Individual Research: Decision Making – Poor Decision Making

Transmittal Letter

Dear Sir/Madam,
This is the last account of the report on Poor Decision Making in the banking industry that was commissioned by the World Bank. This report researches on ten companies distributed over five countries.
From this report, while decision making is the major role of the executive, sometimes, they make wrong decisions. These decisions are sometimes prompted by political influence, neglect of business policies or the failure to perform sufficient research on the topic before making a final decision. Most of these factors can be evaded and thereby, reduce the risk of loss of jobs, business assets and even lives.
Thank you for giving me the opportunity to work on this report

Table of Contents

Transmittal Letter. 2

Table of Contents. 3

Executive Summary. 4

1.0. Introduction. 6

2.0. Literature Review.. 6

3.0. Methodology. 7

4.0. Bank of America (BofA). 7

4.1. J. P. Morgan Chase. 8

4.2. Royal Bank of Scotland. 9

4.3. Co-operative bank (UK). 10

4.4. The National Australia Bank. 11

4.5. Bank of Queensland. 12

4.6. United Bank of India. 12

4.7. State Bank of India. 13

4.8. Deutsche Bank Germany. 14

4.9. Bayern-Lb Bank. 15

5.0. Analysis and discussion. 15

6.0. Conclusion and recommendation. 17

7.0. Biography. 19

DECLARATION BY MANAGEMENT AND ORGANIZATIONAL BEHAVIOUR STUDENTS. 22

Executive Summary
This report was authorized by the World Bank to provide input into poor decisions that have been made by banks over the period 2000-2013. The report involves 10 banks distributed over five countries (USA, UK, Australia, Germany, and India) that have had crises over that time due to poor decision making.

 The bank industry is a very important industry. Failure in this industry can collapse the entire economy or even cause a slowdown in growth. This research is an extensive research about poor decision making in this industry, its effects, and how it can be avoided in the future

The second largest bank in USA, Bank of America, bought a company by the name Countrywide in 2008. Immediately after the takeover, the housing market collapsed turning acquisition to be one of the worst judgments that the bank executive could have done. Similarly, the Co-operative Bank in the UK and the Bayern-Lb bank purchased Britannia Housing Society and Hypo Alpe-Adria Bank respectively. The acquisitions ignite a series of losses that eventually bring the companies down. Eventually, the banks seek support from their governments and are bailed out.

The executive of J P Morgan, the largest bank in the USA, decided to invest more than the allowed amount in high risk investments. In a bid to change the terms of the investment, they changed the terms and further increased the risk of the investment. By the time they announced the results of this investment, the bank had already gone through a $2 billion which would increase to $9 billion. The National Bank of Australia and Deutsche Bank invested in the money and bond markets respectively. The markets went against their expectations leading to substantial losses.

The Royal Bank of Scotland, the largest bank in the world at the moment fails and has to be bailed out. The Bank of Queensland, United Bank of India and State Bank of India get involved into too many bad loans that they appeal for state intervention.
In each of these cases, we find that the executives were in a position to make wiser decisions but for some reasons did not. This report reviews each case individually and then makes a firm decision on the way forward to avoid poor decisions from resulting in such significant losses.

1.0. Introduction
This research was authorised by the World Bank to provide input on poor decisions by companies that might have happened between the years 2000-2013. This research seeks to closely analyse some decisions that have been made in the banking industry, their results and how they could have been avoided. The research looks into 10 banks from Australia, Germany, India, UK and USA. Their decisions vary from one to the other and so does the damage caused. This paper seeks to champion the thesis that most of the problems experienced in the banking industry are majorly founded on poor decisions and with proper mechanisms, these problems can be avoided[1].

2.0. Literature Review

The issue of poor decision making has been deeply researched in the past. The reason this has been so is due to the importance it commands in every business. The writers discuss different aspects of the issue and come to a solid decision that is contained in this paper.
According to Haibin Zhu in his article Capital Regulation and Banks’ Financial Decisions, banks are the most regulated companies in the entire world. To ensure that risky and speculative decisions do not affect the consumers, bank capitals are usually regulated. But, according to many sources, banks have been known to be deceptive to the relevant authorities thereby investing more than is provided and thereby risking the prevalence of the banks[2].
According to a report by the House of Commons Treasury Committee in UK on the collapse of the RBS, while the regulations may be present, the authorities concerned are not good enough at ensuring that the regulations are followed[3].

