As we come to the beginning of the end of the financial crisis, the calls for the blood of bankers have abated. There is universal agreement that the system overall was flawed, and it is unfair to burden a particular group with the full responsibility of our current sorry state.
The time has come to dispassionately step back and ask the tough question. It may or not be unfair, but is it incorrect?
Consider first the arguments for those who claim that the Bankers have suffered enough.
There was a sense of outrage that that the Bankers had not paid for their sins. This is simply not true. As a percentage of their wealth, Bankers have lost more than everyone else combined. Fully 40% of Lehman stock was held by its employees. When that stock was worth $85, the company was worth around the same, in billions of dollars. Every person in Wall Street has the right to claim that they could not foresee the collapse. The original argument was that it took mala fide intent, or stupidity to not have seen the risk. It turns out that stupidity was the right answer, since every idiot on Wall Street was in fact heavily invested in – you guessed it, Wall Street.
Which brings us nicely to point 2. The idiots could not be held responsible, since there was not deliberate fraud. There is today only a perplexing cloud of sub moronic decisions. How, is everyone asking, could we not have foreseen this ? Naturally, we forgive ourselves, and having done that, find it easy to extend the forgiveness to Wall Street. They could hardly be held responsible for the wrong decisions. After all, we made them too!
Finally, we all would like to look at who else we could hold responsible. There is a popular cry that Rating agencies should have done more, or that the entire process of Ratings is intrinsically flawed. Regulatory agencies are also very popular invitees to the whip-them-all parties. Finally, what about the consumer, the buyer of gas guzzling Hummers, the takers of sub-prime loans to purchase houses three sizes too big? Surely, some of the pie, humble or otherwise, belongs to him as well.
These arguments are not unjust, but unfortunately they miss the point. This is not a bad thing – it shows our intrinsic humanity. It takes a special kind of cruelty to turn away from justice for the past and coldly consider what is best for our future. But it must be done. “The greatest good of the largest number” is a disgusting motto, but we it does help in analysing the issues.
I will get to the inconvenient truths, but first let me speculate about why the Bankers lost so much money.
<nasty on>The reason that the Bankers lost so much of their personal money was that they were all overpaid, and behaved exactly like people do when they come into money that they know they haven’t earned. They throw it into the riskiest earnings streams that they can find. That comforts them, because if they lose the money, well then, they did not do such a bad thing after all, since they didn’t take the money home with them. And if they win, well then, this time the money was made by them, so that feels good as well! <nasty off>
Well, that was nasty, but my personal belief in this comes from the incidence of Wall Street Bankers in Las Vegas during the boom years. It really doesn’t take too much intelligence to know that you are playing against the house, so why do such highly educated and well paid people – which probably means that they are intelligent – keep playing these games?
To come to somewhat more factual matters, the arguments for letting Ken Lewis and all the other CEOs “pursue other interests” are as follows.
The current incumbents cannot effect the change we need. It is sad but true that it is only after Obama won the presidency has it become acceptable to admit that it was a mistake to give Bush carte-blanche in Iraq. Only Senator Edwards had the courage to admit that he made a mistake, and in retrospect, it may be because it was one of his smaller ones The current lot will go right back to making original sin #1, forcing really intelligent people to think like idiots because of misguided compensation structures.
Which bring us to point #2. While it is probably correct to absolve the CEOs of fraud, it would be incorrect to absolve them of stupidity. One has to assume that they have blundered, and it would not be right to not hold them accountable for their blunders. In this case, by kicking them out.
The last and final point is simply a rebuttal of the desire to make major changes to the infrastructure, or to the nature of human beings at large. It may or not be feasible to make major changes to the infrastructure and social polity within which Wall Street operates. It is simply not the better answer. We don’t need change around Wall Street, we need it in Wall Street. The best way to effect that change is change the players, not the environment within which Wall Street operates.
The last point is the coldest of them all, because it makes no bones about asking Ken Lewis to lose his job so that we can get on with our lives without having to wait 10 years for a new world order to come into place. But it is also the most important. It is simply the most practical decision to get a new broom to sweep clean.
