Much of what investment bankers do is socially worthless (2010)

http://www.newyorker.com/reporting/2010/11/29/101129fa_fact_cassidy?currentPage=all

by Aloha • 13 years ago

212 171 13 years ago

na853• 13 years ago

Fortunately for investment bankers, much of what they do is not commercially worthless.

Perhaps that's unfortunate depending on one's point of view and/or political leanings but that's how the free market works.

rosser• 13 years ago

...but that's how the free market works.

It genuinely baffles me that people might think of something's being socially worthless, but commercially valuable as a feature.

na853• 13 years ago

I guess you attach some positive connotation to the word "feature"? e.g. Apple products have a lot of features that I find stupid, but that doesn't mean they're not features.

Socially worthless or not, that's how the world works. I'm not trying to be a corporate cheerleader. It is what it is.

jjdro• 13 years ago

It's not a bug, it's a feature!

dinkumthinkum• 13 years ago

I don't know if it is a feature ... I mean ... money talks. (I know we are all altruists here though :) )

phyalow2• 13 years ago

It genuinely baffles me that you may think otherwise?

snowwrestler• 13 years ago

Socially worthwhile things have a cost. Commercially valuable things create wealth. You can't have one without the other.

ZeroGravitas• 13 years ago

The free market is a model in which this would not be possible. A model we aspire to emulate in the real world precisely because it should produce social, not commercial, value.

This activity is either not the free market, or it is the free market failing to work. Why would anyone celebrate this?

edit: I see from your other comment you are not celebrating, but fatalistically claiming that (our attempt at a) free market is fundamentally broken and unfixable. I feel this point would be clearer if you separated the implementation and theory of the free market.

qqwwwid5• 13 years ago

I think this situation would fall under the definition of a market externality though it is hard to say given the ambiguous state interference. Also, I don't think there is any strong link between a free market and social value. At most free market proponents emphasize the mutual benefit of trade between any two parties, and most of them, being individualists, value that freedom of trade as the highest possible social value.

https://en.wikipedia.org/wiki/Externalities

eli_gottlieb• 13 years ago

Why the heck does anyone think "the free market" is so great anyway? When I hear someone chanting hosannas, I get an awful hunch we're talking about religion instead of (social) science.

http://jacobinmag.com/2013/09/dont-mention-the-war/

cell3032• 13 years ago

Didn't they collectively lose more than they ever made in 2008? (and didn't they do so in 1987 already?) How exactly was the free market at work when the government bailed them out?

na853• 13 years ago

Ah yes, the ever-so-refreshing Internet Commenter Pedantry.

Obviously the market is not 100% deregulated. Thank you for your insight.

wavefunction• 13 years ago

Do you think Wall Street would want a "free market."

I think Wall Street likes the market just like it is.

somberi• 13 years ago

This article is from 2010. It is relevant today as well, albeit differently.

zacinbusiness2• 13 years ago

I find the whole banking world to be fascinating, much in the same way that I find the topic of cancer to be fascinating. Both are extremely complex and yet fundamentally simple. Don't get me wrong, I'd much rather have a bank than have cancer, I'm just saying that I love learning about how these complex systems work, how they work with (and against) other systems, and so forth.

In the case of international finance, I think it's really cool how an institution can help another institution raise capital, move debt, and mitigate losses. Like any system that involves independent actors, banking can (and usually is) diseased by those who are able (both intellectually and financially) to game it for their own gain and to the detriment of the system as a whole.

Banking, it seems, is almost aware of how self-destructive it is. These entities take on complex risks that the smartest people in the world can barely understand and they hope that everything will "just work" or, when things don't work, they rely on their overall value to the system - we can't let banks fail.

Still, I don't think all bankers are socially worthless. They help to create confidence in the banking system and in finance in general. It's only the "bad" bankers that are worthless, and even then they are only worthless to those who stand to lose if they fail.

digitalengineer3• 13 years ago

Banks can do whatever they want. It's the Bail-Out part that bothers me. But the Bail-In (The Cyprus Template' where the saver's money is confiscated) that's even more scarier. Check out this Bloomberg chart: http://imgur.com/mjkOn1W If I understand correcly my savings are noted as 'an investment in the bank'. Nice...

klipt2• 13 years ago

So student loans can't be written off, but savings accounts can? Weird world we live in...

qqwwwid5• 13 years ago

I don't know if I'm being naive here but could it be possible that even though bankers acted criminally, the economy and by proxy a lot of average folk, would still have been worst of without a bailout?

crdoconnor3• 13 years ago

This is the reason why it's not just a few bad apples:

"Moral hazard is insidious. It lurks in people's minds and stealthily causes them to make ever riskier, and less principled, decisions. It also fosters Gresham's Dynamics. A Gresham's Dynamic describes an environment in which unethical behavior crowds out ethical behavior. For example, analysts in ratings agencies prior to the crisis had to decide whether they would inflate their ratings to please their customers. Those agencies were, and are, paid for their ratings by the financial institutions that are seeking to have their products rated as highly as possible. The result was that analysts that gave inflated AAA ratings were promoted. Analysts that refused to inflate, were fired. Gresham's Dynamics were omnipresent in the institutions that brought our economy crashing down.

