My cousin and best friend since childhood passed away recently. He was my personal hero and the closest to a brother I ever got. Juan Diego was a font of love. A social worker, focused on at-risk youth, he had been entrepreneurial since his teenage years and incredibly supportive of his family. Our late night phone calls over the past year covered mostly moral psychology and fatherhood. He encouraged me to write more. So I wrote about our talks.
That body of work captured the interest of academics at some major research universities. He didn’t care about academia. He was unmoved by prestige. I was invited to speak, at a conference at the University of Barcelona, about what grew from our hours long conversations. I told him.
“That’s cool,” he said. “But tell me about your son.” It was his way of keeping me focused on the most important subject. He eventually read what I wrote and told me it made him weep. That research needs more attention before publication, and I will have to do it alone.
Grief is having someone you love and want desperately to speak with on the other side of a wall, under the same roof, and not being able to find a door into the room they are in.
On the flight to eulogize him, I sat next to a banker, who worked at Bear Stearns during its final days. We talked about how the future is unlikely to look like the past. That would mean biases like prestige will have less heuristic value. Diego was always miles ahead of the smartest guy in the room, but never bragged about it.
Below I share a couple of book reviews I wrote at the request of an editor friend. They partially relate to my cousin’s POV and are relevant to the conversation with the banker.
Slapped by the Invisible Hand: The Panic of 2007 by Gary B. Gorton. Oxford University Press. $34.95 (240p) ISBN 978-0-19-973415-3
Gary Gorton offers his assessment of the causes of the financial crisis and suggests some solutions to prevent its recurrence. A professor of finance at Yale, his research has focused on asset pricing, financial crises and banking panics, and receives high praise from Ben Bernanke. The [former] Chairman of the U.S. Federal Reserve Board has cited him on more than one occasion [see notes 1 and 2]. Although primarily employed as an academic, in 1996 Gorton began advising executives at AIG Financial Products on positions which would have driven AIG into bankruptcy were it not for a government bailout in September 2008 [see note 3].
In the process of developing his thesis that the crisis was essentially an institutional run on banks, Gorton supplies tutorials on everything from the workings of the shadow banking system [38-45] and subprime mortgages [65-82] to the structure of exotic financial products including residential mortgage-backed securities [82-94] and collateralized debt obligations [97-108]. He concludes with policy prescriptions lacking in the sort of distance one might expect from an academic. Most prominent is his suggestion that senior debt of off-balance sheet entities, which were created by major financial institutions in part to dodge capital reserve requirements [40-1] and whose bonds are now widely used as collateral in the overnight repo markets [27], should be guaranteed by the government [59].
While his narrative begins with an elegantly persuasive description of shadow banking, his “viewpoint that the details matter” [2] might have caused him to fill the book with painstaking amounts of it. Still, he fails to provide much clarity on the overarching issues which caused the panic. It is much like having a doctor explain to you in passionate detail how your liver functions, but not explaining the likely consequences of continuing the habit of downing a bottle of Scotch every night before bed. It is also peculiar that Gorton does not address his involvement in the decisions that eventually brought AIG down to its knees.
His treatment leaves one asking whether he appreciated the systemic consequences of tail risks. Had he mapped out follow on effects such as margin calls in a mark-to-market environment? Or does he think that’s not his job? Gorton does not say.
Notes:
1. Ignatius, David. “Quiet Tiger at the Fed,” Washington Post. May 28, 2009. URL: http://www.washingtonpost.com/wp-dyn/content/article/2009/05/27/AR2009052702907.html
2. Bernanke, Ben. “Reflections on a Year of Crisis,” Comments delivered by the Chairman of the Federal Reserve System at Federal Reserve Bank of Kansas City’s Annual Economic Symposium, Jackson Hole, Wyoming. August 21, 2009. URL: http://www.federalreserve.gov/newsevents/speech/bernanke20090821a.htm#fn173. Mollenkamp, Carrick, Serena Ng, Liam Pleven and Randall Smith. “Behind AIG’s Fall, Risk Models Failed to Pass Real-World Test,” The Wall Street Journal. October 31, 2008. URL: http://online.wsj.com/article/SB122538449722784635.html
The Lords of Strategy: The Secret Intellectual History of the New Corporate World by Walter Kiechel III. Harvard Business Press. $26.95 cloth (352 pages) ISBN 978-1-59139-782-3
Kiechel, the former managing editor of Fortune and author of Office Hours [published in 1989], saw publication of this book about strategy consulting pushed back several times. Through the years-long delays he managed to more fully chronicle the history of business strategy as both an intellectual discipline and an industry [see notes 1 and 2]. After almost 20 years at Fortune, Kiechel moved to Harvard Business Publishing, where he witnessed up-close the conveyer belt-like manner in which business ideas were submitted by professors and freelancers, then polished and broadcast by the staff of editors at Harvard Business Review [see note 3]. As one consultant whose rate was up to $20,000 per day testified to Kiechel, a well-received article published in HBR could garner one to two years in client projects (or between $7.3 million and $14.6 million worth in consulting fees) for a freelance strategist [243]. Unfortunately for HBR’s salaried editors, who helped polish those ideas for publication, they didn’t see a cut of the eventual consulting fees.
