The Fourteenth Banker Blog

August 14, 2010

You Can’t Hide Those Lying Eyes

Filed under: Running Commentary — thefourteenthbanker @ 10:24 AM

This Stanford Paper is absolute gold.  The full paper is attached as Stanford Paper on Deceit.  Huffington Post summary is here.

The paper is brilliant work in its own right.  It focuses on what CEOs say in investor conference calls and how they say it.  How they say it provides psychological linguistic clues into whether they are lying or not.

But that is not what immediately struck me about this paper. What struck me is that the described behavior also happens in a thousand staff meetings throughout the organizations. And is encouraged. Now that is not to say that in organizations such as big banks the use of such lying is pervasive. The subtleties of the question have to do with what is versus what is becoming.

Almost every big organization is run as if it were the sum of its component internal financials. Since management is inspecting these results just as closely as investors inspect the firms consolidated numbers, draw their perceptions and dole out the rewards on that same basis, would not the same deceitful dynamics occur in those contexts as well? In fact, would certain organizations that were more likely to make judgements and determine rewards on the basis of such internal financials be more likely to have deceit in the ranks, effectively making it viral? Might this be part of the answer to the great “WHY” of the financial crisis?

In the classic investor conference call, the CEO and CFO and perhaps on or two others are clearly in charge of the call and dispense the right to question to specific reporters much like the President at an East Wing press conference. Lower in the organization, in the hypothetical staff meeting, the meeting CEO is the inquisitor. They ask the question about divisional performance and have the opportunity to cross-examine, should they choose to do so. In this format the requisite skill is exactly the same. If a divisional manager is skilled at producing deceitful numbers and skilled at lying about the substance behind those numbers, they are rewarded with a higher personal “share price”. The actual deceit can take many forms. In the case of a BP, the on site managers might have adopted deceitful practices that were not officially sanctioned by upper management, but were unofficially mandatory with the financial reviews being the mediating mechanism.  Cutting corners, dumping fluids, falsifying reports, taking risks…. When the project financials rolled up these things would have created better numbers than otherwise, and if the manager could declare it was their excellent management practice that produced such better results, then they have achieved the same as the lying CEO has attempted.

Work such as this analysis, properly used, might provide the foundation for correction of certain behavioral aspects of systemic risk by deconstructing the dysfunctional corporate management systems in place today. Elizabeth Warren and other regulators should take note of the need to address such matters in their Financial Regulation implementation.

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2 Comments »

  1. Great job, nice post.

    Comment by charles — August 15, 2010 @ 8:48 AM | Reply

  2. Very interesting on a quick perusal. The quant’s need to keep their income stream going too at the university. It seemed very obvious to me that Erin Callan personally was selling a conception that Lehman was working out of their problems. Factually, Lehman died of a run by short term investors. Almost surely induced by circumstances of the Bear rescue by big players. Like surrepticiously half sawing through a blind person’s cane. Lehman was in play. The internet was filled with rumour that is grist for every short player. Did the asset condition of Lehman have much at all to do with the collapse of Lehman itself? Marking to market when literally no market exists for much of the paper whose cash flow looked to be substantially all performing cash flow for the moment. Assets that must be held long to survive over the long term but which killed them by borrowing short for the same assets. What was missing was the forced time to work out the poor holdings Lehman did hold. What all this really says is that we are inundated in our society with self deceit. I see little difference here from Joe Bageant’s Reverend brother that casts demons out of old Camaro engines in the trailer park.

    Callan had a job to do . That job was to sell the management position in Lehman never forgetting that around one third of the Lehman shares were held internally. Substantially all of the personal wealth of the inside managers was tied up in Lehman shares which many of the insiders leveraged the hell out of to excercise their options in the first place. What better illustration than Fuld the speculator par excellance whining and crying about Lehman being shorted and panic being strewn all over the financial scene?

    I never cease to be amazed at the misunderstandings about consolidated financial statements. The consolidated financial statement is a pretension that one entity exists. I have, for decades, watched basic corporate protections thrown out by internal managers that do not understand the consolidated financial statement.

    There sure is deceit . American financial deceit on one hand is virulently blatant and do goodish touchy feely on the other hand. Financial pros are poor grifters mostly. The pro grifter knows he is a thief and will proudly admit it among their own kind. Most of Wall Street is incapable of admitting to themselves that they are thieves.

    What kind of national incompetence abounds when pros invest long term in the very people that they wish to reduce economically? Guaranteeing that their investments will not be fully collectable. Sure, they unload the crap on others and go out and repeat the procesure so that at any one time they are directly and indirectly fully invested in the same type of assets? This smacks of delusional demons in the engine block belief structures in their civilization.

    Damn, even deceit get’s so complicated the concept gets buried too !

    Comment by Jerry J — August 15, 2010 @ 11:19 AM | Reply


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