Here is what we now face:

- The structural problems and Gresham's Dynamics in our political economy have been preserved and reinforced.

- The same people that drove us to the brink are still, for the most part, our decision makers.

- We have infused enormous moral hazard into all levels of our economy.

- The majority of politicians and regulators - regardless of party affiliation - are complicit.

http://www.capitalismwithoutfailure.com/2011/02/lawyers-view...

danielbarla• 13 years ago

It's the first time I've run across the term "Gresham's Dynamic"; it very clearly captures a concept I've been trying to explain to explain in my own words, albeit applied to a wider topic. Is the use of the phrase limited to discussions about economies?

midas007• 13 years ago

It's called a racket for a reason:

0. Complexity allows bullshit to conceal the capture of additional money. Case in point: Enron.

1. Goldman Sachs is way too fucking connected. How else would the "non"-double jeopardy prosecution of Sergey Aleynikov and S. 3642 be even remotely possible?

ronaldx2• 13 years ago

Still, I don't think all bankers are socially worthless. They help to create confidence in the banking system and in finance in general.

I don't believe I observe that value in my daily life. Would there be sufficient confidence in finance without investment banking? Surely, there was confidence in finance long before the current generation of exotic derivatives? Surely, there was more confidence in the past, when people were able to relate to what was going on?

Even if the financial industry is apparently building value for now, it seems to be building value on top of a house of cards. And nobody is really sure that the base is stable.

We can argue that this creates value out of nothing, but I don't view that as a good thing - especially not now that a large percentage of the economy is dependent on the financial industry having a steady hand.

gaius6• 13 years ago

I think you don't know quite how old investment banking is. Hundreds and hundreds of years old. Look up the history of the Rothschilds, say, and the industry was well established before even them.

zacinbusiness2• 13 years ago

You're right that a lot of finance is mostly smoke and mirrors. I send you money through my bank, but what actually happens is that debt gets moved around, rather than money. The result is that it looks like I have less money and you have more. And it gets even more tricky when I start paying you back for the loan on my house - you sell off a bundle of loans to someone else, who says that the bundle of loans they bought is a good investment, because now they own debt which is the primary market commodity. Now, there's a market that's built on there being a predictable ratio of payers to defaulters, which makes it easy to calculate how much the commodity is worth.

But we do get the benefit of the trickery - I can go buy shoes at a store because the employees are paid out of debt, rather than out of the store's profits (which are mostly reinvested into other capital that, hopefully, exceeds the debt). Without the debt, and the ability of the market to utilize it as a commodity, I wouldn't be able to participate in mass-market purchasing, and thus my $50 shoes would cost $200

phyalow2• 13 years ago

A lot of technology and software companies are also socially worthless. What a load of drivel.

rodgerd• 13 years ago

Arguably socially counterproductive. Smartphones are nice, but so was near-full-employment in the 50s and 60s.

theorique3• 13 years ago

Why is that an either-or thing?

CmonDev2• 13 years ago

Also charities. Apart of general dodginess, it's unfair that some people can decide what to spend tax money on.

jsmeaton• 13 years ago

Deductions of any kind, in my opinion, are unnecessarily complicated and create so many opportunities for fraud. Reduce the tax rate extensively (make it 10% flat for instance), apply it to gross earnings, and we're done. If you can't afford that 10%, then your business isn't valuable enough or your salary isn't high enough, and something needs to adjust - not your taxable income.

zaqokm2• 13 years ago

most of the things which most people do are socially worthless.

bittercynic• 13 years ago

You should surround yourself with different people.

zaqokm2• 13 years ago

and here I was thinking I was the bitter cynic :)

smsm4210• 13 years ago

I'm afraid if we will start measuring people by their "social worthiness" we'd very quickly arrive to conclusions which most readers of the New Yorker would be very reluctant to support. At least I hope they would.

cousin_it3• 13 years ago

Will we also get to these horrible terrible conclusions if we start measuring jobs by their social worthiness?

smsm4210• 13 years ago

Probably. If you want to be a history scholar but the society decides it'd be better off if you dug trenches or picked apples - would that be horrible terrible for you or just fine?

knowitall• 13 years ago

Possibly: on the phenomenon of bullshit jobs http://www.strikemag.org/bullshit-jobs/

arethuza• 13 years ago

How do you have an objective measure of "social worthiness"?

gaius6• 13 years ago

Especially when you consider that the New Yorker is the newsletter of the Old Money class. They'll be first up against the wall come any revolution, long before "the bankers".

crdoconnor3• 13 years ago

Was there an "Occupy Old Money" protest I didn't hear about?

qqwwwid5• 13 years ago

It seems to me that there is a schism between the financial industry and others harboring huge wealth.

