Risk Management is an Oxymoron

One of the faults of the investment industry is that reason and hubris too often trump common sense. Risk management is a good example of what I mean. Every investment firm trumpets its ability to manage risk as one of its greatest selling points to both its present clients and to future clients whom it tries to recruit through its ability to manage risk. Yet the term risk management is really an oxymoron – the words risk and management contradict each other and so, in the end, make no sense. Risk means the chance of a loss in an investment while management infers such things as structures, policies, use of predictive models, personal experience of managers to know or to sense what is happening in the markets that will control the exposure of any investor to a loss in their investments and thereby minimize the potential for that loss.

First of all, the market is not rational. Indeed, no one really knows how the modern market really works. Note all the different predictive tools in use by analysts to try and to figure out what the market will do and all of these tools, in the end, fail. So many factors outside the control of rational thought influence what the market does – wars, greed, fear, environmental catastrophes (natural ones like earthquakes or hurricanes and human created ones like BP’s oil spill in the Gulf of Mexico), terrorism, short term political and economic thinking that has long term harmful consequences (i.e., the ongoing fall out from those toxic sub prime mortgage investment vehicles) and the list goes on and on. The point here is that most of the consequences falling out from the above mentioned risks are outside of any person or group of persons in a financial institution to control or to manage. Indeed, what can best be said is that risks and their consequences are not managed (they can’t be!) they are reacted to after the fact in an effort to salvage what can be salvaged from the destructive consequences of that risk which is no longer a risk but now a catastrophe.

The investment industry couches risk management within an investment strategy known as a balanced investment strategy which is a method of portfolio allocation designed to provide both income and capital appreciation while avoiding excessive risk. Such a strategy has the ability to ‘win’, to make a profit, more often than it ‘loses’. However, the dynamic of the market is such that it only takes one catastrophe to wipe out the gains (and the original principle) of many wins. A better term for risk management, though admittedly not as macho and in-charge sounding, is reactive risk response – how quickly and effectively is the investment professional and investment firm able to minimize the negative consequences of any catastrophe.

What has all of this to do with ethics? It is about honesty to clients. Call a spade a spade and don’t dress up what is essentially unmanageable with terms that imply the unmanageable can be managed. Transparency is called for here. Investing is a crap shoot in which the dice are often loaded and the crap table moves or completely flips over unpredictably.

June 24, 2010 at 2:27 pm Leave a comment

False Advertising

Today (June 15, 2010) I saw a full page advertisement in the Globe and Mail (Canada’s national newspaper as it calls itself) placed by Athabasca University which is an online university based in northern Alberta. The advertisement, in the Globe’s business section, had a lead off headline that shouted “Leaders” and then it listed the latest crop of its MBA graduates. The advertisement obviously was saying those lucky few who graduated with its coveted MBA were leaders. What bullshit! Someone with an MBA is no more of a leader than someone receiving a high school diploma. Indeed, some graduating high schoolers are more leaders than many holders of MBAs.

This blog is primarily about business and ethics. So what has Athabasca University and its advertisement to do with ethics? Plenty. First of all, not just Athabasca U puts such advertisements about its MBA graduates in the media. All of the major MBA programs in Canada do so. All of them equate holding an MBA with leadership and being a leader. This is, minimally, a lack of transparency on the part of these business training schools and, more often, an out and out lie. An MBA is just a piece of paper that says its holder has completed a number of courses in business. Period. It says nothing about the character of the holder of that diploma. It says nothing about the holder of that diploma having the abilities (vision, motivation, outwards focused, empathetic relational skills, etc) that are core to any leader. The graduates of MBA programs have surely read some articles, maybe even a book or two, on these abilities, chatted about them in class, done a case study or two on them; maybe if the MBA program is a co-op program the student has had the opportunity to observe a real leader in action. But having an MBA does not in any way mean you are a leader. It only means you have passed whatever courses the program (and paid the hefty fees that go with that program) has decided makes for a good theoretical business education. Leadership is theory and so can be studied. Being a leader however is not theoretical, it is the individual who has developed those leadership abilities through experience melded to a character that is focused on the well-being of the larger group (no self-serving, whats-in-it for me types need apply – oops, that covers the vast majority of business MBAs). To say, as Athabasca U has in its advertisement in the Globe, that its graduates are, ipso facto, leaders because they have received an MBA is logically a fallacy and a lie. What would be true is if the MBA factories would say their graduates have received a solid background in business theory and practices. And that’s all, folks.

