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These are situations where "you're damned if you do and damned if you don't". To the two examples cited by you, let me add the couple of shotgun mergers of banks (e.g. Wells Fargo + Wachovia) that literally happened over a weekend at the peak of the financial
crisis 3-4 years ago.
Having been a part of one such forum that had to decide whether a Top 5 UK Bank should take a GO or NO GO decision on a highly visible payments program a few years ago, we knew that a GO decision could lead to a potential catastrophe but also that a NO GO
decision would result in certain disaster for the top management. Had we applied the filters of "correct process", "most informed decision" and so on, NO GO would've been the logical decision. However, despite the odds, the forum decided on a GO decision.
Somehow, things worked out fine in this case as they did with the aforementioned shotgun bank mergers.
While I don't discount the importance of these filters, they're not always practical, especially when it comes to time-critical projects. End-of-the-day luck does matter. This originally-Oriental concept seems to be gaining a lot of currency everywhere else
in the world, if the over 200K Google Search results for "role of luck in business" are anything to go by.
This is exactly the cavalier attitude that consumers, regulators and banks should not find acceptable. First off, luck isn't a sustainable business model. Banking isn't gambling. I don't know of anyone who believes that. Yes, some people can succeed in business
with a bit of luck, but quality always wins out.
Secondly, most of the issues banks have with appropriate decision making relate to the fact that they don't have an agreed strategy. Due to this they always have to make reactive decisions.
What led the bank to be in a position to make a merger/acquisition decision in two days? Rubbish planning and management.
If your strategy is to do a takeover, you have an intention, approach and price point agreed. If the price falls into your parameters - decision made. That is a better way to operate. If you don't have a takeover strategy, don't just decide at the last minute
that a global collapse has made one of your competitors attractive.
After Lehman, the powers-that-be decided that the financial world just couldn't afford another Lehman and virtually forced one bank to acquire / merge with the other in my aforementioned shotgun-weekend-merger examples. All of this is public knowledge including
the role of regulators in these events e.g. according to this USA Today story, "...many bank mergers are shotgun weddings
performed by the Federal Deposit Insurance Corp." A little more connectedness with real word events of recent past would've prevented the irony of asking regulators to curb such attitudes.
It's in the very nature of luck that concepts like sustainability are simply not applicable to it - you just need it when you need it, not all the time!
Because they happen, doesn't make it right. The Lehman's failure and GFC was caused by poor decision making from banks in the first place. Its a vicious circle.
Some have argued, quite convincingly IMHO, that before GFC most banks were playing "passing the parcel (of repackaged toxic assets)" and that, unfortunately, only Lehman and a couple of others were left holding the parcel when the music stopped. Which, to
me, highlights the role played by luck. In my experience, in the real world, what serves self-interest is generally what happens. Even as we're debating about what's right versus what actually happens, banks have apparently recently latched on to other assets
like education loan and insurance benefits transfer to create the next generation of first- and second-order derivatives. Only time will tell whether their decision to do so is right or wrong from a long term perspective but I don't think anyone will deny
that they earn big fees for banks in the short term.
Interesting comment, and a major point that Nassim Nicholas Taleb makes in his writings.
<< While I don't discount the importance of these filters, they're not always practical, especially when it comes to time-critical projects. End-of-the-day luck does matter. This originally-Oriental concept seems to be gaining a lot of currency everywhere
else in the world, if the over 200K Google Search results for "role of luck in business" are anything to go by. >>
WRT the shuttle disaster, there was a good discussion on slashdot (around the anniversary of the disaster) and the major consensus was that the engineers were ignored, and of course should not have been.
True that black swans written about by NNT present an extreme case of bad or good luck. But, in actual practice, we see differences between what's right and what happens in many more situations. Just to take the Challenger example, I'm not sure if "gasket
acting up in cold weather" or "cold weather in Florida" qualify as black swan events. Whenever I see analysis of past decisions, I can't help being reminded of the saying "Hindsight is 20/20".
Talking about leading authors, my comments related to self-interest are inspired by Michael Lewis. I always felt that rating agencies - not banks, regulators or homebuyers - were the only ones who could be charged with making bad decisions that led to the
GFC. After reading "The Big Short", I was convinced.
Yes, the ratings agencies are to blame for a portion of the global financial crises, but no one can argue that RBS's decision to takeover ABN Amro was a bad decision. Likewise NASA's decision to launch the Challenger. It had nothing to do with bad luck,
black swan events or anything else.
Five years later and after one of the worst financial crisis - itself caused by black swan events - things might look different today but, when the RBS-ABN transaction happened, it had the overwhelming support of shareholders. Given that these are common
folk and not vested interests, it's hard to accept that everyone thought it was a bad decision at the time.
Shareholder support was based on the board providing a misleading view of RBS's financial state to investors. Hence the reason for the legal action. The second reason was the relative ease of which RBS acquired NatWest. This gave the board a cavalier
attitude towards the ABN Amro takeover.
This post is from a series of posts in the group:
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