Author: ken

Too Big to Fail?  Too Big to Care?  Or Are We Living in Different Worlds?

 

A vast gap has grown up between the financial industry and the rest of us.  The evidence is piling up – and it’s not just a matter of wealth.

In London, the scandal over the manipulation of the Libor rate, the interest banks charge for borrowing from each other, has forced the resignation, first, of Barclays’ chairman and now, its CEO.  Moreover, The Daily Mail, reported:  “Since January 2011, Barclays has been found guilty of ripping off the elderly, avoiding up to £500million in tax, manipulating interest rates, mis-selling payment protection insurance and systematically exploiting small firms with the sale of complex loans.”

The Guardian, reporting on the Libor scandal, concluded:  “Only through a thorough-going examination of how Britain’s banks have been allowed to metamorphose from sober, conservative guardians of our savings to high-stakes gambling dens run by overpaid alpha males will we see how our own society – and economy – have been warped and corrupted by that process.”  (See, “Banking scandal: our whole society has been warped by the City.”)

In the US, according to new revelations in The New York Times, JPMorgan Chase has been putting its financial interests ahead of its customers.  “I was selling JPMorgan funds that often had weak performance records, and I was doing it for no other reason than to enrich the firm,” said Geoffrey Tomes, who left JPMorgan last year . . .  “I couldn’t call myself objective.” (See, “Former Brokers Say JPMorgan Favored Selling Bank’s Own Funds Over Others.”)

This is the visible surface of what has to be a tidal flood of questionable and illegal practices pervading the financial industry on both sides of the Atlantic.  Recent convictions in New York of prominent executives for insider trading suggest how “normal” such practices have become.  Promised reforms following the 2008 credit crisis have largely been rendered innocuous or blocked.  Banks, bigger than ever, are openly acknowledged to be “too big to fail,” essentially insured against their own mistakes.  Executives who resign confess to mere “embarrassment,” and depart with their bonuses intact.  Financial firms settle claims of fraud for hundred of millions of dollars, but then turn around to make up their temporary losses with new sources of profit.  New revelations show that ratings agencies, presumably independent, have been in collusion with the companies they assessed.

What is happening here?  The usual explanations seem woefully inadequate.  Scapegoating and resignations focus on individuals, distracting us from a problem that is obviously system-wide, pervading the entire financial industry.  Blaming a rogue pack of “Alpha males” is just another version of that.  But what does actually account for a shift in our culture that enables whole new set of standards to emerge, while most of us continue to hope that the system still works?

The simple answer is that we no longer have one culture.  The growing wealth of the super-rich, spearheaded by the finance industry and fueled by extravagant executive salaries and bonuses, has led to the creation of a new financial elite that believes in the sovereignty of money.  That gives them a sense of entitlement as well as moral “flexibility.”  Their superiority allows them to understand when the “rules” need to be bent.

As the bankers attempt to justify their actions, the evidence for this mounts.  According to today’s New York Times, Barclay’s employees not only believed they had the support of government agencies, but they “coordinated with former colleagues who worked at rival firms . . . .”  In other words, their primary allegiance was to each other, not their companies or customers and certainly not to the public.

“In one call, a Barclays manager acknowledged to the Financial Services Authority that the bank was understating its Libor submissions. ‘So, to the extent that, um, the Libors have been understated, are we guilty of being part of the pack? You could say we are.’”  “Or, as one Barclays official told the British Bankers Associations, the organization that oversees Libor, ‘we’re clean but we’re dirty-clean, rather than clean-clean.’”  (See, “Barclays’ C.E.O. Resigns as Bank Frames a Defense.”)

They may not actually believe they do “god’s work,” as Goldman’s CEO once put it, but they do believe that they are the ones who know how the economy works and what need to be done to keep money flowing.  This new class has unparalled access to government officials through lobbyists and campaign contributions.  They move their assets around the globe to take advantage of new investment possibilities as well as to escape taxation and regulation.  They manipulate the public through their control of the media.  They do what they think should be done.

They do it, of course, with an assist from the rest of us who are reluctant to see how much the system we thought we knew has been rigged.  We see the high profile prosecutions, the scandals, the resignations, the testimony before government panels.  We know that something has changed, but we do not put the pieces of the puzzle together because it would be too frightening to see what little control we actually have over this new world.

Elites tend to be arrogant.  The last time we had such a vast gap in wealth, the robber barons openly paraded their power and influence.  Today, the beliefs and attitudes of this new culture – and their indifference to and contempt for the rest of us — are still largely hidden from view.

 

Is Alienation the Answer?

Capitalism makes it possible to exchange anything for virtually anything else.  All objects become commodities with cash values.  But people get attached to things.

Caring more about the personal meaning of their possessions – or their beauty or uniqueness — investors easily lose the flexibility they need to safeguard their monetary value.  One can argue that such possessions enhance their lives, make them happy, engage them or help them feel fulfilled.  But they don’t necessarily make them richer if they cease being thought about as commodities.

