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The catastrophic failure
of the entire banking industry in 2007-2008
is an appropriate place to start.
If we look at Lehman Brothers,
which was the bank
that obviously is no longer with us,
amongst all of that group,
and you look at where they went wrong,
it's quite illustrative
of the endemic problems of management
that the entire investment banking industry
First of all, they were making
shockingly poor risk-management decisions.
That is to say,
not only were they taking on
completely unacceptable loans
on to their books,
and essentially losing billions
of dollars in the process,
they were also at the same time
failing to capitalize
on interesting new opportunities
that rose their way.
So they were making
poor risk-management decisions, meaning,
they were taking on bad risks
and they were failing to take on good risks.
A second category of errors
were around the incentive system.
Everybody knows about the egregious bonuses
that the bankers were getting.
But essentially the reason
that was such a problem was first of all
that it perpetuated
a highly individualistic culture.
They talked about "eating what you kill"
in investment banking,
which basically means that,
if I am the person
who sourced a particular piece of business,
I expect to grab my share
of the reward from it.
And, of course, what that means is that
cooperation and collaboration
are essentially discouraged.
Related to that,
the incentive systems were perverse
because they weren't actually related
to the objectives of the banks.
So in many cases for example,
at Lehman certainly,
the bankers were encouraged
to essentially bring in business
at any level of profitability.
It was the gross volume of business
brought in, not the profitability
of that business that was the key factor.
So the incentive systems
were simply not aligned
with the objectives of the bank.
And taken as a whole, for me,
Lehman Brothers was
what I would call a vehicle
for perpetuating the raw vices of capitalism.
What I mean by that is
there was no real higher order
or raison d'etre for Lehman,
its reason to exist
was essentially to help make
lots of individual people a lot of money.
And taken as a whole,
the Lehman Brothers' management model
was highly suspect for the situation
that it was in.