For example, a lot of wealthy people are honestly or pretend to be libertarians. Libertarians don't seem to be very fond of the finical industry.

I wonder why this is?

randomsearch2• 13 years ago

I'm afraid if we will start measuring people by their "social worthiness" we'd very quickly arrive to conclusions which most readers of the New Yorker would be very reluctant to support.

Could you elaborate for a non-American, please?

lhc-• 13 years ago

The New Yorker is a very affluent magazine for a pretty upper class crowd, in general. Its likely that these findings would put a lot of those professions (such as hedge fund traders) low on the list of social worth while listing much poorer classes (like teachers) on a higher tier. This would not be a popular view among members of that hedge fund trader class.

BadassFractal• 13 years ago

Ever tried writing an NSF grant? The people who take 50% of the grant to help you write a quality proposal also do something that is completely socially worthless and in fact halves how much taxpayer money ultimately makes it back into society. And no, that's not a form of "job creation" since it brings no utility to society.

yummyfajitas3• 13 years ago

Or for that matter, ever tried teaching a class? The people who consume your services generally forget nearly everything a few months after the final, yet still earn a hefty premium over their peers who did not take sufficiently many college classes.

gaius6• 13 years ago

You could always write the proposal yourself, in which case you wouldn't get the money and the research wouldn't get done. Therefore your research must be socially worthless too.

icebraining4• 13 years ago

Explaining why something should be funded by society is worthless? Should we just choose them randomly? Yeah, I'm sure that'd be much more beneficial to society /s

yummyfajitas3• 13 years ago

This article seems to be making quite a few implicit assumptions that should be made more explicit:

Meanwhile, big banks also utilize many kinds of trading that aren’t in the service of their traditional clients. One is proprietary trading...There’s no social defense for this practice...

Implicit assumption: speculation is socially worthless.

“You mean to tell me your work as a [fill in the blank here] is worth more to society than a firefighter? An elementary school teacher?...”

Implicit assumption: pay is or should be proportional to gross utility rather than marginal utility.

Apart from this it's typical economist claptrap - thousands of words, no real point. Why is it here?

theorique3• 13 years ago

Implicit assumption: speculation is socially worthless.

And a further assumption that jobs that are deemed "socially worthless" ought not to be done, or ought to be prohibited. In which case professional poker is on the chopping block, or professional athletics is banned because it is deemed to have less "social value" than its compensation level.

Implicit assumption: pay is or should be proportional to gross utility rather than marginal utility.

Or that pay needs to be determined by some official, 'blessed', committee of professional economists who publish a list every year of salaries, based on how much social and economic value is provided by each field of work.

(Sounds kind of Soviet, actually.)

Nursie7• 13 years ago

I'm not sure the argument is that jobs which are not useful should be prohibited, but perhaps it is interesting to try and figure out what it is about our current system that disproportionately rewards the people that juggle with money over and above (for instance) people that teach our children.

I'm not arguing for a centrally defined salary committee, but surely you have to wonder if there is a better way?

qqwwwid5• 13 years ago

The issue of proprietary trading is not about speculation. If anything it is about a lack of speculation. It is about a conflict of interests between a firm and its clients and its shareholders. As I understand it, sometimes it amounts to the employees acting against the interests of both the other two parties.

merkitt• 13 years ago

Could online peer-to-peer banking replace this whole mess someday?

crdoconnor3• 13 years ago

Maybe one day, but not while wealth and political power are so concentrated.

marcosdumay• 13 years ago

Like Kickstarter and those other similar ones? Looks like we already started on that path.

cell3032• 13 years ago

Why make the implicit assumption that investment banking is at most socially worthless? The scale doesn't end at 0 here. When evaluating the utility of things (could also be technology) than the cumulative effect can be negative as well.

CmonDev2• 13 years ago

Still more worthy than freemium games.

netcan8• 13 years ago

Most criticisms of banking as a whole are largely about the moral hazard issues. Seeking out and creating lopsided risk that can be partially offloaded onto the public while the rewards to those risks can be captured by the bank.

There is a fantastic web series called the "Gervais Principle: The Office According to The Office.(1)" The central thesis is that organizations have three types of employees: Sociopaths at the top. Clueless in the middle. Losers on the bottom. The defining characteristic of the Sociopaths elite is 'the basic heads-I-win-tails-you-lose pattern behind all Sociopath machinations.'