3.0. Methodology

This report was done through a step-by-step analysis of each of the ten banks. The banks were qualified only on the basis that they had experienced cases where bad decisions had resulted in significant losses. The paper first assesses each of the ten cases individually and then gives a general review for all ten cases.

4.0. Bank of America (BofA)

In 2008, the Bank’s purchase of the mortgage lender Countrywide seemed like a brilliant idea. By buying Countrywide, BofA would become the largest loan and mortgage servicer in USA. The union turned BofA into a huge player in the mortgage business immediately before the bursting of the housing bubble[4]. Since then, the bank has lost huge sums in legal fees, real estate losses and settlement with federal and state agencies. In total, the acquisition has come to cost the bank more than $40 billion. This amount is far even higher than J. P. Morgan’s infamous loss which was only $9 billion. Immediately after the deal in 2008, experts got concerned as to whether the deal was too big of a risk. BofA lost US$ 8.9 billion and US$3.8 billion in 2010 and 2009[5]. Also as a result of the Countrywide, BofA had to pay $600 million to pension investors who claimed Countrywide costed them money. The bank is also paying $108 million to SEC over allegations that Countrywide charged excessively to customers who would not pay their mortgages and were facing foreclosure[6]. The bank also accepted to pay $335 million over allegations that Countrywide used discriminative lending practices. With these fees, Bank of America had at some point last year (2013) considered putting Countrywide up for bankruptcy. Since BofA maintained Countrywide as a separate legal entity, it is possible to put it up for bankruptcy alone[7].
The acquisition of Countrywide looked like a great idea at the point of purchase. But, at the time of purchase, the state of USA had just declared the beginning of the recession. The executive of the bank should have known better than to purchase a housing business at that point. They also should have considered declaring the company bankrupt as soon as they realised it was a fluke. They, however, held on to the market and kept dealing with the consequences of their decisions.

4.1. J. P. Morgan Chase

Another bank that has had similar woes in the past is J P Morgan chase. Around 2007-2008, under the leadership of Ina Drew, the Chief Investment Officer, the bank invested in high risk investment. By 2012, the bank had reviewed the terms of the agreement, getting deeper into risk. At this point, they estimated the losses to be at $2 billion. They, however, estimated that the losses would go up to about $3 billion. By the time the liquidation was over, the bank had lost a total of 10 billion dollars[8].
This is a good example of how poor decision making can cost the business. The risk involved in this deal should have been enough to warn the CIO from investing in the securities. However, the possibility of high profits was high and made the members behind making the decision not to review the risk appropriately.
The decision of surpassing the investment absolute value in a business is one that should not be made one or two individuals in the company. Prevention can be done by ensuring the companies are vigilant when dealing with people who show disregard to the company’s policies[9].

4.2. Royal Bank of Scotland

Another bank that has had its woes in the world is Royal Bank of Scotland. At the beginning of 2008, the RBS was the largest bank in the world with over £3.5 trillion in asset foundation. However, at the end of the year, the bank went down and had to be bailed out by the government. The failure was later to be blamed on mismanagement and a series of poor decisions. The bank was found to disregard important procedures when making the transactions. They neither recognized nor re-examined the balance sheet threats relating to capital, liquidity and asset quality .
It was noted that the regulation authority was in a position to warn the company against failure. However, they failed in their role and the business collapsed.

4.3. Co-operative bank (UK)

In 2009, Co-operative Bank formed a merger with Britannia housing Society. At the time the merger was made, it raised many expectations. First, it increased the bank’s size by a big margin. The bank moved from £15 billion in assets, 0.5 million customers and 90 branches to 50 billion in assets, 3.4 million customers and 344 branches countrywide. However, with all the advantages that Britannia came with, it also brought with itself a corporate loan book. Co-operative Bank was to pay more than £802 million of loans. These loans completely harmed the bank’s capability and it had to be bailed out by the state[10].
Co-operative Bank made a poor decision in merging with Britannia. If they had done proper investigations into the deal, they would have found out a set of things that would have warned them from taking the deal. First, at the time of the merger, Britannia was being investigated by the Regulator. Instead, the bank went on with the deal. Secondly, the bank would have discovered that Britannia was a failing business. The Regulator was to later tell Co-operative bank that the housing society would not have survived without the merger.

