How to play chicken and lose
>From The Economist print edition
Finance suffers from reverse natural selection
THE great American economist Irving Fisher was never able to live down his
remark, just before the 1929 crash, that share prices had reached what seemed
"a permanently high plateau". Fisher's shoes have been filled by Chuck Prince.
"As long as the music is playing," the then head of Citigroup told the
Financial Times just weeks before the credit markets seized up in August 2007,
"you've got to get up and dance." Then he uttered his fatal coda: "We're still
dancing."
It was a silly thing to say. Before the year was out Mr Prince had resigned
over Citi's losses. But it was not a silly thing to believe. In financial
services, wallflowers are losers. A bank of Citi's size cannot sit out the boom
without confronting commentators and investors alike. The winner is more likely
to be the bank that dances in the hope that it can scramble to a seat when the
music stops (even if, as in this crisis, there are virtually no seats).
George Gilbert Williams, long-time head of Chemical Bank in New York in the
19th century, once explained that his success was founded on "the fear of God".
But as a boom takes its course, fear is supplanted in what a senior quant at an
American bank calls the "Cassandra effect". The more you warn your colleagues
about the tail risks—the rare but devastating events that can bring the bank
down—the more they roll their eyes, give a yawn and change the subject. This
eventually leads to self-censorship. "The system", he says, "filters out the
thoughtful and replaces them with the faithful."
To paraphrase Keynes, if you work in finance, the market can stay irrational
longer than you can stay in your job.
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