Do recent economic events represent an intelligence failure? - Competitive Intelligence2024-03-28T10:14:18Zhttp://competitiveintelligence.ning.com/forum/topics/2036441:Topic:9766?commentId=2036441%3AComment%3A9807&feed=yes&xn_auth=noFrom a UK viewpoint, the real…tag:competitiveintelligence.ning.com,2008-10-20:2036441:Comment:108082008-10-20T22:31:27.106ZGavin John Wilsonhttp://competitiveintelligence.ning.com/profile/GavinJohnWilson
From a UK viewpoint, the real winners (in terms of public perception) have been those whom I could call 'energetic experts'.<br />
- On the TV, the only guy who is trusted to know what he is talking about is the BBC's Robert Peston. This man has moved markets with his inside knowledge.<br />
- In politics, the most trusted person is the Liberal Democrats' Vince Cable. He has been sending out emails to media correspondents every week or so for the past few years warning about indebtedness. The real loser…
From a UK viewpoint, the real winners (in terms of public perception) have been those whom I could call 'energetic experts'.<br />
- On the TV, the only guy who is trusted to know what he is talking about is the BBC's Robert Peston. This man has moved markets with his inside knowledge.<br />
- In politics, the most trusted person is the Liberal Democrats' Vince Cable. He has been sending out emails to media correspondents every week or so for the past few years warning about indebtedness. The real loser politically has been the Conservatives' shadow chancellor, George Osborne, who has had nothing of value to say.<br />
- Expertise has been a clear differentiator here. Vince Cable used to be the chief economist for Shell; Robert Peston used to work in the City. George Osborne has no past experience of relevance, and his degree is in history.<br />
- The prime minister, Gordon Brown has climbed in the polls dramatically as a result of his handling of the crisis, even though he is partly responsible for creating it.<br />
a. He has been very energetic, jetting between Europe and America.<br />
b. Almost no-one really understands what is going on to the extent that they are prepared to forecast what will happen, so there is almost no-one making strong criticisms of his current actions.<br />
c. To criticise the PM in a time of national crisis would be unpatriotic, so few are doing so.<br />
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I think most people have given up all hope of trying to understand what is going on, so are instead putting their trust in experts. Currently our PM, Vince Cable and Robert Peston are regarded as the UK's experts, so they are the ones who have gained. I am sure there are many writers for The Economist and the Financial Times who understand this crisis even better, but they don't appear on TV, and because of that, their public image has gained almost nothing. Dear Ann Lee Gibson,
As I tr…tag:competitiveintelligence.ning.com,2008-10-13:2036441:Comment:104842008-10-13T05:59:43.133ZAntonio J. T. Buenohttp://competitiveintelligence.ning.com/profile/AntonioJTBueno
Dear Ann Lee Gibson,<br />
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As I try to address your question, let me say that an honest and straightforward answer should be: "Yes, this has been indeed a most serious intelligence failure". We all seem to know how to evaluate risks and how to hedge them, in some way. But "risk evaluation" is not altogether the same as "risk and opportunity awareness". The latter is rather an art than properly a science. This statement does not mean that science is useless or else that it should not be relied upon.…
Dear Ann Lee Gibson,<br />
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As I try to address your question, let me say that an honest and straightforward answer should be: "Yes, this has been indeed a most serious intelligence failure". We all seem to know how to evaluate risks and how to hedge them, in some way. But "risk evaluation" is not altogether the same as "risk and opportunity awareness". The latter is rather an art than properly a science. This statement does not mean that science is useless or else that it should not be relied upon. Scientific models and research are in fact essential, but by all means not enough! Human failed perception of reality cannot be depended upon, unless supported by some methodical observation of data series that do not necessarily correlate (from the flawed point of view of the human observer). We have a long way to go, and need to start paying attention to details that apparently do not fit the picture. Of course I like to think tha…tag:competitiveintelligence.ning.com,2008-10-09:2036441:Comment:103402008-10-09T01:20:52.466ZMelanie Winghttp://competitiveintelligence.ning.com/profile/MelanieWing
Of course I like to think that the reason that Chase took action was because we had a robust CI capability! :) Jamie Dimon talked constantly of a fortress balance sheet and managing risk; therefore decisions that might have looked like a sure thing to other organizations, were carefully scrutinized and if considered a risk that would jeopardize the balance sheet, then executives would certainly be considered to be making the appropriate decision.<br />