Strangely, this fun piece changed how I look at moral hazard. Before, I thought of it mostly as an inevitable consequence of badly designed systems. Similar to employee reward schemes that employees learn to manipulate in a way that is detrimental to the business or cobra bounties intended to reduce the number of snakes in a city leading to backyard cobra farms. I thought it was less of a problem in emergent, evolved human systems. After reading this piece, I think of it differently. It's a human psychology thing. Human systems have assumptions about fair play built into them. Psychologically perverse human (sociopaths) can take advantage of these assumptions.

I knew a guy from Uni. He was doing a Research Masters, badly. He failed. Resubmitted. Appealed. Rewrote. Appealed, and eventually got a pass. He wasn't really smart enough and he never understood the subject. But, universities (especially graduate programs) don't really fail students. Students drop out, especially the ones who struggle. Persistence can substitute for smarts and he walked away with Masters from a top uni. I later learned that he got into the Uni in the fist place with some hack. He applied to a second tier uni, and used some clever clauses to transfer to the better one without having to go through the front door admissions process.

We then proceeded to hound every big name in the field for references. None of them wanted to read this pile of crap but again persistence can substitute for quality and he eventually got some nice references and quotes. He used these along with a professionally written resume and application letters ($450) to land a sought after graduate job. Big government body that takes at least 12 months to fire someone. Excellent entry into the world of public policy research. Before that happened, he had found a recruiter who specializes in these guys. He moves jobs every 6-12 months which means a recurring bounty for the recruiter and a raise for the sociopath. On getting a job they immediately started planning for the next one, like a heist. He was so confident. It took a remarkably long time for bosses & coworkers to figure out exactly how completely useless he was. These people are rare. The systems assume they don't exist and sociopaths take advantage of that weakness.

Around the same time I was hearing the story of a largish company (~$0.5b) bought by a hedge fund and placed in the hands of an 'A-Player' team of senior executives. I knew a manager and long term (20yrs) employee there who narrated the story for me over a couple of years. Outsiders to the company and industry, making salaries an order of magnitude higher than the previous executive team. They proceeded to ruin the company. But, they managed to conceal a lot of that. Milking or liquidating assets. SUing something like a leveraged buyout to raise massive funds to acquire companies. The owners eventually figured it out. The abysmal CEO and his team of executives were paid to leave and every one landed a CEO/COO job at an even bigger company. If they had happened on a win, I'm sure they would have done even better.

After reading 'The Gervais Principle' I saw a bunch of examples of these 'sociopathic machinations' that are much more available to the average person. Just about any mid level manager at any company can take big risks. Draw up massive plans for expensive expansions. Pitch advertising campaigns. Offer to take on impossible product development. Propose to open a new office in another country. Promise huge benefits and demand huge resources. Say you are 100% sure it will work. You might get what you ask for. If you get it, it starts. If you don't, whats the worst that can happen? Maybe your proposals get shot down by a sane senior. That might hurt your status marginally. No big deal. You're more likely to walk away with a small win for initiative. If you get the resources and proceed to balls up your project, you can always quit. If you are in a position to find a similar job, thats not a big loss. If you hit the eject button at the appropriate time and still walk away with a win. You can time it so you are negotiating to be poached while running this doomed program. If it all works out, you are the author of a coup.

A normal company is not resilient to this type of attack because its pretty rare and it's not usually identified if it does happen. Companies are based on an assumption that people aren't like that. The normal deal is that the company takes on the relatively small risk of employees being unproductive. In exchange they take all the upside. A sociopath flips it, taking on massive risk the company is on the hook for and capture some of the rewards. They're own risk is capped at a pretty low level so the more reward the better, regardless of risk. In an extreme case they might lose their job and take a reputation hit, but most likely they'll just leave and get a higher salary elsewhere. It's like taking money out of a company account to the casino. If you double it, you keep the profit. The moral hazard is always there. Most people just aren't corrupted by it.

Moral hazard is the right word for this. Morality is what prevents it in normal circumstances. Sociopath is a bad word for it, because it implies some sort of born pathology. That probably exists, but more often it is a learned behavior. Human morality is absorbed from the environment. If you get a bunch of these sociopaths together, they will rub off on other people. That's how sociopaths breed. It's like a cancerous meme.

I don't have suggestions for dealing with it.

(1) http://www.ribbonfarm.com/the-gervais-principle/

dmgd• 13 years ago

I don't have suggestions for dealing with it.

How about: 1. Keep companies small. 2. Ensure top level management has skin in the game (e.g. partnership).

netcan8• 13 years ago

Libertarians find it ridiculous and innocent to think that moneyed people or corporations are not going to lobby, bribe, manipulate and otherwise take advantage of a political system that can arbitrarily create subsidies, trade barriers, zoning laws, etc. If the opportunity to profit by corrupting the system exists, it will happen. Appealing to morality is naive. So is running around trying to plug the holes in our laws and tweak incentives. The only way to plug the whole is to take away the opportunity by constraining and defunding the government, reducing their ability to be corrupted.

