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LQD - Bankers as gangsters and cult followers

by Jerome a Paris Wed Feb 13th, 2008 at 05:55:21 AM EST

This Lazy quote Diary to point out the incredibly violent charge against bankers by John Kay, one of the regular columnists in the FT. It's quite stunning to read this, frankly:


Bankers, like gangs, just get carried away

Groups routinely demonstrate behaviour that few if any members would choose to adopt as individuals. Look at teenage gangs, soccer hooligans, religious zealots - or clubbers. Sometimes the group provides a cloak of legitimacy for misbehaviour. The trading floor has a similar effect. You get carried away, explained Jérôme Kerviel, Société Générale's former trader. The process by which hysterical groups damage themselves and others in assertion of preposterous beliefs is a recurrent theme in human history. We see it in anti-Semitic pogroms or McCarthyite persecution. Before the mysteries of structured credit there were the mysteries of witchcraft; before investment banks used initial public offerings to turn dotcom concepts into billions of dollars alchemists claimed to turn base metals into gold.

Shared values and beliefs create a group identity. No matter that the beliefs may be absurd or the values contemptible: that Salem was not besieged by witches, the US was not threatened by communist infiltration, that greed is not good and that suicide bombers will not be greeted in paradise by 71 virgins. The very improbability of the belief, the unacceptability of the values, reinforces their social function; these factors distinguish the real members of the group from the less committed.

Gangs differentiate themselves by their characteristic beliefs and values. Your performance as a gang member is judged not by rational, objective criteria but by the approbation of your peers. As on the streets, also in the office towers.

(...)

 Like the politicians who invaded Iraq, executives of major financial services businesses did not reflect on questions to which they did not wish to know the answer.

The whole article is worth reading, if you can get through the firewall. Most of it is spot on.


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I didn't understand his starting comments on how economic theory about incentives can't explain the situation, but a gang-ethos explanation can.

He seems to suggest that bankers 'keep dancing to the music' while they know this will make the eventual downfall both to society and to themselves harder, and he explains this by talking about group-think etcetera.

I have no trouble believing the group-think story. But isn't the main problem that going along with the group-think was indeed very profitable to these people, even when they would have been aware of a coming crisis? I would say he IS describing a typical story about skewed incentives, where expecting a crisis would mean losing ones job, while the worst the crisis could do was the same job loss, but a few well-paid years later.

I really think this is an important distinction. If unrational group-think has caused the crisis, and this cult effect is in the long run against the 'cultists' own interest, then we have at least hope that less gang-like banks come out on top and will be the examples for the future.  But if group-think didn't really hurt the long term profits of those involved, there is no reason to assume it will go away.

by GreatZamfir on Wed Feb 13th, 2008 at 08:37:29 AM EST
But isn't the problem that in the land of the insane, it's the sane person who is mad?

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Feb 13th, 2008 at 09:01:27 AM EST
[ Parent ]
But the heart of it is these two different bits you note:


expecting a crisis would mean losing ones job, while the worst the crisis could do was the same job loss, but a few well-paid years later.


But if group-think didn't really hurt the long term profits of those involved, there is no reason to assume it will go away.

I agree that the short term rationality is obvious for those inside the system: following group-think was indeed profitable, and not doing so was detrimental to your income and career.

The question is what the long term prospects are. For the traders and the big bonus earners, the gains over a few years may justify to accept the prospect of not being able to make a cent long into the future, but this is most likely not true for the institutions themselves, nor for their management. which suggests (as the article points out in its conclusion, which I did not copy here) that management was effectively prisoner of the short term motivations of its staff - and derelict in their duty to their company and its shareholders.

Oddly enough, this may be a case where more assertive shareholders would be needed - shareholders able to look beyond a few quarters of bumper profits and see the potential ruin of the value of their shares.

If you look at what shares in Citibank et al have done over the past few years, it's really not great...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Feb 13th, 2008 at 09:25:27 AM EST
[ Parent ]
Why would management have different incentives than traders ?

If the bank isn't doing as well as the competition, it's going to be bought and management fired, anyway...

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Wed Feb 13th, 2008 at 10:27:08 AM EST
[ Parent ]
That's where regulation comes in...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Feb 13th, 2008 at 10:53:23 AM EST
[ Parent ]


The Hun is always either at your throat or at your feet. Winston Churchill
by r------ on Wed Feb 13th, 2008 at 11:00:02 AM EST
[ Parent ]
I read this part about management being locked in, and I wasn't really convinced by it.

  1. Management was receiving enormous bonusses too, and still is. I don ot know if their long-term personal profit expectations were that different from the rest of the company.

  2. I read the "dancing while the music plays" quite different then the article writer. He seemed to read it as if Citigroup management really wanted to quit, but was forced by circumstances to continue 'dancing'. I read it as a much more literal referal to musical chairs: everyone was hoping they would reach a chair when the music stopped, and from the context I presume they expected pension funds and other buyers of their financial constructions to be the ones left standing.

  3. Even now that banks clearly lost (or are losing) much more than they expected, are they really losing more than they profited originally from the boom? I don't now, it's hard to tell how much of past and present profits are 'artificial-boom-related'. Perhaps someone else has a better view on this?

 Altogether, the groupthink seemed much more a symptom than a cause of the situation. It really looks more like a good-old 'tragedy of the commons': everyone knew their would be some crisis someday, but the crisis wouldn't be confined to the ones causing it. So better to make as much as you can in the meantime. In such a situation, 'groupthink' that assumes the crisis is still far off can actually be quite rational. Even better would be to help cause the crisis and accurately guess when it would happen, as Goldman Sachs appears to have done. But not contributing at all has little benefit
by GreatZamfir on Wed Feb 13th, 2008 at 11:32:56 AM EST
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