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This situation is complex. I like this…
Of course I like to think that the reason that Chase took action was because we had a robust CI capability! :) Jamie Dimon talked constantly of a fortress balance sheet and managing risk; therefore decisions that might have looked like a sure thing to other organizations, were carefully scrutinized and if considered a risk that would jeopardize the balance sheet, then executives would certainly be considered to be making the appropriate decision.<br />
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This situation is complex. I like this explanation.<br />
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<a href="http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1">http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1</a> This was a failed sociologica…tag:competitiveintelligence.ning.com,2008-10-06:2036441:Comment:102992008-10-06T19:30:06.358ZClaudia Claytonhttp://competitiveintelligence.ning.com/profile/ClaudiaClayton
This was a failed sociological experiment that was not publicized to the American public for political reasons and now is once again being obfuscated by those who engineered it for political gain. There is sufficient information regarding this available, but no one wanted to complain because banks would be seen as unfeeling toward low income buyers and minorities. Banks that did not go along were criticized, ostracized and impacted negatively. All of the major economists agree on this…
This was a failed sociological experiment that was not publicized to the American public for political reasons and now is once again being obfuscated by those who engineered it for political gain. There is sufficient information regarding this available, but no one wanted to complain because banks would be seen as unfeeling toward low income buyers and minorities. Banks that did not go along were criticized, ostracized and impacted negatively. All of the major economists agree on this point.<br />
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Yes, there were some greedy politicians and financial institutions once the die was cast but frankly it couldn't have happened without support from the government.<br />
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We need to run our economy like an economy, run our finances effectively using sound fiscal management, and not ideology, and better educate consumers - not with sound bites but with real information based on financial realities.<br />
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All of us want to live in a better society and a better world, but everyone suffers when we lose sight of financial and economic reality. The result is chaos, financial disaster, and no one suffers more than the poor or lower income people these experiments in social engineering were supposed to help. It has also taken away the faith of hard working people around the world who worked, saved and had hopes for the future.<br />
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In terms of how we in intelligence could have better helped our companies understand the implications ... perhaps it is time that we seek the truth, ask our media to be real journalists instead of publicists, and begin to listen more to economists and financial experts than to politicians (of both parties).<br />
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Strong analysis of the impact of proposed and existing regulations (especially the potential for unintended consequences), more attention to financial experts when implementing legislation around the economy, and perhaps more focus on government regulation based on its increasing role in our economy as it increases over time -- these steps might help companies at least see the potential results of political policies beforehand. Melanie, thanks for this insi…tag:competitiveintelligence.ning.com,2008-10-05:2036441:Comment:102742008-10-05T20:21:14.390ZAugust Jacksonhttp://competitiveintelligence.ning.com/profile/AugustJackson
Melanie, thanks for this insight. We know that executives at other banks were also making the case that the subprime mortgage market was destined to collapse. Why did Chase and Wells Fargo take preventative action based on this knowledge while WaMu, Lehman Brothers and so many others did not?<br />
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What sort of consequences do you think Chase executives dealt with while they were taking a strategy to mitigate the potential collapse? Often strategies of mitigation are regarded as timidity on the part…
Melanie, thanks for this insight. We know that executives at other banks were also making the case that the subprime mortgage market was destined to collapse. Why did Chase and Wells Fargo take preventative action based on this knowledge while WaMu, Lehman Brothers and so many others did not?<br />