4.4. The National Australia Bank

In Australia, the situation is no different. The National Australia Bank once had a situation that could have been avoided through making the right decisions. It faced continued volatility that led to the resignation of both its chairman and its CEO. In March 2004, the National Australia Bank (NAB) forced the resignation of about eight senior staff members and disciplined or moved at least 17 others and restructured its board of Directors. This came up as a result of losses that amounted to over $360 million in foreign currency trading. This loss drew the attention of the investors and shareholders to the speculative and high risk investments that the NAB had been getting involved in to stay in profit.
A report by Pricewaterhousecoopers (PwC) showed that the damage would have been worse with the potential of being the worst banking crisis in Australia. The losses came up as a result of a decision by the bank’s investors to exceed the highest amount it is allowed to invest in the money market. They surpassed this limit in an effort to lower losses they had incurred some time before in the same market[11]. This happened when the dollar weakened against two of their favourite currencies, the Australian dollar and the New Zealand dollar. They exceeded the trading limits in an attempt to cover the losses, but it only got them deeper into losses.
This is a direct disregard for the company’s rules and regulations. The executive would have avoided most of the losses if it had stuck o the rules. They also failed to inform the shareholders about the problems the company was facing. Instead, they chose to cover up the losses and only got deeper into losses.

4.5. Bank of Queensland

The Bank of Queensland posted a net loss of $90.6 million in the first quarter of 2012. This was as a result of revision to their regulations and thereby enabling unqualified borrowers to take loans with the company. The bank eventually suffered losses in terms of bad loans. While the bank looked at the regulations as a way to improve its operations, they did not foresee the losses.
Again, this is a case of poor decision making that could have been avoided. If only the company had put its mind on effective money making practices, it would have been able to, at the least, avoid making losses. They, however, chose to implement new practices and eventually started making losses. This could be a case of poor, or no, research at all[12].

4.6. United Bank of India

On 7th February 2013, The United bank of India reported Rs. 1238.08 crore net losses for the quarter ended December 31, 2013. These losses were mainly as a result of bad loans and non-performing assets that were unearthed by the Reserve Bank of India (RBI). The bad loans came up to the tune of Rs. 2260 crore. Over the year 2013, the NPAs and bad loans rose by Rs. 7900. While defending the company, the bank’s officials raised issues of a poor Infosys system which they claimed failed in categorising badly performing loans and NPAs. It is, nevertheless, very important to note that over 90% of banks in India are still using this software on their systems and no other bank has had similar issues. Also, the NPAs and bad loans have been noted to have started increasing immediately after Archana Bhargava joined the company as CEO. IT is, therefore, very likely that the bad loans were as a result of the bad decisions that were made by or due to the presence of the bank CEO. It has been noted,also, that there has been an increasing gap between the CEO and the senior leadership at the bank.
While it may not be clear what exactly caused the troubles that are being experienced at United Bank of India, it is clear that the bank had the capability of making better decisions to avoid this situation. It has been thought that the software that is raising concerns was not updated even after the provider of the software required the bank to renew it. More so, it is also clear that the bank should have been able to see the effect of the failure sooner than they did and cub additional losses.
Another factor that is clear is that if the bank’s management had been more cohesive they would have been able to communicate better as well as avoid such issues as are being experienced.

4.7. State Bank of India

State bank of India saw a dip in profits for the quarter ended 31st December 2013. It reported a 34% drop in profits. This drop resulted from the poor management of the company’s lending system. With their lending system, they have been able to issue too many loans that have ended up being defaulted. The provisioning of the bad debts resulted in the drop in profits. To make matters worse, the State Bank of India has been having hard times since they adopted their system. The adoption of their new system has proved to be a failing one, but the bank does not seem to be letting go.
This is a case where an institution adopts a decision in oneness. While cohesion is a good factor at the work place, the company should be let go of ideas once they fail[13].