With the recent turnaround in the stock market, happy days are here again, at least for a minute. And yet, if you are very, very still, you will a hear a faint rustling in the background, like something scary sneaking up on a rabbit.
That rustling you hear is everybody sneaking around looking for anybody to blame for our current economic distress. Soon we will witness a free-for-all blamefest.
Let me just get a jump on here that while no one is paying attention.
First of all, I don’t believe that we are witnessing the bursting of an ‘oil bubble.’ What we are seeing now is a combination of 1) an expected drop in prices due to a drop in demand and 2) a reaction to market turbulence that sent the dollar dropping rapidly against the euro. This happy time won’t last. It’s a blip on the screen; a shiny reflection on the water that survivors stranded on a deserted island briefly mistake for a rescue ship.
Calm down. It’s not a rescue ship. We really are doomed.
So let’s get back to naming names and assigning blame. Who caused this mess? Was it Alan Greenspan? Was it day traders and short sellers? Was it oil and commodities speculators? Whom should we string up for this? I think there is plenty of blame to go around, but it doesn’t seem to be settling in the right places. It may never settle there. That doesn’t mean I can’t assign it in my own special way, right here, right now:
Why is it that if I go to the restroom too many times on my shift I get in trouble, but if our CEO loses us billions of dollars by making risky investment decisions that go bad, he gets to retire with a golden parachute of $132 million? Personally, I call that bad management. I mean, I could run our corporation into the ground faster and better and all I would require by way of a parachute is a single million dollars. That’s all I want, not a penny more. You see, right there I could have saved our stockholders $131 million but did anyone ask me? No. I’m not waiting by the phone either.
It really is the economy stupid. What did you think the spoiled son of a Texas oilman was going to do for you anyway? What ever made you think for one single second that he even cared? Molly Ivins sounded the alarm about Dubya over and over again, in book after book, and she kept on sounding it right up until her untimely death last year, but did anyone listen? They did not. You know those chickens that will be in every pot? First they have to come home to roost. That’s what’s happening right now. Try and catch one if you can. You’ll be needing the protein.
Who ever heard of an economy that could sustain itself simply by buying tons of cheap crap from China? Which economic theory lays that possibility out in a way that makes even marginal sense? I used to like to troll the bargain end-caps at Target as much as the next woman, but no more. Even if it means the terrorists win, my pocketbook has forced me back to ‘use it up, wear it out, make it do’. I have been forced to ’stretch’ meat with noodles and mashed potatoes. Next I’ll be making Depression Cake. We should have known this all along, but, flush with cash, many Americans overspent while the housing boom was booming, and now that it’s bust, the party is over. Expect the next waive of credit defaults to be unsecured.
Investment banks should not be allowed to chop up bad in debt and package it in ways that make it untraceable, then trade it in insane ways that bring down entire retail institutions. That is the sort of high risk gambit that regulation was invented to address, but no one in Congress got around to passing any regulation. Could it be because they themselves were making too much money while things were going well? No, that’s too cynical. Still, they have been less than effective. The current legislation meant to help out the five million homeowners expected to lose their homes this year to foreclosure, if passed, will help about 400,000 people, if the banks agree to work with them. It leaves the decision up to the banks. But it hasn’t been passed yet. There’s talk of a veto. God help us, because Congress won’t. You can count on that.
That’s my short list for today. I’d like to see a parade of CEOs held accountable for horrible decisions and unfathomable losses. I dream about that.
I may as well dream. You know what happens when we let dreams die.
The Game-Changer: How You Can Drive Revenue and Profit Growth With Innovation. By A. G. Lafley & Ram Charan. Crown Business, 2008. 352 pages. $27.50.
As the subtitle (How You Can Drive Revenue and Profit Growth) of The Game-Changer indicates, this recent volume by A. G. Lafley and Ram Charan is meant more as a business book, even a business how-to manual, than as an economics text. The stature of the two authors may make this a moot point; Charan is a highly influential analyst of corporate America, corporate consultant and author of books such as Boards That Deliver (2005) and Execution (2002), while Lafley is chairman and CEO of Proctor & Gamble (P & G). Between the two of them, these men regularly make decisions that fundamentally affect the economy. However, that’s not why this book was selected. Rather, The Game-Changer will be discussed for what it shows about the nature of the corporation in a changing economy.
