“CONCEPTS OF CONVENIENCE” AND THE DISEASE OF INSULARITY
The report on Lehman’s fall released this week revealed more than Lehman’s predilection for ill-advised financial engineering. Issued by a former prosecutor working on behalf of the Justice Department, the report detailed Lehman’s use of a stratagem called Repo 105 to remove $50 billion from its balance sheet for a short period of time—time that just happened to coincide with its regular report to analysts on its financial health.
Lehman was so intent on using Repo 105, which it failed to disclose to regulators or investors, that it went ahead even though it was unable to get a single U.S. law firm to render an opinion on the practice. So, Lehman went to London where Linklaters came forth with the opinion the bank needed. It went on to execute the strategy through its UK subsidiary.
One pre-condition of the financial collapse (“the meltdown,” “the great recession”—or whatever we’re calling it this week) was the subordination of professional expertise to one’s own interest. Lehman’s U.S. lawyers didn’t tell it what it wanted to hear, so the firm went shopping for someone who would. Debt ratings agencies participated in the same kind of behavior: issuers of baseless derivatives went shopping among the agencies in search of the most favorable risk assessment. There was so much money to be made that the agencies, whose crucial role in the financial system was to render independent opinions, were happy to oblige.
Lehman, of course, did not invent the practice of hearing only what you want. MIT Finance Professor Andrew Lo, interviewed by the PBS Newshour March 12th, drew comparisons between foot-dragging in investigating roots of the crisis and the refusal of NASA to recognize a clearly-defined O-ring vulnerability in advance of the Challenger disaster. Often, people just don’t want to know, and Lo points out that many parties have little interest in seeing the truth uncovered. They might be financial institutions who bet against securities they, themselves, had issued; or regulators who ignored signs of utter irrationality and, like a steroid-shooting homerun hitter, would prefer to forget the past and move on with life.
The recent publication of “No One Would Listen,” the account of Madoff whistleblower Harry Markopolos, who began shouting into the void of the SEC from the days when Madoff was a $6 billion fraud and continued to do so all the way up to $50 billion, documents the tendency in human psychology to believe what we wish, no matter what the stakes.
I’ve used the term “Concept of Convenience” to describe Toyota’s belief in the unassailability of is engineering, which blinded it to the signs of core problems that a decade of recalls should have made clear. Quality-of-engineering problems didn’t square with Toyota’s view of itself, so it treated each of the recalls as an exception—while the damage multiplied.
Concepts of Convenience virtually saturated the financial world in the years leading up to the meltdown. The big players convinced most of us that unfettered markets could cure many of the world’s ills. But it didn’t turn out that way. And corporations paid CEOs ridiculous sums of money on the bet that outsized financial beneficence would align their interests with the long-term health of their companies. The opposite turned out to be the case.
Survival of a Concept of Convenience requires insularity. Some of us may have had the experience of being closely related to a teenager whose mantra “Not Listening” seems to define a complete world view. Although they grow older, some do not grow up, which does not seem to exclude them from running large corporations and government regulatory agencies.