Neo-Marxists find it ridiculous to think that we can have a handful of billionaires & corporations controlling all the wealth in a country without that handful manipulating and controlling the political system. Big money has always come hand in hand with power. It's silly to expect morality to fix this. The super wealthy will control government. We can either be ruled by the wealthy or we can eliminate wealth of this magnitude. Those are the only choices.

Personally I think both of these are naive, in much the same way. They are modernist ideas that assume an understanding we just don't have. Human systems are complex and cannot be designed. The idea that we can start with a limited set of laws and a small government and let everything else emerge, and that the consequences of that emergence (including the political ones that may derail it) will be acceptable is not that different from the old communist 10 year plans.

Ideas like skin-in-the-game are in that category, IMO. Useful as a perspective. Sometimes useful in practice. Not realistic as a solution in many/most cases. Sometimes the world present opportunities for asymmetric risk. Even if we go by the Hammurabi code suggested by Nassim Taleb (currently promoting this idea) of killing an architect who's building collapses there is potential for asymmetric risk. Maybe its small and asymmetric enough to be worth it (5% chance of killing 100 people; huge commission; the architect is old anyway) Maybe the immortal legacy of building a temple is worth the risk of death to the architect, but not the risk of death to the worshipers.

My point was that I don't think we can build systems (or meta systems that let systems emerge) that don't have a risk of moral hazard. Moral hazards exist. Usually morality is the anecdote. Sometimes it isn't

edit: added paragraph

quanticle3• 13 years ago

Ensure top level management has skin in the game (e.g. partnership).

It's better than nothing, sure. But let's not forget that over half of Richard Fuld's wealth was in Lehman Brothers stock. It didn't prevent him from flying his company straight into the ground.

DanielBMarkham2• 13 years ago

There's an assumption here that you're making that I'm not sure you are aware of: that the system is good and that individuals "should" operate a certain way inside of it. Failure to do so is a fault of the individual, not the system.

This occurred to me reading your story of the guy who barely made it through school. You know, telling the story from the guy's point of view might be more useful. Here he is, struggling with the system, and over time and with enough effort he manages to claw his way into a future that he's created for himself.

Same goes for the CEOs "ruining" the company. Get a new executive job, the board of directors are a bunch of idiots, nobody wants to take ownership and the ship is going to sink one way or another. So you keep the ship afloat as long as possible. Meanwhile, since you've managed to keep the company viable much longer than most others could, you get a nice reward.

I'm not saying that these people aren't morally defective in some way, only that you, as the author, are applying a moral judgment to the story that the reader needs to be aware of. I could tell these same stories much differently.

From my own personal experience, I find I understand systems well enough when I can assume that all players are acting in good faith and intelligently. I don't need dumb people at the bottom or sociopaths at the top. In fact, that's the irony of it all: once you begin to make moral judgments about the qualities of various people in systems, it becomes much easier to behave in ways that most folks would find offensive.

Just thought I'd point that out. Nice stories.

Nursie7• 13 years ago

> From my own personal experience, I find I understand systems well enough when I can assume that all players are acting in good faith and intelligently.

So there's no room in your worldview for people at the top who act in their own self interest to the detriment of others and the company as a whole? And everyone that thinks they see that happening just doesn't understand the system well enough?

How charmingly naive.

onetwofiveten3• 13 years ago

I think you're being unfair to netcan here. Netcan is talking about system problems, not individual moral deficiencies. It doesn't really matter whether netcan assumes that these systems are good and individuals should operate a certain way inside of them. The point is that these systems are designed under that assumption, and that causes problems (for those systems). It's pretty clear that the story about the guy who barely made it out of school highlights flaws in school admission and employment recruitment mechanisms. By any reasonable objective measure, his high profile employment is contrary to the design goals of those mechanisms. Whether or not you agree with those goals, it is very plausible that the flaws are present because the designer made the implicit assumption that actors would (to some extent) agree with those goals, and would act "morally" from that point of view. With the story about the executives, either they acted in the best interests of the company or they didn't. If they did, then there's no moral judgement to be made. If they didn't, then the implicit moral judgement was made by the board of directors who hired them (not netcan).

Netcan's point isn't that people at the top are sociopaths and people at the bottom are dumb. It's much more complicated than that. Bad systems set up moral hazards which incentivise sociopathic behaviour. Different people react to moral hazards in different ways. However, once one person (who may be morally deficient) starts following the incentives, many other people (most of whom are simply normal flawed humans) will follow suit. Thus, practically dealing with the problem means treating it as a flaw the design of the system, not in the individual actors.

qqwwwid5• 13 years ago

That kind of behavior is strangely similar to the kind of behavior that corrupts the public sector and government.

