Away from the flock
Companies need to actively encourage dissent and aspire to heretical rather than consensus views if they want to avoid being as unprepared as they were for the financial meltdown.
Noreena Hertz, professor of finance, sustainability and globalisation at Erasmus University in the Netherlands, kicked off the CFA Institute’s second annual European Investment Conference in Frankfurt with a wake up call for the assembled asset managers and bankers.
“This was not just a financial crisis – this was an existential crisis that exposed a faultline in the system,” she said. “The way we thought about the world was profoundly flawed.”
Hertz identified several major problems – a culture of intellectual conformity, the deification of experts like Alan Greenspan, and dogma superceding reason. She said the free-market economics that triumphed post-1979 should have been treated more as a hypothesis, not fact, but within economics debate was discouraged, and thinkers like Keynes and Minsky who didn’t fit the prevailing view were sidelined.
For their part, individuals and businesses had accepted orthodox thinking and allowed the proclamations of “experts” to go unchallenged. She urged delegates to think in a more holistic way – for example, rather than just focusing on rising house prices in the US, they should have given some consideration to the amount of credit cards the average household had.
Psychology also played a part. Investors had accepted Bernie Madoff’s ability to deliver an 11 percent return year after year because they wanted to believe it. “In the same way, you need to ask yourself whether the “green shoots” recovery story is so dominant because everyone is bored with bad news. Is it a political construct in the hope that it will become a self-fulfilling prophecy?”
Having unsettled delegates, Hertz offered them some hope. Replacing the individualistic “Gucci capitalism” that has predominated for the last 30 years she foresaw a more co-operative capitalism in which individuals took a more active role in helping solve complex problems like climate change, the demographic timebomb and sustainability. Everything to play for there.
from Summit Notebook:
Private bankers chanting new mantra
Private bankers still getting their ears bashed from clients enraged about massive portfolio losses now are chanting a new mantra.
Murmur along with me, those seeking inner peace and appeased clients: the word is “holistic".
Three years ago, before Lehman and Madoff shattered clients’ confidence, the soothing formula might have been "absolute returns" or "structured products". No longer.
Bankers shooting French cuffs in Super 180 suits and obsessed with spread sheets now are seizing on a word redolent of green tea, acupuncture, crystals and the New Age.
"Holistic" bubbled up at least four times at the Reuters Global Wealth Management Summit as bankers and consultants in Singapore and Geneva outlined how to keep clients after the market meltdown.
But what does a word meaning that whole entities have an existence other than the sum of their parts have to do with rich people and the gnomes that mind their money?
"Holistic" in bank-speak translates as handholding, face time and hustling to assure wary clients bankers are on the job. Mass mailings are out, daily phone calls are in.
Reuters Funds Summit: Madoff, the silent presence
Master-fraudster Bernie Madoff is the invisible guest at an annual fund fest in Luxembourg, the European capital for fund administration.
Even though the former Nasdaq chairman is under arrest thousands of miles away from this discreet financial centre nestled between Belgium, France and Germany, his presence was omnipresent. Fund managers just can’t stop mentioning him.
One example: “The hedge fund bubble has popped. The market bubble has popped, and to put a cherry on the top you had the Madoff probe in December,” said Ken Kinsley-Quick from hedge fund Thames River Capital.
Other speakers have gone into deep soul-searching, accepting that more transparency and due diligence is needed. But few would openly beat their chest and admit any wrongdoing as they all seemed to agree that if the Securities and Exchange Commission could not catch Madoff’s wrong doing over 20 years, no-one could.
“Except for a few whistle blowers no-one had expected anything. I really do not think that custodians did not take their role seriously. But it’s not helping the industry,” Yves Francis, a partner from Deloitte said.
Even Luxembourg’s budget minister, Luc Frieden, got into the act, suggesting that a deal should be made out of court to compensate Madoff investors who had gone through Luxembourg-based investment vehicles.
He clearly wanted Madoff to just go away.
Hi,
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Have a nice time.
Very good point about the preparation required for companies given the risks in our financial system and economy. And I think that as an investor though one can only spend so much time focusing on the problems in the economy and criticizing the govt for its misguided policies, because the govt has proven, at least so far, that they aren’t going to change. So in order to actually profit from it, I think one needs to invest in sectors that should continue to benefit from these policies. In my opinion the gold price and the stocks of gold mining companies should continue to rise due to the Fed’s efforts to prevent any kind of deflation from occurring. And I just saw at http://www.goldalert.com that Claude Resources received a strong sign of support from the former CEO of Kinross Gold, one of the largest gold mining companies in the world. There are many unintended consequences of all the money printing and bailouts our govt is doing, and in my opinion, as investors people should pay close attention to these consequences.