Thursday, March 10, 2011

Too big to fail vs too small to care about

Mervyn King, The Governor of the Bank of England, was interviewed by Charles Moore of The Telegraph.  I love his observation about business managers, especially banking managers, being overly reliant on data and mathematical or statistical analysis in running their operations:

“Alfred Marshall [the founder of Cambridge economics] was absolutely right that you should do the mathematics but then burn the paper and write it down in words.” Maths and models should be “aids to thinking, not substitutes for it”. 

I am seeing the management of my own company plunging themselves into “maths and models” and getting completely lost in the process.

What the highly regarded Mr. King was talking about, however, was the financial industry which is still operating with excessive risk because they are too big to fail and have incentives to take risks too big to take.

“Mr King goes on, too many in financial services have thought “if it’s possible to make money out of gullible or unsuspecting customers, particularly institutional customers, that is perfectly acceptable … in the past 25 years, banks have increasingly “taken bets with other people’s money”.

Now, as then, a lot of people know that the financial industry is operating recklessly, but no one can persuade the governments to break up these banks.

I still praise Bush and Obama, and their counterparts in Britain and Europe for rescuing the financial system in 2008 and 2009.  I remain deeply disappointed that they didn’t break up the banks that were too big to fail when the banks were weak, confused, and vulnerable.  But they didn’t, and the banks rallied and won their key battles and are onto bigger and better systems of compensation that pay them superstar bonuses while they risk other people’s money, knowing that the taxpayers will rescue their biggest mistakes, and knowing that the ones to lose their jobs, livelihoods, families, and futures are those who are too small to care about.

Mr. King says simply:

Could there be a repeat? “Yes! The problem is still there. The 'search for yield’ goes on. Imbalances are beginning to grow again.”

As the producer of the Academy Award winning documentary “Inside Job” pointed out when given his Oscar that not one financial executive has gone to jail.  And, as he said, that is wrong.