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What sort of consequences do you think Chase executives dealt with while they were taking a strategy to mitigate the potential collapse? Often strategies of mitigation are regarded as timidity on the part of stockholders and commentators, and executives are criticized because it appears they are not taking full advantage of what, to many, still appears to be a risk-free market opportunity. Interestingly, there are part…tag:competitiveintelligence.ning.com,2008-10-05:2036441:Comment:102702008-10-05T20:04:27.090ZMelanie Winghttp://competitiveintelligence.ning.com/profile/MelanieWing
Interestingly, there are parts of the financial services industry that did see this coming and were preparing for this. While I was at Chase, we evaluated getting into sub-prime lending (talking retail here, not seconary market) but chose not to pursue because of the inevitable collapse. We were looking at refinancing volumes, housing prices, debt accumulation etc, etc. Did we do everything right? certainly not! But did we limit the exposure, absolutely and more importantly, it was a conscious…
Interestingly, there are parts of the financial services industry that did see this coming and were preparing for this. While I was at Chase, we evaluated getting into sub-prime lending (talking retail here, not seconary market) but chose not to pursue because of the inevitable collapse. We were looking at refinancing volumes, housing prices, debt accumulation etc, etc. Did we do everything right? certainly not! But did we limit the exposure, absolutely and more importantly, it was a conscious decision, not luck, not happenstance, a choice based on data and foresight.<br />
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There is an interesting article in Fortune about what JPMorgan Chase did differently. I think Chase, BofA and Wells Fargo took a different approach and have not suffered as much as other institutions.<br />
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<a href="http://money.cnn.com/2008/08/29/news/companies/tully_jpmorgan.fortune/index.htm">http://money.cnn.com/2008/08/29/news/companies/tully_jpmorgan.fortune/index.htm</a> Good catch Tim - I didn't cat…tag:competitiveintelligence.ning.com,2008-10-04:2036441:Comment:102302008-10-04T16:06:27.354ZArik Johnsonhttp://competitiveintelligence.ning.com/profile/ArikJohnson
Good catch Tim - I didn't catch it until <a href="http://www.slate.com/id/2201527/" target="_blank">Slate's summary in Today's Papers</a>:<br />
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<blockquote>While McCain was widely ridiculed for putting much of the blame for the financial crisis on Christopher Cox, the chairman of the Securities and Exchange Commission, the NYT suggests today that the Republican candidate may have been on to something. The NYT says one of the root causes of the current crisis can be traced back to a brief meeting in…</blockquote>
Good catch Tim - I didn't catch it until <a href="http://www.slate.com/id/2201527/" target="_blank">Slate's summary in Today's Papers</a>:<br />
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<blockquote>While McCain was widely ridiculed for putting much of the blame for the financial crisis on Christopher Cox, the chairman of the Securities and Exchange Commission, the NYT suggests today that the Republican candidate may have been on to something. The NYT says one of the root causes of the current crisis can be traced back to a brief meeting in 2004, where the big investment banks pushed the SEC to allow them to take on more debt. A few months later, "the net capital rule" was changed, and "the five big independent investment firms were unleashed." Although the new rules would allow the SEC to keep banks away from excessively risky activity, the agency essentially ended up "outsourcing the job of monitoring risk to the banks themselves." Cox came onboard a year later, but he made it clear from the outset that oversight of the banks was not an important priority, and regulators essentially ignored any problems that were discovered.</blockquote>
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The piece you refer to opens with this priceless quote from Cox himself:<br />
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<blockquote>“We have a good deal of comfort about the capital cushions at these firms at the moment.” — Christopher Cox, chairman of the Securities and Exchange Commission, March 11, 2008.</blockquote>
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But it goes on to dig deeper into your observation about the only two apparent skeptics in the whole matter.<br />
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<blockquote>A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake. He never heard back from Washington. One commissioner, Harvey J. Goldschmid, questioned the staff about the consequences of the proposed exemption. It would only be available for the largest firms, he was reassuringly told — those with assets greater than $5 billion.