4.8. Deutsche Bank Germany

Deutsche Bank has also experienced its share of big losses this year. It reported a $1.3 billion dollar loss for the quarter ended December 2014. It also blamed the decline in bond trade that assisted in the reduction of the bank’s revenue by about €6.6 billion[14]. Deutsche experienced big losses in the bonds and other fixed securities as investors shifted their focus from them to the booming stock business. The bank also attributed some of its losses to lawsuits that were being conducted against it over suspicions of misconduct. The bank has had to pay, for example, a sum of €528 million concerning accusations that the bank was part of a group of banks that tried to manipulate benchmark interest rates.
The case of Deutsche bank is a distinctive one. While the bank had done all in its power to maintain its profitability, company principles contributed in part to the losses that were experienced. If the bank had been more receptive to the changing business, it would have been able to reduce the losses. One thing they would have done is to distribute their resources over more investment methods. That way, some investments would have been profitable while others would have resulted in losses. Overall, the losses would have reduced with a big margin.

4.9. Bayern-Lb Bank

The bank’s acquisition of Hypo Alpe-Adria bank was such a good idea when it was done. It fitted perfectly into the bank’s expansion strategy. Hypo Alpe-Adria bank was operating in south and Eastern Europe and this meant hat Bayern-Lb would be able t service these regions as well. At the criminal trial over the acquisition, the former risk officer said that the deal would have been a perfect one if it were not for the collapse of the global financial markets. The acquisition eventually costed the bank 3.7 billion Euros. The management in this case rushed the deal and failed to assess the risk involved in the acquisition.
In this case, there have been reasons to show that the management was under pressure, to allow the deal. They, as aresult, were not in a position to make a fair decision on the matter. Political influence is a real problem when dealing with decision making. In cases where political pressure is piling on the bank’s executive, it is only advisable that they consult widely so that they can fully understand the matter before them.

5.0. Analysis and discussion

The challenges of decision making in most cases lie on the shoulders of the executive or senior members of a company. However, when the decisions already made turn out to be wrong ones; everyone in the company shares the risk. Some people lose jobs; others get demotions or are transferred while others get their salaries reduced[15].
From this report, decision makers are able to choose the right decisions. However, the right decisions are not made for some reasons. First, there may be political forces that are pushing for the decision to be made. In the case of Bayern-Lb Bank, the company executives could have made the right decisions but the people who wanted the decision to be speeded did not let the executive do enough research into the company to avoid losses.
Secondly, the decision makers sometimes fail to research properly on the deal. Eventually, they make the wrong decision and cost the company large sums in losses. In most the cases discussed on this paper, proper research was not done. Some of these companies that had not been known to make losses were then found making losses that were unacceptable to the company shareholders and the public. To ensure this is done well, the banks should allocate enough funds into the research department.
Thirdly, sometimes lack of proper managerial skills may lead to poor decision making skills[16]. In some cases, pure ignorance results in people being unable to choose a right decision from a wrong one. In that case, the company involved should be completely careful when selecting its workers[17].

Fourthly, the authorities show a laxity in controlling the activities of the bank. Banking institutions seem to be in a position to do anything they like with their money. The regulation authorities should be in a position to determine what amount of the bank’s resources can be invested or used for development. By doing this, the banks will be sustainable businesses and will not require to be bailed out at any point. Another way the relevant authorities can ensure there is sanity in the banking industry is by ensuring that errors that cost the shareholders money are prosecuted if they are negligent[18].

Finally, there should be proper guidelines to assist the decision makers during the decision making process. These guidelines should be clear and specific to ensure that the people involved in the decision making process know what is right and what is unacceptable. The policies of the company should be able to guide the decision makers to make a decision that is beneficial to the company and to everyone involved.

6.0. Conclusion and recommendation

The banking industry is a very delicate industry. The industry holds so much power in its hands that its collapse in most cases results to collapse in many other industries. This shows clearly that the people involved with decision making have so much power in their hands[19]. To prevent them from making wrong decisions and hurting the economy, the companies should put enough effort to the process of making the policies as self sufficient as possible. A good culture at the work force can also be cultivated to ensure that the leadership gives their work enough attention. They should also be ready to sacrifice enough funds for research since the consequences of poor decisions usually result in big losses. In conclusion, most poor decisions can be avoided. The can, however, be avoided if all parties participate in its elimination.

7.0. Biography

2013. “Government Picks 7 Banks For 5 Percent Stake Sale In Coal India (the banks include Goldman Sachs, Bank of America and Deutsche Bank).” India Business Insight, 2013. 