Isn't it ironic that we are so quick to bring about arguments regarding the inefficiencies of command economies and big governments due to corruption, bureaucracy, and misalignment of government worker incentives, when our economy is made up of these same smaller scale command economies exhibiting these same problems and inefficiencies?

mathattack7• 13 years ago

At a prior (very larger) company, someone described the path to career success as "Jumping into a lake, creating as big a splash as possible, and getting out of the lake before the water comes down."

I think that summarizes your point. :-)

To answer, "How do we deal with it?" Make the owners and lenders of firms responsible. If a CEO or other employee screws up a company, take the shareholders to 0, then take the bondholders to 0, then take the counterparties to 0. People won't want to do business with people taking crazy risks. The market knew that AIG was gambling bigtime. If folks thought their trades might go to 0, AIG would have never been given so much rope.

It's a tough issue though. There's game theory behind it too. If everyone makes the same high risk trade, and you don't, you can't win. If they're right - they get paid, and you get fired for underperformance. If they're wrong, the system collapses and nobody gets paid.

netcan8• 13 years ago

I agree that too big to fail is an unacceptable piece of public "policy". If shareholders, bondholders & counterparties can't be taken to 0 without collapsing an economy, we have a dangerous moral hazard.

But I think that assymetric risk and moral hazard is just a reality of the world sometimes. It can't be completely eliminated.

rasur• 13 years ago

"someone described the path to career success as "Jumping into a lake, creating as big a splash as possible, and getting out of the lake before the water comes down.""

In the UK, I've overheard the term "Seagull Management" used; "Fly in, shit everywhere, fly off".

AnthonyMouse2• 13 years ago

Make the owners and lenders of firms responsible.

Here's the trouble with that: You haven't solved the mundane version where a mid level manager destroys a division of a large corporation but not the entire corporation. In that case, shareholders losing a large chunk of money is what already happens today. They lose the value of the entire division, and they therefore have a large incentive to prevent it. But it still happens. The shareholders in general have devised no universally effective way to prevent it.

If you increase their exposure, you haven't given them any new defense to the attack, so all you really end up doing is encouraging them not to invest in stocks because stocks now have increased risk over other investment securities.

Your proposal is, essentially, to put incentives in place for the market to solve the problem, and then you assume without proof that with the right incentives the market will solve the problem. But someday somewhere you actually need a solution which parties wanting to avoid being damaged can employ to solve the underlying problem, ideally without overcompensating and causing parties to become unduly risk-averse.

ap22213• 13 years ago

This is an interesting post, and I really like it. Thanks for writing it all down for us.

A mostly off-topic anecdote: this makes me think of my first job, as an intern. I was working for a senior tech manager, and I remember this moment clearly. I had only been working for the company for a few weeks. We were in his office, and he received a phone call. He was on the phone for a while, and I could hear him committing to some things. After he got off the phone he explained the call to me and explained his approach to working in the corporation.

The person who had called him was a peer from another manager. The person had asked him to help with another project that they were working on. I could hear on the call that he verbally agreed to whatever it was that they were asking. He was quite agreeable. However, he told me afterward, that he had no intention of following through. He pointed to an org chart on the wall. There were several people on the chart highlighted. He proceeded to explain the rules: I would have two people that I must impress: my boss's boss, and my boss's boss's boss. To everyone else, I must be amiable and agreeable but to never actually do work. I must present myself well and to say interesting things in meetings. But, my work should be directed at helping those two people achieve their career goals while being as visible as possible in the process.

I thought this was clearly a cynical way of living. However, it was quite successful for this guy. I stayed on with the company for several years after I graduated. During that time, my mentor had been promoted to VP and then general manager. With his help I was promoted to his old position.

I don't think that these types of people are all that rare, unfortunately.

In the end, I had way too much 'moral fiber' to continue on that path. Taking his sociopathic approach always grated internal to me - it just felt wrong. I didn't have enough motivation for success to quell the feeling. I ended up abandoning management (even though I thought myself a fairly effective manager and leader), and going back to be a 'loser' at the bottom.

Luckily for me, the tech world has grown enough in the time since that demand for our loser jobs is really high. I am now able to do fun things, develop projects, feel good about the work that I do, and in the end actually make a really good living. However, most people aren't in such a situation. They must play this absurd game to get ahead.

d23• 13 years ago

I thought this was clearly a cynical way of living. However, it was quite successful for this guy. I stayed on with the company for several years after I graduated. During that time, my mentor had been promoted to VP and then general manager. With his help I was promoted to his old position.

Maybe I'm misunderstanding what you're saying here, but I don't see it as being all that bad.

Sometimes when I go to meetings I don't know what the overall "strategy" is of my boss. I don't want to stay things that might fuck up his plans, so if a client is asking me whether we are doing X and we should be doing X, I don't immediately say "no that's a bad idea" even if I think so, because I know the value of presenting a unified front.