“We’ve said these are the big guys,” Mr. Goldschmid said, provoking nervous laughter, “but that means if anything goes wrong, it’s going to be an awfully big mess.”<br />
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Mr. Goldschmid, an authority on securities law from Columbia, was a behind-the-scenes adviser in 2002 to Senator Paul S. Sarbanes when he rewrote the nation’s corporate laws after a wave of accounting scandals. “Do we feel secure if there are these drops in capital we really will have investor protection?” Mr. Goldschmid asked. A senior staff member said the commission would hire the best minds, including people with strong quantitative skills to parse the banks’ balance sheets.<br />
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As Monday's House vote precipitated the $1.3 trillion sell off, I heard a few <a href="http://arikjohnson.com/2008/10/04/tim-harford-on-moral-hazard/">Broke Streeters</a> commenting on CNBC how all these "liberal arts majors" serving in Congress just don't know anything about money and they need to just trust Paulson and Bernanke and get the bailout passed. (Disclosure: I was a History undergrad and took this rather personally.) Then, when it did pass yesterday and President Bush hurried to sign off on it, the market tanked anyway.<br />
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Maybe the <i>idea</i> of the bailout was just way better than the <i>actual</i> bailout itself? If history teaches us anything it's the old cliché about those who don't understand history are doomed to repeat it. Earlier this week there was a…tag:competitiveintelligence.ning.com,2008-10-04:2036441:Comment:102192008-10-04T13:03:46.556ZAugust Jacksonhttp://competitiveintelligence.ning.com/profile/AugustJackson
Earlier this week there was a great interview on <a href="http://www.npr.org/blogs/money/2008/10/hear_wamu_banker_bares_soul.html">National Public Radio's "Planet Money" podcast with William Longbrake</a> who had been CFO at Washington Mutual from 1982 - 2002. Longbrake also stayed on at the bank after his tenure of CFO ended. He describes his efforts to make the case that the rapid increase in house prices was unsustainable (a point Eric Garland's graphic makes so very well). NPR later carried…
Earlier this week there was a great interview on <a href="http://www.npr.org/blogs/money/2008/10/hear_wamu_banker_bares_soul.html">National Public Radio's "Planet Money" podcast with William Longbrake</a> who had been CFO at Washington Mutual from 1982 - 2002. Longbrake also stayed on at the bank after his tenure of CFO ended. He describes his efforts to make the case that the rapid increase in house prices was unsustainable (a point Eric Garland's graphic makes so very well). NPR later carried a story noting several WaMu board members confirmed (off the record) that Longbrake had long banged this drum at the bank. Longbrake's conclusion was not a conclusion based on a complex quant model, it's a simple truth that is intuitively obvious: if people can't afford to buy houses, they won't buy them. Add a dash of basic supply and demand, and you have the recipe for a bubble bursting.<br />
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The economic situation shows us a potent cocktail of some of the risk assessment, agency problems and cognitive dissonances that so many CI professionals deal with on a daily basis. I can recall in the early '00s telling telecom executives that the rapid expansion in long-haul fiber capacity, acquisitions funded by printing stock, pursuit of market share at the cost of revenue and profits and the win-at-any-cost pursuit of 3G licenses in the UK and elsewhere in Europe was a recipe for disaster. Intuitively it was obvious what the trajectory of the industry was going to be. I remember laying this out for a senior executive at a leading industry analysis firm (a firm that no longer exists, but I'm just saying). She stared at me blankly while I laid this out and simply responded "I don't understand how you could be so wrong."<br />
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So much of what CI professionals do is qualitative in nature. Often we are up against other decision-making tools that appear quantitative, and it always amazes me the faith that people will place in numbers. This is even the case for numbers that are based on countless assumptions-- effectively made-up numbers. Ditto for models.<br />
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What fascinates me about this situation is less a question of the ability to conduct the appropriate collection and analysis and more a question of basic elements of the human condition that prevent collective action in a corporate or government organization from taking preventative action or even hedging based on the possibility of disastrous scenarios. All of this has happened before, and all of this will happen again unless intelligence professionals (commercial and government alike) can find the secret formula to break through the haze. Being bellicose or overselling the risk is clearly not the solution, Rather some sort of systematic approach to motivate action is what we need to define. Reverse psychology, hypnosis, guardian angels that show us what the world would be like if we had never been born... whatever. I mentioned above that there…tag:competitiveintelligence.ning.com,2008-10-03:2036441:Comment:101992008-10-03T22:19:03.072ZTim Powellhttp://competitiveintelligence.ning.com/profile/TimPowell
