CEO Psychology

If you need more reasons to dislike former Bear Stearns CEO Jimmy Cayne, apparently William Cohan’s new book about the fall of Bear gives you plenty more. I’m just judging from the excerpts in Malcolm Gladwell’s new article in The New Yorker, which is really about the tendency toward overconfidence among the people who rise to the top on Wall Street, but also quotes Cayne saying that people he doesn’t like are gay – and he doesn’t mean it in a nice way.

Gladwell tries to position psychology as an alternate explanation of the financial crisis:

Since the beginning of the financial crisis, there have been two principal explanations for why so many banks made such disastrous decisions. The first is structural. Regulators did not regulate. Institutions failed to function as they should. Rules and guidelines were either inadequate or ignored. The second explanation is that Wall Street was incompetent, that the traders and investors didn’t know enough, that they made extravagant bets without understanding the consequences. But the first wave of postmortems on the crash suggests a third possibility: that the roots of Wall Street’s crisis were not structural or cognitive so much as they were psychological.

I think this is a bit much. The fact that some Wall Street actors were megalomaniacs does not change the facts that regulators did not regulate, or that rules and guidelines were inadequate. Nor is overconfidence inconsistent with incompetence.

But Gladwell is probably right that overconfidence was a factor in the terrible decisions made by so many people. The problem, Gladwell argues, is that overconfidence is a useful trait to have in many settings – perhaps even an evolutionary adaptation. But then we fall into the trap:

I’m good at that. I must be good at this, too,” we tell ourselves, forgetting that in wars and on Wall Street there is no such thing as absolute expertise.

In addition, the business world tends to breed overconfidence in CEOs. There is dumb luck in everything. But people who are successful tend to think that their success is a product of their own abilities, which leads them to overestimate those abilities. The sycophantic nature of the corporate culture at most large companies only reinforces this delusion. Then there is the insistence by the media, analysts, and institutional investors that CEOs project constant, Herculean confidence. If a CEO were to say the truth on an earnings call – “I’m pretty happy about how we did last quarter; we got lucky and closed a couple of big deals we might not have won; if things go well next quarter we’ll meet our targets, but any number of things could go wrong” – investors would fall over themselves trying to dump his or her stock.

But all of these problems are endemic to modern American capitalism, not just Wall Street banks (although Wall Street trading floors are particularly fertile breeding grounds for overconfidence, given the nature of trading gains and losses, and the amount of money being made). I would tend to put it more in the category of problems that will always be with us than the category of specific causes of the financial crisis. Maybe the specific problem here was that megalomaniacs ascended to be head of systemically important banks that could bring down the entire financial system, rather than running airlines, telecom companies, private equity firms, high-tech companies, baseball teams, or other organizations whose collapse would not have such dire consequences.

By James Kwak

61 thoughts on “CEO Psychology

  1. I believe Tolstoy put a hole in the “great man” theory of the world over a hundred years ago. It came back with the insanity of the twentieth century’s murderous states, but it is worth rereading every time a CEO claims credit for his twenty-thousand man organization:

    If it had depended on Napoleon’s will to fight or not to fight the battle of Borodino, and if this or that other arrangement depended on his will, then evidently a cold affecting the manifestation of his will might have saved Russia, and consequently the valet who omitted to bring Napoleon his waterproof boots on the twenty-fourth would have been the savior of Russia. Along that line of thought such a deduction is indubitable, as indubitable as the deduction Voltaire made in jest (without knowing what he was jesting at) when he saw that the Massacre of St. Bartholomew was due to Charles IX’s stomach being deranged. But to men who do not admit that Russia was formed by the will of one man, Peter I, or that the French Empire was formed and the war with Russia begun by the will of one man, Napoleon, that argument seems not merely untrue and irrational, but contrary to all human reality. To the question of what causes historic events another answer presents itself, namely, that the course of human events is predetermined from on high – depends on the coincidence of the wills of all who take part in the events, and that a Napoleon’s influence on the course of these events is purely external and fictitious.

    At the battle of Borodino, Napoleon shot at no one and killed no one. That was all done by the soldiers. Therefore, it was not he who killed people.

