Thursday, February 21, 2008

Credit experience left wanting at the top

(Gillian Tett in the Financial Times) Can you teach a geek to schmooze? Or is it easier to make a charming schmoozer into a geek? That is a question I have been mulling in recent weeks, with a growing sense of immediacy following the recent, surprise, revaluations at Credit Suisse.

Earlier this year, I penned a column which observed that investment banks which had hitherto dodged subprime bullets tended to have one of two traits: either a partnership spirit which did not allow bankers to become too tribal; or top managers who personally understood the realities of managing market risk.

I will return to the issue of bank tribalism in another column. However, the most current issue – and one that has triggered an avalanche of reader emails – is the sensitive issue of bank managers’ skills.

If you look around the realms of banks these days, you will see armies of people trained in modern financial science. Never mind the traders who actually create this stuff, every bank also has an army of support staff who are deeply knowledgable about collateralised debt obligations (CDOs) and all the other modern banking acronyms.

However, what is striking is that this army of CDO-lovers generally are not currently running any banks. This partly reflects an issue of timing – most notably that the credit derivatives industry only sprang to life a couple of decades ago, which means that somebody who has hands-on experience of this field is probably too young to have climbed the greasy management pole.

But there is also an issue of mindset. It seems to me that people who have been immersed in the derivatives world for several years - or run a trading book - tend to emerge from this intense environment with a subtly different “cognitive map”, as an anthropologist might say.

They tend, for example, to see life as a series of mathematical probabilities, since they are constantly trained to assess downside risks. They also tend to be good at spotting inconsistencies in structures or systems. Last, but not least, they analyze problems in multiple dimensions. Blame it on all that time spent creating derivatives, or derivatives of derivatives.

Now, in many ways these are precisely the skills you need to run a modern, complex financial organisation, particularly given that banks currently have a nasty tendency to blow up if they misread their exposure to CDOs, say. But there is a crucial catch: namely that derivatives geeks also have at least two weaknesses.

One is a tendency to place an excessive emphasis on models that can become detached from real life; but a second problem is that derivatives experts are sometimes bad at relating to anyone who is not as bright as them. Geeks, in other words, do not make natural schmoozers or statesmen (or at least, not compared to your average salesman or mergers and acquisitions adviser, say.) And that matters greatly, given that the ability to schmooze tends - unfortunately - to be the hallmark of those who rise to the top of a bank.

Now, like any generalisation, there are certainly exceptions to this rule. Most notably, some derivatives experts are now rising through the ranks of banks. Just look at Bill Winters at JP Morgan, Anshu Jain at Deutsche Bank or Jerry Del Messier at Barclays. Moreover, some of the world’s greatest banking schmoozers appear able to compensate for their lack of geeky skills by listening to their eggheads: bankers with good knowledge of Lehman Brothers, for example, tell me this is what Dick Fuld has done well, in the last year.

But for every top bank manager who does understand risk, there are plenty who might struggle to understand how their trading desks value complex CDO products each day. So the fundamental management challenge remains this: somehow banks either need to turn their CDO experts into charismatic leaders, or persuade their senior statemen to embrace their inner egghead. It is certainly not an easy task. The only consolation is that the bank which first cracks the secret of creating lots of schmoozing geeks (or geeky schmoozers) will also be the first to clean up from the current credit mess.

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