2013. Bank Of America To Pay Fannie Mae $11.6 Billion To Buy Back Troubled Loans. n.p.: National Public Radio, 2013.

2014. “Bank of America Should Pay $2.1B for Fraud, U.S. Says.” National Mortgage News, 2014. 

2014. “Financial Companies Announce Results Schedules, Milestone Achievements, Preferred Stock Dividends, and Board Changes – Analyst Notes on Bank of America, ICICI, TD Bank, First Republic Bank, and RBS.” PR Newswire, 2014.

Ashill, Nicholas J., and David Jobber. 2013. “The effects of experience on managerial decision-making uncertainty.” Journal Of General Management 39, no. 1: 81-110.

Beck, Joseph B., and Margarethe F. Wiersema. 2013. “Executive Decision Making: Linking Dynamic Managerial Capabilities to the Resource Portfolio and Strategic Outcomes.” Journal Of Leadership & Organizational Studies (Sage Publications Inc.) 20, no. 4: 408-419.

Daning, Hu, J. Leon Zhao, HuaZhimin, and Michael C. S. Wong. 2012. “Network-Based ModelingAnd Analysis Of Systemic Risk In Banking Systems.” MIS Quarterly 36, no. 4: 1269-1291. 

Drescher, Frederik. 2013. Insolvency Timing and Managerial Decision-making. Wiesbaden: SpringerGabler, 2013. 

Faulin, Javier. 2013. Decision Making in Service Industries : A Practical Approach. Boca Raton: Taylor & Francis, 2013.

FitzGerald, Stephen P. Decision Making. Oxford, UK.: Capstone Pub., 2002 <http://search.ebscohost.com/login.aspx?direct=true&sope=site&db=nlebk&db=nlabk&

Franklin II, Carter L. “Developing Expertise In Management Decision-Making.” Academy Of Strategic Management Journal 12, no. 1 (January 2013): 21-37.

Gianiodis, Peter T., John E. Ettlie, and Jose J. Urbina. 2014. “Open service innovation in the global banking industry: Inside-out versus outside-in strategies.” Academy Of Management Perspectives 28, no. 1: 76-91.

Goh, Kim Huat, and Robert J. Kauffman. 2013. “Firm Strategy and the Internet in U.S. Commercial Banking.” Journal Of Management Information Systems 30, no. 2: 9-40. 

Gormley, Todd A., Bong Hwan Kim, and Xiumin Martin. 2012. “Do Firms Adjust Their Timely Loss Recognition in Response to Changes in the Banking Industry?.” Journal Of Accounting Research 50, no. 1: 159-196. 

House of Commons Treasury Committee (2012). The FSA’s report into the failure of RBS. London: The Stationery Office Limited

Keane, John G. “Some Observations on Marketing Research in Top Management Decision Making.” Journal Of Marketing 33, no. 4 (October 1969): 10-15.

Kráčmar, Jan, and MiroslavUhliar. 2012. “The Impact Of Control Processes On Managerial Decision Making.” Problems Of Management In The 21St Century 3, 43-52. 

Kunc, Martin H., and John D. W. Morecroft. 2010. “Managerial decision making and firm performance under a resource-based paradigm.”Strategic Management Journal 31, no. 11: 1164-1182.

Munusamy, Jayaraman, Ernest Cyril De Run, Shankar Chelliah, and SanmugamAnnamalah. 2012. “Adoption of Retail Internet Banking: A Study of Demographic Factors.” Journal Of Internet Banking & Commerce 17, no. 3: 1-14. 

Singh, Kamini. 2011. “Innovated Technology in Banking Services.” Journal Of Internet Banking & Commerce 16, no. 2: 1-15. 

Sutcliffe, Kathleen M., and Gerry McNamara. 2001. “Controlling Decision-Making Practice in Organizations.” Organization Science 12, no. 4: 484-501. 

Pricewaterhousecoopers, (12 March 2004). Investigation into foreign exchange losses at the National Australia Bank

Zhu, H (2008) Capital Regulation and Banks’ Financial Decisions. International Journal of Central Banking. Vol. 4, No. 1 pp 165-211

Bertrand M., Mullainathan S., Shafir E., Behavioral Economics and Marketing in Aid of Decision-Making among the Poor: Journal of Public Policy and Marketing

Beresford B. and Sloper T. (2008). Understanding the Dynamics of Decision-Making and Choice: A Scoping Study of Key Psychological Theories to Inform The Design and Analysis of the Panel Study: York; University of York

DECLARATION BY MANAGEMENT AND ORGANIZATIONAL BEHAVIOUR STUDENTS

I declare the assessment two is my own work and has not previously been submitted for assessment.

