were no longer funding sound property investments but inflating a bubble of asset speculation.

In recent decades, throughout the developed world and beyond, buying a home has come to be seen as a smart investment. The more demand there was, the higher prices rose and the “richer” homeowners felt—even if that wealth was illusory. As long as the real estate market remained fizzy, consumers could count on selling easily and at a handsome profit, or else borrowing cheaply (i.e., refinancing) against the increased value of their property.

It’s an immutable law of economics that bubbles burst. From the Dutch tulip mania of the 1630s to the dot-com boom of the late 1990s, the good times don’t last. And sure enough, this property bubble is bursting far and wide, especially where it’s blown up the biggest and fastest, the United States, the United Kingdom, Spain, the Netherlands and Ireland. What makes this bubble distinctive is just how many consumers are involved and how much

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W HEN ONE HOMEOWNER HAS TROUBLE SELLING, IT’S AN INDIVIDUAL PROBLEM. WHEN MANY HOMEOWNERS (OR BANKS) ARE FORCED TO SELL, IT BECOMES A SOCIAL PROBLEM.

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--> they all counted on their property to fund current and future plans.

What happens when borrowers can’t pay? THE TERMS VARY from country to country, but in general, when borrowers miss three consecutive payments, the lender has to assign the whole debt to its Tier 1 capital. This amounts to a big loss. If the lender is leveraged at 7:1, a $70,000 debt default will cost it almost half a million dollars in lost lending capacity. Lenders may force the sale of the assets (i.e., foreclose) to recover the debt. Delinquent homeowners get kicked out. In the U.S., some struggling borrowers don’t even wait for the hassle of repossession; they move out, put the keys in an envelope, drop them off at the lender’s office (“tinkle mail”) and disappear. Nearly 3 million U.S. homeowners (6.3%) were behind on their payments in the fourth quarter of 2007, and more than a million more (a record 2% of loans) were in foreclosure. In some areas, the statistics are even worse: Around 4.9% of households in the Detroit metro area were in some stage of foreclosure during 2007; 4.8% in Stockton, California; and 4.2% in the Las Vegas metro area. Whole neighborhoods that were fueled by subprime borrowing are now being hollowed out by defaults and repossessions. Even in communities where the numbers aren’t this high, the repercussions are powerful. With banks trying to sell off the houses they’ve repossessed and overmortgaged homeowners trying to sell rather than default on their loans, the market has become flooded. In this uncertain climate, would-be buyers are skittish about taking on debt, and lending institutions have tightened up their rules. Demand has gone down at the same time supply has gone way up, and home prices are tumbling.

What happens to everyone else? WHEN ONE HOMEOWNER has trouble selling, it’s an individual problem. When many homeowners (or banks) are forced to sell, it becomes a social problem. If towns

see a lot of owners sell, their property-tax revenues decline and they have to cut services. If owners go back to being renters, they’re less likely to feel they have a stake in maintaining their neighborhood. If people leave town altogether, local businesses suffer. Streets with vacant homes can quickly become dangerous. On an individual level, the mortgage mess doesn’t just affect the subprime borrowers who may have been greedy or ill-advised. It also hits a broad swath of prime borrowers who went by the book. A home that was purchased for $300,000 two years ago may have fallen by 15% in value, making it worth $255,000 today; an owner who put 10% down now has negative equity—a mortgage bigger than the value of the property. If he needs to move for work or for financial reasons, and if he manages to find a buyer at $255,000, he’ll have to say good-bye to the $30,000 down payment and come up with another $15,000 to repay the mortgage. No wonder antsy homeowners are addicted to websites such as Zillow.com, where they can track the price of their homes on a daily basis. People facing foreclosure have no choice. Others will have to decide between selling and taking the loss, or staying put and risking a further fall in value. This may not be such a big deal in countries such as France, Germany and Italy, where people typically buy homes with the intention of living in them for the rest of their lives. It’s likely to come as a big shock to the more fidgety and flexible markets of the U.S. and UK, where consumers expect to buy and sell several times in their life, trading up as their economic status improves.