    The French soldiers went to kill and be killed at the battle of Borodino, not because of Napoleon’s orders but by their own volition. The whole army – French, Italian, German, Polish, and Dutch – hungry, ragged, and weary of the campaign, felt at the sight of an army blocking their road to Moscow that the wine was drawn and must be drunk. Had Napoleon then forbidden them to fight the Russians, they would have killed him and have proceeded to fight the Russians because it was inevitable.

  2. There is also a condescension that business executives have to just about anyone else, especially politicians/regulators. They think that they can do anything.

    CEOs and business types are completely oblivious to the fact that politics is about negotiation, compromise and electoral strategy….these are things that they never have to consider in their field. CEOs are essentially despots.

    So many strange things happen in business that can only be explained by overconfidence. Bob Nardelli, hardware retail guy, put in charge of a car company? Huh? By private equity “experts”, no less? The AOL Time Warner merger? How many of these integrative mergers brought to us by CEOs actually worked?

    Yet somewhow, the failings of political leaders are always trumpeted first in our news headlines; for business, it’s conveniently always forgotten. In the end, both are human and fallible. Equally so. We need a balance of power between them, not a naive “efficient markets hypothesis.”

  3. I think the mass failure on Wall Street was precipitated less by incompetent leaders and more by a lack of capitalism.

    Capitalism requires capitalists. Real capitalists are owners of capital. Banks in the 19th century were owned by real capitalists who had around 60 to 80% of the total equity capital on the balance sheets. Bankers were lending or investing their own money; as a result, they were responsible and thought in terms of the long term.

    Banks today are bureaucracies in which the consequential decisions are not taken by shareholders but by managers. Managers earn wages and are not capitalists. It is only rational for them to try to maximize their income in the short run.

    Government intervention compounds the problem of moral hazard by further perverting incentives. Under the pretense of “too big to fail”, financial firms have been repeatedly bailed out by the government, the so-called buyer of last resort.

    High-flying financiers and investment bankers were well aware of the risks inherent in their operations. It was only rational for them to use leverage to try and maximize gains. Profits would be privatized among the chosen few. Any losses would be socialized to the taxpayer through government bailouts.

  4. Of course there is a psychological element. This has to seem incredibly alien to people without Street experience. These firms are built on a performance-based culture. It does not matter who you are at one of these firms, everything you do every day is quantified and compared to others. If you make a habit of performing well you are rewarded. If you do not, or grow complacent, you have a short lifespan. You are constantly reminded of this. Try living that way for years and see if you are normal.

    As far as competence is concerned, I think executives’ talents are rarely in the things that make the company money directly, so much as in scaring the other megalomaniacs into consistent performance. This makes managing some of the realities of risk difficult.

  5. How can someone in this context ignore the overconfidence the regulators had in the capacity of the credit rating agencies, so much that they built up a whole regulatory system around it, so much that when lending to corporations rated AAA banks need only 1.6 percent in capital (62.5 to 1 leverage)?

    Tell us, do you believe in the credit rating agencies? You do! You do because when the system so orders you, there is very little benefit not doing it… until the music stops and it is too late.

    What about Regulators Psychology? What about those in the IMF that travelled around the world marketing Basel regulations and making their Financial Sector Assessment Programs (FSAPs) that promoted the soundness of financial systems without a word on what the purpose of the financial systems should be?

  6. I will need to read the Gladwell piece, but admit to be literally incredulous to hear about yet another excuse people claiming for the failures over there on Wall Street.

    Too stupid, too greedy and now, too full of themselves.

    Leaders need massive egos. They just have to – in order to place themselves in a position where their advice, their wisdom, their sharp eye on the business is what drives the company.

    Leaders are highly influential and important – just witness Jack Welch at GE.

    In all frankness, my imagination is too limited to envision a world where an entire sector was too megalomaniacal to figure out that housing prices weren’t going to skyrocket forever and that bad loans would never come due once they were bundled together.

    This is a community of highly compensated, exceptionally bright people, educated at the very best institutions of higher learning in the world.

    They knew EXACTLY what they were doing. They were profiting greatly by hiding the risk. And as they did that, they were developing their influence and connections with the politically powerful in Washington.

