February 12th, 2009

On the boards of rescued banks.

Geithner and Summers are successfully resisting populist pressure channeled by Axelrod to tackle the fatcat bonuses of Wall Street. Random punishments would be gratifying political theatre but procedurally unjust. Reforming the compensation structure to align incentives with genuine economic achievement is a difficult and lengthy task. But we need a cultural shock, fast. Requiring rescued banks to fill half their board seats with women in 6 months would do just that. Citigroup for instance has 3 (non-executive) women directors out of 15: Lehman had one out of 11, a retired admiral (!) without financial experience.

Selling points:

* gratifyingly insulting and humiliating to sexist Wall Streeters;

* no downside risk- it can’t possibly make the banks’ top management any worse;

* rewards a key electoral constituency of Obama’s (women split 56-43 for him).

It’s true that the subset of qualified women on Wall Street is already biased towards macho characteristics of aggression and competitiveness.

We are not talking earth mothers here. But the same selective pressure has applied to men. Since women on average are less aggressive, individualistic and risk-taking than men, the imbalance will still be there at the top 5% of the distribution. Take professional tennis. When did you last see a women’s final that was closely contested? The weaker finalist on the day – who is by definition one of the most competitive and skilled players in the world, a merciless destroyer of qualifiers earlier in the competition – usually reads the tea-leaves early on and the match is over in an hour. Second-rank men players will battle a top seed for four or five sets.

I once saw an old German TV documentary on the selection and training of USAF officers to form Minuteman missile crews. The object was to weed out every vestige of the warrior spirit, the narcissistic pride, courage and initiative of Achilles and Top Gun. Missile launch crews must score at the very top for conscientiousness and tolerance for boredom, at the bottom on imagination and initiative. And that’s a big relief. The documentary left me with a nagging worry about missile submarine captains. They have to navigate and run their boat, as well as holding the missile launch keys: the tasks call for different character profiles.

Short of sending the bankers to the countryside for reeducation and self-criticism, something drastic is needed to change the culture of commercial banking back to prudent boredom. The Glass-Steagall Act, separating risky investment banking from insured commercial banking, had the great merit of protecting the latter from the deal-making culture of the former. When the wall came down, the investment bankers took over their bigger rivals, and used the deeper pool of capital to make even bigger and more profitable deals.

The benefits of repeal – advertised by Larry Summers among others at the time – now look overstated. Among the different functions of investment banking, providing venture capital and market-making offer few economies of scale, and underwriting can be shared between institutions. The only function I can see where bigger is better is mergers and acquisitions. Making the managers of industrial corporations more nervous out of fear of takeovers is only beneficial up to point. If the pressure becomes too great, they will turn from managers into dealmakers themselves, and cook the books to secure the appearance of short-term profits and their own golden parachutes. It’s rather similar to the way Soviet central planning created too strong incentives on managers to achieve plans: beyond a point, people just lie. The other way of escaping takeover pressure is to become too big to swallow. That’s how we got Verizon and Telefonica, as bloated as their ancestral monopolies but without their public-service ethos. Size is not all about gouging customers and suppliers.

Banking should become a “boring public utility” according to John Quiggin. Feminization would help. I’m not a member of the”women are always nicer than men” school: but the vices women have at least as often as men – spite, deviousness, possessiveness – are not the ones that created the banking shambles. The exception may be conformism, the key to the psychology of bubbles: fashionistas are common and whistleblowers rare in both sexes. But in general, a good mix of genders is more likely to create Madisonian cultural checks and balances within an organization.

The future of banking may be glimpsed in the conservative institutional cultures of the banks that have survived best. The largest bank in the world by market capitalisation is now HSBC (with 3 well-qualified women on a board of 20). Although now headquartered in London, its not-so-distant origins lie in the managerial culture of Hong Kong, a curious fusion of dour Scots Presbyterianism and Chinese thrift. The current chairman Stephen Green has a background in treasury not investment banking; and he’s an ordained Anglican priest.

Green has written a book: Serving God? Serving Mammon?

I don’t know whose side he takes.

Share this post:
  • Twitter
  • StumbleUpon
  • Digg
  • Reddit
  • Facebook

Comments are closed.