March 25 2020

During this time of enforced isolation, these quotes from one of my favourite books caught my attention.

They are from The Leopard by Giuseppe Tomasi di Lampedusa: a wonderfully evocative portrait of a Sicilian aristocrat, Don Fabrizio Salina, at the time of Italian unification. His nephew supports unification because “Everything must change so that everything can stay the same”. (The book is beautifully narrated by Alex Jennings here or in Visconti’s gorgeously lush film version).

Don Fabrizio admires his cynical nephew, clever enough to fall in love with a member of the new moneyed bourgeoisie. But he knows that, as a member of the old ruling class, he is part of “an unlucky generation …. suspended between the old world and the new …. and ill at ease in both”.

The Piedmontese politician sent to persuade him to become a Senator in the new Italy is told by Don Fabrizio that he is not suitable. He has no illusions. He lacks “the faculty of self-deception, that essential requisite for anyone wanting to guide others”. The politician needs to look for those who are “good at masking and blending … their obvious personal interests with vague public ideals.”

There have been few better summaries of the political class.

The politician leaves, his final thoughts on the Sicilians summarised as: “All were fundamentally equal. All were comrades in misfortune.”

Not just Sicilians, these days.

Photo by Mattia Bericchia on Unsplash

July 30 2019

Ever since the financial crisis started there has been a plethora of explanations about why traders and bankers behaved as they did.  Some have been purely descriptive: what happened and when, allowing us to marvel at the folly of it all, at least in hindsight.  At the time these clever financiers were praised by pretty much everyone from Chancellors down. There were very few pointing out at the time that the Emperor had no clothes.

But increasingly there have been attempts to use the insights gleaned from other disciplines to explain why what happened in the way it did. The latest neuroscientific findings were used to describe the biology of boom and bust (The Hour Between Dog and Wolf, for instance). Behavioural economics has had its say, as has nudge theory. Rather than nudging people to behave well, all the payment and reward incentives nudged financiers into doing what suited them financially irrespective of the effect on the customer and no matter what the expressed good intentions of the firm were. Goodness! Whoever could have predicted that, without a theory to explain it.

Psychologists have had their say, of course, though only a cynic might wonder about how much actual knowledge about the realities of life in the financial sector they have. No matter: all could opine merrily on the importance of culture in finance and on all the wonderful insights that these disciplines could bring to those seeking to manage and regulate the financial sector.

And now the anthropologists have got in on the act, as in this article by Gillian Tett. In it she points out how anthropologists have tried to analyse the cultural patterns, the rituals and symbols, even the words people use in finance to understand what was going on under the surface. In truth, the insights brought by anthropologists (at least as described here) are pretty obvious rather than thought-provoking; the article does not need them to be worth reading.

What is interesting, though, is how commentators on finance and perhaps also regulators are, perhaps unconsciously, making the same mistake as many of those traders and bankers. They are over-complicating, coming up with all sorts of theories and hypotheses apparently grounded in science or other social studies, described and interpreted by experts, using technical language to describe common human behaviours. Just as too many traders developed over-complicated products which they only half-understood and managers kidded themselves into believing that they had found a foolproof solution to valuation or risk management or any of the other difficult tasks they had, so there is a risk of developing overly complex explanations for why so many people behaved so stupidly or worse. The risk is that the more complex the explanation, the more people feel that it is all too difficult really to do anything about it or that this is something best left to the culture specialists, psychologists and other “ologists“.

Keep it simple might be the motto. In the end, by whatever means the conclusions are reached, what everyone in finance needs to remember is this:-

1. Trust is at the heart of finance.
2. Everyone in a financial institution is, in one way or another, managing risk.  There is no such thing as a risk-free product or institution.  Or, indeed, individual.  Understanding the risk you are running and managing it properly is what every bank, every employee in a bank, every customer of a bank, every shareholder in a bank, every investor in a financial product and every regulator of a bank is doing.  Or ought to be doing.
3. Understanding properly is hard work.  There is no magic bullet, algorithm, theory, process, spreadsheet, AI or killer piece of management information which will do it for you. Thinking is often required.
4. There is no way of eliminating risk.  Mitigating and minimising it: yes.  Eliminating it: no.  If anyone says otherwise (and much of the financial crisis was caused as a result of clever people thinking they had done just this and learning, painfully, that they hadn’t) they’re a charlatan or worse.
5. Human beings, even clever ones (particularly them, it sometimes seems) do not behave rationally around money. Money and emotions are bosom pals. As any decent novelist or lawyer dealing with divorces or wills will tell you.  The “animal spirits” Keynes described do not just apply to market participants but to all of us.
6. Managing people, understanding them, motivating them, inspiring and leading them, teaching them, setting them a good example, setting them high expectations and making it clear what the boundaries are, what behaviour will not be accepted, what crosses the line, helping them get past their frailties, working effectively with them is hard work, the hardest work anyone ever has to do.  And by far the most valuable – and rewarding.
7. Finance is there to serve others, not itself.  It is a means to an end and the moment it (and the people in it) start thinking of themselves as indispensable, as set apart from the society they are part of, as entitled to special consideration and immunity from challenge is the moment when hubris sets in.  Nemesis will surely follow.

Photo by Lesly Derksen on Unsplash

June 28 2019

2016: Tracey McDermott, the then acting CEO of the FCA:-

“I’m not saying in 2001 I would have seen a failure. But one of the roles of a regulator is to have the confidence to ask what you think might be stupid questions. This is a big task for a 25-year-old faced with masters of the universe. The people who live and breathe this stuff, who speak in basis points, will say you don’t understand because you are in some ivory tower as a regulator. Making sure FCA people have that resilience is very important.”

26 June 2019: Andrew Bailey (CEO of the FCA) when questioned by the Treasury Select Committee admits that, despite having concerns about the Woodford funds since February 2018 and the various risk warnings it had given, the FCA had been taken by surprise by the wave of redemption requests and their effect on the fund. He admitted that the fund had been guilty of “regulatory arbitrage” and ‘sailing close to the wind”.

The FCA’s Chairman said that the European funds regime had created a “perfect storm” that allowed the Woodford situation to escalate, but that there should have been a more incisive cutting through to the key issues.  You don’t say.

27 June 2019: Mark Carney (Governor of the Bank of England) talking to the Treasury Select Committee about the issues raised by Neil Woodford and his various funds:-

“These funds are built on a lie, which is that you can have daily liquidity for assets that fundamentally aren’t liquid.”

The FCA’s answers do not impress the Committee’s Chair.  “Doesn’t anyone at the FCA actually read the newspapers and listen to what’s going on in the industry?”

Evidently, developing the confidence to ask any questions, let alone stupid ones, or even learning to cut through to the key issues are harder tasks than the FCA thought.  Still, after three years you’d have thought some lessons would have been learnt.  If only this one: curiosity is one of the most underrated but most necessary qualities for a regulator to have.

Photo by Ken Treloar on Unsplash