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Another interesting post. You've certainly been prolific of late. Two days ago I was thinking your pause this summer (?) when you didn't post for a few weeks. Recently you've been on such a roll. It made me really happy for you, and I felt very fortunate to have be exposed to such insight. Glad you have found your muse.
Cheers,
Russell
Not necessarily contributions of blog posts, but perhaps an educational resource center serving people looking for information about the SOC and the issues it deals with.
There's a fellow named Patrick Byrne who's the CEO of Overstock and reckons that naked short selling has had a large part to do with the crisis. You could interview him: he created the site businessjive.com and deepcapture.com. patrick@overstock.com
This may be why:
Historically, Presidents will respond to "good ideas" by replicating them on their own terms. Take the Dept of Homeland Security, for example. I'm certain there were experts hustling to organize themselves after 9/11 to try and figure out how to protect the country. Having more robust organizations to deal with threats sounded like a good idea to Prez Bush, but instead of creating a new department out of these already formed groups, he created HIS Dept of Homeland Security.
I don't know if your idea for a Council runs the same risks, but I would be concerned it would only shut you out of the inside goings on.
Got me thinking... what's going to happen with InternetForEveryone.org
with Obama's new statements on broadband. This will be perhaps be the
first test of how he relies on existing alliances and organizations...
http://innonate.com/2008/06/24/internet-for-eve...
You assume that the government will create their own version of what you're doing, taking your best ideas, but you create a situation where they can connect with yourself and the outside groups also in this realm. There are some things that government cannot replicate, like having member organizations and industry focus groups.
In this respect SOC could become a non-profit, advocacy group and member association. Organizations and individuals pay a small fee to be a part of it and its initiatives in return for some degree of positive influence over government policy, which SOC would advocate on members' behalf.
Here are some examples in Australia regarding Environmental concerns:
http://environmentbusiness.com.au/ - Promoting commercial solutions in sustainability and environmental economics with its members being some of Australia’s leading sustainable organisations.
http://www.agdf.org.au/ - Accelerates the adoption of sustainable practices in the Australian building and development industry. Provides a recognised forum to connect innovators with potential business customers and policy-makers.
We already have seen that "Economics is too serious a matter to be left to Economists." Your ideas and observations are too important not to be shared, Roger. Your idea to have observers from other disciplines weigh in these matters is an outstanding one.
Truth Examiner
Actual letter just sent to the head of a regulatory agency.
Dear "head of regulatory agency"
I wish to share what I have learned from nearly 15 years of Bank Regulatory service (as a Senior Examiner, Senior Analyst and Case Manager, in the field and in regional offices and HQ). I also have 5 years experience at a major bank.
I have been fortunate to work for a number of well meaning and dedicated supervisors at the ______. What I find unusual is that generally the weaker supervisors are those who have migrated to HQ. It is a bit of a chicken and egg conundrum – are they promoted to Washington, DC because of their high energy and skills, which dissolves over time due to politics? Or, are they generally the meek individuals and not prone to rock the boat, who are chosen for Washington positions? Perhaps, a little of both, in my opinion.
But leadership talent is scarce here any way one cares to slice it. Sure, there's lots of technocrats with specific skills, regulatory backgrounds and many with positive mental attitudes. This is not sufficient; one must also have a good understanding of banking issues and the other, softer, skills, usually so lacking on the part of former examiners and researchers, usually Type A personalities by trade, who have found refuge at the ________.
Let me discuss some observations as I see it, at least those relevant to our corporate morale problems being addressed by the outside consultants:
1. The corporate performance review model is broken. It's utterly ineffective for executing the mission of the _____. How can 100 or even 50 managers ever agree on anything? They cannot and they do not, especially when it comes to ranking the performance of their direct reports. They cannot realistically rank their own contributions. As a result, agency consensus "leadership" is forced to compromise by making decisions with faulty or incomplete data. Supervisors are subsequently informed of those decisions. This is why nobody ends up satisfied.
2. Which leads me to the difficult realization that, with rare exceptions, management and chiefs care mostly only about themselves and getting their bonus. There is no higher public service purpose, no overriding "professional" mission, no fiduciary duty beyond that of getting monetary rewards and accolades from the Chairman or executive management. Instead, we should require that managers are focused and measured on two things and two things alone: (a) ability to produce high quality service and (b) ability to motivate, develop and maintain staff. (Okay, other corporate objectives are still measured but success is defined primarily by those two attributes.)