    Was Lloyd Blankfein in on the AIG meeting – the one when Paulson was figure out what to do with the bankrupt company – because of his ego? Absolutely not.

    He was there because his firm utilized its political capital to gain the nation’s capital at a time when the global economy was collapsing.

    Are they pushing back against regulatory reform because of their ego?

    Of course not! The shadow banks are where the money is at. They’ve consolidated even more, thanks to TARP – there’s no way we can let them fail now, no matter what they do.

    These people knew exactly what they were doing – and the ones that have emerged on top are reaping extraordinary benefits today.

  7. On the other hand I read a Harvard research paper about a month or two ago that showed that entrepreneurs who succeeded once were more likely to succeed the second time also when compared to those who never ever succeeded in their ventures.

    I think there are some general skills and traits that successful people have which help them in all respects of life and make them winners more often than not.

  8. In my experience, leaders are extraordinarily important in the direction of a company. There truly is a “trickle down” effect within corporations – how the leader treats people, responds to crises, communicates with employees is critical in how the company will respond to the business climate.

  9. As for the fall of Bear Stearns and Lehman, could it be just a case of Goldman Sucks wanting to wipe out the competition? They had the power and they used it. The Big Dog thinning the Crony Capitalist pack.

    Even Jon Stewart gets that point in this video:

    As far as having superior executive skills, does a Mafia Don have better executive skills than the CEO of a legitimate firm he wipes out? Those who are willing to cross the line often succeed over those who don’t; that does not make it right or admirable.

  10. Anne “They knew EXACTLY what they were doing. They were profiting greatly by hiding the risk”

    Some did the hiding and some of them knew or should have known what they were up to, but, most of them were just buyers of instruments rated AAA that paid some basis points more. Now since the regulators did not require you to put up a lot of capital for them they seemed to make a lot of sense as a safe investment.

    Even today is hard to make heads or tails about many of these instruments.

  11. I agree, the executives are extraordinary at developing a specific business climate and it certainly impacts the direction of the firms. But that is not the same things as saying that they understand and appreciate the mechanics of their firms.

  12. How can such very bright people have such faith in tools they knew nothing about? That’s what I find so extraordinary about this. These are people who got paid tens of millions of dollars TO KNOW these things, Per.

    At least, so I thought until last fall…

    And if they’re too foolish to look into the tools they’re using, why do the continue to get bonuses after the crash? Why do THEY get to profit from this catastrophe?

  13. I have wondered many a time how one executive can be expected to fully comprehend the operations of a multi-national corporation with billions in revenue. Seems impossible….

  14. I think I’m firmly in Anne’s camp when she says she’s “incredulous to hear about yet another excuse people claiming for the failures over there on Wall Street.” While I agree there’s a psychological element, that does not absolve the guilty parties one bit. How many times have we heard “Well, everyone was doing it and I just got caught up in the euphoria”? That might be a passable excuse if you’re speeding down the highway going 75 in a 55 but not when you’re literally gambling with the structural integrity of the American economy. Let’s lay blame where it belongs: Rubin, Greenspan, Graham, the credit rating agencies, the predatory lenders, the greedy (and corrupt in many cases) bankers and lastly let’s not forget the “flippers” who wrecked the housing market for honest people just wanting to buy a home.

    The one “upside” to the catastrophe is I think we’ve finally found an issue Republicans and Democrats can agree on. I have yet to find an issue that has more bi-partisan support than financial de-regulation.

  15. I don’t think it’s that difficult for a leader to mold a firm to his/her image.

    Dissenters leave or are sacked and when you’re left with only sycophants, of course, the company will be like you.

    I’ve seen that happen in many places: a mediocre manager surrounded by mediocre subordinates because anybody worth something had left.

    I’ve seen the opposite too. A brilliant manager who only had outstanding people in his group.

  16. Anne what I referred to was that what really started it all was that the regulators had a lot of faith in it.

    Whether those who made 10 millions on it had faith or not is irrelevant, they were selling the securities cash… the faithful were the buyers… who lost because of their faith.

    Would Madoff have had a chance were it not for the existence of a SEC which everyone supposed was doing at least the minimum part of its job?

  17. Do you think the Wall Street CEOs are comparable to Madoff? Crooks who should be in jail?

    Why do you think the regulators failed so hugely? That’s one of the many issues I do not understand.

