COUNTERCOLUMN: All Your Bias Are Belong to Us

Say it ain't so!

The “snooty” attitude of bankers and financiers who thought they were cleverer than everyone else is largely to blame for the global credit squeeze “disaster”, Germany’s finance minister has said.

In an interview with the Financial Times, Peer Steinbrück played down the impact on Europe’s largest economy of the turmoil but said steps had to be taken to raise risk awareness.

German proposals before the squeeze for increasing transparency had been “mocked” and sometimes deliberately misunderstood as an attempt to impose regulation rather than voluntary codes, Mr Steinbrück said, but were now winning support.

In a swipe at finance industry leaders, he said the “quality of managers” had proved a weakness. “The snooty attitude that we have sometimes seen – under the motto of ‘we are cleverer than the others’ – ended in disaster,” he said.

The finance minister said the bankers were "unable to cope with the complexity of the products in which they were investing."

That's ridiculous. There's nothing "complex" about collateralized mortgage pools. Even if you've carved them up into a few tranches, strips, etc., these are very basic investments that any experienced banking professional ought to be expected to understand.

Regardless of how they're tranched off, either the borrowers repay their loans and they are correctly underwritten for risk or they are not.

In an environment where half of new loans originated were interest only loans in some markets, and in which the waiter at the local Longhorn was hawking mortgages when he brought you the side order of broccoli, and X percentage of these loans were "no docs," and/or adjustables sold to people with no assets in an environment where homes had already far outstripped their intrinsic worth based on rental values, these bankers were more than "snooty." You can be prudent and still be snooty. These bankers were negligent.

They applied not the slightest due diligence on behalf of their investors.

And their idiot boards of directors, eager to keep up with the next bunch of idiots on the block, prevented any prescient managers they had from rolling back their exposure to the riskiest loans (though once the money is lent, there is no eliminating that stupidity. It can only be transferred from one institution to another).

Here's a passage from a terrific book called The Warren Buffett Way, by Robert Hagstrom:

"The final justification for the institutional imperative is mindless imitation. If companies A, B, and C are behaving in a similar manner, then, reasons the CEO of company D, it must be all right for our company to behave the same way. It is not venality or stupidity, Buffett claims, that positions these companies to fail. Rather it is the institutional dynamics of the imperative that make it difficult to resist doomed behavior. Speaking before a group of Notre Dame students, Buffett displayed a list of thirty-seven failed investment banking firms. All of these firms, he explained, failed even though the volume of the New York Stock Exchange multiplied fifteenfold. These firms were headed by hard-working individuals with very high IQ's , all of whom had an intense desire to succeed. Buffett paused; his eyes scanned the room. " You think about that, " he said sternly. " How could they get a result like that? I'll tell you how, " he said, "mindless imitation of their peers."


Emphasis added for emphasis.

I might add that military officers, and those responsible for promoting them, should likewise take note.

We need a broad spectrum of military thought and leadership styles. We were not well served while kinetic thinkers ruled the officer corps while counterinsurgent theorists like Nagl and Petraeus were the exceptions and dissidents.

It's likely too easy to go overboard with Petraeusism, too. Petraeus seems like the right man in the right spot for this war.

But we have other wars to fight. And we need a diversity of opinion and approaches as well. Kineticism has not been discredited. We may well need to get uberkinetic on someone's ass very soon.

And what's beyond counterinsurgency? What's the post-Petraeus approach? Do we need to look at retirees from the Clinton era OOTW people? Is that the next phase in Iraq? Do we then gather our kinetics and our counter-I's? Do you pair kinetic commanders with counter-I deputy commanders? Can you synthesize them?

Splash, out

Jason

Labels: business, investing, Leadership, Real Estate