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Damned if You Do, Damned if You Don't

Stephen White

The recently released movie Margin Call tells the story of a seminal moment in the general financial collapse of 2008. A fictional investment bank, probably a thinly disguised Lehman Brothers, discovers that its huge holdings of subprime mortgage bonds are worthless. If they are liquidated, even at virtually any price, the damage caused to the bank's reputation by doing so will be irreparable. If the bank do nothing they will be bankrupt in days. The Board of the bank convene, in the dead of night, to decide a course of action for the following trading day.

The dilemma is simple. If they offload the junk bonds, every buyer they sell to, in many cases contacts with whom they have done business and developed long term relationships over the years, will unknowingly be buying worthless poo, and the effect will be a catastrophic end of these relationships and a fatal blow to the reputation of the bank. If they hold off, they will drown in their own worthless assets anyway.

The decision is made and the young team of brokers in the bank are instructed to sell, sell, sell the bank's holding of junk bonds during that trading day, which they successfully achieve. In the film, the longer term outcome is unreported. In real life, Lehman Brothers is no more.

Similar instances of 'damned if you do, damned if you don't' are common in business. For example, Bernie Madoff must have been as aware as the rest of us that no Ponzi scheme has ever proved to be viable in the long term. When he continued to accept investment money from his friends and family, amongst others, even after the writing was clearly on the wall that the pyramid was collapsing, the ethical option still escaped him.

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Recently some grocery suppliers have been placed in a similar position by their retailer customers who use their buying power misanthropically. The current vogue for 'preconditioning' is a case in point. Letters go out from the retailer to their suppliers 'requesting' a retrospective discount, not previously negotiated, to 'encourage greater volume' or 'offset marketing costs'. No threat is made, but the implication is that failure by the supplier to comply will have a damaging effect on the relationship. From the supplier's perspective, acceding to the demand for more discount might turn a barely profitable contract into a loss making one, but refusing might mean the loss of  the  contract altogether. As a result the ensuing negotiation, with the supplier on the back foot because of the pressure created by the preconditioning letter, has been manipulated in favour of the retailer.

Far be it from me to call 'foul' in terms of the retailers' behaviour - all is fair in love, war and business. My advice is for the supplier. Don't allow yourself to be a victim. If you believe your business will not survive the loss of the contract, and as a result you give in to the demand, you will just be taken for more and more. Readjust your view. Think about how you might survive and prosper, even without them and their contract. Negotiate resolutely with your bottom line position clearly set and in mind. Be prepared to walk away.

Stephen White

Stephen White
More by Stephen White:
Complicated Games
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