    When people sell damaged pharma products, they’re held liable. If they push the boundaries of FDA regulations and fail to sell within the proper guidelines, they’re fined heavily.

    When cribs kill kids, the product is immediately recalled.

    When financial products fail and take down the global economy, the people in charge get bonuses. Things work weirdly over there on Wall Street.

    Thanks for your comments. I’m not an economist, so am desperately trying to educate myself on the reasons for the crisis.

  18. Anne writes:

    When people sell damaged pharma products, they’re held liable. If they push the boundaries of FDA regulations and fail to sell within the proper guidelines, they’re fined heavily.

    For literally centuries, doctors applied “heroic” measures: bleeding patients. Many of these patients died, of course, but some survived, and the survivors tended to credit the intervention of the learned doctor who had just drained them.

    During all of these long centuries, doctors believed they were following a noble calling. They earned their living with the best of intentions. And you can be certain that the doctors with the highest survival rates thought of themselves as a cut above, and charged accordingly. That their version of medicine did dramatically more harm than good, that the PROPER application of their intentions would still be harmful, completely eluded them.

    Wall Street does not reward the guy who goes his own way. There are some successful contrarian investors, of course, but for the most part the returns go to the lemmings. So individuals follow the conventional wisdom and the most slavish followers of the conventional wisdom – the ones who, 1984-style, are always able to parrot a received wisdom even if it conflicts with the received wisdom a year ago – are the ones who find the corner office.

    Society isn’t much different. The FDA punishes you if you break the regulations, but it doesn’t punish you for breaking what the regulations should be but are not. And that’s what would have to be the case to take on the current architects of the crisis.

  19. OK, so there is a lot of various “wills” affecting various outcomes–or, at least, this is one way of looking at the world. But are you suggesting that leaders do not have a larger impact on the outcomes relative to their subordinates (through the direct orders, strategy, planning, training, etc. that can by found in any organization whether it be Google or the Russian Army)?

    Leadership is important. I don’t think we should forget that. Are leaders perfect? No.

  20. Usually “New Yorker” magazine does a good job, but I didn’t like that article. 2 pages of rambling about military history??? Is that like one of those Dennis Miller jokes where we’re all supposed to be impressed because 1 in 50 people gets the reference? If I was Gladwell’s editor I’d toss the first 2 and 1/2 pages in the garbage and say “narrow that military gunk from the Encyclopedia down to a paragraph saying many Wall Street Execs are known for overconfidence, but Cayne differentiated himself by absenteeism.”

    Melodramatic garbage. Maybe Gladwell and Michael Lewis should get together and write a novel loosely based on the banking crisis. Based on how nauseated it would make me, I’m sure it would be a rousingly phenomenal success.

  21. Very well said. I add only a corroborating quote from the financial writer Bill Bonner:

    “CEO’s are only hired guns–not genuine capitalists. Their extravagant pay levels are testimony not to the victory of raw capitalism, but to its defeat. Real capitalists would never allow so much of their money to get into the hands of mere managers.”

  22. Both the Gladwell and the Lewis articles are exercises in finding pseudo-explanations in order to exonerate a fundamentally criminal system and cadre.

    While Lewis offers up a version of the bad apple theory (Joe Cassano as the lone villain), Gladwell chalks it up to the overconfident “psychology” endemic to leadership.
    He therefore explicitly disavows the moral opprobrium implicit in terms like “hubris”.

    Hmm, he spent alot of space on the Gallipoli comparison. But if the overconfidence thesis is valid, why not give examples like the Nazis or the Mafia?

    Or would Galdwell, given an example like that, feel constrained to concede that the “moralists” have a point when they insist on referring to organized crime as organized crime?

    All of the efforts of Gladwell, Lewis, and other establishment figures to exonerate the system and the rank and file (just decent, hardworking people victimized by bullies and the “overconfident”, right?) will never change the fact that the finance “industry” is existentially a parasitic criminal racket, and the soldiers (a mafia term), all highly paid mercenary volunteers, are just as culpable as the bosses.

