Credit crunch is a sideshow

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I believe that the global financial crisis is getting too much attention, while the principal [but underlying and understated] cause: the crisis of integrity, is completely ignored.

Collectively and individually the direct and indirect perpetrators of our current financial problems were clearly guilty of totally abrogating their integrity in favour of greed and wilful ignorance.

It’s not just a banking problem, though. The abysmally low standards of the banking community are increasingly reflected in the shameless lack of integrity shown by many British Members of Parliament when claiming their so-called ‘expenses.’

The only hope on the horizon for bemused taxpayers is that more transparency and information will improve the corporate and personal integrity of our bankers and politicians to an acceptable level. We deserve better behaviour and we need better information systems. Now.

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http://marioferreira.wordpress.com Mario Luis Tavares Ferreira

Hi Colin,

Another great,great post!
I could not agree more with you!

Probably you already saw, this video. It endorses your comment 100%, and I love it. It says exactly what is happening in the real world with the bankers. It is a video from “Bird and Fortune”. I think that it is a British TV Program.
http://www.youtube.com/watch?v=mzJmTCYmo9g

Cheers,
Mario
http://www.colin-beveridge.com colinb

Mario

many thanks for the comment and the video link (which I have now added to the post).
http://www.creditcrunchleadership.com Steven Sonsino

Hi Colin, interesting post. When you say the credit crunch is a sideshow. You’re right. Unfortunately though it has a depressing effect on many senior executives. Depressing in the sense that it stops them acting. Many managers I’m in touch with want to take action, they want to get on with the day to day business, but it’s the very senior executives who seem paralysed, unable (unwilling?) to act. They’re frightened.

There’s a great discussion over on LinkedIn at the moment about the recession and what managers need to do as a result. The over-riding answer? What they should always do. Innovate. Try new things. Take risks. After all, no one knows what ‘the answer’ is any more do they? (Even if they think they did before.)

More thoughts from Jacqueline Moore and I over on CreditCrunchLeadership.com. feel free to visit.

All the best
Steven Sonsino
DavidM

Bankers are bankers – they were told they could play to win – No more point in blaming them than blaming lions in a zoo for being lions. They owe no alliegence to me

Regulators and politicians who , blinded by the tax take – who failed to regulate and who failed to prevent the crunh – thats who I blame, like negligent zoo keepers who left the door open on the Lion cage

So when the Lions escape and do what lions do – what do the Zoo keepers do ? Blame the lions.

Well, some of the lions are nastier than the others , but blaming the lions – making a lot of noise about blaming the lions is just about evading responsibility.

The thing is , these politicians , unlike the bankers do owe me something as a citizen of this country – I elect them to represent me. I expected them to prevent this and they failed.

Not only have they failed at this – but these people have form – they also fiddle their expenses – showing no sign of understanding what is and is not appropriate to claim .

The above would be enough to get these people sacked from employment at any decent company.

- There is more though these people have form – they run childrens services departments and Hospitals so badly that people die – much worse than what the bankers did

Any wonder that the people who can;t get these basics right , is it any wonder they can’t run/ Comission IT projects that work

P.S I’m not a banker
John Varney

Loss of integrity may be at the bottom of all this – but what does it mean exactly?

According to Wikipedia:
# Steadfast adherence to a strict moral or ethical code.
# The state of being wholesome; unimpaired
# The quality or condition of being complete; pure.

And more interestingly:
#As a holistic concept, it judges the quality of a system in terms of its ability to achieve its own goals.

But in this case ‘its own goals’ seems to have been widely interpreted as the reward of its agents instead of sustaining the system for the greater good.

There is not much evidence of moral code being observed. I think what we are witnessing is the antithesis of integrity and I wonder whether things will be better when the economy recovers. Is lack of integrity endemic in public life today? Do I collude with you because we are complicit in seeking gain for ourselves at the expense of society as a whole? Is this the basis of western capitalism? Colin is right to imply that capitalism without morals is dangerous, selfish and destructive.

Regulation has failed, because getting round the rules has been seen as a challenge. It has replaced the self-restraint that adherence to an ethical code provides. I think the idea of self-regulation has great merit (to avoid armies of thought police) but those found wanting, who fail to hold to their publicly agreed moral code, should be booted out of the system. There is little evidence of that happening.

Let’s hope we can build a better future based on accceptable values
DavidM

John,

I agree with much of what you are saying – but am not quite so ready to give up on regulation to be replaced by self regulation. There are always people trying to get around the “society system” – People who want a new car, so they steal mine, people who want money, so they steal – We call these people criminals. We don’t let them run prisons or governments – but we need to build systems and regulate assuming that they have no moral objection to stop them pursuing their careers.