Are people without mortgages safe? EVEN PEOPLE WHO RENT their homes or own them outright are confronted by the effects of the prime crisis. As people default on loans and the financial sector stumbles, shock waves ripple through the economy. In order to cut costs, companies are doling out pink slips at an accelerating pace. In the fourth quarter of 2007, there were 1,619 mass layoff events—defined as more than 50 employees of one company filing unemployment claims in a five-week period—that affected 265,454 workers,

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according to the U.S. Department of Labor’s Bureau of Labor Statistics. There were almost as many in March 2008 alone: 1,571 mass layoffs involving 157,156 people—the highest numbers for the month of March since 2003. And that doesn’t take into account the hundreds of thousands of employees who were let go when their companies downsized less drastically. In March 2008, the national unemployment rate hit 5.1%, up from 4.8% in February and from 4.4% a year earlier. ID

SMART TALK

CNN HOST LARRY KING: “If you’re losing your house or your job, you’re in a recession.”

GERRY WILLIS, CNN PERSONAL FINANCE EDITOR: “Two million Americans have faced foreclosure in the last year, and more are expected to.”

KING: “They’re in a recession.”

WILLIS: “They’re in a recession, and they’re feeling the pain. And if you live near those people, your home value is going down, too. This is a-you know, a domino effect that’s going on across the country.”

-Larry King Live, January 17, 2008

BIG QUESTION

2

SMART TALK

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WILLIAM SCHNEIDER, CNN 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.” -CNN’s Your Money, March 23, 2008

Is today’s crisis a prelude to

even bigger disasters in other sectors, such as education and retirement? S TUDENTS ARE “TAKING A YEAR OFF” BECAUSE THEIR FAMILIES CAN’T BORROW AGAINST THEIR HOME EQUITY FOR TUITION. THE IVY LEAGUE WILL LIKELY WEATHER THIS STORM, BUT THIRD-TIER COLLEGES MAY SUFFER BECAUSE THEIR ENROLLMENTS ARE DOWN.

THERE ARE TWO POLES of opinion on the prime crisis. Some economists see it as a “hundred-year flood”—a rare and devastating event that will completely change everything. Others view it as just another trough in the cycle of ups and downs that all markets go through; some people get lucky on the ups, and others get unlucky on the downs. At the very least, it looks like this is going to be a deep trough. Globalization means that the effects of the bust are felt far beyond its epicenter in the U.S. subprime market. Some of the world’s biggest names in banking, such as Switzerland’s UBS, have taken a big hit. The entire economy of Iceland, which depended heavily on international investors, is in such dire straits that New Yorker financial columnist James

Surowiecki recently wrote that it could “become the ‘first national casualty’ of the ongoing credit crunch.” On a personal level, all around the world, some of the most profound effects will be felt at the beginning and end of adulthood.

What happens when funding for school fees dries up? RISING HOME EQUITY and easy credit have enabled many families to stretch a little bit further with education. After all, families with middle-class aspirations have always looked to education as the way to a brighter future. And if that’s not worth taking on a second mortgage, what is? As

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--> prosperity has grown in developed countries, this has pushed up the demand for education as well as the costs. In the UK, for example, where public (state) education has been in turmoil for decades, parents have looked to private schools as a way of giving their children the best possible start in life. One consequence has been that the fees for UK private schools have risen twice as fast as retail prices.

cash into their checking accounts to stay afloat if their job disappears. For starters, experts say, they should learn to cook, get

a library card and, perhaps, a skateboard to fill the hours they used to spend at the mall.”

SMART TALK

In the U.S., many homeowners counted on borrowing against the equity in their homes to pay their children’s school or university tuition. But now, as property prices fall, many parents find themselves unable to qualify for that second mortgage. And they can’t count on student loans to cover the gap, because the subprime mess has made lenders wary. Students are “taking a year off” as their families regroup. The Ivy League will likely weather this storm, but third-tier colleges may suffer because their enrollments are down. They may have to lay off staff. In some “college town” cities, where the school is a prime employer, the effects could be felt far beyond the quad.