    They all knew they were antisocial gamblers. They knew their activities created no social value. They knew their cabal had relentlessly lobbied for deregulation. They knew the gutted regulations served the social purposes of equity and stability, but were hindrances to antisocial vandal greed, and therefore they supported this onslaught.

    By their own admission they took the abuse of a bullying worm like Cassano, danced for him like the monkeys they are, because the paychecks he handed out made it all worthwhile. This lays bare the kind of souldead criminals we’re talking about, willing to overthrow every decent value, every human value, for the sake of vile greed.

    Worst of all, it was greed for money which didn’t even serve a purpose for them. I don’t hear that any of them got off that horrid treadmill the moment he had “enough” money for some REAL life purpose.

    Because for pure criminals, money has no purpose, and there’s never enough of it.

  23. James, I would like to suggest that there is a fourth possibility to explain why so many banks made such disastrous decisions. The fourth possibility is that the banks were not acting from a moral basis. Yes, you heard my right! The banks acted immorally. But, you say morality has nothing to do with banking, or economic theory. Well, I think that’s the problem. My perception is that the investment banking sector intended to squeeze as much money as possible out of the bottom third of the American economic spectrum. The investment banks thought they had a money pump that would squeeze money out of people who didn’t have anything to give. It’s been said you can’t squeezing blood out of a turnip, but the investment banks tried anyway. The investment banks did not care that they were often taking 50-60% of borrower’s incomes. They did not care because the investment banks do not recognize morality when it comes to making profit. The investment banks created the CDOs and the CDSs. The investment banks owned mortgage originators. The investment banks manipulated the ratings agencies. And of course the investors sometimes looked the other way. The subprime loans were designed such that it was expected that some percentage of borrowers would fail. Of course, the plan was that only some small portion of the subprime loans would fail. This was part of the plan. Is it moral to lend money to someone who the lender knows will almost certainly fail? For those who did not fail they became economic slaves to the bank. But, things got out of hand. Too many borrowers failed and the collapse was on. So, the forth possibility I give is lack of morality. Of course this lack of corporate/business morality is not exclusive to investment banks. Now, you are probably asking why would anyone suggest that an investment bank should have morality as part of their corporate culture or psychology? The reason I suggest it is that I believe that is at the core of the problem.

    Because it will be awhile before morality takes hold in finance and economic cultures Congress needs to do the following:

    Implement the Consumer Financial Protection Agency as proposed.

    Break-up the banks along the lines of Glass-Steagell.

    Limit the size of banks using anti-trust laws.

  24. Per, you say the regulators had a lot of faith in it.

    That is not my understanding. The SEC was essentially gutted by the Bush Administration. If you take a look at the history of the SEC during 2001-2008, you will see that the agency intentionally looked the way using a variety of techniques.

  25. and — – I have seen a manager change a sleepy obstructionist bunch into a diligent work force each one proud to manage his/her own little pond as best as possible while always keeping the team in mind, i.e. no stars or special darlings

    To me it seems that professional pride has somehow gone out of fashion –
    maybe that is because becoming carpenters or plumbers have stopped to be respected aspirations –
    see Obama’s speech at the NAACP –
    he only praised academic jobs but did not mention one job that required excellence in using one’s hands. In German the word for understanding is begreifen, which if you take it literally means grip it – so maybe CEOs just have lost the grip of people getting the grip of it.

  26. do not waste your time on the Gladwell-piece –

    except for the juicy Cayne-quotes it is nothing but mumble-jumble, uninformed small talk fodder …
    especially his taking the Gallipoli desaster as an example. It was a lot more complicated than he describes it. Especially the part before the beaching took place is at least as Churchill describes it oddly familiar and therefore plausible to anybody having worked in office bureaucracies, i.e. you know a sound plan is altered in unsound ways but you miss the moment where you could quit or even sabotage the altered one.
    Which is a scenario which you find nicely described in Michael Lewis piece about AIGFP in Vanity Fair. After the fact it always seems almost incomprehensible why even decent people who knew better kept on.

  27. More to the point: in the old Communist days, until quite recently, most infestment banks were partnerships. This was relic of laws and a benighted corporate culture.

    Organizing an infestment bank as a limited or a “straight” partnership means that the partners in the bank were personally liable for any losses the bank generated which could not be covered by the bank’s capital.

