Boomer Banker

Leadership is one of the most analysed topics in business literature. There are thousands of management books issued – all with the intent of helping people be better leaders. But perhaps the most critical success elements for leaders are common sense and an openness to feedback on bad judgement – preferably before mistakes are made. Recent stories revolving around COVID-19 issues supports this simplistic view of good leadership.

Queen Elizabeth II highlighted her approach to being a leader in a trying time at the April 2021 funeral for her husband, Prince Philip. As reported in The Guardian, the Queen attended her husband’s funeral and sat on her own. This simple act of lonely suffering resonated with many in the United Kingdom who were also suffering losses at a time that human contact was limited in an attempt to control the spread of COVID-19.

No such leadership was on display during this same timeframe at No. 10 Downing Street as summarized by The New York Times. There parties continued throughout and whilst the final report on who did what when is expected this week, it was clear that the Prime Minister Boris Johnson did not see his leadership as requiring the sacrifice of good times and parties even though the government policy imposed that sacrifice on the rest of the country.

This same lack of leadership was more recently seen in António Horta-Orório’s departure from Credit Suisse. The Financial Times summarized the numerous times where he did not follow various quarantine and travel requirements relative to COVID-19. Having been brought into Credit Suisse to address reputational issues, it was clearly not possible to continue in that role after a series of violations of COVID-19 requirements.

Then we move to the Antipodes where the participation of the Novak Djokovic in the Australian Open ended up not happening. Tennis is a game of man-made rules but apparently Djokovic was not able to adequately follow the man-made rules of Australia relative to COVID-19. The twists and turns of this story were usefully covered in The Guardian.

And just as Queen Elizabeth II showed her leadership ability at the funeral of her beloved husband, Prime Minister Jacinda Ahern showed her leadership ability when she cancelled her wedding due to the increase in COVID-19 and the imposition of stronger rules in New Zealand. As quoted in a BBC article:

“I am no different to, dare I say it, thousands of other New Zealanders who have had much more devastating impacts felt by the pandemic, the most gutting of which is the inability to be with a loved one sometimes when they are gravely ill,” she said. “That will far, far outstrip any sadness I experience,” she added.

Why is that too many leaders lack the simple common sense to follow the rules established for all? Where are the advisors and friends who tell them they are making a mistake? Or do too many leaders believe that they are too important to have rules apply to them? Do they suffer from the Leona Helmsley syndrome: “Only the little people pay taxes?”

Everyone would like to believe that the work they do is critical to improving the world. Prior to the financial crisis investment bankers active in creating the financial products that ultimately led to the crisis saw themselves as “masters of the universe” delivering wealth for society. A similar self-importance can be seen among sustainable bankers with a belief that their work will somehow solve the critical economic, environmental, and social issues facing today’s world. An advantage of being a retired banker is the realization that banking and finance should not be the center of the world.

A series of recent articles have reinforced my view. Two articles in the Financial Times in August (“The whistleblower who calls ESG a deadly distraction” and “The ESG industry is dangerous”) led me to the Secret Diary of a Sustainable Investor written by Tariq Fancy, BlackRock’s first global chief investment officer for sustainable investing. His “secret diary” is worth reading in full.

As noted in early in this well written and entertaining essay, he sees sustainable investment as “a dangerous placebo that harms the public interest.” He goes on to note that a systemic crisis requires systemic solutions – and the environmental challenges we face are systemic in nature. He correctly notes that “many things that are lucrative are also bad for the world.” As a result, in a world where “we’ve built private firms from the ground up to do one thing really well: extract profits,” it is not surprising that firms are not sufficiently addressing climate change.

Fancy also brings additional nuance to the supposed view of Milton Friedman that the only purpose of a corporation is to make money. Fancy notes:

What’s most galling about the entire debate is how Friedman’s own message has been mangled. Yes, he said that the sole purpose of a business is to generate profits for shareholders. But that didn’t mean that he thought no one should look out for the public interest: in the very same paper he argued that the responsibility for protecting society fell to civil servants, whose authority business executives should not usurp as such roles “must be elected through a political process.” In fact, he called the idea of business executives taking on this role to be “intolerable” on grounds of political principle.”

This analysis leads to his conclusion that there is “a dire need for government action.” This view is supported by a recent article in The Economist on Glencore. As summarized in the final sentence: “Only concerted government action to tax carbon emissions and redesign energy systems will kill off king coal.”

Bankers with good intentions were prominent in Glasgow with assurances that their work could resolve the environmental challenge. This path was skeptically viewed by Christopher Caldwell in the New York Times. He noted that “(m)oney men have taken the thing over.” He quotes Gillian Tett from The Financial Times that Glasgow like other COP events have been taken over by “business leaders, financiers and monetary officials.”Caldwell goes on to note “(t)hat is bound to render the movement’s tactics and goals less democratic.”