KIM KIYOSAKI, AUTHOR OF

RICH WOMEN: A BOOK ON INVESTING : “I think there is going to be a recession coming. I don’t think the government has any way to bail us out of this. I really think it’s a perfect storm of oil prices-energy pricesgoing up, the whole

How will the prime crisis affect millennials? WHETHER THEY’RE IN school, delaying their enrollment or already graduated and working in an entry-level job, Americans and Europeans in their late teens and early 20s are affected differently than their older counterparts. They grew up during the greatest period of wealth creation in modern history. This is the first real economic downturn they’ve seen—and it’s arriving just when they expected to be coming into real spending power and independence. Their inflation-adjusted earnings are down, their job security is in doubt, and their student loan debt is high. The economy is very much on their minds: In an October 2007 Pew Research Center poll, 80% of voters ages 18 to 29 cited the economy as a “very important” concern, versus 61% who named the environment as a major issue. As a blogger on mlive.com put it, “Now is indeed the time for millennials to pump

subprime mess, the weakening dollar, unemployment going up, the retail sales are dropping. . . . And it’s a global problem, not just a U.S. problem.”

-Larry King Live, January 17, 2008

And whether because they’re delaying college or because they’ve “boomeranged” back home after graduating and having trouble paying the bills, more and more 20-somethings are living with their parents.

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What happens to older people who were counting on their property investment? RECENT DECADES HAVE been a turbulent time for pensions. Employees and former employees of big corporations can no longer be confident that the company will still be around to pay out their company pensions. Pension funds have underperformed or gone bust. Few people with individual retirement accounts managed to save enough to cover the gap— especially as people are living many more years after retirement and often needing expensive medical care in the process. For many people, cashing in the equity in their home looked like the safest bet for their retirement years. However, the credit crisis and falling real estate prices will make that difficult if not impossible for older homeowners who had been hoping to withdraw equity from their home (known to the Dutch as “eating your house up”). Others who had counted on downsizing—selling their current home, buying a cheaper one and living off the difference— may find that plan won’t work anymore. Furthermore, in the United States, older people in particular were victims of predatory lending—even “reverse mortgages” that actually increased as time went by. Some retirees are finding themselves not only without home equity but even without a home. The American nuclear family is exploding as members of this generation move back in with their adult children (and those children’s youngadult children, too). Global demographics make this concern especially acute. In most developed countries, the population balance is tipping toward the gray end of the scale, with median ages of 36.7 in the United States, 39.9 in the UK, 39.2 in France, 43.4 in Germany and 43.8 in Japan. The big issue for countries with aging populations is balancing the books: As more people retire and need more health care, and fewer people enter the workforce and generate wealth, where will the money come from? ID

BIG QUESTION

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Does the prime crisis have health implications? SMART TALK ANDREW KOHUT, PRESIDENT, PEW RESEARCH CENTER: “It is not a pretty story. Every monthJanuary, 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.”

--> IN THE U.S., at least, it looks likely that it will. The country is undergoing a health care crisis in which 47 million Americans are uninsured and their ranks are growing. Time magazine recently reported that “As 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 article cites a study conducted at Cincinnati Children’s Hospital Medical Center that found that “kids who did not have continuous health insurance were 14 times less likely to have regular visits with a pediatrician than those

-The NewsHour with Jim Lehrer, March 27, 2008

who did. They were also three times less likely to fill prescriptions for necessary medication. ‘These unmet medical needs directly put a child’s health at risk,’” said a researcher at Cincinnati Children’s. The crisis affects adults, too: “Leading health researchers at the Urban Institute on April 29 warned that each percentagepoint rise in unemployment would result in an additional 1.1 million people losing health insurance,” the same Time article reported. Even people who still have jobs and employer-funded health plans are struggling: Premiums have shot upward at a rate ten times greater than incomes.