Perhaps we need to review what is and is not criminal . Perhaps a general “Interests of society” act should be passed to make it clear that bringing the system down for personal gain is unacceptable

- But if the bankers had known what they were doing would have the effect it has – would they seriously have pursued the courses of actions they did ? I think Self interest would have prevented it – even without legistlation to remind them.

What the legistlation would have done is to make criminal the actions of George Soros – betting against the £ and forcing it out of the ERM. – but then as he is an American citizen – how would we impose a judgement ?

So – Ok talked myself out of the “Interests of Society Act” – but we must build our democratic and regulatory systems assuming bad people will always do bad things.
http://www.thehiddengameblog.com John Berling Hardy

I think this attempt to legistate integrity with tougher regulations is missing the mark. It is a knee-jerk response which reflects a dualistic mental set. It will only exaserbate the crisis we are in. This entire crisis I believe distracts us from a deeper reality – that being that the old economy is dead and a new one is emerging. No amount of regulation can change that reality. In fact it represents a misguided attempt to cling to old pardigms which no longer apply.
http://marioferreira.wordpress.com Mario Luis Tavares Ferreira

Hi John,

If you allow me to disagree of some points, I would like to give my humble opinion.

I will be very comfortable to talk about paradigms and mental models, because I never accepted the “status quo” in many environments and situations, which I already had been through, and paid the price for that attitude, and I continue paying.

That we need new paradigms, it is unquestionable. That we are in a deep crisis in those last decades, it is also true, but the crisis is of Ethics and Honesty against Greed and Selfishness (I am not a priest or a saint, far from that…).

That our mental models (people in general) are surpassed and blocked by old rigid models, it is also true. But there are limits of common sense and good sense that never should be surpassed, independently of the mental model.

If the financial markets don’t need regulation, then we will not need, also, Law Enforcement Departments in our cities. We just need to change our paradigms and all problems will be solved.

Great discussion!

Cheers,
Mario
Cory Baron

A perspective from across the pond:

This whole “financial crisis” is a perfect sample of the “system driving the behavior” such as Deming and Ohno have stressed (a current major spokesman over there, John Seddon – System Thinking).

I’ll line up the facts of the system that drives behavior by actions of the US Government resulting in waste on a catastrophic scale:

- Federal Reserve: unlimited power to finance federal debt (print money / inflation), debt is worth less over time = temptation to hold more, encourages over-leveraging (before the Fed 1913, banks leveraged closer to 1:1 thus if your competitors are leveraged more [under the Fed] you cant make much money as a business)

- FDIC: cause banks to over leverage and ensure the lack of market discipline, start up banks with no reputation can start up and over leverage capital (i.e. – failed lenders: Country Wide, Wamu), made possible the “Pick-A-Payment” mortgages: Owe $1,000 interest per month; only pay $500 (each month you owe more on your house) after all, for the home owner, property values were increasing forever and about to gain on future re-financing and, for the banks, they can keep over-leveraging.

- Freddie Mac / Fannie Mae (Government sponsored enterprises): Would not exist in free market, leveraged 1000 to 1, government sponsored = implied guarantee, lower cost of capital, acted on the the belief that housing prices never fall based on government policies, larges contributors to the Democratic Party = promote sub-prime “affordable” lending.

- Housing Policy: bankruptcy/foreclosure laws prevents market from clearing: in some states over 2 years for the real estate to go to sale).

- Failure of rating agencies: S&P / Moody’s / Fitch (Government sanctioned – SEC) Horrible rating of the new market instruments (securitized mortgages) so the market lost confidence in the ratings for risk = lock up for liquidity,

- New crazy accounting rules: Fair Value Accounting (government determined enforced by the SEC), 2 years old as opposed to standard accounting that was in place for over 100 years, assumes all assets are all sellable at a “market price” when assets are not (for there to be a market, there must be a willing seller and buyer) = ignore that markets are forward looking, a willing buyers would not take accounting risk of write-down on actual economic value. This is only one of Fair Value Accounting’s many flaws that drive unsafe market behavior.

These are just some of the major influences in the predominately anti-banking system in which banking must act to save their skins.

Just remember what Deming advises (and proves): more than 95 percent of our quality problems are derived from the system. This all adds up to TAMPERING in the market (government intervention) and creates far more signal than noise. This is not a free market system; hasn’t been for quite some time.

I hope this clears up any debate over understanding the root cause of the problem.

The issue is not selfishness/greed, the issue is what is the fundamental root cause that “drives the design of the system”: the deepest causes are philosophical.

Altruism
- Affordable Housing
- Redistribute from productive to non-productive
- No one has a right to their own life and property(= $)

Pragmatism
- Short term: What works: subprime worked for several years
- Irrationality

Welfare State “Free Lunch” Mentality
- Social Security
- Medicare
- I made a bad choice, Save Me!

Lack of Personal Responsibility
- Death of Democracies: Tyranny of Majority (remember how Athens was defeated in the Peloponnesian War, this is why the Bill of Rights was instituted by the US Founding Fathers, driven intellectuality by John Locke.)

