September 30, 2008 09:16 PM UTC

Windward Rule - what financial businesses are safe.

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• by: DavidThi808

Years ago Thomas Friedman came up with the Golden Arches Theory of Conflict Prevention which was:

No two countries that both had McDonald’s had fought a war against each other since each got its McDonald’s

It is no longer 100% true but at the time it was, and the reasoning behind it was sound, that the presence of a McDonalds correlated with a countries approach to the world.

Well, I have one for the present financial crisis.

Windward Reports has been purchased by 33 financial services companies including Citigroup, Goldman Sachs, Royal Bank of Scotland, and many others. Not a single financial institution that has purchased Windward has declared bankruptcy, been sold for pennies on the dollar, or been listed as in serious trouble. Not one.

On the flip side, every bank that has gone under, from Lehman Bros to Fannie Mae & Freddie Mac to Washington Mutual to Wachovia to Fortis has considered Windward Reports, and then selected an alternative. Every single financial firm that has failed looked, but did not buy.

Ok, so correlation does not imply causality. And plenty of strong banks also do not use Windward (yet). But I think there is a correlation here based on the following.

We are contacted by employee after employee at a financial institution. They see how our system works and it will provide them a means to get the reports they need, and to do so quickly and easily. With this system they have more accurate information available.

Sounds good right? Well for a large number of financial services companies, that employee is told that they are not allowed to consider any new reporting system. They cannot even install it on their computer to try it. One person got in trouble for installing it on their home computer to try it.

I think what we are able see is how a company balanced out most effectively delivering the reports it’s employees need vs “there is a system and you will use the system.” And I think that same “you don’t need better information” mindset is what led to creating financial instruments that could not be measured and then buying them up because the system said to do so.

We’re certainly not the only company that has had this window into the financial services firms. But I think we are a very useful view because our system is attractive to those that want a better way to look at their information. So the combination of which companies have employee after employee looking at our system because they need a better way to view their data, and their company’s reaction of no you can’t – is a good indicator of their financial health.

How useful is this measure? Well there are a couple of financial services firms that I don’t think are on anyone’s watch list that fit this same model. We get constant requests for information, but they are not allowed to even evaluate it. I’ll be watching to see if any of them are suddenly “in trouble.”

(And no, I will not name them, as they may actually be in fine shape. This is merely a theory and will never have a 100% match.)