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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.”

Forced to choose between buying insurance and making mortgage payments, a growing number of people is opting out of health plans. Whatever the reason, families are forgoing medical attention. Time reported that in a poll conducted by the Kaiser Family Foundation in April, 29% of respondents said they’d postponed necessary care, 24% had put off a test or treatment and 23% had chosen not to fill a prescription. Furthermore, research has shown that unemployment is itself detrimental to health. According to a review published in

the journal Public Health, unemployed men and their families had an increased incidence of mortality, particularly from suicide and lung cancer; they were more likely to use general practitioner and hospital services and receive more prescribed medicines; and their use of tobacco and alcohol increased after the onset of unemployment. The mental health effects will likely be even worse. The prime crisis has hit the U.S. at a time when the nation was already in a pretty glum frame of mind, thanks to 9/11, the war in Iraq and alarming reports about climate change. It goes without saying that mortgage angst,

worries about job security and anxiety about the financial future have not cheered anyone up. Recent research bears that out. A study published in the journal Development Psychology found that “a reduction in disposable family income constitutes a risk for child mental health through increased economic pressure and negative changes in parental mental health, marital interaction, and parenting quality.” MSNBC.com reported that “divorces and reports of abuse are rising as families burdened by impending foreclosure take their stress out on one another.” ID

SMART TALK

SCOTT GURVEY, NIGHTLY

DAVID WYSS, CHIEF

DEAN MAKI, CHIEF U.S.

BUSINESS REPORT

ECONOMIST, STANDARD &

ECONOMIST, BARCLAYS

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the Conference Board.”

softer labor market.”

-Nightly Business Report, March 28, 2008

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BIG QUESTION

4

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If banking and finance are to blame, who will punish them and how?

SMART TALK

LYLE GRAMLEY, FORMER FEDERAL RESERVE GOVERNOR: “I don’t think any of us have any

TO PUT IT MILDLY, it’s unlikely that the banking and finance industries will emerge from this turbulent period with enhanced reputations. Executives who routinely enjoy multimillion-dollar remuneration for their expertise and risk-taking genius have presided over huge losses and potentially huger losses to come. Those losses are staggering—more like the GDP of some developing countries than a big bump in corporate accounts. The biggest so far (as of April 16, 2008) has been Swiss-based UBS, with $37.4 billion of write-downs, prompting the departure of chairman Marcel Ospel. His successor, Peter Kurer, told Financial Times,

“We can’t pretend that there has been no reputational damage. Experience says it goes away after two or three years.” Merrill Lynch CEO Stanley O’Neal bowed out in November 2007, and his successor, John A. Thain, is currently looking at $22 billion of write-downs. The roll-call of big write-downs continues with Citigroup ($21.1 billion), HSBC ($17.2 billion), Morgan Stanley ($9.4 billion), Deutsche Bank ($7.1 billion), Bank of America ($5.3 billion), Bear Stearns ($3.2 billion), JP Morgan Chase ($3.2 billion), BayernLB ($3.2 billion), Barclays ($2.6 billion), IKB ($2.6 billion), Royal Bank of Scotland ($2.6 billion) and Credit Suisse ($2 billion).

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cookie cutter solutions to the problem. But we need to begin thinking outside the box, because what we’re experiencing now in financial markets is unlike anything I have seen in more than 50 years of looking at the economy.”

-CNN Newsroom, March 19, 2008

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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. For ordinary consumers, the dented reputations of high-rolling finance houses may be of little lasting interest, even though taxpayers’ money is being used to rescue some from their own lack of judgment. In fact, “rogue trader” Jerome Kerviel has become something of a folk hero in France, where he is being blamed for Societe Generale SA’s record 4.9 billion-euro ($7.7 billion) trading loss. But for regulators, lawyers and financial authorities, it’s going to be different matter.