This above are some of the “cultural” challenges that must be changed for a successful transformation of a people to be a happy, productive and flourishing life in the “system”. Life does not flourish in a gulag; but a life in a gulag is in a system. It starts (just as Toyota started on its journey to perfection) with better ideas; lets stand on the shoulders of great men, like many have with Deming, Juran, Ohno and created something better. Just as the U.S. Founding Fathers stood on the shoulders of Locke and Smith. A return, re-discovery and re-formulation of better ideas.

Bad ideas kill, they kill companies just as much as they kill culture and a country.

FYI: this is a summary of facts (with some of my observations mixed in and application to System Thinking) given in a talk below by John Allison (chairman of the board of BB&T Corporation) as to the cause/effect of regulations in a mix economy:

http://www.aynrand.org/site/Pa…eg_ls_financial_crisis

Cheers,
-Cory

http://www.colin-beveridge.com colinb

Cory

thanks for taking so much time to share your views so well, much appreciated. I appreciate the Deming reminder about tampering. In the context of my piece though, I am concerned about the fundamental lack of integrity of too many individuals in the financial and political spheres. For sure there are other factors but integrity appears off the radar at the moment, which is why I shouted.

Cory Baron

Corrected link of the talk given by John Allison (chairman of the board of BB&T Corporation) as to the cause/effect of regulations in a mix economy:

http://www.aynrand.org/site/PageServer?pagename=reg_ls_financial_crisis

Cheers,
-Cory
Cory Baron

Integrity? Recognition of the facts and having the courage to be true to existence and not fake it?!

Currently the systemmatic application of altruism to polities prescribes the law that and the system in place. What fundamental question are these politicians avoiding to answer: At who’s expense?

Avoiding the answer to this question comes from leadership’s lack of integrity. For if they did, they would identify the underbelly of their ideas: too many people want to live at the expense of others. And the truly devious ones want to harness the power of the government to do it for them. Laws and regulations against the US banking industry for almost its entire history is the result.

Altruism is not just a pretext, it is the goal.

I leave the readers with a quote from Auguste Comte (who coined the term):

“The social point of view cannot tolerate the notion of rights, for such notion rests on individualism. …. This ["to live for others"], the definitive formula of human morality, gives a direct sanction exclusively to our instincts of benevolence, the common source of happiness and duty. [Man must serve] Humanity, whose we are entirely.”

(Comte, August. Catechisme positiviste – 1852)

Sounds peachy… but answering the question “At who’s expense?” we see that altruism is a package deal equating the good with the giving up values (of in individuals right to his own life – the values that support it).

Integrity, as defined above, cannot survive consistently in a mixed-market (altruistic) system.

Change the system by a re-discovery and re-formulation of better ideas.

Cheers,

-Cory
Gabrielle

Hi Colin – delighted to see your article – I absolutely agree with your comments – the ‘real show’ is about the lack of ‘integrity’ – in my opinion the constant erosion of ‘integrity’ has been going on for at least 7 years – if not more – at all levels. A few other words of interest to me are : Corporate ‘Governance’ and ‘accountability’ (as in ‘the buck stops here’). And we should be asking what is the accountability of the Government and regulators in all this as well – they too are accountable – but who will hold them to task. The Government – and in particular the Treasury and Chancellor of the Exchequer – talk about the Credit Crisis as if it was an American flu that infected the UK – and it is so far from the ‘real’ truth.

An interesting link for you.
http://www.icahnreport.com/
‘The way CEOs become CEOs in America is a travesty. This is one of our major problems. I use the anti – Darwinian metaphor. The survival of the unfittest’.

Corporate Governance is as clear as daylight – its enshrined in the law of the land – its a regulatory mandatory Corporate requirement to comply (SOX, the Combined Code – and BASEL II etc) and it was introduced to protect us (the public) and Shareholders against Corporate Fraud and Abuse.

The problem seems to be that the regulatory, the Government, audit (internal and external), the Chancellor of the Exchequer – the opposition etc. etc. – were all asleep – nobody knew we have a banking crisis in the UK???? – and now they are collectively suffering from amnesia and have ‘forgotten’ they need to enforce the law they introduced to protect us from Corporate Abuse. Unless the law is enforced – by those that introduced it to protect us – it makes a farce of the law – and a fool out of those that thought they were protected.

So – the ‘real test’ of Government and regulatory integrity – will be to see what Directors and CEOs will be questioned ‘in the dock’ – and how will the judiciary system hold them to ‘account’ (as in ‘put in jail’). We know this is Corporate Abuse if not Fraud from C-level down. Yet nobody is taking legal action – and if those responsible to do so and entrusted to do so by the electorate don’t act – then you have to question why – and you have to wonder who will act.