Behind the scenes I can tell my boss that I don't think doing X is a good idea, but ultimately people tend to be wishy-washy and showing a lack of confidence or a lack of cohesion with your team is a bad thing in and of itself.

patentoftheday• 13 years ago

what he got working is not a bad thing. In fact that is how people in a chain of command should act. Impressing your chain of command means, achieving what they want done quickly and efficiently which inturn means what the company's big plan needed your team to achieve. You might not know the big plans of the company's heads, but as long as you get done what are asked to do you can't go bad. Say the task other team who asked for help got for him might be of a lesser priority for the company (if it was a higher priority it would have came through his chain of command that he help these folks) he would be screwing up the company plans if he decided to help because of his misguided attempt to "help" the overall company. His only bad thing was not helping other IF he has some free time. that might have helped him reach the GM role even faster, instead of just looking good infront of other teams they would have talked about him good too.

mathattack7• 13 years ago

A lot of this depends on the type of organization. Some organizations are very top-down, with corporate metrics and P&L flowing down a hierarchy. In firms like this, the approach your boss mentioned works very well. As long as everyone is working to make things happen up their management chain, the organization survives. The nice thing is people tend to have control over what they're accountable for. The down side is teamwork is not incentivised.

Some organizations are very much about cross-organizational teamwork. The bosses have very broad spans of control, and they expect their underlings to work things out between each other. These cultures promote teamwork. The downside is accountability sometimes gets lost.

What's interesting is both types of firms sound similar from the outside. Everyone talks about the importance of teamwork. Once you get inside, or see how they work, you realize it's not always that way.

A couple examples... In general banks generally support the "As long as you hit your # and you make your boss look good, you're ok" mindset. Some firms (Goldman Sachs - like them or not) do find a way to cooperate, and bring the entire breadth of the firm to their customers. Others are much more of a "Every desk for themselves" mindset.

Some consulting firms tend to be good about bringing the best experts from around the world to solve problems. (McKinsey for example, again like them or not) Others are very local office driven, with everyone worrying about their own P&Ls.

tootie• 13 years ago

Found this quote on HN a while back:

I divide my officers into four groups. There are clever, diligent, stupid, and lazy officers. Usually two characteristics are combined. Some are clever and diligent -- their place is the General Staff. The next lot are stupid and lazy -- they make up 90 percent of every army and are suited to routine duties. Anyone who is both clever and lazy is qualified for the highest leadership duties, because he possesses the intellectual clarity and the composure necessary for difficult decisions. One must beware of anyone who is stupid and diligent -- he must not be entrusted with any responsibility because he will always cause only mischief.

http://en.wikipedia.org/wiki/Kurt_von_Hammerstein-Equord

jackgolding• 13 years ago

Good quote, thanks for this

jacques_chester• 13 years ago

I'll take credit, even if it wasn't me personally, as I recall dropping this into an HN thread a few years ago.

wisty2• 13 years ago

A similar quote is commonly (mis?)attributed to Rommel.

mathattack7• 13 years ago

Warren Buffett had something similar, though his point was that you don't want people who are smart, diligent and unethical.

dharmach• 13 years ago

"The central thesis is that organizations have three types of employees: Sociopaths at the top. Clueless in the middle. Losers on the bottom."

How about types of employers based on their attitude to employees? It's a two-way relation after all.

netcan8• 13 years ago

The piece is a kind of tongue in cheek parody. Read it if you're interested. It's very good and I can't do it justice.

api2• 13 years ago

I've run into the Gervais principle in practice too, and I have a different thought. It's a thought that I find very depressing.

It seems to me that the vast majority of people are timid, conservative, and simply too afraid to do anything. The sociopathic business hustler types I've met may be awful people, total assholes who stomp on everyone they can, but they also are unafraid. They're initiators. They make things happen.

It seems sometimes like there's two kinds of people in the world: monsters and the timid. Heroes only exist in comic books.

If this is true, then perhaps societies and economies tolerate the antics of the sociopaths because they are the only people who initiate new actions on a large scale. I definitely see that tolerance in peoples' attitudes toward "captains of industry" who have obvious narcissistic or sociopathic leanings: "sure he's an arsehole but without him there would be no X."

wisty2• 13 years ago

That's just not true. Personality traits are pretty well studies, and you don't just get monsters and the timid.

There's plenty of people who mean well, and are "doers".

Personality traits tend to be normally distributed. There's a few heroes, a few monsters, and a lot of in-betweeners; even if you're just looking at people with low anxiety and low agreeableness.