This democratic deficit is further highlighted by Olufemi Taiwo in The New Yorker in a review of three recent books. The first book builds on the story of nutmeg and the role of the Dutch East India Company (V.O.C. in Dutch). Taiwo notes: “The global marketplace, created and shaped by forays like the V.O.C.’s in Indonesia, is fixated on growth in ways that have led to an era of depredation, depletion, and, ultimately, disruptive climate change.” The two other books reviewed tell similar stories about “hierarchy, commerce, and exploitation” highlighting broken climate politics. Taiwo notes that none of these books provide a solution for the politics but all note the need for political solutions.

So whilst finance should focus on issues of sustainability, bankers as individuals and professionals should be working to deliver the necessary systemic change within existing political structures. Perhaps outside their comfort zone but one required for long term, sustained change.

Boomer Banker has been quiet for the last six months. This pause has allowed me time to take a step back and consider what issues are most important for bankers in the current environment of increased evidence of environmental risk, heightened levels of political risk and the ongoing high level of economic inequality. Unfortunately, I have not been able to develop any breakthrough ideas for solving these complex and inter-related issues. But I realized that this blog can and should provide links to a variety of thinkers and writers on issues that may be less directly related to banking. So 2022 will be a year of fewer posts with a reduced focus on banking but an increased focus on the overall environment in which banks and bankers are operating

In that vein, what struck me most in the last week is the question above: Why is everyone so angry?

This question came to mind after reading two articles highlighting the high level of anger that seems to be prevalent in various locations. The New York Times on 1 January 2022 reported on increased anger among young South Korean men regarding women’s rights. Despite having one of the highest gender gaps for pay and a low level of female participation in both government and business, there is a very large movement opposing feminism. One group even had the motto: “Till the day that all feminists are exterminated.

Just a day or so later I read an article by Evan Osnos in The New Yorker titled: “Dan Bongino and the Big Business of Returning Trump to Power.” This article provided an interesting insight into a business model that is focused on making money by creating and exploiting a general anger that seems to be prevalent in the United States. As noted in the article, he builds on the premise that “suspicion is an appetite that is never fully sated” as he covers a variety of conspiracy theories that seem never to be proven but also seem never to be able to be disproven. A key part of Bongino’s business model is that nothing is “more potent than the constant regeneration of fear.”

In both of these examples and others, there is an underlying anger that is difficult to explain or understand. In general other than the known challenges arising from the impact of the COVID pandemic, the underlying economics for the vast majority of people are relatively good. Nearly all countries provided substantial economic support to date in the pandemic. But as Nobel Prize winner Abhijit Banerjee stated at a John Adams Institute event last year: “We ignore at our peril what people tell us.” And too many people are saying they are angry.

The final piece of my thinking fell a bit into place with an Elizabeth Kolbert article in the same issue of The New Yorker as the article on Dan Bongino. Whilst Kolbert is best known for her focus on environmental issues, she did an excellent analysis on the impact of social media on the rise of anger. She covers a variety of analyses on how social media has exacerbated societal division as well as noting some suggestions on how to address this challenge.

As bankers it is easy to ignore these challenges as being irrelevant to our work providing financial services. But I would argue that this rise in societal animosity is a substantial business risk that could have a very negative impact on the economy and banking. Perhaps the roots of the next financial crisis are being created in the fury that seems to be growing around the world. Whilst I do not know what bankers should be doing in either their work or in their personal efforts as citizens, ignoring these issues does not seem to be a very prudent approach.

A recent commentary in The Washington Post regarding the labor market in the United States highlights a bias towards wealth inequality and capital rather than labor in the general business press. Paul Waldman cleverly notes “(a)s any conservative will tell you, markets are extraordinary. They’re nimble and responsive, combining thousands or millions of individual decisions into a system that hums with efficiency and fairness, and it processes its inputs and outputs.”

Waldman goes on “it was only when the price of labor threatened to go up for some businesses that Republicans declared it an emergency that demanded immediate government action.” That government action being requested by these businesses was ending of extra unemployment payments that were seen as the reason why not enough individuals were accepting low paying positions. A request that was not necessarily supported by factual evidence linking the lack of individuals seeking work with the temporarily higher levels of unemployment compensation.

These comments highlight a frequent bias in much of the reporting in the financial press. Typically there is much hand wringing over increased wages for workers as that will lead either to lower profits negatively impacting share prices or higher inflation. But those remarks suggest that the allocation of revenues between capital, labor and providers of inputs works only if labor consistently gets less. Perhaps the growth of inequality and the related growth in populistic politics over the last several years is a result of this bias towards providing rewards primarily to the capital inputs without considering the role of labor in the economy.