For the author, the rise of business strategy as a discipline constitutes “the bit-by-bit creation of the first comprehensive paradigm [to pull] together all the elements most vital for a company to take into account if it is to compete, win, and survive” [1]. As the assembled elements for a new intellectual foundation came together, it became possible to profitably market strategy consulting services to managers. The four individuals Kiechel most associates with the discipline’s maturation include a professor (Michael Porter) who transformed the curriculum at Harvard Business School, the founders (Bruce Henderson and Bill Bain) of two of the three top consulting firms (BCG and Bain), and the most influential managing director (Fred Gluck) in the history of the undisputed industry leader, McKinsey & Co.
The author begins in the difficult early years of the industry, when Bruce Henderson founded the Management Consulting Division of the Boston Safe Deposit and Trust Company, as its sole employee in 1963. This was the era when concepts such as the “experience curve” and “growth-share matrix” were first developed, and consultants struggled to market their ideas to corporate executives. These ideas, now covered in all standard MBA curricula, were developed outside the walls of the academy at the Boston Consulting Group and were later imported by the academy–after the field of business strategy became better understood and respected.
Boom times for the industry began around 1982, “in an era when it sometimes seemed all the business press could talk about was the superiority of the Japanese,” and the year that In Search of Excellence was first published by Tom Peters and Robert Waterman, two McKinsey consultants [144]. At around that time, the leading firm’s revenues approached $250 million and by 1987, McKinsey’s revenues had doubled to $500 million [260]. By this time, consultants from the three major strategy firms were coaching executives at nearly every one of the Fortune 500 companies on the significance of costs, experience, efficiency, intellectual capital, innovation and the magic of leverage. By 2008, the industry leaders’ sales were estimated to be $6 billion [see note 4]. By Kiechel’s account, only about fifteen to twenty percent of revenue for strategy consulting firms now comes from consulting on strategy [262]. The days of the pure-play strategy consultant and consulting firm are passed. Today, these firms must supplement strategy with services in logistics, technology, and human resource management. And they must deepen their expertise in the needs of particular industries like health care and pension funds.
On the question of whether anyone at the Big 3 is to blame for the global financial collapse of the late 2000s, Kiechel says, the “sharper-elbowed of the Wall Street houses had never had much use for strategy consultants, peopled as the former are with "deal guys and the transaction-minded” [311]. This statement is silly. Although most of the major investment banks have in-house strategy units, these groups are often populated with Big 3 alumni and many of the major banks made regular use of the strategy firms prior to the crisis [see note 5]. Also, Kiechel is silent on the effect of accounting innovations which increased uncertainty during the panic, many of which were popularized by strategy consultants. This silence speaks volumes.
He does offer that “[w]hile a few academic and journalistic voices raised questions about the hastiness of the innovation in the financial sector, there is little evidence of any strategy consultants throwing their bodies across the tracks in an attempt to slow down the process” [316]. Self-sacrifice and quixotic forms of suicide might not have been required to prevent the damage though. It might only have required the major consulting firms to abstain from preaching the wonder of leverage, or voicing some skepticism.
Notes
1. http://staging.hbp.internetkeep.net/on/wp-content/uploads/2008/12/14942_press_spring-09-catalog.pdf
2. http://nacdny.org/PDF/Kiechel_Bio.pdf
3. http://www.alumni.hbs.edu/bulletin/2001/october/janussource.html
4. http://www.forbes.com/lists/2009/21/private-companies-09_McKinsey-Co_IPPW.html
5. UBS was famously encouraged to adjust its strategy and expand into the CDO market by McKinsey & Co. and Oliver Wyman: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/2792800/UBS-The-crisis-at-the-heart-of-the-Swiss-bank.html
