Wednesday, October 30, 2013

The positive opportunities to give up market share

A short anecdote came to mind today that links comments made in two of the most recent posts.

In the early 1990's Washington Mutual initiated their completely flawed strategy of setting up de novo banks in major cities.  These completely new banks, unencumbered by local market knowledge or contacts, planned to take market share in consumer banking and small business banking.  In New York it was a welcome opportunity for existing banks to unload underperforming or unwanted clients without going through bankruptcy or time consuming discussions seeking concessions or more collateral with companies that did not meet hurdle rates for internal profitability.  At the same time, small businesses that had never had the financial results, profile, or times the integrity to get a bank loan found a new great friend.

So the portfolios of the two seminal JPM predecessor banks, Manufacturers Hanover and Chemical, that really ruled the small business banking market, plus the portfolios of many smaller banks like Greenpoint and others could be reduced in an appropriate and easy way.  They had an irrational and uninformed aggressive new "competitor" in the market.  They let Wamu do its marketing and relieve them of many clients.

Washington Mutual quickly gained market share in New York and bragged about it in investor presentations and in their annual report.  They seemed to think that their khaki pants, blue shirt, no tie look was a real killer as a marketing tool(Washington Mutual never gave an investor presentation without all "good news" backed by dubious statistics).  To the extent necessary they cross funded the costs of the de novo bank operations across the country with profits from their only other big business, mortgages.  So when the mortgage market began to unravel and Wamu's many poor products collapsed so did all of their new branches in urban areas across the country.

So this little comment is not just one about the incompetence of Wamu, mentioned in a prior post, but also about the earlier commentary of insurance companies not necessarily wanting leading market share positions.  Since this is not a pure comparison, banks are, for mostly legitimate business reasons,not as rigorous about this in some areas but the above is an example of where they are.  The smart firms in the insurance industry are uniformly looking to mitigate risk relative to competitors, and this seemed be a good example of the concept.


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