Co-written by Murat Alpaslan
Earlier this year, we published Swans, Swine, and Swindlers: Coping with the Growing Threat of Mega Crises and Mega Messes. It was an in-depth study of the Great Financial Crisis of 2008. While it was written long before the latest JP Morgan Chase debacle, unfortunately, it anticipated it perfectly. Indeed, it predicted that unless there were momentous changes in the culture of Wall Street, we were in for more of the same.
We are dealing with a perfect storm of (1) complex financial instruments that are beyond the abilities of even the best so-called experts, let alone ordinary mortals, to understand adequately, and (2) an enabling culture of Wall Street that despite all disclaimers to the contrary has little interest and will in understanding and mitigating risk. In short, the financial temptations to engage in risky activities are too great, especially for those with a predisposition towards psychopathology. Apparently, Wall Street tends to attract and nurture psychopaths in greater numbers than are found in the general population.
The complexity of the financial instruments and the lack of proper regulation of the industry are certainly key factors in what caused the latest crisis. Still, it demonstrates once again that until the culture of Wall Street is reformed radically, unscrupulous agents will find ways around the best regulations.
When the Great Financial Crisis started to unfold, Mitroff was fortunate to have repeated conversations with a friend -- call him Adam Smith (not his real name, and not necessarily his real gender; in fact, "Adam" is a composite of several people) -- who works for a major bank. Adam has uncovered a set of primary assumptions and beliefs that are at the heart of the financial industry. The assumptions and beliefs that he has exposed result from hours of interviews and conversations that Adam has conducted with some of the top Wall Street analysts, managers, and executives. They are also the result of his analyzing countless books, reports, and articles. They derive as well from Adam's many hours of working among and thus observing at first hand the behavior of the "natives."
The following set of assumptions and beliefs that Adam observed not only tell us about the dominant culture of Wall Street but they also reveal its dark side as clearly and starkly as anything:
1. We are the Masters of the Universe; we can manipulate anything and anybody to our advantage; we can "game the numbers and the system to serve our needs."
2. We're smarter than anyone else; unless you are as smart as us, you can't possibly understand the complicated financial instruments we've invented.
3. We don't need controls and regulations. We have been selected for our unique skills and talents. As a result, we know what's best for us.
4. We bet and play with others' money. It's a high-risk, high-reward environment. It's not for everyone.
5. We are entitled to the huge amounts of money we make because of the value of the huge deals that we bring to market.
6. We don't fail -- period! We're too big and important to fail. Indeed, the world cannot allow us to fail because we are essential to the functioning of the world's capital markets.
7. Since numbers are the only things that really matter, we can manage risk by reducing it to a mathematical equation.
8. You are only as good as your "last kill" -- that is, "big deal." If you are not producing, then you are not valued.
9. To succeed you have to make difficult decisions. There is no room for bleeding hearts. If, in order to get ahead, you have to fire your best friend, then don't think twice about doing it.
10. We can't control the markets. We just pay attention to today and to the transactions immediately in front of us that are within our control.
11. If you're standing still, then you're "moving backwards."
12. We are a culture based on performance. We are constantly grading and weeding out the weak and underperforming.
All of the preceding assumptions and beliefs not only reflect the narrow-mindedness and insularity of Wall Street, but they express a deep sense of entitlement and narcissism, as well as an inability and/or unwillingness to self-regulate. In fact, the assumptions and beliefs constitute a self-sealing and perpetuating system. In many ways, they are nothing but primitive defense mechanisms. They certainly reveal the underlying psychopathology inherent in the system.
Obviously, not everyone in the industry subscribes fully to these beliefs, but according to Adam, the majority not only overlooked and tolerated them to a great degree, but sadly, they still do.
A Culture of Trust
A financial system is basically a trust-based system. No financial system can operate effectively without trust.
Even after the financial crisis, most of us still have to assume that our financial system is trustworthy. For instance, we still trust that "money" is a valid form of payment and assume that others do as well. We trust that the banks will be there tomorrow. We trust that our pension funds, insurance companies, and investment advisers have our best interests in heart. We trust policy makers. We trust the Fed chairman's monetary policies. In short, trust is the central assumption in any financial system.
With this firmly in mind, let us offer a set of counter assumptions or beliefs that a trust-enhancing financial system would have. Indeed, given recent events, doing everything that we can to ensure such a system is of the highest priority.
1. We are the Moral Masters of the Universe; we never manipulate anything and anybody to our advantage.
2. We have been selected for our unique moral values. Although we can self-regulate, we also want controls and regulations.
3. We never bet with your money. We don't take unnecessary risks with your money that we wouldn't take with ours. We know what's best for you and all of us.
4. We are not entitled to the amounts of money we make unless we bring do so responsibly.
5. We make mistakes! We know we are essential to the functioning of the world's capital markets. That is why we will not get too big to fail.
6. Moral values matter. We manage risk but never reduce it to a mathematical equation.
7. We are only as moral as our last action. If we are not acting morally, then we ought not to be valued.
8. To succeed we have to make difficult decisions. But there is no room for machismo. We try to make the best decisions, and we never put aside our values and emotions.
9. We can't control the markets. But we do our best to pay attention to the future.
10. We are a culture based on trust. We are constantly grading and weeding out the untrustworthy.
The main cause of the Great Financial Crisis was not merely financial. It was also cultural. The financial system needs to move from a culture of selfishness and narcissism to a culture of trust.
Obviously, given recent events, we have no illusions whatsoever that moving to a new culture is either easy or forthcoming. For this reason, we have to keep the pressure on.
Given Adam's penetrating analysis, we can no longer pretend that we do not know the underlying cultural forces at work. We have indeed met the enemy, and "he is us!"
Ian I. Mitroff and Murat Alpaslan are crisis experts. Mitroff is an Adjunct Professor at UC Berkeley. Alpaslan is an Associate Professor of Business at Cal State Northridge. Their most recent book is Swans, Swine, and Swindlers: Coping with the Growing Threat of Mega Crises and Mega Messes, Stanford, 2011. Their forthcoming is, A Prefect Mess: Why Everything Is A Mess And How To Cope With It, University of Pennsylvania Press.