The agency should encourage greater integrity. Our employee satisfaction survey results were too low. I get the sense that my supervisor to eliminate the causes for the low scores, is attempting to fix the morale problem(s) by the wrong means. He is ever so subtle in informing staff that his compensation is somehow tied to the employee satisfaction survey scores, and thus staff compensation would be more attributable to the scores as well. Guess what? The current survey should have the highest scores in the nation.
3. Getting promoted to Chief or Manager is often a mystery. It's a mystery which remains a mystery, even to those who participate and is still a mystery long after it's over. There is no real ranking of candidates I have been informed. The agency seems to have a vested interest in keeping it that way because it gives it flexibility to promote certain candidates without regard to merit or even diversity concerns.
One thing many have found unusual was that performance scorecards used to evaluate staff didn't align with the metrics used, nor did they align with that used to evaluate management. Given the agency's push for fairness and cost containment, you would think those Managers and Staff with the most pressing workloads and those whom have demonstrated awareness of risks would be those deserving recognition. Sadly, the system is not working that way. Favoritism and cronyism plague this agency, sadly but true. It seems to me that those singled out to be rewarded are based as much on appearance and conformity and ability to "go along to get along" as for anything else. The appeals process to contest a performance rating is stacked against any fair hearing and should be completely overhauled by having a larger, independent grievance panel.
From my point of view, the passed-over "boat-rockers" who may have created constructive-friction are quite possibly our only hope for future leaders, with charisma and ideals and the courage to speak truth to power. Therefore, our entire rating and reward vetting process tends to discriminate against the very folks that the agency would seem to need the most right now. (One of the most frequent criticisms, and it's quite correct, is that leadership is comprised of good technicians and managers and administrators—but very few good leaders.) As thus described, it is quite literally "the bland leading the bland." This is not conducive to producing a "culture of high performance."
4. One more point. Collective bargaining is necessary, especially given the ineptitude on the part of some supervisors still in place. Example: "I'm sorry we couldn't promote you to _______ this year, even though you met all the criteria for doing so. The fact is, that not all deserving candidates can be promoted. The only way to open the veil that covers compensation and promotion is to do it on a collective basis, since individuals essentially have no ability to do so and, as noted above, individuals who rock the boat generally are not considered to be good candidates for promotion.
Okay that's it. Perhaps a bit more negative than intended, but that's how we can make progress, right? Keep up the great work and continue to make Effective Changes where necessary!
Perhaps, start with the Large Bank Division as it is emblematic of most of the problems cited here.
I've actually been thinking about starting a blog to centralize all my commentary and opinions abou t fnance and the markets. I may start toying around with it later this month.
As for regulation: the financial industry needs better PR. It needs to convey to the masses that (1) it is regulated; (2) certain aspects of finance that are unregulated, such as credit default swaps do not by themselves prove that finance generally is unregulated; (3) hedge funds are not "unregulated" vehicles, despite the press' treatment as such*; (4) many or perhaps all financial regulation is ineffective and outdated.
My stumbling block is I don't know what effective regulation would look like. But the financial industry has its back against the wall. Laying low while angry people cavil about "deregulation" will only serve to stymie the markets and its participants.
*Hedge funds have farily stringent restrictions about who can invest in them. Their trading strategies are unregulated and the opacity of their trading positions may be a problem. But it is not true that they are completely unregulated.
Alternatively or in combination, the SEC itself could be reshaped, after all it is its job to regulate. In this crash it has shown itself to be dysfunctional, at least from a systemic perspective. So to me, the answer is perhaps better and more effective regulation, not just more of it as you rightfully pinpoint.
For example, regarding information, when you buy a share or security, it would be interesting to see from whom you're actually buying it, especially for larger deals. Like on Ebay, you could flag a buyer or seller. In other words, a social network of market participants. I am speaking about the issue of attempting to resolve naked short selling rather than trying to ban it somehow. There should be a way to see if securities actually get delivered or are actually in possession by the seller.
From another perspective, those contributing to the current crisis are as follows: ( http://www.nytimes.com/2008/11/26/opinion/26fri... ) : "People who had no business buying a home, with nothing down and nothing to pay for two years; people who had no business pushing such mortgages, but made fortunes doing so; people who had no business bundling those loans into securities and selling them to third parties, as if they were AAA bonds, but made fortunes doing so; people who had no business rating those loans as AAA, but made fortunes doing so; and people who had no business buying those bonds and putting them on their balance sheets so they could earn a little better yield, but made fortunes doing so."