And there's a reason why a lot of those "in between" movers and shakers don't try to take down the assholes - it's because these assholes generally go down in flames, eventually. It's generally not from some Batman figure taking them on, but a quantum of their peers going "nope, fuck that guy" when they temporarily hit a wall, and need someone to throw them a line.

smsm4210• 13 years ago

This public policy guy looks like a perfect candidate to be a head of a federal department one day. Degree from top university, impressive resume, wide experience... Imagine he's in charge of your healthcare, or education, or nuclear industry, or national security.

netcan8• 13 years ago

I'm going to look him up. Last time I spoke to him was 4 years ago. I wonder where here he is.

flinty• 13 years ago

What you describe in your third paragraph is exactly what was shown in "The Office" episode - "branch closing"(http://en.wikipedia.org/wiki/Branch_Closing#Synopsis).

Based on the pitch/plan of the manager of the Stamford branch the C level executives plan to close the Scranton branch and make the manager of Stamford the head of the northeast division. The Stamford manager leverages this new potential position to get a C level position at Staples thus destroying all plans that Dunder Miflin had made.

This example isn't cited in the Gervais Principle series but is a classic example of the sociopath layer devising a heads I win tails you lose scenario

k3n• 13 years ago

This is perhaps the most insightful comment I've read in weeks, if not months. Kudos.

smky80• 13 years ago

Great post. It really comes down to morality and "cooperation" in the sense of the Prisoner's Dilemma. The more people see defectors succeed, the more likely they are to defect themselves. But once enough people are defecting, almost everyone is worse off.

Nursie7• 13 years ago

Of course it's worthless. They're effectively a parasite class, they exist to direct money to themselves under the guise of directing it where it's needed. They are so far removed from any/all productive work that the whole thing's laughable.

refurb2• 13 years ago

You don't know much about the finance industry I take it?

Nursie7• 13 years ago

Depends if by "know much about" you mean "love unquestioningly".

In which case no, I don't "know much about" the finance industry.

jackgavigan• 13 years ago

Money follows profits in the same way that water follows gravity - it flows into every nook and cranny it can find. The rules and regulations governing financial services are like the tanks and pipes through which water flows. If there's a (loop)hole, it will find it and drip through. If the rules that govern money are too weak, they will be eroded, in the same way that flowing water erodes a riverbank.

Loopholes will always be exploited. If a financial institution decides not to exploit a potentially profitable opportunity, someone else will (and reap the rewards). After a while, your shareholders are going to be asking pointed questions about why your competitors are more profitable. Eventually, you're likely to be fired and replaced, or your company will be acquired by one of your more profitable competitors. Thus, in a Darwinistic fashion, those who exploit the loopholes prosper, while those to stand on their principles are eclipsed and, ultimately, perish.

Risk and reward are inextricably linked. You can't have one without the other. So, wherever you have the potential for profit (i.e. reward), you have the risk of failure. The fact that some banks were allowed to become too big to fail is a regulatory failure, and the regulators get their marching orders from Congress, which is elected by the People.

It's also worth bearing in mind that the US government looks set to make a handsome profit on its "bail-outs" (many of which were actually investments into, or loans to companies, which have yielded dividend or interest returns): http://projects.propublica.org/bailout/

mentos• 13 years ago

"Don't hate the player, hate the game."

vernie• 13 years ago

Why not both?

mankypro• 13 years ago

Who is John Galt?

vfclists• 13 years ago

The article is a long-winded piece of piffle that says nothing in particular. I would say it was even planted by the banks themselves. After all it easy to use soft criticisms to divert attention from the harsher ones that will receive more attention in the absence of such mild diversionary ones.

Readers don't understanding the sheer duplicitous nature of the media, even the liberal ones who appear critical towards the banks. They simply don't explain the facts that would result in the public asking for bank chiefs to be summarily executed like they occasionally do in China. It makes you wonder whether the writer is a shill, whether the editor chose the most clueless reporter to write about the issue, deliberately or otherwise. I never understood why Max Keiser repeatedly called for the bankers to be hanged until I read Griftopia by Matt Taibbi. Its such an eye opener. I can't even understand most of the instruments involved I see enough to understand why Max Keiser called for their hanging.

Turner’s viewpoint caused consternation in the City of London, the world’s largest financial market? Is the writer serious? That is the City sounding like Brer Rabbit asking not to be thrown in the briar patch.

Let us take US for instance. $1.4 trillion would have been enough to pay of the all subprime mortgages which were allegedly at the heart of the crisis. Why then will the bailout cost $15 trillion? Who then incurred the additional $14 trillion in debt taxpayers, their grandchildren and their great grandchildren are saddled with?

Turner's statement that what investment bankers do is socially worthless must be the understatement of the millennium.

axilmar• 13 years ago

So many words to say that people in finance prefer short term investments that are more profitable than long term investments, no matter what the consequences of the short term investments are.

Much of what investment bankers do is socially worthless (2010)

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