"It's about time!!!" was how one, possibly irritated, blog reader greeted the news that Lloyd Blankfein, Goldman Sach’s CEO, and his team will be paid only their base salaries, with no bonuses this year, as a show of contrition for being part of an industry that's been responsible for the current crisis. My reaction, on the other hand, is just a big yawn, mainly because under the Troubled Assets Relief Program (TARP) rules, there are really restrictions on executive compensation which would apply to Goldman as a voluntary beneficiary of the federal government's capital injection program. In other words, Goldman is only squeezing every bit of media spin that it can get out of this inevitability. But that's not what this post is about.
You see, there's this Gilian Tett article about the insights she gained on Wall Street banking behavior while working as a social anthropologist, studying Tajik goat-herders in the Himalayas some two decades earlier. Apparently, her observations or studies on micro-level incentives and political structures among Tajik goat-herders provide a useful template for analyzing risk and remuneration at modern-day banks. The interesting point she attempted to explain is this: How come the bonus system, despite its being endemic to the industry, has not produced identical outcomes at the banks?
Let me now quote her explanation (emphasis are mine):
Why? Luck, undoubtedly, plays a part. But I suspect at least three other factors might also shed light on the puzzle.
One is obvious: namely the character of those running banks. In recent years, it has been fashionable in management circles to encourage leaders to delegate. This is a principle Chuck Prince, former head of Citi, for example, appears to have practised (perhaps because there was no alternative, given Citi’s gargantuan size). So, famously, did James Cayne at Bear Stearns.
But one trait most surviving bank leaders share, as one policymaker recently observed to me, is that “they tend to be meddlers – very hands on”. Moreover, many also have another key feature: they have had direct career experience of trading and managing market risk. This has given them an obvious advantage in navigating the credit cycle, since they presumably know what a derivative is.
Furthermore, men such as Lloyd Blankfein at Goldman Sachs or Anshu Jain at Deutsche, who have risen through trading desks, instinctively tend to view everything in terms of probabilities and risk. That is a different mindset from somebody who has previously worked as a salesman, adviser – or lawyer, such as Mr Prince.
However, there is a third issue which may be even more important – the culture of power. As far an outsider can tell, Goldman Sachs appears to have retained many of the cultural features of its previous partnership. Employees typically view themselves as being affiliated to the bank, not business line, and there is a strong ethos of shared accountability. As a result, senior Goldman staff appear able to scrutinise the operations of other business units with more freedom than at other banks.
However, groups such as Citi or Merrill appear to have developed a more hierarchical pattern, in which the different business lines have existed like warring tribes, answerable only to the chief. Moreover, the most profitable tribe has invariably wielded the most power – and thus was untouchable and inscrutable to everyone else. Hence the fact that, in this tribal culture, nobody reined in the excesses of the structured finance teams at Citi and Merrill.
So there you have it. The financial institutions that tend to be winners in the current mess are those whose leaders are meddlers and hands-on, have direct career experience in trading and managing market risks, and have a strong "tribal" culture. Do you belong to one such institution?
(Photo credit: Google Images)
Posts