Stop trying to con us. After all, almost all of the MBA factories emphasize how ethics is a key component of their training process. So practice what you preach.

June 15, 2010 at 1:27 pm Leave a comment

Here We Go Again

The man just doesn’t get it. It absolutely amazes me how someone who is so intelligent is such an ethical klutz. Lloyd Blankfein, Chairman and CEO of Goldman Sachs (I know, I know…Goldman again. I really want to blog about other important ethical issues but Goldman has become the flag bearer for everything that is wrong with the ‘free’ market system. Every day either Mr. Blankfein or one of his senior execs says something that is so mind boggling that I have to talk about it. So into the Goldman breech I go again) yesterday pledged to Goldman’s clients that his firm would be, I quote, “the leader in things (my italics) like ethics, in putting clients first”. This quote really highlights his misunderstanding of just what is ethics.

While some MBA schools will protest what I am about to say, for the most part, aspiring student executives, particularly in the financial services field, are first taught in most business schools that ethics is value-added or an add-on to what the firms do to make their money (in many business schools ethics is either an elective course – the future business exec doesn’t have to take it because as an elective it just isn’t that important ¬ or it is taught integrated into many courses as just another part of the course on finance or marketing or leveraging or whatever course is taught by instructors who themselves have had little or no formal training in ethical awareness and therefore, for most of them, do not really comprehend how dynamic and central ethics is to human behaviour). This credo of ethics as an add-on is then practised that way for many firms, particularly in the financial services industry, which further reinforces the idea that ethics is a thing that isn’t really central to the whole business process. If you think I’m just bitching with nothing to back up this last statement, just look at the actions of most of the investment firms and almost all of the mortgage firms in the run up to our most recent financial melt down. It was primarily greed at play in the fields of easy profit. Ethics, the how of doing business, and fiduciary responsibility which is a core reality of good business ethics, were simply ignored, seen as not central to the whole process of making money, and the consequences of that approach to business was, quite simply, catastrophic. Mr. Blankfein’s misunderstanding of ethics as a thing, as some thing that is added on to our behaviour from outside of us, as something that is dealt with as not really present until the outside world complains, is, sadly, emblematic of how much of the investment industry misunderstands ethics.

However, ethics is not a thing like a mortgage or a hedge fund. Mortgages, derivatives, income trusts and other created financial vehicles are things. One creates them, they have their time in the sun, and, once they cease to produce the desired profit level, they are dismantled and abandoned for some other human created investment package. Ethics, on the other hand, is not a human created package. Ethics is a human relational dynamic that has its own building blocks (values) and its own goal (trust or mistrust for the many practitioners of me-first economics). Ethics is not primarily concerned with profit for all those business types who see ethics as an add-on that is mainly concerned helping the business person look good while making big $$).

Ethics is present all the time, whether or not, you and I are aware of it – it is part of who we are as human beings. What Mr. Blankfein, by his classification of ethics as a thing, is demonstrating is a tragic and ultimately destructive (for him personally, his firm and all of those people adversely affected by his and his firm’s actions) misunderstanding of ethics. Like breathing, ethics is always present in our personal and corporate make-up. Like breathing, it disappears into the background for most of us because it is so much a part of what we do as human beings that we are often not aware of it until something outside of us shakes us into awareness. At that point, as Goldman and Mr. Blankfein are now experiencing, ignored ethics generally leads to really bad consequences.

Ethics is not an add-on, not value added, emphatically not a thing. It is central to almost everything we do as people as our internal dynamic that either creates trust or mistrust with others. Mr. Blankfein, you don’t just do ethics like you do lunch. Like physical fitness, ethical fitness must be constantly cultivated and actively and consciously incorporated into our dealings with other people. It takes time and effort to understand ethical dynamics and incorporate positive ethically influenced behaviour in a firm. In an industry which is almost completely short term focused on the profit margin for the next quarter, time is an enemy. But time is needed to understand and encourage ethical behaviour. If you don’t understand and approach ethical awareness in a respectful and effective manner, you get the mess in which you currently find yourself.

May 6, 2010 at 2:34 pm Leave a comment

What Planet Are These People From?