    This meant that the investment firms had to be far more conservative with leverage, decision-making, and admission to the partnership, as the partners were basically entrusting their entire personal fortunes to the partnership.

    In those days, if you as a partner let Bradford get too silly with leveraged bets (’cause he’s a Porcellian man) and if exchange rates don’t go the way he planned: not only does the entire bank go up in smoke, but so does your yacht, your vacation home, your investment portfolio, etc..

    This obviously could not be tolerated. Fortunately, we are beyond such ridiculous ideas now.

  28. I would not say that the average CEO is extraordinarily bright.

    The ones I have known have been smarter than average, but not much smarter, as far as raw intelligence is concerned.

    However, they have been extraordinarily self-confident, beyond cocky, good salesmen, and very competitive. A never-ending dick-waving contest. Overgrown frat boys; the conversations you have with them are about like conversations with you have with frat boys.

    Actual smart people design computer circuits or design cryptography or experiment on fruit flies or whatever; stuff the average CEO could not do if you put a gun to his head.

  29. Lots of people do lots of things they don’t enjoy for money.

    What amazes me in the whiole AIG FP debacle was that none of these people, every one of them allegedly very clever and every one of them most definitely paid astronomical sums to take intelligent decisions with money

    – none of these geniuses ever seemed to examine what they were selling, what or how the rating agencies were rating, what they were buying or what risks they were insuring on anything but the most superficial level.

    That is that part in Lewis’ narrative that beggars belief; the idea that one guy was somehow responsible and noone ever bothered to ask the most elementary questions.

    To paraphrase Tom Wolfe: “All we have to do now is stop putting incompetent people in Wall Street boardrooms and we’ve got the problem licked!”

  30. Anne, in part so that I could better understand what happened I recently passed all the exams in order to be licensed as real estate salesmen and a mortgage originator and I what I learned some of them did, clearly puts them in the Madoff league… do not forget that in accumulated amounts of losses many of which originated in fraudulent operations they represent about 100 Madoffs.

    Now as to why they are not in jail (with some Wall Street securities packager and some credit rating agents) you have to ask someone else… to me a land where they threat you with five years of jail for copying a video but permit the street in front of Bloomingdale in New York to be littered by persons from Africa selling fake handbags (which all law abiding citizens happily buy) is something that I could have expected in my country… but here? (But there I go walkabout on this blog again)

    Now back to the theme. Madoff got a sentence of 54.900 days it serves him right but having said that the regulators should also spend at least one day in the slammer for the sake of justice, just to help us restore some minimum accountability. Are they not at least 1/54.900 part responsible for this crisis? Of course they are. Not only those who were paid to keep an eye on Madoff but even more so those in Basle who are responsible for setting up a system that stimulated the financial sector to depend so much on the opinions of the credit rating agencies and the race for the triple-As… and this includes of course those who occupied important places in the IMF and did not use them to stop the regulators from what they were doing… on the contrary they promoted this regulatory madness.

  31. William. When as a regulator you nominate 3 credit rating agencies to be your sentries on risks and you then go to bed to sleep like a baby, it is because you have an extraordinary (gullible and naive) faith in them.

  32. could just be that people are more willing to give them $$ with a track record. And well capitalized businesses have better track records.

  33. overconfidence helps in dating too. It’s endemic in our culture.

    I’m interested at what point it became so bad, wrong, etc, to admit some weakness and/or nervousness. Maybe it never was acceptable.

  34. Silke, nice to see you back.

    Beigreifen. Yes, an ancient concept that those objectionable Europeans socialists never quite lost a grip on. The ancient Greeks described it this way: poetry is “act of production.” (Sorry to sound sophomoric here.)

    In one of Simon’s slide shows he indicates at one point (early 2000) 40% of economic growth in the United States was in the financial sector. One can only imagine what percentage it will be for 2009 with the Zombie banks posting such huge profits during an economic downturn.

  35. Very well put.

    With few exceptions, the successful entrepreneurs I know who started businesses with their own money are humble, cautious, deliberate, thoughtful people. They have to be; one mistake can mean personal ruin. Their success is usually due to hard work, brains, and extreme tenacity – knock’em down and they get right back-up and keep going. On the other hand, most of the corporate ladder climbing MBAs and would be CEOs I’ve encountered tend to be greedy, arrogant, over confident, and very cavalier with other people’s money.