The Game-Changer blends two distinct purposes. It tells how Lafley turned Proctor & Gamble around after being appointed CEO in 2000. The Game-Changer also explains how to innovate, and, as the subtitle suggests, how to use innovation to transform a business and make it more profitable. Since Lafley sees innovation as central to the transformation executed, these two purposes are definitely linked. Often, a challenge at P & G is used as a platform to develop general principles of innovation. What’s more, since Lafley is exceptionally open about how decisions were made, how ideas are developed and what mistakes were made, the sections on P & G are a worthy extended case study in themselves.
The Game-Changer has a number of strengths and weaknesses; like its purposes, these are often interwoven. The co-authorship provides an example. On one hand, it provides opportunities to switch perspectives usefully, moving from inside P & G to outside. On the other, switching points of view from chapter to chapter can be jarring, and it isn’t always clear why the switches occur as they do. (In some cases, I was more interested in the other perspective than the one given. This is especially true when Lafley was discussing things like P & G’s values; he was so caught up in emotionally charged language that he drifted away from reality.) The text doesn’t limit itself to P & G but gives examples from numerous companies—a definite plus. On the other hand, they aren’t as fully realized, and so they become mere sketches or hints at times.Central to the multi-faceted value The Game-Changer offers readers are two definitions. The first is the definition of “game-changer” itself, found on page vii. “Game-changer” is defined seven different ways. All are positive, and it’s clear the definition is meant to be sweeping. However, it also reveals the many potential paradoxes in their endeavor. Are these authors discussing the work of “a visionary strategist” who would reshape things unilaterally? Or the “hardheaded humanist” of the seventh definition “who sees innovation as a social process”? The tension between these two is part of what fascinates about this book and about innovation today; who controls the changing game? The economy?
The second essential definition is of innovation: “An innovation is the conversion of a new idea into revenues and profits” (21). The book goes to draw the distinction between invention and innovation and to explain that, without customers and success in the market, an innovation “is, at best, a curiosity.” From a business standpoint, that sounds pragmatic and perhaps even self-evident. However, notice what this does; it focuses solely on the successful innovations. It removes the learning process, and, because no time scale is provided, is likely to pressure firms to focus on the short-term.
Other tensions define the book and P & G’s struggle. On one hand, Lafley can sum up situations simply, saying, “P & G prices were too high” (9). On another hand, he can discuss his organization’s corporate cultures with phrases that are so cliché they are almost dim. What does it mean to say “P & G is purpose-lead and values-driven” (11)? Seriously. Are their organizations out there that are saying, “We’re proudly purpose-free”? And yet, there’s the much needed third hand on which we must recount the intense complexity of reorganizing an entire corporation, one with highly profitable brands, and realigning how business is done. There is a tremendous gap between the overly simple statements and the deeply complicated information sorting P & G, or any innovative company, must engage in. If you read The Game-Changer, you won’t just be studying Proctor & Gamble or innovation. You’ll get a glimpse at how an organization, even an immensely successful organization, must redefine itself as the economy shifts.
Two details of this redefinition deserve special attention, both for their centrality to the process and because the authors deal with them explicitly: unlike many of us, Lafley & Charan recognize the forces at work on them. The first is a push towards commoditization, a transformation that has blindsided too many firms who thought they’d differentiated themselves in the market. The Game-Changer explains how P & G used innovation to differentiate themselves in a market defined by commoditization. Second, and perhaps the most fascinating part of the book, Lafley describes the lengths to which researchers at P & G go to understand their customers. My favorite is “Living It,” a program developed after 2001 as part of P & G’s “consumer closeness program” (38), in which employees actually live with customers. The description of what they learned from living with lower-income customers in Mexico is striking, and it’s hard to imagine learning such a visceral respect for these specific values any other way. It’s clear that in an information economy, successful organizations may have to become economic anthropologists to get the information they need, and that is changing the game indeed.
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