The tax payer and shareholders as far as I can see are the only ones complaining – wanting legislative action – not just a ‘sorry’ – and even the tax payers anger has been slow in coming – I guess we were expecting to see Government legislative action – but instead we got the Select Committee enquiry – and we the tax payer got to bail out the banks as well!!

I don’t see anything to indicate there is any real ‘will’ on the part of the Government or the opposition to get to the bottom of this crisis – in real terms – to find who is to blame – and prosecute them.

Until that happens I too think the ‘credit crisis’ is indeed a ‘side show’ – the constant focus on the sympton (and not the problem) becomes a farce – whilst the credit crisis is undoubtedly real – you have to wonder if were are being bombared by it daily to distracted us from the main event – just too much noise.

The real test is legislative action. Its likely the US / Lehman shareholders will lead the way – But who do they sue? As a new shareholder (UK tax payer) in the UK Nationalised banks – I wouldn’t even know where to start. What law is there to protect our tax payers £s. and what are our rights are shareholders? As a shareholder surely we had a right to vote??

Where banks have been protected – investment shareholders have been protected – but the tax payer is the new victim (again) and not only the effective insurer – its our money – but we now also own the toxic debt (and not the assets). How did this happen without our consent?

I do think though that investment shareholders need to realise what role they took in supporting Corporate Greed. They had rights – they had responsabilities too. How did they justify £million bonuses. When you look at RBS and HBOS C-level – its astonishing to realise that none of the top 4 exec. had a single banking qualification amongst them. Who supported these appointments?

If Directors are not held to account – ‘accountability’ and ‘integrity’ are token words – words to apease and no more. The years and years of mis management – coverups – deceipt – bullying – have real consequence – but the victims is the one paying the price – not only the price of losing jobs, homes, pensions – but also we are paying the bill – the bailout – the insurance – and we now own toxic debt.
And yet we are not even asked to vote – we don’t know our rights – we have no means of holding those that caused this to account.

The City these days has a lot to answer for – it used to be the ‘old boys’ club – but the rules of integrity existed albeit they were simple – ‘chaps don’t cheat on chaps’. It appears to have worked – but then again that was when banks were being run by bankers. Nowadays – in a few banks – you would be hard pressed to find the professional banker / ‘gentleman’. The behaviour is often more like thugs and bullies – toxic management – hire and fire – fear brigade. For the last 15 years everyone that worked in banking knows that if you blew the whistle on the banks that your banking career was over – you would be discredited forever – and would never work in the City again (for some banks – not all). So you may well wonder where the integrity has gone – its been bought by £M bonuses – and those with integrity have left.

Look at the collapse of Barings – Liam Neilson ended up in jail – and every Director got a huge £M bonus from the merger and continued to work in banking without a blemish on their character. Traders in the City run their own book – they are personally held to account for any failure – until the rules are changed – and the Stock Exchange holds the Bank / BOard of Directors to account – there will always be a scapegoat in the world of banking – and Directors will continue to get away with Corporate negligence.

Northern Rock, RBS and HBOS exec. have gotten away with it so far – it seem ‘sorry’ is the price you have to pay in front of the Select Committee. If you think about it there were 2 enquiries into the Jonathan Ross and Russell Brand radio catastrophy – 2 resignations – 1 suspension etc – yet the entire banking world is on its knees – as is the world economy – and not an enquiry of any substance in sight. You have to wonder what is going on – and where the integrity is in any of it???

The FSA under BASEL II had regulated that all banks must be BASEL II compliant by 2004 – if they were compliant – which was mandatory – then Banking Credit issues would not have emerged – the shareholders investment would have been protected – as would the liquidity of the banks. So why don’t we hear any politician – or the FSA – or the Treasury talking about non-compliance with BASEL II accord which was mandatory for all banks to be compliant by 2004 – nobody is speaking about that – why ever not!!!

The Bank of England – has been warning as far back as 2002/3 – it was in the press weekly – of the BoEs concern that the level of borrowing in the UK was out of control (personal unsecured debt has surpassed £Trillion). Mervyn King also warned – time and time again – that the rapid growth in the UK housing market (30%+ p.a) was unsustainable back in 2003. He said that if the markets did not correct themselves in a controlled way – that a dramatic correction was inevitable. Yet banks went on lending – housing prices went mad – people kept on borrowing – sometimes 10 times their salary – and now everyone wants to know how it all went wrong. Northern Rock offered a 100% mortage for people with No Income and No Assets (UK subprime surely). The collapse of the UK housing market has been a long time coming – and the collapse of Northern Rock, HBOS and RBS had everything to do with poor management – reckless business models – and a will to cover up these losses – and take more and more risk to hide the problem. Independent Financail Advisors, Mortgage Lenders, greedly estate agents, and greedy developers have a lot to answer for too. The banking sector is not the only sector that is broken.

TroubleShooter

Credit crunch is a sideshow