The idea for this book came on the back of the losses incurred by large investment banks in 2008. One investment bank announced a quarterly loss of $14 billion as part of its full-year 2007 results. This was only one quarter of the $52 billion United States investment bank Merrill Lynch was to lose on United States mortgages. It seemed impossible to manage so badly as to incur a loss of this magnitude. Surely nobody would do this. If nobody would manage that badly, this pointed to another possibility. Some banks were simply not managed at all.
This book is about management in banking and particularly about absent management in banking. Bank customers, shareholders and regulators have assumed that banks are always managed. Banks have been assumed to be no different than other large commercial organisations, such as manufactures and retailers, in having a management that sets strategy, implements this and holds itself accountable to its owners and other stakeholders. Like other commercial organisations, some banks are assumed to be managed well, others badly, with the quality of management being subject to change over time.
But banks are different. They developed with a different approach to management historically, with banking being the top priority and much more important than management. For centuries banking was almost everything that was required. Only a few early banks grew complex enough to require management. Two of these are the subjects of the early chapters. Some banks developed by size and complexity and prospered, at least for a time. When some banks grew very large and complex, they lacked the historical development of management of other commercial organisations, such as railways and car manufacturers. Some banks learned and borrowed management from other commercial organisations.
Banks are also different in that they found it difficult to develop and change incentives to reward management as much as banking was rewarded. After five centuries of banking, many bankers had a way of doing things. They found it difficult, sometimes impossible, to change even when the banks themselves changed enormously, in both size and complexity. And these changes in size and complexity transformed the need for management. At times, this transformation was ahead of the development of management and resulted in absent management.
When banks are not managed, this makes them much more likely to fail. Bank failure has serious consequences. If some banks are not managed, this has implications for customers who have their money deposited with the banks or who depend on future bank borrowing for their lives and businesses. A failing bank can also have serious consequences for other banks with whom it may do business including borrowing money. A bank failing can cause suspicion that other banks may also be in trouble and subject to failure. This is because banks base their business on trust. For customers to deposit money with a bank they must trust the bank to be able to pay these deposits back. If one bank fails, the trusts in the banking system may be undermined. A bank failing can have serious consequences for a government. If the bank is so large that its failure threatens the stability of a countryâs financial system, the government may need to rescue the bank. Such a rescue can be extremely costly to the extent that it affects the governmentâs finances. One or several bank failures can require a government to raise additional funds, through increased borrowing and taxation or reduced expenditure or all three.
This book is about absent management in banking, but that is not meant to imply that there is no management in banking. There is currently little sympathy for banks amongst the rest of society. This is unsurprising given the devastation caused by the recent financial crisis where banks are seen as one or the main culprits. However, there always have been, and continues to be, many managers in many banks who ensure that the crucial function of banking makes its indispensable contribution to modern society. No banks are completely without any management. This book is about the partial absence of management in some of the most important banks as well as in some less important banks. Because banking is based on the trust of its customers and because banks are increasingly interconnected, any partial absent management that causes a bank to fail can have serious consequences for customers, other banks and governments. Any absent management in a bank can contribute to, and sometimes cause, a financial crisis.
Many questions have been asked regarding how banks failed and caused the most recent 2008 financial crisis. Few questions have been asked regarding why some banks did not fail and did not cause the crisis. There is only one difference between individual banks and that is the people who have managed them in the past and who manage them now. Individual banks succeed or fail because of the people who manage them. Individual banks are in the business lines they are in, the locations they are in, have the brands and culture they have and so on, because of the people who ran them in the past and who run them now. The managers and only the managers have made one bank different from another. External forces, including economic conditions and regulation, heavily influence the destiny of banks. At times, this influence is completely beyond the control of the banks. But it is the people, and particularly the most senior people in the bank, who decide to establish a bank in the first place and subsequently decide in which lines of business, in which countries and how the bank should operate. Unlike the British soldiers in the First World War who 100 years ago sang, âWeâre here, because weâre hereâ, and often had little or no choice in the matter, banks are where they are because of their managers, past and present. In an interview with the Financial Times in Japan in 2007, just as problems in the United States mortgage market were beginning to cause a wider market crisis, the chief executive officer of Citi, one of the largest banks in the United States and in the world, said: âWhen the music stops, in terms of liquidity , things will be complicated. But as long as the music is playing, youâve got to get up and dance. Weâre still dancingâ (Nakamoto and Wighton 2007). Dancing simply because the music is playing is not good or bad management. It is absent management.
So this book is about the banks that were not managed. It is less about the banks that were well run, did not fail and cause a crisis and did not need rescuing. These managed banks are, however, now enduring significantly increased regulation and much reduced reputations, due to their unmanaged competitors.