I never intended for this blog to become a bash Goldman Sachs commentary but, OMG, what is with the senior management of this firm? Are they all moral morons? Psychopaths in suits? Ethically challenged to the point of farce? They have proven beyond a doubt they are rip-off artists with how they treated their clients and the world economy in the subprime mortgage scandal that Goldman was at the heart of…their actions show that the term ‘fiduciary responsibility’ is totally meaningless to them. When asked if Goldman had a duty to act in the best interests of its clients, Goldman senior exec. Daniel Sparks replied “I believe (italics mine) we have a duty to serve our clients well.” Uh, no Mr. Sparks, fiduciary duty of Goldman towards its clients is not a mere belief to be applied when, and only when, Goldman stands to make a lot of money by looking out for its clients, fiduciary duty is a moral right that is the very basis of your relationship with your clients. Fiduciary duty is the corner stone upon which the financial services industry is supposed to rest. When Goldman’s own senior execs are sending each other emails describing subprime based investments Goldman are pushing their clients into as “one shitty deal” and making “lemonade from some big old lemons” and “crap” I have to question the very reason for Goldman Sachs being allowed to exist as a firm. Goldman was not providing its clients with the service those clients were entitled to; instead Goldman, acting more like a giant casino than an investment bank, bet against its clients.  If Goldman knew these mortgage based investments were disasters waiting to happen, why didn’t they warn us about them instead of abetting the financial meltdown through its greedy self-serving actions?  Lloyd Blankfein, Goldman’s CEO, brazenly tells the US Senate panel that he doesn’t “think our clients care or should (my italics) care” what Goldman is planning to do. What?????? The clients of his firm have no stake in what Goldman is doing even when they are knowingly placing those clients in toxic investments? This statement is absolutely mind boggling. Fiduciary responsibility? What’s that asks Goldman.  Corporate social responsibility?  Never crossed our minds.  While Mr. Blankfein is the 2009 Financial Times man of the year because he knows how to profit big time by betting against his clients, the man is clearly demonstrating he is either ethically bankrupt or morally ignorant. Neither of these attributes is what society needs in a man in his influential position. The actions of Goldman Sachs show that it has jettisoned the reasons why investment banks were approved by society in the first place – to be financial intermediaries whose role is to transfer savings from one sector of the economy to another that needs capital and to provide stability and liquidity in the market to allow for the free flow of capital in the market. These were the reasons it was given its charter to operate in the market in order to benefit, be value-added to (in MBA-speak), society. Goldman, by its actions, has shown that it has discarded its given societal role to enhance the overall well-being of society in its heady rush for profit and executive bonuses at any cost. Just what is the social value of this moral black-hole of a firm?

April 28, 2010 at 3:09 pm Leave a comment

Dehumanizing Language

We live in a business culture. The driving values of business are the underlying values of our culture. Business culture is no longer just confined to business. It is now the underlying ethos behind most aspects of our society. Health care is no longer patient oriented, it is business oriented at its core providing not healing but services. Education is no longer about a more traditional approach to educating our young to think critically; now it is basically concerned with job training skills and thinking critically is definitely not high on list of those skills and so we have a ‘dumb downed’ approach to education. Government is less and less about serving the people and more and more about being run according to “efficient” business principles. Our legal system, once the great equalizer in our society that supported the powerless or less powerful in their interactions with the more powerful (read business elite), if we go by recent Supreme Court decisions, is more pro-business than ever before. Even the artistic expressions of our society are completely at the whim of the business ethos that permeates our society.

A major consequence of our business oriented culture is the degrading of human relationships which are at the heart of ethics. Ethics is how we conduct ourselves in relationships with others to create the trust we need to function effectively as a society. I find one of the key debasing features of our business culture has been the wholesale adoption of business language as the language of human relationships. In the business world people are not referred to as people but as clients or customers. ‘Client’ and ‘customer’ are abstract terms that confer on the object of those terms only a quasi-human status. In the business world of spread sheets, statistics, proposals, and overall ideology, these terms have the great tendency to remove the business person from encountering the humanity of the client/customer. Instead of John Doe or Jane Smith, who by virtue of their names are flesh and blood people demanding the dignity accrued to their persons through their real names, the use of client/customer turns a person into a thing, something on an impersonal ledger that can be moved around and dealt with with minimum attention to the personhood of that person. I think this is why there are so many violations of basic human rights, needs, and fiduciary obligations in the business world. The language of business de-humanizes people; it removes the humanity of people from the consciousness of some business people as it effectively categorizes people as things. It is easier to take advantage of a client/customer when the humanity of that client/customer has been effectively marginalized by the very language used to describe and identify.

