The Fourteenth Banker Blog

May 2, 2010

We must begin to say “No!”

Filed under: Uncategorized — thefourteenthbanker @ 10:12 PM

Once again a writer has struck a chord.   Thank you Linda Keenan & Janine R. Wedel.  As usual, it takes someone with a broader perspective, social anthropology in this case, to see what is really going on.

“Only by engaging in irregular practices can the manager run a successful enterprise.”

Does this quote describe the unspoken operating principle for profiteers of Goldman Sachs, and the rest of the disgraced financial industry? It could. But actually the quote is from economist Joseph Berliner, in his classic study of management methods not here in America, but in the Soviet Union.

For that Soviet-era manager, “success” meant meeting production targets, or, at least, appearing to meet them.

14 here.  This describes my experience at my large bank.

What was the personal agenda for a manager during the Cold War years? To please authorities. An entire language was developed under communism to describe the practice of creating fictions to do just that. Russians speak of ochkovtiratel’stvo, literally, to kick the dust into someone’s eyes, or as we might say, pull the wool over someone’s eyes. In the case of a factory operating under central planning, that meant anything from managers subtly readjusting figures to outright falsifying them to appease or fool their overseer. They took it as a given that false reporting – pripiski–or other shady practices was the norm.

14 here.  As we have asked before, how does such a culture come to exist?  How do our institutions come to resemble Stalinist coping mechanisms?  It is not happenstance.  It is because of what has been imposed by CEOs, or even by shareholders who are too often speculators.  That is why I keep posting on the ownership conundrum.  We are not going to solve this until we have new types of owners.

But what comes first, the chicken or the egg?  Will the owners and CEOs change first, and then allow other managers and employees to change?  Or will the employee and his manager begin to say “No!”, and usher in a new age of CEO and ownership?  People throughout the organization must begin to have the courage to say “No”.  That is how all revolutions begin. Martin Luther King said “No!”  Mahatma Ghandi said “No”.  Revolution does not have to be violent so do not be afraid of the word.

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15 Comments »

  1. Your example of the Soviet Union is interesting. I studied (and wrote my thesis) as an undergrad on the transition from Communism to Capitalism in the FSU and CEE. One of the outcomes of the Soviet economic planning was that success in meeting targets was not rewarded and failure was punished severely (not severely like losing a bonus). As a result, factory managers essentially engaged in creative massaging of production outputs. Another factor was that because the Soviet economy was so complex (too complex for the government and probably even too complex to be managed by the most powerful supercomputer today) that the targets for next year were set at the production levels achieved last year. This created a powerful incentive to ratchet up production (or as you mentioned manage reporting of production) only just above the level of last year. If you miss the target, you are punished severely. If you exceed the target by a large amount, you increase the probability that you get punished severely next year.

    The analogy to the banks of today (and of all large public companies) is that “production” from the Soviet era can be replaced by revenues/earnings in the current era. Management of public companies are punished (in the markets at least) for missing earnings guidance (the analogy to production targets). The worse the miss, the greater the punishment although, unlike the Soviet factory managers, they stand to make a great deal of money for exceeding estimates. Thus, the response has largely been for them to shape the estimates themselves by providing guidance that analysts then (generally) use as estimates for the company’s future earnings potential and is built into their recommendations. The massaging of supposedly independent analysts’ estimates (not to mention the adoption by “news” networks like CNBC of an “analyst estimate”) has allowed companies to capture the analysts covering their company, much in the way Soviet factory managers could “pull the wool over the eyes” of their overseers. When this fails, ther are all kinds of way for the management to massage the accounting (most of which are legal) to not disappoint the analysts’ numbers which management spoon fed them. If all else fails, there are always maybe legal (Lehman Brothers’ Repo 105) and entirely illegal (all of Enron’s accounting) methods to meet those estimates.

    Comment by B G — May 3, 2010 @ 4:44 AM | Reply

  2. It’s interesting that the same organizational features for which the Soviet Union was (rightly) derided are heralded when applied to individual corporations. Centrally planned dictatorship didn’t work on the scale of any of the former communist countries. Why should the same principles be suitable to run modern large corporations which have balance sheets larger than most communist states ever had?

    There is no better model available at present–experiments with neoliberal corporate management (i.e. internal competition between divisions) and democratic corporations have not been promising–but it seems clear that a new model of corporate organization and governance is necessary to reduce the damage corporations inflict on human welfare.