  36. The over-emphasis on the CEO is endemic in both business and government now (not in the home, though, thankfully). “Leaders” of all stripes–university presidents, school system aministrators, heads of public utilities, etc–are all overpaid for what they accomplish, and the expectation of what they should accomplish is way overestimated. What’s more, they all seem to “fail upwards.”

    I’m not sure what’s caused this. I think that the people at the top do believe that they really are in control, and the people below them are too happy to let them think that, lest they be held responsible for the failure around them.

    Whatever the cause, the over-reliance on the CEO is part of our culture now, and it will probably get worse. Those who hate Obama are scared because they assume that he has near-dictatorial powers. The same thing happened to lefties during the Bush years. Everyone just assumes that our Leaders actually do control everything.

  37. Nick
    you have stumbled on an inevitability –
    it is called the Peter-Principle and it stipulates that everybody is promoted until he reaches his level of incompetence and if he hasn’t reached it by the time he is at the very top he is horizontically “promoted” i.e. on the same level to another outfit – sorry to write only about HEs but at the time of first publication women didn’t yet insist on being verbally (and probably otherwise too) included
    PS: Leaders do NOT control everything, they do not have to, but in German we say the fish starts to stink at the head and that is a very true observation – the climate the Leader creates in his close surroundings trickles down either people aspire to copy it or they reject it (sycophants operate in both instances but probably have a greater chance with a universally rejected Leader who needs consolation in his growing realization that he/she is not lovable

  38. Silke “but in German we say the fish starts to stink at the head and that is a very true observation”

    And can you imagine how much that fish can stink if as in my homeland, Venezuela, he is equipped with a checkbook full of oil revenues?

  39. but somewhere I have read that the professional management of the central? Venezuelan oil company has been replaced by the head-fish’s cronies – that certainly will eventually damage the revenues severely (due to bad maintenance and exploration etc. i.e. general short sightedness – even though all engineers are rightfully considered to be kind of dumb by bureaucrats like myself I think when it comes to purely technical decisions they are a brilliant bunch) – replacing them by cronies therefore bodes disaster but unfortunately like all those disastrous decisions by top-fish they take terribly long to “mature” and then the cost of the desaster will be paid by the “little people”.

  40. William, you call it moral I call it disregard of sound principles – the rating agencies getting paid by the ones who would sell the rated products – das stinkt zum Himmel (that stinks to heaven) and that in a country where I admire journalists for obviously routinely disclosing even their most minute entanglements with the subject they are writing about.
    Conflict of Interest whether you call it Moral or sound principle is one thing the violation of which should always be avoided like the devil fearing the holy water (der Teufel fürchtet das Weihwasser)

  41. Silke: “Which is a scenario which you find nicely described in Michael Lewis piece about AIGFP in Vanity Fair. After the fact it always seems almost incomprehensible why even decent people who knew better kept on.”

    I think Lewis did provide an explanation for that. Cassano would bully you but this would not affect your bonus. People stayed despite Cassano because the money was good.

  42. Black Swan,
    in my experience the ready to be bought path is almost always a too simple explanation – for people to become mercenary there has to be a conducive culture – what that is is extremely hard to pin down and I think that is why this specific VF-Lewis piece reads rather vague – but if you happen to have spent your life in the Scotts Adams Dilbert or Yes, Minister atmosphere it immediately comes to life and is plausible, down to the taste of the coffee at the conference table.
    Because: No matter how self-aware you are it is hard to keep always alert to the fact that you are making your money in a paranoia friendly surrounding and that that will at times inevitably damage your judgement and you give in to mercenary so-what-actions. Of course I have not worked in finance and there everything may be totally different and highly rational etc. and generalisations about human nature may therefore not be applicable ;-)

  43. And the 19th century, which was chock full of “true capitalists”, was much less vulnerable to financial shocks and unmitigated economic volatility.