This marginalization of personhood through the use of business language also plays itself out in other areas of our society. Just two examples of what I’m writing about. First education. One of the major battles at our universities and colleges (and, unfortunately, in some of our elementary and secondary schools) is the use of the alienating terms of client/customer to refer to what we used to call ‘student’. In education, client/customer as a term has a whole different connotation than does the term student. The former is someone to be dealt with on a far more impersonal level while the latter term demands personal attention from his/her teachers. Client/customer is the preferred terminology used by administrators in academic institutions while student is still the preferred terminology invoked by most teachers/professors and the students themselves (I have yet to hear of a student in a college or university refer to him/herself as a client of the institution). When dealing with the dollars and cents of running an academic institution I think it makes hard decisions a bit easier for administrators when referring to students as clients who are provided services rather than students who learn through their encounters with their teachers. The other example is health care. Again the preferred term for health care administrators to apply to people who require medical attention is client/customer rather than the traditional term of patient. In health care, a client is provided services in the most ‘efficient’ manner while a patient is someone who is looking for a personal relationship with the health care provider (also a business language term, not doctor or nurse) which quite likely makes for an inefficient relationship from a money point of view. Also note that both academic institutions and health care institutions must have business models of operation rather than caring models or patient/student centric models. Another business language (business model) term that distances the user of the term from the humanity of the people who require education and health care.

April 19, 2010 at 2:43 pm Leave a comment

What is a Hero?

This post is a little different from my other ones. But it is something I’d like to share.
What’s a hero? I was reading about a controversy that is brewing in Canada over the awarding of scholarships – the so called “hero scholarships” to the children of soldiers who were, and will be, killed in the war in Afghanistan. As a former soldier myself, this controversy has me questioning just what is a hero in our contemporary society. Hero is a word that has a lot of mileage on it if we go by the number of times it is used in our media. Webster’s defines a hero as someone who is an illustrious soldier, a person admired for his or her achievements and noble qualities and as someone who shows great courage. First of all, let me narrow the field of who, by this definition, is a hero. It’s not our sports ‘heroes’ or our action heroes. While our sports ‘heroes’ may on occasion play in pain, put up incredible statistics, throw, catch or run with a ball when they know they are going to be hit hard by a 200-300 lbs. human missile, or just demonstrate incredible athleticism, none of this makes them heroes in the sense of our definition. A hero is someone who gives of themselves for the betterment of their group or of society. What sports ‘heroes’ are are incredibly good athletes who are rewarded for their athleticism through money or fame or entitlement or all of the preceding. I don’t know of any athlete who does what they do for the betterment of their group; most of them, particularly professional athletes, seem to be in it ultimately for themselves. It is the media who bestow upon these athletes the honorific description of hero rather than the term that should be used which is idol. The media, and most  sport fans, project our own fantasies of athletic greatness onto those athletes we admire for their incredible skill. This idolatry of athletes can border on outright worship. But that doesn’t make them heroes.
Action heroes are strictly a media creation and we can leave it at that. The Jason Bourne character created by Matt Damon is just that, a created character who, if any of us tried to accomplish just a fraction of what Jason Bourne did, we would be dead.
This leaves us with the emotionally charged issue of contemporary soldiers who die in combat in Afghanistan and are then called heroes. I think it goes without saying that the war in Afghanistan is a mess, a quicksand of a situation that is sucking NATO into eventual submission, however they will disguise that submission. Canadian soldiers are in Afghanistan because that is where they were sent by our government. They did not volunteer to go; as professional soldiers they go where they are told to go and perform the tasks they are told to perform. They really have no say in this except that when joining up they gave up the option to say ‘No’ to going to war. For the most part the war in Afghanistan is a guerrilla war that is not winnable by conventional military means. I think a couple of points need to be made here. First, soldiers on the ground are not fighting for grand geo-political goals like a democratic Afghanistan. That may be the ‘official’ reason presented to us in newscasts and briefings by politicians and generals but soldiers who actually look for Taliban fighters to engage, in the heat of the engagement, fight primarily for their own survival and for the safety of their fellow soldiers. Geo-political goals are for politicians and maybe generals. They are not the main reason why the vast majority of soldiers actually fight the Taliban. Second, most of the engagements in Afghanistan are messy and shifting and most of the casualties come not from actual close quarter’s engagement with Taliban fighters but from IEDs that explode and kill and maim before the soldiers are even aware of what is happening. With IEDs the Taliban are nowhere to be seen. Military vehicles are blown up with the occupants barely having time to realize what has happened or troops walking on the ground are killed or wounded before they know what is happening.   An exploding IED will destroy perhaps one vehicle in a column of vehicles or kill or maim a few soldiers in a line of soldiers. Death in these instances is more a case of being in the wrong place at the wrong time than an act of heroism.  These deaths are horrific and tragic. Young lives and all the potential that accrues to those lives are lost forever. This is heartbreaking, painful and distressing. But it is not heroic in the sense of the definition of heroic. It is tragic.
When I think of heroic and hero I think of Romeo Dallaire in Rwanda. Seeing genocide beginning and being orderedby his superiors to leave for his own safety and for political expediency on the part of the UN, Canada and NATO, Gen. Dallaire and his aides freely chose to disobey what they thought was a cowardly, unethical order and stay to try to do something to save people’s lives. He willingly put his own life in danger to save others. He suffered personally from this decision having to deal with psychological demons that tormented him from what he experienced and he literally had to pick himself out of alcoholic despair due to those nightmarish experiences to eventually serve the greater good. That is heroic.
This controversy over the use of the term hero to describe all the dead service people in Afghanistan is caused by the media. I blame the media in Canada for distorting the meaning of the term, applying that term indiscriminately, playing on the raw emotions of those families who have lost sons and daughters in Afghanistan and then fanning the controversy which they themselves created in the first place. I believe this whole misuse of the term is simply a case of poor media ethics. Not every soldier, sailor or air force member killed or wounded in World War 1,WW2, Korea, or on UN Peacekeeping operations was described as a hero. I have to ask the media, why now?

