'Ed Yardeni's Response to Merrill Lynch's Y2K Survey
asked in the TimeBomb 2000 (Y2000) Q&A Forum
The following is Ed Yardeni's response to the Merrill Lynch Y2K
Survey. It is complete and unedited:
Date: Sat, 11 Jul 1998 09:43:26 +0100 From: Ed Yardeni
Subject: Merrill Lynch Y2K Survey Is Naively Optimistic To:
y2kreporter-recipient@yardeni.com X-Original-Envelope-From:
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In the comic-classic movie "What About Bob," phobic Bob
(played by Bill Murray) tells his shrink that there are two kinds of
people in the world: those who like Neil Diamond and those who
don't. In my opinion, there are two kinds of people regarding
Y2K: those who Get It (GIs) and those who Don't Get It
(DGIs). The GIs, like myself, are pessimistic about the eventual
and inevitable outcome. We are alarmists. We believe that so
much is at risk that there is no way there won't be significant
disruptions, malfunctions, and crashes in vital computer systems.
In our opinion, you have to be naively optimistic to conclude that
everything will be fixed in time just because the consequences of
failure are obviously so grim. I think we are realistic pessimists.
(Unlike Bob, I had a happy childhood and am an optimist at
heart.)
The folks at Merrill Lynch are naive optimists in my opinion.
They just don't get it. They just issued a very impressive 440
page survey of thousands of companies around the world to
assess their Y2K preparedness. The general conclusion is that
"companies appear reasonably confident of their own Y2K
issues, but uncertain about those same issues at their suppliers
and customers." Before I launch my GI counterattack, I want to
praise ML for this great effort. ML has enormous research
resources and it is laudable that they've mobilized them to assess
the Year 2000 Problem. I hope that they are now committed to
providing quarterly Y2K progress reports of all the companies
they follow around the world.
While I disagree with the overall optimistic conclusion of the ML
assessment, I found lots of very useful information there that
actually increased my concerns about Y2K. In other words, the
ML survey has a wealth of information that can easily lead to
exactly the opposite conclusions about Y2K! I would love to
turn more optimistic about Y2K. But the ML data doesn't do it
for me. Here is why:
1) Why is ML willing to trust the informal assurances of their
responding companies, when those very same companies don't
trust the assurances they've received from their suppliers and
customers? Of course some of the doubts about third parties
may be attributable to the fact that the responding companies
haven't even asked them yet about their Y2K compliance.
2) ML's survey methodology is totally inadequate. Apparently
ML analysts simply asked their companies if they will be ready.
Some may have asked more pointed questions than others. In
any case, there was no standard questionnaire and no indication
of who provided the answers to the informal and ambiguous
survey. At a minimum, companies should disclose how many
mission-critical systems they have and how many are in
production--not just "fixed" and ready for testing. They should
also disclose how many mission-critical systems are from third
parties and have not been delivered yet.
3) ML analysts were asked to assess whether their companies: i)
will be compliant, ii) likely, iii) less likely, iv) unlikely, or v) don't
know. Nearly all of the surveyed companies fell into the first two
categories. I couldn't find one that is "unlikely" to be compliant,
and only a handful that are "less likely."
Now let's look at the evidence in the ML report that completely
contradicts the optimistic spin provided in the introduction to the
survey:
1) ELECTRIC UTILITIES: In the US, the ML analyst observes
that the level of preparation of the electric utility industry is a
"mixed bag." Some companies are still assessing the problem.
There is a "risk that Y2K issues could result in power flow
interruptions for the transmission grid." The analyst gives a
"thumbs down" on Y2K disclosure, yet he ranks most of the
companies as "will be compliant" or "likely compliant." In Japan,
the analyst observes that "electric power companies are pretty
much on their own in tackling the Y2K issue. They report that
MITI, which oversees electric utilities, has not come up with any
special guidelines or test standards to meet as of this writing."
Among other Asian nations, Pakistani, Malaysian, and Chinese
electric utilities appear to be least prepared, according to ML.
2) TELECOM: According to the ML survey, the one and only
noncompliant standout on the in telecom services on the planet
earth is Brazil's Telebras. However, the ML analysts in Japan
provided only three short paragraphs on there companies, noting
that NTT was "lucky" to change headquarters three years ago, so
it is ahead of its competitors. A recent US State Dept survey
showed that roughly half the nations in the world are not moving
fast enough to fix their phone systems.
3) BANKING: The ML survey is surprisingly upbeat about
banking in Asia. However, "25 percent of respondents fear the
interbank clearing and settlement systems may not be compliant
in time." The analysts covering banks in Continental Europe
hedge their optimistic assessment by noting that all banks have to
claim they will be compliant because "any public declaration of
this not being the case would lead to regulatory action such as
forced mergers, and possibly even withdrawals by depositors." A
good point that applies universally to all companies in one way or
another. The analyst of Japanese banks declares, without proof
or explanation, that Japanese banks don't have to spend as much
money or time on Y2K as US banks because they use more
mainframes. He doesn't mention the impact of the Asian Crisis on
Y2K remediation efforts, nor the regional risks of even more
nonperforming loans caused by Y2K troubles. In the US, banks
are expected to finish the "nuts and bolts" in 1998--leaving 1999
for testing. Interestingly, the US banking analysts didn't provide a
table of expected compliance. Instead, they show the percent of
estimated Y2K costs spent through March 31, 1998. The
median was only 30 percent!
That's enough for now. After all, I'm supposed to be on vacation.
However, I received so many e-mails about the ML survey, I
decided to respond now. Fortunately, a friend messengered the
report to me just before I left New York and I had plenty of
quality time to study it next to a pool. Again, I applaude ML for
their great effort. It does provide quite a bit of good news about
Y2K. I expect that there will be more and more good news as
judgment day for our computers arrives. But let's stop being
naively optimistic; some systems are bound to fail and we must
prepare to cope with the resulting disruptions. Interestingly, about
a week ago, Canada's Task Force Year 2000, issued an update
showing a marked improvement in the number of Canadian firms
that are taking action, but still found enough bad news to
recommend that "all economic sectors should accelerate the
development of contingency plans...."
Ed Yardeni
greenspun.com |