Barclays just published a report on the dilemma of “treasures” as investments.  According to Mindful Money,  Dr. Greg B. Davies at the bank “says that this growing focus on treasure is just one example of a ‘familiarity bias’ that has become more pronounced since the financial crisis – meaning we search for assets we understand.”

MM adds: “For most people, it is the emotional aspect of owning ‘treasure’ that provides the most satisfying returns – but the potential for profit shouldn’t be underestimated for the shrewd investor.” (See, “Alternative Investments for Profit and Pleasure.”)

Paul Sullivan, the financial columnist for The New York Times, commenting on the same report, noted that it confirmed what he suspected:  “if you think people make bad decisions when it comes to investing in securities, they make worse ones when it comes to something tangible.” (See, “In Investments, as in Life, Passion Can Cloud Judgment.”)

For investors concerned about getting the best possible return for their money from the objects they love, “treasures” can all too easily become “liabilities.”

But perhaps this is exactly the wrong way to think about our possessions.  If everything can be converted into cash, does that mean we need to think about them that way?  Has the modern world so alienated us from our emotional and spiritual selves that something we buy automatically becomes “a bad decision” if it does not increase in value?

Modern tax laws make it seem so.  When all that is left of you is your estate, the only thing that matters to the tax collector is the cash value of the things you leave behind.  Sullivan cited a lawyer in a wealth planning practice who noted that collectors and other “passion investors” typically made two mistakes when it came to estate planning.  “They do not tell their adviser the extent of the collection, which throws off calculations, and they cannot conceive that their heirs will not want to take over what they have collected or invested in when they’re gone.”

Perhaps they deny the inevitable as a way to protect themselves from the contradiction of owning things for pleasure yet wanting them to turn a profit.  We all know that you can’t take it with you, but we seldom stop to think through what that actually means.

We can try to be “shrewd” as Mindful Money suggests or calculating as Sullivan implies, but perhaps the truth of the matter is that we end up fooling no one but ourselves.

 

 

 

Is There Anything Good About It?

Gossip has a bad name, as does rumor, innuendo, leaks and many of the other quick and dirty ways we have of disseminating information.  We reject the idea of gossip because it is irresponsible.  But that’s just another way of saying that it is not subject to the usual restraints we impose on our social discourse.

When we gossip we don’t check for accuracy, or think through the consequences.  We don’t stop to examine our motives or reflect on our goals.  We disregard collateral damage.  It’s like a garage sale of the mind, allowing us to impulsively put on display the facts and feelings we want to get rid of.

All the advantages are with the seller.  The object of gossip is exposed and vulnerable, while the source is protected.  The “news” spreads anonymously, enjoying the privilege of always seeming inside information.  That makes it dangerous.  Not only can the facts be wrong, but also the intent can be malicious.  Speculators can manipulate this unregulated information for their own ends.  And they can settle old scores with impunity.

But researchers now are exploring another side, the benefits to the consumers of gossip, as reported recently in The New York Times.  A sociologist at the University of California found that “gossip can play the role of protecting others from being exploited by passing on information about bad behavior to warn others.” (See, “The Virtues of Gossip”)  According to the author of the study, “We sometimes need to trade information with third parties about people who aren’t around.”

In addition, the threat of gossip can act as a restraint.  Fearing exposure, people will sometimes stop themselves from acting badly, never knowing who in the anonymous crowd of onlookers might turn them in.

Given the dangers of gossip as a kind of toxic by-product of our social lives, many think it should always be discouraged, if not prohibited.  But that won’t happen.  People enjoy it, and it serves several purposes as these studies show.  Not only does it often spread useful information, it is a way to feel effective.  The bearers of gossip enjoy the sense of being insiders, the first to know what is really going on, and they offer that status to others.  Moreover, in a world awash with disinformation or news that is doctored and spun, gossip can even seem more reliable than official statements.  Not having been approved or sanitized for public consumption can make it appear more authentic and, even, more true.

Better, then, to accept it and find ways of working with it.  Timothy Hallett, a sociologist at Indiana University, noted that aware leaders can be alert to the cues. “If someone is sarcastic, you can jump in and say, ‘What do you mean?’”

Robb Willer, a sociologist at Berkeley, sums it up:  “The trick is to learn to navigate between helpful and malicious or unreliable gossip.”  If you can’t regulate it, at least you can be clever and alert in dealing with it.

 

The Collapse of the Middle

Our candidates are talking to voters about getting America back to work, but economists are talking to each other about how this is not likely to happen.  The changes that have occurred are, as they say, “fundamental,” “structural.” They are not reversible.