March 29, 2010 at 5:44 pm 2 comments

A Blinding Insight or Did I Choose the Wrong Vocation?

I had a blinding insight a few weeks ago and then watched Jon Stewart a couple of days ago “steal” my insight and do a much better job of presenting it than I ever could. But, what the hell, this is my blog so, for those of you who haven’t seen the Jon Stewart show, I figured out how all of us insignificant tax payers could make a bundle. How? See, here’s the insight and it’s so simple…we act like corporations! The Supreme Court views corporations as ‘individuals’ from a legal point of view. Corporations have all the rights that you and I do (except they can’t be sent to jail). With this legal understanding of that thingy called a corporation as really a person, the people who run that corporation can’t be held personally liable or accountable when that corporation goes rogue like all those Wall Street financial corporations did as they set about bankrupting us and destroying so many lives so those corporate cats could make a killing. It wasn’t those greedy financial types who wiped us out, it was the corporations they worked for who wiped us out.  So those greedy financial types can’t be held accountable for their duplicity and greed, its their firms who are accountable.  Indeed, their firms will pay those greedy financial types large bonuses to keep them in the fold because they have “talent” that is too valuable to fire.

So this got me thinking…if corporations can be viewed as people then maybe the courts could be fair (the law is fair, right??) and view me as a corporation. Instead of just being Phil I could be Phil Inc. As Phil Inc I could head off to my banker and ask for a loan. Now when a financial wizard on Wall St. does this the banker would ask for collateral and that collateral would be, yes you guessed it, billions of dollars in financial vehicles based on worthless sub prime mortgages packaged as great investment products. What made these worthless investments worth so much? Well, the financial wizard has a buddy called a financial rating agency like Moody’s and they work hand in hand to support each other so they both can make enough money to choke a herd of horses. So the financial rating agency slaps an AAA rating on these worthless investment vehicles and this allows the financial wiz to unload them onto trusting investors as great investments. And so this worthless shit gets moved around by other financial wizs who recommend them to their clients as really solid investments (whatever happened to fiduciary responsibility? Oh well, what does fiduciary responsibility really mean if the financial wiz is making money?).