    Comment by Curmudgeon — May 3, 2010 @ 5:38 AM | Reply

  3. A friend (admittedly very liberal) sent me this link today
    http://exiledonline.com/confessions-of-a-wall-st-nihilist-forget-about-goldman-sachs-our-entire-economy-is-built-on-fraud/

    that tangentially speaks to the structure discussed here. I would be curious to hear 14’s comments, from the belly of the beast, as it were. Granted, the author of this piece sounds like Matt Taibbi on meth, but his tale makes the point that the near certainty of the panic that would ensue if all the culprits were brought down is what prevents justice ever being done. Anyone care to speak to this?
    One snippet here-
    “I’m sure you have the answer, you and Ron Paul and all the other pot-smoking libertarian do-gooders have it all figured out. But what I’m saying is, no confidence means end of the confidence game. That’s what Lehman showed. Every single player in finance suddenly had to face the fundamental problem—this whole fucking economy is built on fraud and lies and garbage. So when Lehman collapsed, every single player panicked, going, ‘If Lehman was nothing but a Ponzi scheme—and I know what I’m running is a Ponzi scheme—holy shit, that means everyone else is running a Ponzi scheme too! Run for the exits!’ No one trusted anyone else, everyone pulled out, and the entire global economy collapsed just like that. And that meant your parents, my parents, every teacher, every fireman, every person in the country going into retirement, every price on every asset—wiped out.

    Comment by Sandi — May 3, 2010 @ 12:35 PM | Reply

    • I guess if I knew the answer to all that I could get rich on everyone going bust. First of all, there is a lot of truth in that link about human nature and about the situation we found ourselves in and remain in to some degree. (And it is very entertaining) I have several thoughts that bear on the questions and I think it is worthy of a post. So I will get back to you on the topic. But, I am not so pessimistic. I think the answer may be in the realm of creation/evolution and neuroscience, but I’m going to have to try to something useful yet succinct, which most people will probably find boring.

      Comment by thefourteenthbanker — May 4, 2010 @ 2:06 AM | Reply

      • Neuroscience? Now that’s an angle I hadn’t considered. I look forward to your thoughts!
        I have long been a student of human behavior and am glad to see its role addressed in some of the current financial writings, like “Animal Spirits”. It always amazes me that people like Greenspan think events happen in a vacuum, sans any human input except pure intellect.

        Comment by Sandi — May 4, 2010 @ 12:02 PM

      • I was reading the book The Hidden Brain where the author holds the view that a large number of our daily decisions/biases are product of the unconscious mind and not based on deliberation, reason or rational thinking! Wondering if implicit obedience to the prevailing wind or corporate culture or to the diktats of the chain in command is automatic while saying NO requires more effort (and is slow)

        Comment by alwaysnaive — May 4, 2010 @ 5:51 PM

      • Well, after reviewing my library, I have not found what I was looking for. But the gist if it is this, hard as it may be to believe, societies do become more cooperative over time. Those that don’t become extinct. I’m not talking species here, I am talking cultures, nations, groups. Because of that, there is also an evolution in the brain and the “cooperative” genes become more prevalent. I have seen this demonstrated scientifically and I believe we can see it more often in the world at large. I just couldn’t find the succinct references I wanted. So, evolution and neurology tend towards more cooperation. Now, we could be the group that is going to become extinct, but I’m hoping not.

        What is required, mandatory, and essential, is that there must be sanctions for those who act against the interest of society. That is a challenge we have to face up to. If I find more scientific stuff, I will post it.

        Comment by thefourteenthbanker — May 4, 2010 @ 10:47 PM

  4. Speaking to BG’s point about expectations, as Simon and James point out in “13 Bankers”, back in the old days of LTBH (long-term buy and hold) investing, not much attention was paid to quarterly earnings, or rather, not that many of us were invested, so it wasn’t an issue.

    This is something that has bothered me for some time – the drive to increase quarterly earnings, driven in part by the ubiquitous CNBC, Bloomberg, etc. and the fact that most of us are invested now, one way or another (that “ownership society BS again). IMO, it wasn’t just the sweet fees that investment banks get from M&A activity, or creating ways to finance buyouts; it is that by doing such deals and eliminating the “excess” in the system, profits increase, at least temporarily, and share value rises. Back in the Pleistocene, nobody worried so much about capital appreciation on their portfolio – they were in for the long haul. Now capital gains are ALL that matter – and how nice of Uncle Sam to make them even MORE attractive by cutting the taxes on them to peanuts. I wonder if anyone on the tax writing committee has thought through the consequences of that tax cut? It surely has driven more consolidation. And now we have United and Continental merging. And guess who’s going to take it in the neck and who’s going to whistle all the way to the bank (as it were)?