Martin Arnold opined in the Financial Times on 31 May that regulators are “stepping up pressure (for) banks to tackle climate risk.” His opinion cited several examples of how the regulatory pressure has increased over the last several years – including a focus on how climate risks need to included when looking at safety and soundness of banks. The issue of safety and soundness is important as banks face financial losses both through climate change leading to disastrous weather conditions (flooding, drought, etc.) and through providing financing to companies for assets that lose their value (oil exploration, fossil fuel automobiles, etc.).

These issues were reinforced in a discussion on 1 June which I moderated. A panel of four experts on sustainability issues joined me for a roundtable organised by IFN to discuss the future of sustainable finance. Clearly sustainable finance is no longer a fringe issue for banks but has moved to the core of the issues which banks must address to be successful.

Yesterday’s events regarding the large oil companies shows that money talks and b.s. (Bad Science) walks as noted in three headlines:

• A Bad Day for Big Oil – Washington Post
• Climate Activists Defeat Exxon in Push for Clean Energy – New York Times
• Climate activists hail breakthrough victories over Exxon and Shell – Financial Times

For some time there have been numerous groups working to organise shareholders to take action on climate change. This work led to stunning successes at the annual meeting of Exxon Mobil where at least two directors were elected to encourage Exxon Mobil to address climate change. These directors were not supported by management but rather by shareholders who are concerned about the impact of climate change. Of interest was the support these insurgent directors received from large investment managers including those responsible for passive investing (Vanguard, BlackRock, etc.).

But the success at Exxon Mobil was just one of three yesterday where large oil companies will be required face their responsibility for climate change. The shareholders of Chevron, supported a resolution that the company must substantially reduce its climate impact. And a Dutch court ruled that Shell was required to substantially reduce its emission impact. 26 May 2021 will be remembered as a day when money via investors impressed on oil companies that their strategy of ignoring climate change is no longer sustainable.

On occasion a simple sentence in a longer analysis captures not only the core issue being discussed but provides a solid framework for thinking about finance in general. Such was the case in an essay from Paul Krugman in the 20 May 2021 New York Times. In a very clear and insightful discussion on bitcoin, Krugman asked a very simple question: “What problem does this technology solve?” He expanded on that simple question as follows: “What does it do that other, much cheaper and easier-to-use technologies can’t do just as well or better?” Refining his initial question to: What problem does this financial product solve? pivots his analysis to be a very valuable framework for looking at finance and banking. Focusin on meeting real needs rather than invented needs use to generate profits to pay bonuses would certainly push finance and banking in a healthy direction.

The importance of Krugman’s analysis was reinforced in today’s Financial Times in an article on bitcoin. That article was focused on the value of bitcoin but not once raised the issue of why is bitcoin relevant or what problem does it solve. Perhaps it is time for the financial press to use the common sense of Krugman as they write about financial innovation.

Occasionally there is an article that captures very well so many of the themes impacting banking and finance today. A recent New Yorker article covering Robinhood, an online trading platform is such an article. And the story is told using the lives of real people who faced real consequences from their involvement with finance – including a suicide.

Robinhood is a “zero-commission” trading firm that according to its own publicity has a mission to “democratize finance for all.” As noted in the article: “A Robinhood spokesperson said that attracting users who had previously been excluded from the financial system is a ‘profoundly positive change,’ and that ‘suggesting otherwise represents an élitist, old way of thinking.’ As noted in the article by the CEO of a competitor, Robinhood is “. . . the first company that introduced premier user experience and design in a mobile application to finance, and they also dramatically lowered the cost of investing,”

The mission of a democratic financial system is one held by many banks that practice values-based banking. Therefore it would seem that Robinhood’s actions would be supportive of values-based banking. But as one digs deeper into the practices of Robinhood a different story emerges. A story that aligns more with the traditional “greed is good” associated with Wall Street.

Although appearing to be commission free, as everyone knows there is no free lunch. So how does Robinhood generate revenues if not by charging commissions for trading? They do so by a practice called Payment for Order Flow (“pfof”). The trades made with Robinhood are directed to brokers who pay Robinhood a fee for that activity. As noted in the article: “Payment for order flow is common among brokers, but it is controversial, because it appears to create an incentive for them to send their customer orders to whichever market maker is willing to pay them the most.” The article further notes: “In exchange for access to the orders, the firms pay rebates to the brokerage company that routed the orders to them. The rebates and the skimming are invisible to the customer placing the trade order.” So it would appear that the commission free trading is funded through execution at prices that are not the best in the market for the buyer or seller of shares. As noted in the article even after controversy, “in the first quarter of 2021 Robinhood’s pfof revenue was three hundred and thirty-one million dollars.”