I mentioned above that there would be plenty of blame to go around -- but I neglected two of the biggest -- the Securities and Exchange Commission, and the press.<br />
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Today (October 3, 2008) the <i>NY Times</i> has an amazing article about a meeting held <b>April 28, 2004</b> by the SEC, in which they unanimously voted to reduce the capital requirements for investment banks, and basically let them monitor their own risk using "computer models". This is a day that will live in infamy, in my humble…
I mentioned above that there would be plenty of blame to go around -- but I neglected two of the biggest -- the Securities and Exchange Commission, and the press.<br />
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Today (October 3, 2008) the <i>NY Times</i> has an amazing article about a meeting held <b>April 28, 2004</b> by the SEC, in which they unanimously voted to reduce the capital requirements for investment banks, and basically let them monitor their own risk using "computer models". This is a day that will live in infamy, in my humble opinion.<br />
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This was public information -- at the time, it was written up in the <i>Financial Register</i> and is available right now in streaming audio on the SEC's web site (look for open meetings.) But the <i>Times</i>, which generally has excellent financial coverage, admits it never reported it at the time.<br />
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This should have been a big bright warning sign. This enabled the situation we have now -- where the i-banks are so highly leveraged they can play with 30 times the amount of capital they actually hold. That CAN work, as long as LOTS of things go in your favor.<br />
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And they did have the "models" to warn them of excessive risk. But I've built quant models, and guess what -- GIGO, garbage in, garbage out. They are (at best) only as good as the assumptions built into them.<br />
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Here's the part I find amazing. Most of these quant models being used on Wall Street DID NOT include the assumption about what the other guy who was using a similar model was doing. So everybody started dumping the same stocks at the same time. Hello, can you spell "Nash Equilibrium"? This is kind of Game Theory 101, guys.<br />
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To his credit, Bill Donaldson, then chairman of the SEC, was skeptical of this arrangement, and created a risk monitoring unit at the SEC as a backstop. But he left the following year, and his successor Christopher Cox pulled the plug on that office.<br />
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So they were doing very risk things -- but with a monitoring system -- and then the monitoring system was abandoned. All five SEC commissioners voted for this resolution, by the way.<br />
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One person did at the time warn that this was a highly unusual and risky arrangement -- a computer programmer who worked on those "magic models." His letter to that effect to the SEC was never answered. You're right, Eric, but it's…tag:competitiveintelligence.ning.com,2008-10-03:2036441:Comment:101972008-10-03T21:55:21.602ZTim Powellhttp://competitiveintelligence.ning.com/profile/TimPowell
You're right, Eric, but it's actually much worse than this. According to a recent article in the NY Times, many institutional pension funds are planning for 8% growth to make their actuarial assumptions. They're not underfunded if they can make that bogey. But if they can't, they are underfunded.<br />
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And do you think they can? Are YOU making 8% these days on ANY investment? Some institutions are, sole university endowments for example, but that's because they can invest in stuff like timberland…
You're right, Eric, but it's actually much worse than this. According to a recent article in the NY Times, many institutional pension funds are planning for 8% growth to make their actuarial assumptions. They're not underfunded if they can make that bogey. But if they can't, they are underfunded.<br />
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And do you think they can? Are YOU making 8% these days on ANY investment? Some institutions are, sole university endowments for example, but that's because they can invest in stuff like timberland and commodities.<br />
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In other words, in order to make their numbers, these pension funds will need to move to more risky investments. (The higher the risk, the higher the return -- it's the first thing they teach you in business school finance.)<br />
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What happens when the boomers retire (70 million sounds high, but maybe that's the total number of penioners by a certain date), and these funds cannot make their current obligations?<br />
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This is not a rhetorical questions, I'd really like to know. The problem is, this "perfect storm" of circumstances has never happened before. It really creates a vicious cycle.<br />
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Now how's THAT for some pessimism?