    Comment by Sandi — May 3, 2010 @ 3:02 PM | Reply

  5. http://dealbook.blogs.nytimes.com/2010/05/03/what-goldman-was-and-what-it-now-is/

    <<>>

    That’s not the only thing they bet, the short-sighted bastards. They not only nearly sunk the ship, they want the captain to save their foundering vessel! Now THAT’S gall.

    Comment by Sandi — May 3, 2010 @ 9:35 PM | Reply

  6. Back in 1890, Gandhi once famously said “A customer is the most important visitor on our premises. He is not dependent on us. We are dependent on him….” He went on to emphasis that “We are not doing him a favor by serving him. He is doing us a favor by giving us the opportunity to do so.”

    The hearing by the Senate Panel demonstrated that Lloyd C. Blankfein, or other Goldman execs hold a very different view!

    Could the employee handling Abacus at GS said NO (to screwing the customer) and read what Gandhi said back to the the CEO?

    Comment by alwaysnaive — May 3, 2010 @ 11:57 PM | Reply

  7. 14. I agree with the USSR analogy – but doubt that it originates from an ownership problem.

    TBTF banks have, since the ’80s, have adopted a business model that involves – primarily – monetizing our political process for profit.

    As such, they have learned and now emulate the political practices that have grown to exasperate us all.

    I’m sure I don’t need to point-out that this has proven to be a super-profitable strategy. Why grow organically, when you can grow politically? Why work for profits when you can ensure that you’re legally entitled to them? Better managers will float to the top only once we resolve the campaign contribution problems that have hijacked our ‘democratic’ system.

    The water won’t clear until we kick the pigs out of our stream.

    Comment by Lucy Honeychurch — May 4, 2010 @ 10:15 PM | Reply

  8. 14. Here’s an interesting piece from Potlatch (http://potlatch.typepad.com/weblog/) that posits where we went wrong was a focus on maximizing rather than optimizing –

    “The first question is how we can return to thinking of business in optimising terms, rather than maximising. Then the deeper question is how we became so deluded as to treat surplus extraction – surely a bi-product of making, exchanging and consuming – as our raison d’etre in the first place. The fact that surpluses are simple and quantifiable, while achieving them is complex, is an absurd justification for elevating the former above the latter in our hierarchy of economic goals and needs.” …

    “Even the most aggressive profit-seeking manager will probably admit that this is mainly a rule of thumb. If they only thought about profit, they’d have a mutiny from employees, citizens and customers on their hands. If they were truly to maximise the return to shareholders, they’d liquidate the company and offer a bumper payout there and then.” … well, the mutiny is HERE.

    “A more nuanced understanding of both capitalism and nature might recognise that ‘survival of the fittest’ isn’t some quasi-Fascist appeal to supremacy, but a recognition that survivors are those who fit in with their surroundings.”

    http://www.demos.co.uk/publications/reinventing-the-firm

    Perhaps a recognition that adaptation, rather than control;

    Comment by lucyhoneychurch — May 5, 2010 @ 8:07 AM | Reply

  9. … should be the goal on the business side.

    Comment by lucyhoneychurch — May 5, 2010 @ 8:09 AM | Reply

    • Along these lines, the NYTimes magazine has a story on how babies seem to understand the difference between right and wrong, or rather, what is just and what’s not.

      http://www.nytimes.com/2010/05/09/magazine/09babies-t.html?hp

      This speaks to what I think thefourteenthbanker was referring to, that we seem to have an “alturism gene”. This would make perfect sense, because a tribal unit could not survive if the members behaved as our Wall St. buddies have been doing . And I agree with lucyhoneychurch that Dawin has been misinterpreted – it is about adaptation, not “the fittest” (which we have construed in our culture to mean “the strongest”). But then, we’ve also interpreted Genesis to believe that “dominion over” meant rape and pillage…….

      Comment by Sandi — May 5, 2010 @ 2:08 PM | Reply


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