All bulls are dangerous; it is just that some bulls are more dangerous than others. So it is with banks. All banks are complex; it is just that some banks are more complex than others. And all banks are dangerous. Even a run on the deposits of a small bank, where depositors fear for the safety of their savings, has the potential to cause a wide panic and a banking crisis. However, there are some banks that are significantly more dangerous than others. These very dangerous banks are now known as Systemically Important. They used to be known as âtoo big to failâ, but when they failed, the term was changed. They nearly all show some instances of absent management. By mid-2017, banks in the United States had paid fines of over $150 billion related to the 2008 financial crisis. And banks continue to commit acts today, resulting in large fines. If a bank continues to incur fines of hundreds of millions even billions of dollars, pounds, euros and so forth, it is sometimes not because the bank is badly managed, it is because it is not managed at all.
Management is one of those activities that is so well known that it is possibly not necessary to define it. Most of us have worked for or been subject to an organisation, public or private, with some level of management. Perhaps the first time we encountered management was when we first attended school and became aware of a headmistress or headmaster. Most employees have a manager and so do most managers. The earliest use of the word appears to relate to the Latin manus or hand and the French main and coming to us through the French manège , which in English can mean an area where horses (and riders) are trained or handled. In other languages, manège is now used to describe the performance circle in a circus. âI will handle thisâ is close to âI will manage thisâ.
In this book, management involves deciding on objectives and a strategy, on how to achieve these including the risks involved, the strategyâs implementation and monitoring as well as accountability. Management requires thinking, planning and delegation. It is very much about handling or managing people. However, and most importantly, management is not about producing, and it is not lending, trading, analysing and all the many other production activities in a bank. This distinction is central to absent management in banking. It is often the doing, the lending, trading and so forth that people in banks want to do. Most bankers want to be producers, not managers. But when bankers are recognised internally as good, successful and profitable producers, they are often then promoted to managers. The cowboy who herds the most cattle becomes the head honcho; the best saleswoman becomes head of sales or sales manager.
However, bankers often remain producers while they manage and hardly any become full-time managers. This was how it was from the very first banks, which were simple, one location operations and just required a banker or two and no full-time, specialist managers. Most heads of large banks still meet clients. Some retain an active producing role, typically in retaining key clients and acquiring new ones. Buying or merging with other banks mostly involves top management because it is important. But it is really a type of production because it is nearly always about growth. Due to the continuing producer role, and its associated skills, rewards and status, the banker has less time, energy or interest in management, and at times none at all.
Sometime in the last ten years, the term âmanagementâ has been replaced by âleadershipâ, in business schools, academia, the media and banks. This is a dangerous, semantic fashion. Leaders lead, and we remember brave example of leadership as we have just commemorated the centenary anniversary of the brave officers and sergeants who lead their men over the top of the First World War trenches. The managers then were the most senior officers, the generals and the politicians, democratic or despotic. Much, but not all, of their management was terrible, ending in long stalemates with catastrophic casualties and suffering. There was some exceptional management in the First World War, such as the medical services and supply lines, but much of it was terrible. However, the management was not absent, and it was not just leadership, however brave. The tendency to talk about leadership rather than management is attractive to bankers, some of whom are military history buffs, but it does a disservice to management and to war. Only war is war, however much investment bankers and traders would like to see themselves as being in the trenches. And management needs thinking and planning and discussion, which can take a long time and be tedious. In banking, management rarely receives the rewards and status of a producer winning a battle for a client or a profitable trade.
During the last ten years, many books were written about the 2008 financial crisis. As this is a history book, there was no particular rush to write it. By waiting ten years the book would hopefully benefit from the extensive research being carried out immediately after the latest financial crisis and also enable more of a historical approach. If evidence could be found that banks are not managed, the approach would be to try and answer one of the basic historical questions of how we got to a situation of absent management in banking.
This book was not a management consultancy presentation in a former life. There will be no charts. Actually there will be one chart, as an exception to prove the rule that there will be no charts. But it is a really good chart.
It is sadly not possible to write any book about banks without some figures. There were two figures in the first paragraph. However the figures have been kept to a minimum, and there are no tables of figures, not even one to prove the rule that there are no tables of figures.
What this book aims to do is to explain why complexity caused absent management. Without complexity in banking there is no need for management. So it is important to explain complexity. One of the approaches to explaining complexity will be to explain the jargon and abbreviations that hide complexity behind them. And it is important to avoid using multiple and endless abbreviations that make those not familiar with these abbreviations feel like uninformed outsiders.
The board of directors of some banks were guilty of absent management because they did not understand wh...