In a new book, Thomas Edsall of Columbia University points to trends of increasing unemployment and inequality.  In an article in The New York Times, he notes that a number of highly respected economists believe that capitalism has all too successfully again run its course in efficiently realigning job markets, leading to “the weakening of the social fabric.”

In a paper written for the Council of Foreign Relations, Nobel prize winning economist Michael Spence, argues that “the employment problems of the United States do not result from market failure.  Just the opposite: the problems arise from an exceptionally efficient global marketplace.”

Other economists worry that “large segments of the American workforce — millions of people — [are] at a structural disadvantage in the face of global competition, technological advance and ever more sophisticated forms of automation.”

Moreover, Richard Freeman of Harvard point out that “economic interests of small groups of “crony capitalists” have come to dominate government responses to the financial crisis and ensuing recession. The danger is . . . of a move to economic feudalism . . . and the failure of democratic capitalism.”

As a result, it is “possible that in the United States and Europe, democratic free market capitalism is no longer capable of providing broadly shared benefits to a solid majority of workers.”

Francis Fukuyama, at Stanford’s Center on Democracy, notes that elites are particularly good at holding on to power.  “There are a lot of reasons to think that inequality will continue to worsen.”  That means that it is unlikely that they will support calls for a more equal distribution of wealth through taxation or more effective social safety nets.

David Autor at M.I.T. “found that the combination of three trends — automation; the emergence of a trade-based international labor force; and the movement of jobs offshore — has polarized the job market.  There is growth at the high and low ends, but the middle collapses.”

Solutions are possible, but it is unlikely we have the political capacity to implement them.  Social democracy ­– “capitalism plus a hefty dose of state support for families, education, early childhood development, higher education, and active labor market policies — can still do the job,” argues Jeffrey Sachs at Columbia. “The performance of northern Europe, around 120 million people including Germany, Austria, the Netherlands, Denmark, Sweden and Norway, provides a good illustration of this success.”

But Edsall notes that our “political system instinctively avoids this debate . . . because the political costs of engagement are likely to substantially outweigh any potential gains.” In other words, the public doesn’t want to know how bad things really are.  And politicians won’t tell them.

“At an undetermined point in the not too distant future, as the ‘gale of creative destruction’ blows through the heartland, the debate will become inescapable.”  But, again, will the economists be talking to each other or to us? Will the politicians continue to look the other way? (See, “Is This the End of Market Democracy.”)

http://campaignstops.blogs.nytimes.com/2012/02/19/is-this-the-end-of-market-democracy/?hp

The Lessons of a Creative and Realistic CEO

“I thought I had to have all the answers myself,” said Kyle Zimmer on starting out as CEO of First Book.  “I don’t think I had the humility or the perspective to understand that that’s never the game, and that reaching out to as many brilliant minds as you can find is where the real strength is.”

That is a kind if common sense.  Anyone in a leadership role would be foolish not to tap into the knowledge and skills in others that are available.   But it is unusually frank in a CEO to acknowledge it, and Zimmer stands out for not only exposing her reliance on others but also for owning up to her misconceptions and pointing out the mistakes she made along the way.

But that’s just the beginning of the unconventional and frank observations on leadership, offered in an interview with The New York Times.  This is not your usual “Ten Steps To Success,” promoting the myths of mastery and immaculate decision-making CEOs usually prefer.  She appreciates the inevitability of mistakes:  “We want people who have tried things, and have failed, and have risen above it.”

That way, she explains, you not only benefit from the knowledge of what doesn’t work, you become more open and receptive in working with others:  “if you’re bright, and you’re a builder, and you’ve overcome the winds that blow against anybody trying to build anything, a lot of other things fall away, like defensiveness.” (See, “So, Your Idea Hit a Brick Wall. Congratulations!”)

This is not just about being in charge.  It is how you create a culture that encourages and supports innovation:  “if you have senior people who are dismissive and condescending, you’re going to have a very different group of people who are coming into the organization at the more junior level.”

It’s crucial, she points out, if you hope to do anything new.  “If you’re pushing in whatever you’re doing, you’re going to fail way more than you succeed. It’s that old saying: ‘You can fail without ever succeeding, but you can’t succeed without ever failing.’”

She concludes by offering two generalizations.  The first follows from her willingness to embrace the inevitability of failure.  “The culture we live in teaches us to fear failure, and I think that’s a huge mistake. When I look back over the history of our organization, the times we’ve been most creative were a result of the pressure of a failure or near failure.  The second is more surprising in an age of texting and video conferencing.  “There is no substitute for people spending time together. All the technology in the world doesn’t replace that. You have to interact with each other. You have to trust each other. And that doesn’t happen through e-mails.”

It sounds old-fashioned, but it is really timeless.  The world in which we live may be changing rapidly, bewildering us with constantly new challenges.  But our minds and our collective ability to think together, as Zimmer suggests, have pretty much stayed the same.  We still need each other, and that means spending time together.