Also, another idea regarding instilling trust: a way for organizations to quickly and cheaply (that is the key) to be audited with the resulting information and balance sheets available in a social network to others who are also labeled 'transparent' for this purpose. The actually revealing of information is orderly whereby it can only occur in mutual agreement with another party with whom one might want to conduct business, whereby they can be asked to reveal their information at the same time. Once each party agrees, the information is distributed simultaneously and privately. Facebook has very good privacy controls, and otherwise confidential business information should be more available within systems designed to manage it.
1. It will neither “seek nor require consensus” yet will be designed to avoid “decision paralysis”. Seems to be a dichotomy … how do you propose to balance the leadership and decision making vs. the buy-in needed to implement the findings.
2. How will you compete for mindshare vs. the blizzard of blue-ribbon panels, committees, think tanks, and other councils that will inevitably be created. What’s the edge over the idea competition?
3. I’m reluctant to ask, but I must. What are your motivations? Political, altruistic, monetary? Are you willing to put yourself and your family thru the inevitable ringer of exposure this could potentially generate? Having been thru and led a couple of industry initiatives, these are no small questions.
That said…
You brand is Information Arbitrage and that is the place to start. The information spread between buyers and sellers and from the beginning of the information chain (the security) to the end (derivatives of the security) is way too fat and the source of the current systemic meltdown . On top of that there are layers of risk introduced throughout the whole process by outdated and poorly conceived legal and regulatory structures. Point is, your organization will suffer from the same poor information as the rest.
To me, a national financial markets information architecture initiative must be mandated to create implementable standards for the private sector to leverage. A few examples, standardized identification of counterparties (e.g. and open financial ID) to reduce suitability, AML and Anti-Terrorist ID costs, standardized identification of securities (e.g. open securities ID) for standardized securities reference data. Tackle the semantic standardized tagging needed to implement content-based best practices for PE, VC, Hedge Fund and other derivative structures.
I envisage a community of practitioners, with government participation and sponsorship, building the standards we need to close the unnecessarily large info. arb. gap and match the financial innovation needed to minimize systemic risks. We have all the tools we need today in XML, community platforms, wiki’s and other Web and Enterprise 2.0 apps. We critically need architects and folks who understand the power of these tools to resolve these issues an show the way.
My 2¢.
Your comments on technology and standardization are fantastic. I couldn't agree more. A huge undertaking? Absolutely. But necessary to adapt and thrive in the 21st century? Certainly.
It took the '87 crash to get us FIX, Enron and WorldCom to get us XBRL, and now it's time to start kniting it all together into a national financial information strategy to drive transparency from the ground up. Go long fin tech. Think of all the innovation and opportunity this will create.
Go get 'em. and we're happy to help.
It's great that you're taking the lead on this. The Obama administration is already marshaling an effort to organize "communities for change" by asking for house meetings. Online communities could be considered another "house" or "neighborhood of houses."
Organizing the "best of the best" to come up with workable solutions and implement them is a great idea. Your knowledge of derivatives is just one area where you and a hand-picked team could make a contribution. I look forward to seeing how this evolves. Adrian's website idea is a great way to start.
Structuring the SOC like you would if you were designing a major project and populating your team(s) is the only way to go. You've already stated the mission. Now all you need are: What specific problems will it address first? What possible solutions can it provide initially? Benefits/Value Gained? Required resources to implement? Key personnel and talents needed to accomplish key deliverables? Communication strategy? Milestones? Accountability? ROI? Critical interdependencies?
You probably want to design the SOC site to address these issues and facilitate collaboration between potential team members. You have so much to work with given your contacts and the firms you fund.
I spent a decade on Wall St. myself during the 70s and early 80s. Despite all the problems then, it was a rewarding and exciting time for those with creative solutions and successful change strategies. Such times are upon us again.
As an example, during this time, I consulted with (or worked for) Wall Street Banks to craft online solutions for money market instruments in a period of excessive rate volatility. New risk information management systems for such became extremely important (and as you well know led to the design of new financial instruments like commercial paper backed by letters of credit.) Companies who understood this and how to effectively produce such application solutions quickly outpaced their competition.
I'm guessing that the Obama administration would jump at any opportunity to tap into similarly aligned talent ready to run with solutions.
