Losing investor cash

17th May 2012

JP Morgan is seen as one of the safest banks in the world. Like HSBC and Standard Chartered, it largely escaped the financial meltdown in 2008. But last week, it admitted losing $2bn on trades designed – irony of ironies – to hedge the bank against risk.

This was not bad luck or that other banking standby, the rogue trader. Instead, it appears to show a lack of risk awareness and a failure of risk management. It seems that the bank was aware of the problem some weeks ago. It kept quiet, presumably hoping it would go away or that the adverse positions would reverse, after all the same strategy might have proved profitable previously – investors never hear about the plays that win. The hoped for good news did not happen so heads rolled.

Good company in corporate blunderland

But JP Morgan is in good company in corporate blunderland. Around 1982,  the newly born London Cycling Campaign, a registered charity, had a bright idea. It would raise funds by selling life memberships for £15 – five times the then annual rate.  Three decades later, there are still some members on the deal – saving over £30 a year. Losses from this – assuming membership would have been continual – is in the high tens of thousands.  The implications were not thought through – especially as many who took the deal were in their twenties at the time.

But the bike group is in good company. Henderson Global Investors has uncovered something  very similar in the airline world, where customers win and shareholders lose.  American Airlines (AA) started selling lifetime airline passes in a bid to raise cash in the early 1980s. The passes for first-class travel were priced at $250,000 and a companion ticket could be had for another $150,000. American Airlines was happily selling the passes, albeit at a higher price, well into the 1990s.

In less than a month this year, lifetime passholder, Mike Joyce made 16 ‘free' first class round trips to London, effectively making back a sizeable amount of what it cost him for the ticket in just one year. And to rub salt into the airline's wounds, his trips earned frequent flyer points.

The public is smarter than the company

Former American Airlines chief Bob Crandall confesses:, "It soon became apparent that the public was smarter than we were."

Henderson says: "AA had significantly miscalculated the air miles these passengers would be racking up – heavy users were eating into its revenue by the millions. This is a lesson to all businesses considering ambitious sales promotion tactics – ensure the risks are known first."

Air travel brought down the once mighty Hoover European domestic appliances empire. The Hoover free flights promotion  offered free European and then transatlantic travel for two for all purchasers of goods worth £100 or more. As the journeys cost more than £100, people would buy an appliance and claim the tickets. Then they would sell the item (often still boxed) second hand, and repeat the process,  over and over.  Hoover tried to dishonour the deal with small print tactics but failed after court action. The fiasco cost at least £50m – the Hoover brand was bought by an Italian company.

Never underestimate the customer was a rule that Coca-Cola failed to follow when it introduced New Coke  in 1985 with a huge fanfare. This was a flavour change which consumers hated, breaking rules that you don't fool around with a winning formula that was growing sales, and that you have to respect the conservatism of Coca Cola drinkers, some of whom saw the change as akin to flag burning. New Coke did not last long. It should have been introduced as a variant – like Diet or Cherry Coke.

Comparing your jewellery to a prawn sandwich ruined Ratners in 1991 while Barclaycard managed corporate errors at roughly the same time and then over ten years later.

Banks behaving badly

Barclaycard tried to impose annual credit card charges some two decades ago. 

Customers hated it, defecting to new entrants to mop up their millions. And, in 2003,  it might have been truthful but not too clever for the then boss of the UK's largest credit card company, Barclays chief executive Matt Barrett, to tell the Commons' Treasury select committee, that  he did not use credit cards from his own subsidiary, suggesting that the astute consumer would do well to steer well clear of them.

Far more recently, Bank of America showed that top executives learn nothing from the mistakes of others when convinced they have a profit making formula. The bank  proposed a $5 monthly fee on debit cards, expecting (as Barclaycard did) that all the others would follow, leaving consumers with no choice. The others did not copy the concept, leaving account holders free to defect to a big selection of free cards elsewhere.

Investors can ignore the Post Office's pointless attempt to rebrand itself Consignia – it was a state monopoly so only taxpayers lost from the corporate lunacy.  Taxpayers also lost out in billions from the corporate lunacy surrounding the RBS takeover of ABN Amro. Everyone but the RBS board could see this emperor was totally naked.

Smash my guitar….and pay the consequences 

Finally, another air travel tale coupled with the power of social media, still largely ignored in the top directorship zone. United Airlines smashed musician Dave Carroll's $3,500 guitar in transit in 2008. The easy route was to say sorry and buy him a new one (preferably a better one). Instead, UA took the small print exclusion line, pushing him from department to department, and forcing him to dip into his not large savings to buy a new one.

Carroll set out his feelings about the airline in a song which was posted on YouTube.  His tune went global, slicing millions from the airline's market value. And he g
ot his new instrument. UA had demonstrably failed to understand consumer fight-back or the power of social media.


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