So here’s how Phil Inc could allow each of us to oink our way to the money trough. As Phil Inc I need something with which I can go to the bank to get a loan to get this money machine rolling – I need some collateral. As Phil the real person I really don’t have anything in the real world to use for collateral to get this money maker rolling but I do have a 2005 Yamaha Vino 125 cc scooter sitting in my driveway. Its gotta be worth something like $1000 which if I was Phil the person isn’t much but with which as Phil Inc I can be very creative. I call up my good friend Louie who has recently incorporated himself as a financial rating agency known as Louie’s. Louie comes over to my place and looks at my scooter, places a value of $500,000 on it and slaps a Louie’s rating of AAA on it as well. I take this on paper collateral of $500,000 and its Louie’s triple A rating to my banker who happily presents me with a $500,000 loan. I’m so happy with myself I pay myself a bonus of $250,000 to keep myself from moving across the street to work for someone else and give them the benefit of my financial acumen. Not bad for a Yamaha Vino, eh? But I’m not finished.  I need to make some payments on this $500,000 loan but I don’t want to use “my” $250,000 bonus money to make some payments to keep the bank happy – after all, I worked really hard to earn that money so its mine and I’m not parting with it.  I could create a Ponzi scheme like Bernie Madoff but, lets face it, he was really sleazy and I’m not – I’m a businessman who is doing everything legally even if it is just a wee bit ethically suspect.   So I need to come up with another way to keep this gold mine producing.   So the bank wants to see some payments on its $500,000 loan so I create another corporation, I’ll call it 2Phil2 Inc and I sell this worthless piece of shit (OK it is worth $1000) to 2Phil2 Inc for $2,000,000 and, of course, I just have to pay myself another bonus of $500,000 for increasing the worth of my original corporation, Phil Inc, by another $2,000,000. Now 2Phil2 Inc is selling this crap to its clients as a great investment and the clients, believing 2Phil2 really have their best interests front and centre, jump on board. A bit later these clients are looking for a return on their investment only to discover that maybe the ol’ Vino 125 at the heart of their investment portfolios isn’t really worth $2,000,000. Oh oh, trouble is brewing. Now in real life something like this did happen with Goldman Sachs placing its clients in these worthless sub prime based investments which the big wigs at Goldman knew to be worthless but Goldman covered its bases by taking out insurance on firm it didn’t own, AIG, and when AIG crashed and burned because of these worthless investments, Goldman collected lots of money. So 2Phil2 Inc has learned from the pros like Goldman how to play both sides of the same coin (sell worthless investments to its own clients and collect the commissions from those sales and bet against these same worthless investments they put their own clients into by taking out insurance to collect more money when those worthless investments inevitably do collapse). 2Phil2 takes out insurance on his neighbour for $2,000,000 and when his neighbour commits suicide because his investments, based on the Vino 125 which I of course steered him into because he trusted me, have crashed leaving him penniless 2Phil2 steps up to collect that insurance money.

Now here’s the real beauty of all this deceit. According to our courts I, Phil the real person, am not responsible for this mess. Legally, Phil didn’t do any of this. It was the corporate persons Phil Inc and 2Phil2 who did it. They are the guilty culprits but they have no money left in their accounts. I paid all that money to myself as bonuses for a job well done and to keep myself and my ‘talent’ from leaving Phil Inc and 2Phil2 to work for some other outfit.  As Phil the person I’m legally safe and sound lying on a beach in Tahiti while the investors who trusted me are left holding the now very empty bag (or, like my neighbour, dead). Geez, I should have gone to business school instead of studying philosophy and ethics and religions.  At the very least some MBA school should hire me as a professor to teach these ‘alternative’ investing methods to those aspiring students who dream of making their own killing once they graduate.  I could even teach their ethics course…no wait, that might be seen as a conflict of interest.  But I’m sure there is some ‘creative’ way around that dilemma too.

I wonder if it’s too late to jump on this money making bandwagon????  Praise the Lord for insight!

March 19, 2010 at 5:11 pm 2 comments

A Greek Tragedy or There’s a Sucker Born Every Minute

Is legal the same as ethical? Is following the letter of the law the same as being guided by the spirit of the law?

What has me asking these related questions is the latest news emerging from the melt down of the Greek economy (as well the economies of Spain, Portugal, Italy and Ireland) that could have a devastating effect upon the euro. Greece borrowed like a drunken sailor in the late 1990’s and early 2000’s. This orgy of borrowing has placed it in an extremely treacherous debt laden crisis. It has now come to light that Goldman Sachs, the subject of my January 14 blog, aided the Greek government in its destructive efforts to suck itself down the debt drain by arranging financing through derivatives known as swaps which imploded along with so many other derivative based financial schemes in 2007-2008. While these financial arrangements were legal within the context of financial arrangements of the time (2001), Goldman Sachs structured these derivatives for the Greek government in such a way that in effect they masked the true extent of how much the Greeks were borrowing.