This work complies with Curtin University rules concerning plagiarism and copyright.

I have referred to www.policies.curtin.edu.au/documents/unit_outlines_plagiarism_state.doc for plagiarism and copyright information. I have retained a copy of this assignment for my own records.

of this assignment for my own records.

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[1] Beresford B. and Sloper T. (2008). Understanding the Dynamics of Decision-Making and Choice: A Scoping Study of Key Psychological Theories to Inform The Design and Analysis of the Panel Study: York; University of York

[2] Zhu, H (2008) Capital Regulation and Banks’ Financial Decisions. International Journal of Central Banking. Vol. 4, No. 1 pp 165-211

[3] House of Commons Treasury Committee (2012). The FSA’s report into the failure of RBS. London: The Stationery Office Limited

[4] 2013. “Government Picks 7 Banks For 5 Percent Stake Sale In Coal India (the banks include Goldman Sachs, Bank of America and Deutsche Bank).” India Business Insight, 2013. 

[5] 2013. Bank Of America To Pay Fannie Mae $11.6 Billion To Buy Back Troubled Loans. n.p.: National Public Radio, 2013.

[6] 2014. “Bank of America Should Pay $2.1B for Fraud, U.S. Says.” National Mortgage News, 2014. 

[7] Gianiodis, Peter T., John E. Ettlie, and Jose J. Urbina. 2014. “Open service innovation in the global banking industry: Inside-out versus outside-in strategies.” Academy Of Management Perspectives 28, no. 1: 76-91.

[8] Beck, Joseph B., and Margarethe F. Wiersema. 2013. “Executive Decision Making: Linking Dynamic Managerial Capabilities to the Resource Portfolio and Strategic Outcomes.” Journal Of Leadership & Organizational Studies (Sage Publications Inc.) 20, no. 4: 408-419.

[9] Ashill, Nicholas J., and David Jobber. 2013. “The effects of experience on managerial decision-making uncertainty.” Journal Of General Management 39, no. 1: 81-110.

[10] Beck, Joseph B., and Margarethe F. Wiersema. 2013. “Executive Decision Making: Linking Dynamic Managerial Capabilities to the Resource Portfolio and Strategic Outcomes.” Journal Of Leadership & Organizational Studies (Sage Publications Inc.) 20, no. 4: 408-419.

[11] Pricewaterhousecoopers, (12 March 2004). Investigation into foreign exchange losses at the National Australia Bank

[12] Zhu, H (2008) Capital Regulation and Banks’ Financial Decisions. International Journal of Central Banking. Vol. 4, No. 1 pp 165-211

[13] Bertrand M., Mullainathan S., Shafir E., Behavioral Economics and Marketing in Aid of Decision-Making among the Poor: Journal of Public Policy and Marketing

[14] 2013. “Government Picks 7 Banks For 5 Percent Stake Sale In Coal India (the banks include Goldman Sachs, Bank of America and Deutsche Bank).” India Business Insight, 2013. 

[15] Drescher, Frederik. 2013. Insolvency Timing and Managerial Decision-making. Wiesbaden: SpringerGabler, 2013. 

[16] Beresford B. and Sloper T. (2008). Understanding the Dynamics of Decision-Making and Choice: A Scoping Study of Key Psychological Theories to Inform The Design and Analysis of the Panel Study: York; University of York

[17] Beck, Joseph B., and Margarethe F. Wiersema. 2013. “Executive Decision Making: Linking Dynamic Managerial Capabilities to the Resource Portfolio and Strategic Outcomes.” Journal Of Leadership & Organizational Studies (Sage Publications Inc.) 20, no. 4: 408-419.

[18] Faulin, Javier. 2013. Decision Making in Service Industries : A Practical Approach. Boca Raton: Taylor & Francis, 2013.

[19] FitzGerald, Stephen P. Decision Making. Oxford, UK.: Capstone Pub., 2002 <http://search.ebscohost.com/login.aspx?direct=true&sope=site&db=nlebk&db=nlabk&