Saturday, November 27, 2010

Um, Boss, There's Something I Need to Tell You...

Still reading Bethany McLean's and Joe Nocera's* Admirable All the Devils are Here, and I pick up a theme worthy commentary; it may be just a tic of the authors but it resonates with me.

Background: N&M's book appears to me so far to be the best all-over analytical account of the late uproar--at the very least,  up there with Charles Morris' Two Trillion Dollar Meltdown or Mark Zandi's Financial Shock.  It's not always an easy read, in part because it is populated by so many unlikeable characters--not the testosterone-driven young bucks of Michael W. Hudson's Monster, but the greedy and rapacious banker/traders of Wall Street and their bosses, for whom (often) bullying and intimidiation seemed to be the strategy of choice.

And not merely "choice": forget about all the talk about leadership and staff support--N&M make it reasonably clear that in plenty (though not all) cases, bullying and intimidation work: that you're going to get more out of your staff if they sweat bullets out of skipping Saturday morning in favor of their daughters' soccer games.  As Machiavelli says, given the choice between love and fear, choose fear.

But here's a nuance: two of the most telling episodes in the story involve bosses who carried fear to a logical, if suicidal extension: nobody dared tell them the truth.

Item: Stan O'Neal of Merrill Lynch, a man who M&N describe, in a wonderfully telling phrase, "liked to play golf by himself."  N&M recall a story about "Greg Fleming, one of the few O'Neal lieutenants who had the temerity to disagree with him."  Fleming, they report
was having dinner with him, pressing him on a handful of issues.  As the dinner was ocncluding, O'Neal said, "This is getting too painful."

"Stan, I don't understand what you mean by 'too painful.'  I'm just disagreeing with you," replied Fleming.

"I don't think we can have dinner anymore," said O"Neal.  They never did.
 The other is Joseph J. Cassano, formerly head of "financial products" (heh!) at AIG--the man Matt Tabbai calls "patient zero" of the financial meltdown.  By all accounts, Hank Greenberg's AIG was as festering swamp of intrigue and isolation,  mostly generated by Greenberg himelf, but Cassano seems to have been a particularly hard case, running his division like a pirate captain with habit of staging temper tantrums.  

Anyway, quite late in the game, it finally sinks in on a couple of senior FP executives that they've got a problem on their hands--huge exposure on obligations backed by lousy collateral:
And yet, how to break this newsd to Cassano without having him blow his stack?  How to explain thhat this seemingly great business was exposing the firm to enormous risks that non one had been aware of?  They couldn't.  Park himself never spoke to Casssano, but Forster decided that the best way to approach him was to say tht the business hand changed and the underwriting standards were deteriorating.  "We're comfortable with the portfolio today, but we're not comfortable going forward," Forster told Cassano, according to several former FP executives.  "They were afraid to say that they had made a mistake," adds one of them.  "They couldn't admit to that.
The upshot was that Cassano never learned the truth--until, that, is everybody learned the truth, by which time it was far too late to do anything to save the enterprise (except, of course, pour in a boatload of taxpayer money).  The O'Neal story ends pretty much the same way.

Are all bosses so intolerant of information inflows?  On N&M's account, no.   The great counter-example here seems to be Goldman, Sachs which, whatever its vices, always seemed to keep the information channels open--always keeping the feedback loops friction-free, always disciplined enough to hear, if not accept, the bad news.  I wonder if Cassano/O'Neal would handle the information issue differently if they had another chance.

*Amazon lists it in at least one place as Nocera & McLean; elsewhere as McLean and Nocera.  The jacket picture I've seen shows McLean & Nocera.  I have no reason to assume anything other than a fifty-fifty contribution.

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