Well, so what? What does this have to do with ethics? The transactions between the Greek government and Goldman Sachs were legal. The problem is Goldman Sachs violated one of the so called sacred ethical principles of the financial services industry. That principle is transparency. What is now happening because of Goldman Sachs’ actions (it advised and then partnered with the Greek government using swaps to raise money while hiding its real debts) is that it has greatly, if not terminally, handicapped the Greek government in its efforts to deal with its debt crisis. Greece is having difficulty in attracting investors to help it out of its self induced debt crisis because no investor can be sure that the government balance sheets are telling the truth or are there more of these Goldman Sach-like investments waiting to explode and further plunge the Greek economy into deeper economic crisis and consequently losing the investments of any investors who are lured into investing in Greece. In hindsight, a senior Goldman Sachs executive, Gerald Corrigan, recently stated before a British parliamentary committee that, while there was nothing inappropriate done by Goldman Sachs (read Goldman Sachs followed the letter of the law), “the standards of transparency could have been and probably should have been higher” (read Goldman Sachs violated the spirit of the law to collect its reportedly $300 million (US) in fees). What is chilling is the language used by Mr. Corrigan. Even after the experience of our world-wide economic meltdown, caused in no small part by the really irresponsible trading practices of investment firms like Goldman Sachs, Mr. Corrigan doesn’t say his firm should have been transparent in its actions, he says they ‘could’ have and they ‘probably’ should have. Like, kinda sorry everyone and maybe next time we will, ya know. Just trust us, we know what were doing here, bucko.

Why does a firm like Goldman Sachs, one of the very best at what it does, filled with the brightest people from the most prestigious MBA programs in the world, constantly shoot itself and its reputation through its very questionable actions? Could it be that by following the letter of the law but constantly ignoring the spirit of the law, its profits first and those profits more than make up for the public humiliation of being recognized as sleazy snake oil sales people (my apologies to any snake oil sales people who are offended by being lumped in with such company)?  Could it be that while the firm is publicly chastised for its greedy behaviour  the individuals within the firm who engineered this behaviour and profited handsomely from this very questionable behaviour remain anonymous while they collect their bonuses?  There is little or no personal accountability for this irresponsible and often destructive behaviour but the financial rewards are, as the younger generation says, awesome.  After leading the world economies to the brink of disaster in 2008, Wall Street is paying itself a reported $20 billion dollars in bonuses for 2009. Ca-ching goes the cash register. Ethics to the back of the bus.

February 24, 2010 at 5:09 pm 2 comments

Some Thoughts on Character

Webster’s dictionary defines character as the complex of mental and ethical traits marking and often individualizing a person, group, or nation. As the definition suggests, character is multifaceted. For one, character is cultivated over long periods of time. It is partly formed through one’s biological inheritances and partly through choice.
Character is the embodiment of a person’s moral orientation. It is dependent upon how a person has interpreted his/her values. It is built up, piece by piece, through the decisions we have made over time. It is not innate, we aren’t born with it, rather we create it. But the rub is most of us create our character more or less unconsciously. Character is based upon our core values and how our interpretations of those values influence our behaviour. What is unconscious for most of us is how we have interpreted our values. It takes a lot of self-reflection to understand what our values are and how we have interpreted them. Unfortunately, we live in a society that largely ignores, indeed in many instances actively discourages, self-reflection.
In the development of character, the cultural and physical environments play an enormous role. You can send individuals to ethics seminars that emphasize trust and fiduciary responsibility as the subject material but if the overall environment those individuals work in day to day is one of a cut throat pursuit of profit often at the expense of the clients the individual and the firm have promised to serve, then the environment will heavily influence many of those individuals to act against the well being of the client. While all of us are limited through circumstances, intelligence, self-awareness and environment, we still do make conscious decisions that define who we are. Morally we come to be what we do and not what we say or think.
With moral values it is one thing to “know about” them and another thing to “know” them through the richness of encounters with other people. When we merely know about values, we can become easily detached from their real existential meaning. Abstract intellectual analysis of values allows for distancing oneself from the spirit of the values. Talking about honesty, fairness, fiduciary responsibility and other critical values is not the same as experiencing those same values in encounters with other people. Some investment firms have magnificent value statements and they may even throw in an ethics seminar to highlight those values, but in their actions one can see that the values statement is merely a mist behind which those firms operate like pirates. One can look at the present state of the investment industry where many of the behaviours that created the massive economic meltdown that we are still suffering through are still the operating behaviours of many of those firms whose selfish and stupid actions created the economic mess in the first place. Here is character on display. These firms can speak abstractly about values but their behaviours indicate the values aren’t worth the paper upon which they are written. They flaunt both the letter and the spirit of the values that they present to the public as demonstrations of their true character.
While most individuals in the investment industry (and, to be fair, the general public) are more or less unaware of the values that influence their decisions that create who they are, many financial firms through their actions are consciously demonstrating an awareness of their values and that awareness, sadly, is still mainly selfish and destructive to the society that both created them and sustains them.