BTW, I'm voting for on- and off-balance sheet derivative transparency as a top priority solution area, or a new debt management approach. Be prepared to customize any solution during implementation, as times of great change require a lot of flexibility. Education (best if free given the times) must be part of the solution package to insure successful implementation.
even obama cannot find fresh voices ...
ignore all, it is the only way, do your work, enjoy
I've been reading a post over at Occam's Razor today [http://feeds.feedburner.com/~r/OccamsRazorByAvinash/~3/473428437/web-analytics-career-advice.html]. (Wasn't sure about the comment stream taking HTML tags, so I just copied the post link.)
It got me thinking some more about your SOC idea. You'll need various types of expertise and here's a shortlist to get started:
1) Consultative Sales Team--client-facing experience required, preferably trained to call on executives--an expert in the solution strategy (business and specific solution knowledge such as your contacts with lots of knowledge in the targeted problem area) and an executive sales type (maybe a wholesale relationship manager or an IB deal maker, should be a lot of them available now).
2) Solution Design Team--quants and techies--you'll need people with knowledge of the current solutions before you can change them and you'll need talent to design new software applications, data analysis tools, and models. The ability to weave in online tools and widgets will help also.
3) Client Liaison Team--project leader plus appropriate personnel from other teams as needed over the course of the project--strong business background, comfort with complexity, client-facing experience, used to working across functional and organizational lines. A master of indirect management and a subtle influencer. This person should be able to skillfully tap client talent, identifying who can be trained in the proposed solution concept and technology.
4) Trainers--at first you may have to use talent from the Sales/Tech/Project Teams to handle this, following KISS (keep it simple stupid). As solutions solidify and expertise builds, you can build a trainer team and courseware. This is why I suggested free training at first as so much will be fluid at first.
Also, your SOC website will need cloud capabilities to exchange docs, set up presentations, collaborate, training ideas, target clients, marketing materials, etc.
There are so many directions you can go with this idea. I heard a rumor that the traditional training of Wall Street bankers has changed so much that the ability to evaluate credit spreads isn't stressed anymore. If true, it's an opportunity for those who were trained in credit. Somebody will have to evaluate the tranche loans to start. Then, there are the opportunities with regional and community banking. The whole banking system could be innovated as a result of this crisis. (Sorry, I was an industry manager for Commercial and Thrift Banking in my past too. So, I get excited when I see the potential ripple effect this could have on the entire industry.)
I hope you don't mind my thinking off the top of my head here. Oh, and the idea of standards--that will be hard at this point, as too much is about to change. Trust me--I've been involved in setting standards from everything from SWIFT to EFT to chip layout. It can't hurt to get involved now and take the lead in making your approach a standard, but standards won't solve anything yet.
The common sense and innovation continue, Thank you. I would like to offer the following to you and everyone. It's very simple so that everyone and not just the geniuses can understand the current situation. It's a starting point:
Subject: Bail out
Young Chuck in Montana bought a horse from a farmer for $100. The
farmer agreed to deliver the horse the next day. The next day he drove
up and said, 'Sorry son, but I have some bad news, the horse died.'
Chuck replied, 'Well, then just give me my money back.'
The farmer said, 'Can't do that. I went and spent it already'
Chuck said, 'Ok, then, just bring me the dead horse.'
The farmer asked, 'What ya gonna do with him?
Chuck said, 'I'm going to raffle him off.'
The farmer said, 'You can't raffle off a dead horse!'
Chuck said, 'Sure I can, Watch me. I just won't tell any body he's
dead.'
A month later, the farmer met up with Chuck and asked, 'What happened
with that dead horse?'
Chuck said, 'I raffled him off. I sold 500 tickets at two dollars a
piece and made a profit of $998..'
The farmer said, 'Didn't anyone complain?'
Chuck said, 'Just the guy who won. So I gave him his two dollars back.'
Chuck grew up and works now for the government. He was the one who
figured out how to "bail us out".
I'm going to email you as well some information on something that I have been building. I think you'll see that the features you need are there already.
Best,
Peter
If we want to have a safety net -- which I agree is desirable -- keep it at the individual level via unemployment or welfare benefits, and far far away from the corporate level.
Those individuals then get a lifeline to bridge them between their previous job with a defective employer and (either) their new job with a legitimate company or their entrepreneurial future.
The focus on "saving firms" is absolutely the fatal flaw in this current regime, in my opinion.