SMART TALK

Will it mean a return to stricter regulation for the banking industry? FOR THREE DECADES, the finance industry enjoyed increasingly loose regulation; banks and mortgage lenders have been allowed into each other’s territories, and geographical barriers to trade and ownership have been dismantled. And they engaged in lending practices that the U.S. Department of Housing and Urban Development has identified as predatory, including:

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“Loan flipping,” or refinancing borrowers’ loans repeatedly in a short period, with high fees each time

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Excessive fees and “packing” that far exceeded what would be expected or justified on economic grounds and “packed” into the loan amount without the borrower’s understanding

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Lending without regard to the borrower’s ability to repay, including elderly people living on fixed incomes with monthly payments that equaled or exceeded their monthly incomes

ERIK HURST, PROFESSOR, UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS: “U.S. consumers today are scared. The uncertainty in the economy is spilling over to the consumers.” FASHION CONSULTANT AMY SALINGER: “I’ve noticed people have adjusted

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their spending in terms of how they’re spending their money. They’re not as frivolous as they were.” HURST: “There’s more uncertainty out there. More uncertainty, less spending. ‘I have to save more because I might be the one who loses my job tomorrow.’” -NBC Nightly News, March 20, 2008

Outright fraud and abuse, with deceptive or high-pressure sales tactics, often against certain groups—the elderly, minorities and individuals with lower incomes and less education.

Loose regulation allowed the industry to make a lot of money through the use of complex new structures (such as CDOs) and to disguise risk through creative accounting. Going forward, it seems inevitable that governments will get together to tighten regulation. On the other hand, as the Economist commented recently, “The notion that the world can just regulate its way out of crises is…an illusion. Rather, crisis is the price of innovation, so governments face a choice. They can embrace new financial ideas by keeping

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SMART TALK MICHAEL KINSLEY, TIME MAGAZINE COLUMNIST: “Increasingly, the U.S. government is borrowing [money] abroad. It’s borrowing it from other governments. You know, for us to be in debt to the Chinese is a very sad development-not that there’s anything wrong with the Chinese, but, you know, the average income of a Chinese citizen compared to the average income of an American citizen-the idea that they are financing our lifestyle, it’s a little sad.” PBS HOST CHARLIE ROSE: “We’re borrowing money from them so we can buy their goods.”

-The Charlie Rose Show, March 28, 2008

markets open. Regulation will be light, but there will be busts. The state will sometimes have to clear up and regulation must be about cure as well as prevention. Or governments can aim for safety and opt for dumbed-down financial systems that hobble their economies and deprive their people of the benefits of faster growth. And even then a crisis may strike.” In any event, look for lawyers to get involved, as there’s ample room for classaction lawsuits against predatory lenders. ID

BIG QUESTION

5

Who will benefit from the credit crunch? “I

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THE ECONOMICS-TEXTBOOK reading of the prime crisis is that it’s an example of how markets reallocate capital and resources to those who can use them most efficiently. In human terms, it means boom times for insolvency practitioners. There are buying opportunities for eagle-eyed entrepreneurs with cash to buy repossessed houses and goods at bargain prices. And as weak companies shed staff and contract, well-run companies that operate with spare cash can expect to pick up talented new hires and expand their business.

Which retail sectors can expect to survive and thrive? WHATEVER IS HAPPENING to the economy, people still have to eat. But where they eat changes: Good-bye, restaurants and Whole Foods; hello, home kitchens and discount

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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 stand to do well as consumers look to stretch their reduced budgets. When money is a source of anxiety, a Starbucks latte may seem like irresponsible indulgence whereas a Dunkin’ Donuts coffee feels more like an affordable comfort.

Who has the cash and what will they do with it? JUST AT THE TIME the economies of the U.S. and Western Europe are foundering in the credit crisis, the oil-fueled economies of the Persian Gulf and the trade-fired economies of Asia are flush with spending cash. Fortunately for the West, at least in the near term, they’re willing to invest some of it in Western markets. At the beginning of 2008, the governments of Singapore, Kuwait and South Korea provided a large chunk of a $21 billion investment to prop up Citigroup and Merrill Lynch.