February 16, 2010 at 7:08 pm Leave a comment


Investing, as it is presently conducted by the investment industry, is a lot like throwing darts at a dart board that is constantly moving in a random manner, not knowing exactly where the board will be but throwing the dart where it is thought the board could be. When you hit the board, you score points; when you miss, you lose. This dart board analogy came to me a short time ago when I had finished reading two related articles. The first was an article that stated RIM’s sales forecast for the current fiscal quarter did not meet analysts’ expectations/forecasts/projections of what they felt RIM should achieve. The second article was an interview in Report on Business magazine with Bill Kanko who is a respected funds manager. Mr. Kanko stated he firmly believed in “the unreliable nature of economic forecasts, especially our own”. Let’s look at this for a moment.
First the big picture in which this forecast is situated, the economy. Now as far as I can make out, no one truly understands how the economy really works. That is why Nobel Prizes are awarded in economics and why we have a plethora of economic theories and investing models which often contradict each other.  Not to mention all those can’t miss economic initiatives or investment opportunities that have been presented to us that, well, missed and missed catastrophically. Not only do we really not understand how the economy functions, the economy also is very susceptible to randomness. That highly insightful saying ‘shit happens’ comes to mind. Wars break out, Mother Nature defies our need for control and unleashes her uncontrollable power to show us where we really stand in the evolutionary pecking order, terrorism, technological glitches like power grid failures or new technologies having negative often unforeseen impact on how we live or do business, pandemics, luck, someone dies unexpectedly, bad timing, unforeseen consequences occurring from poor business decisions, all of these instances, and numerous other instances that a lack of space on this blog preclude me from listing,  have the capacity to disrupt the best planned economic undertakings.
Back to RIM and its forecasts and the forecasts of the analysts who follow RIM. Their projections, then, are based on an economy that can be highly unpredictable or random in its actions. So, projections are made on a firm that operates in an environment, the economy, which is unpredictable. Analysts study a firm’s financial statements, the industry of which the firm is a part, the state of the economy as that relates to the firm, they look at the firm’s management practices and competitive position in the market place, use whatever model they have been trained with to push all this information into and then make a prediction on what they think the firm should do profit-wise primarily in the short term. Firms also go through this same process for themselves to set out their financial expectations in the short term. They make a prediction. In other words, both the analysts and the firm itself come to a best guess at what they think the firm will do. This guess is overlaid upon an economy that is, in the end, unpredictable. Further, these forecasts are taken one more irrational step. These best guesses based on an ultimately unpredictable economy are turned into hard goals by the investment industry against which the firm’s performance is benchmarked. A guess, its dictionary definition being an opinion formed from little or no knowledge (in this case of this unpredictable economy), has now morphed into a hard and fast benchmark that will relate success or failure to the investing world. The guess now has been dressed up as rule approached by the investment industry much like a physicist approaches the law of gravity. In terms of the dart game analogy, the analysts have decided they know where the randomly moving dart board will be in the future. The firm’s share price will depend upon how successful the firm is in achieving this guess-rule – not whether or not it made a profit (the dart hits somewhere on the board) but whether or not it achieved or exceeded the guess (the dart has hit the bulls eye). This random hit or miss in turn has a good possibility of positively or negatively affecting the society you and I live in.
I recently spoke to a financial advisor who told me these predictions tend to be right more often than they are wrong. They hit the dart board more than they miss it. He quoted me a 52/48 right to wrong prediction ratio which is quite scary when you think about it. Even if his ratio is off, lets be really positive here and say it is a 70/30 right to wrong ratio, does this way of managing our economy, let alone our investments, ever take into consideration that just one wrong guess (one miss of the dart board), one “hot” derivative that turns out not to be so hot, such as derivatives based upon sub-prime mortgages, can wipe out the gains of all the right guesses combined? Has anyone ever stopped to think just how crazy our market economy is? Or consider that the less regulated that market is, the more likely it will blow up due to outright greed and fraud of the dart throwers? Further, how crazy are we, that’s you and me, to allow guessonomics to form the basis of our social and economic lives?

February 2, 2010 at 3:21 pm 2 comments

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