But the motivation of the users of Robinhood is also of interest. Their motivation seems to be often related to the issues that arose from the financial crisis of 2008 so many years ago but sill impacting banking, finance and politics. Some of the users of Robinhood see it as a means to get revenge for a financial crisis that impacted their families very personally. Those stories as reported in the article surfaced on chat sites focused on trading. As one individual wrote: “I remember when the housing collapse sent a torpedo through my family. My father’s concrete company collapsed almost overnight. My father lost his home.” Around the same time, the author claimed to have seen “hedge funders literally drinking champagne as they looked down on the Occupy Wall Street protesters.” The poster said that, as a result of the loss, his father had descended into alcoholism, and existed as only “a shell of his former self, waiting for death.”

This theme was taken up by one of the key characters in The New Yorker article had a similar family experience. He wrote in response to that post his reasoning for holding a position in Game Stop: “This is about more than just money, it’s about fucking these hedge fund managers until they understand what we’ve all gone through because of them. I am holding to ensure my parents can live comfortable lives at the expense of the assholes that almost cost them their lives. This is for you, Dad.”

But underlying all of this story is a fundamental misuse of the financial system. No where in the story is there a discussion of how Robinhood, various other institutional investors or the individual investors were thinking about how money should be used to finance productive assets. Rather the focus is on finance as a casino. And as we all know, betting in casinos is a losing proposition for everyone except the casino owners. Or in this case the financial companies that are running a casino and not investing in addressing the needs of society.

In the current economic climate and in times of rapid technological change, banks are facing unique challenges to their business models. This challenge is especially large in Europe where profitability of banks has been under attack for many years. For many years some European banks have tried to compete with the US investment banks – in some cases by purchasing them. But the recent events surrounding Archegos suggests that they have not been successful in using these new banking opportunities to create profitable sources of not only revenues but also net income for their stakeholders.

A recent series of articles in the Financial Times highlights this conclusion. The first article on 6 April noted that the collapse of Archegos cost Credit Suisse a $4.7 billion impairment charge in their prime broking activities. The article goes on to note: “In theory, prime brokers hedge all exposures, making only a modest margin on their activities. In practice, hedges are rarely perfect. Bonus-hungry bankers can find ways to exploit that.” The article also highlights that Credit Suisse is not the only bank active in this area.

The second article on 20 April goes further to note that Credit Suisse had substantially reduced its risk management capability in the run up to the Archegos debacle as well as the losses it incurred on Greensill. Whilst these losses have led to the departure of several senior managers (and one board member) responsible for risk management, that is a a bit like locking the barn after the horses have been stolen. The article noted that “six current and former Credit Suisse managers said the bank hollowed out risk expertise and trading acumen in favour of promoting salesmen and technocrats. Dissenting voices were suppressed, they said.” As anyone familiar with banking knows, suppression of dissenting voices is almost always the start of a downhill trend.

In an article on 27 April the Financial Times provided an update on the Archegos situation noting that total bank losses on Archegos were likely to exceed $10 billion. Interestingly all these losses were at non-US banks. It would seem that the US banks had in place much better risk management systems that allowed them to exit their exposures with minimal losses.

Finally on 3 May the Financial Times reported that the revenues (not net income but only revenues) on the Archegos relationship were just Swiss francs 16 million in 2020. Clearly a business model that faces potential losses of $4.7 billion for revenues of around $17 million is not sustainable. The only good news from this article comes in the following statement from the new Chair of Credit Suisse, António Horta-Osório:  “I firmly believe that any banker should be at heart a risk manager.” Clearly a signal of new times at Credit Suisse.

The large amount of liquidity in the current market has led to some unusual stories – stories that too well illustrate why the financial world easily loses touch with reality. The story of Hometown International, Inc. is told with humor and insight in a recent short article in The New Yorker. The article details how a small deli in New Jersey chose to go public including refusing to state that they were a shell company since after all they were an operating business. A deli with average sales of about $80 per day. The New Yorker goes on to test the deli’s pastrami sandwich to see if there was a “special sauce” that made it worth $2 billion at one point but later returned to a less stratospheric level of $100 million.

More information on the financial activities was available from an article in the Financial Times. This article noted that included in the investors of Hometown International, Inc. were the endowment funds of two major US universities, Duke and Vanderbilt. These investments appear to be made by an Asian asset manager on behalf of the universities. It would also appear that the ultimate goal is to use the entity to be a cheaper version of a SPAC (special purpose acquisition corporation).

Many bankers claim that all this innovation is good for the overall economy but is that so or merely a chance for bankers to make fees that can be used to pay their bonuses? And is it responsible for university endowment funds to support this type of speculative activity?