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JOURNALIST TONY JONES: “If it is the worst downturn since the great depression, how can the rest of the world avoid being dragged into the abyss along with the United States?”

ECONOMIST AND AUTHOR JOE STIGLITZ: “Oh, I don’t think it can. Right now you are increasingly hearing stories in Europe that it looks like one business person, the skid marks are on the road. It does look like Europe will be affected. . . . I think that those countries who’ve diversified their markets and are more dependent on China are going to probably weather the storm far better.”

-Lateline (Australia), May 5, 2008

The long-term effects, however, could lead to painful adjustments as the U.S. loses, or at least shares, its economic superpower status. Although the details are complex, the big picture is simple: “I have no doubt that power and ownership of resources are shifting eastward,” explained Roger Martin-Fagg of Henley Management College in the UK. “This raises questions about governance and priorities that need to be thought through carefully. Among other things, the constituent membership of G9 needs to change so that it reflects not only the productive power of countries but also their financial power. The Gulf States wouldn’t even qualify for a G30 on the basis of their economies, but their financial power is huge.” As Emirates Business magazine put it, “Western banks are wilting and American house prices are in free fall; for the UAE, however, a recession in the United States offers considerable opportunity.” The publication went on to say, “Another positive benefit from the wider global economic woes and dollar decline has been to make the UAE an even more attractive destination for foreign capital.… The US may be in trouble following the sub-prime mortgage crisis, but euro-zone economies appear to be in a robust shape, despite dire numbers emanating from the continent’s banks.”

IN CONCLUSION THE PRIME CRISIS raises countless questions—the starting points for a lively and fruitful exchange of Intelligent Dialogue. What really happened? Is anyone to blame, or was it just one of those things? What’s happening now? How much worse will it get before it gets better? How will we know when it’s over? Engaging with any of these questions raises dozens more about what’s coming next for the global economy and individual consumers. No one can offer all the answers, and there’s no such thing as a fail-safe strategy

13 INTELLIGENT DIALOGUE: PRIME ANGST

or no-risk investment. But for those of us trying to make sense of the situation, the smartest strategy will be to cultivate an inquisitive mind, to take nothing for granted and to use these questions and others as the basis for Intelligent Dialogue. With all the angst it’s provoking, we see the prime crisis as an opportunity to sharpen the skills needed for the sort of dialogues that build reputations and relationships. When the stakes are so high, details of tone, manner and intention are crucial. Stakeholders are in a heightened state of alert. Organizations that make light of the crisis and claim to be completely in control risk coming across as glib and insincere; official responses to events such as SARS in China and Hurricane Katrina in the U.S. have made people suspicious of reassuring pronouncements. Organizations that speak of the crisis in apocalyptic, “end of the world as we know it” terms risk rerunning the Y2K scenario and being dismissed as sensationalist scaremongers. Whether the issue is the prime crisis, climate change, health care, GMOs or any of the other big issues that concern people everywhere, the challenge and the opportunity are similar: to earn stakeholders’ trust through dialogue and to use it wisely. In this cynical, media-savvy age, nobody expects organizations not to have vested interests; everybody has an angle, everybody “talks their book.” The imperative for organizations is to talk about issues not just from their own perspective but also with awareness of and respect for other perspectives, including those of implacable critics. The imperative is for organizations to focus on more than their own questions about an issue and to be aware of wider questions that may be troubling immediate stakeholders, or the stakeholders of those stakeholders. Porter Novelli’s imperative is to stay aware of many perspectives on big issues and to bring in wider questions that may impact our clients’ business. ID

The Porter Novelli

INTELLIGENTDIALOGUE Principle

WHAT PORTER NOVELLI UNIQUELY

offers can be

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.