    Oh, wait…

  44. Malcolm Gladwell, astute though he usually is, has misinterpreted Mr. Cayne’s outbursts as displays of overconfidence; what they really display is rage. Overconfidence does not explain the name calling, the threatening, the venom spewed uncontrolled. If we didn’t know Jimmy Cayne was the CEO of Bear Stearns, I daresay we would have assumed him a drug dealer thwarted in a sting. Wait. Any self-respecting drug lord would have had the sense to restrain himself in the presence of a reporter.

  45. I do not think that society has any prospect of advancing beyond the current level of sustainability/fairness/civilization (take your pick) unless we recognize that the urge for power and the greed for markers that lead men (and predominantly men) to the very top of dysfunctional success are a pathology – necessary survival mechanisms running berserk, traits that, in an environment of scarcity and more or less immutable to our collective actions, served a purpose, but that in the modern world advance the leverage [sic] of the worst kind of sociopath – the Eichmanns of wealth management.

    Our collective inability to reign in and repurpose such “leadership” reflects that these afflictions are widespread – neither enlightened self interest of the many nor elite meritocratic beliefs would object to drastic taxation of accrued, especially inherited, wealth.

    A very simple analogy is our inability to handle an abundance of food, as our bodies respond to hunger much more intensively then they respond to being sated. This, in turn, leads to a food economy where obesity and starvation are well balanced – as Paul Roberts argues in “The End of Food”.

    If we cannot even manage the very essentials of life – water, food – in a way that passes the most permissive of ethics, it is no surprise that we are content to see the economy managed like a casino.

  46. Black Swan:
    of course I do not want to say that the bonus takers should not be held responsible – very much the contrary
    understand how they could slip does have nothing to do with that
    taking responsibilities for one’s actions no matter how understandable one’s failure was is the final proof of being a responsible adult which is something every human being who cherishes some concept of honor should aspire to being
    you did wrong you pay for it – period

  47. OH Tippy….

    There is something so very wrong with our culture when one of the few voices speaking out against Wall Street had to resign from his position of power cuz he couldn’t keep it zipped up…

    Nice interview. Too bad he opted out of a role last year.

  48. I’ll be the first to agree that the regulators were naive, gullible, and incompetent.

    With their institutional biases and the way that the regulatory agencies were run (and not only in the U.S.) the regulators could not have been anything but naive, gullible, and incompetent.

  49. Minor nit: Nardelli worked at GE before Home Depot, in their medical systems division, and at their locomotive division. At locomotives, he was head of manufacturing, and eventually became the CEO of the whole operation. I know, because I worked there when he ran the place. Whatever his other failings, he came to Chrysler with a strong manufacturing background.

  50. I guess the CEO psychology applies to Greenspan also.. If the President term limit is two, then why keep someone in a position for 22 years? There needs to be a term limit..

  51. I think the asymmtric pay and bonus incentives were much more important than egos in causing the recent disaster. I think most ordinary people would accept a small role in a very large disaster three years or more down the road (and losing their job at that point) in exchange for $5 or $10 million per year in the nonce.

  52. Leadership is important but leaders are nothing, repeat nothing, without willing followers (or dupes, in the case of recent Wall Street shenanigans).

  53. Jen, agreed
    but the “willing followers” are harmless or at best nothing but a nuisance until the moment somebody arrives to focuse their energies.

    This is the reason I am feeling more and more worried – there is at the normal-people-level so much seething anger piling up and the “elite” or rather the mouth pieces of the elite at least in Germany are belittling and sneering at the bottom part of the population so mindlessly that I can see us becoming dupes the moment somebody will appear up there to give voice to the sentiments.

    I for one astounded myself by becoming enthusiasic about Sarah Palin, a woman who stands for everything I am against as long as I manage to keep thinking clearly … and I still have that reaction to her whenever there is a class fuelled criticism of her while at the same time being appalled at her rambling nonsense.

  54. You might want to look at this much more broadly. I think it less a comment on CEOs than the nature of the game being played. It seems to me there is a proof waiting for someone to make it that shows attempts to balance risk vs. reward will always settle in on the side of normally profitable, but once in N-years (N something like 40 to 80) disastrous? Strategies that work most of the time but fail less than 1 time on average in the career of an individual and which increase reward are likely to be employed; human nature is replete with examples of low-probability events being considered ignorable.

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