The news that Raj Rajarathnam, head of hedge fund Galleon, has been arrested for insider trading opens up all sorts of interesting issues. The use of wire taps to track white collar crime is reminiscent of tracking down mobsters, the Sri Lankan government’s claims that he had ties to Tamil separatists and Mr Rajarathnam’s motivation – in the book New Investment Superstars, he said: “After awhile, money is not the motivation. I want to win every time. Taking calculated risks gets my adrenaline pumping.” – and his prominent position in the philanthropic organisations in New York, and so on.
What struck me, is that he planned to be in the office this morning to explain this all to staff. Managers face all sorts of communication challenges and this surely has to be among the toughest, a delicate balance of trying to maintain a level of credibility as the company leader but also, presumably, trying to make sure the people in the business keep the business going, all against the background of a handcuffed Mr Rajaratnam being escorted by FBI agents on the front page of most major newspapers.
UPDATE: Ok, so I guess you simply protest your innocence.
If you haven’t seen it already, I would highly recommend our Future of Investing series. There are a lot of interesting contributions (yes, I would say that, but check out the list of people involved – Martin Wolf, Mohamed El-Erian, Andrew Lo, Gillian Tett, Robert Shiller etc – and tell me if I’m wrong) but especially good is today’s fascinating interview with the mathematician Benoit Mandelbrot, which considers why ‘efficient’ markets collapse and why we need some new theories on markets.
It’s also worth highlighting an article Prof Mandelbrot wrote with Black Swan author Nassim Nicholas Taleb three years ago, for the FT’s Mastering Uncertainty series. They argued that how business approached uncertainty was the wrong way round. Risk models focused too heavily on the norm rather than the exceptions. So, just because something is correct 95 per cent of the time doesn’t mean that should predominate when the remaining 5 per cent are important enough that they could bring down the whole system.
As you would expect, they explain it much better than I do.
I’m a bit late on to this but last week Jerome Kerviel, the “rogue trader” who is accused of losing French bank Societe Generale €5bn, was interviewed on French television.
The video on France 2′s Objet du Scandale is revealing partly because of all the talk at the G20 and, in the UK at the Labour party conference, of the need to curb bankers’ bonuses or at least restructure how they are paid out. Kerviel’s broader point is that there isn’t any point; whatever rules are created, clever people will find a way round them.
But I thought his other comment on the nature of his former job as a trader pointed to a wider issue that doesn’t seem to be attracting quite as much discussion. “It’s a job that makes you a bit crazy, an addict. They push you to take risks,” he said, referring to the culture of his former workplace.
I’m coming a bit late to this but just as our debate on women in the boardroom generated a fair bit of heated discussion a few weeks ago, today’s report that women in the the UK’s financial industry suffer from a “shocking disparity” in performance related pay (many receive 80 per cent less than male colleagues) has rightly been getting a lot of attention.
If the report by the Equality and Human Rights Commission is accurate, the results are difficult to swallow. Not only is the pay gap is one of the widest in the UK economy and could be being entrenched by recruitment patterns, an issue we take to task in an editorial in today’s paper.
Bob Sutton is singing hymns to a 1984 study of peripatetic Methodist ministers.
The Stanford Graduate School of Business professor and author of The No Asshole Rule says it still shows how good leaders have the most impact on teams and small organisations, not vast companies.
The difference between managers and entrepreneurs was highlighted this week by University of Cambridge research on the latter’s mental tolerance for risk – and how that might be simulated through the use of drugs.
The findings are discussed in a podcast by Shai Vyakarnam, director of the Judge Business School’s entrepreneurial learning centre.
On a similar theme, you might also like to check out the FT’s video lectures on managerial psychology, our podcast interview with Stanford’s Baba Shiv on how to master emotions when making decisions and our MBA Gym entrepreneurship workout.
Buyouts do better in US states that vote Republican. That’s the conclusion of research by HEC’s Oliver Gottshalg and NYU’s Aviad Pe’er.
Republican views are better aligned with buyout value-creation strategies (such as outsourcing labor, shutting down less efficient units, lower commitment to social responsibility, and deunionization) than Democratic views are.
I’ll file it next to ”Foxes Report Feeling Less Hungry When Hen Houses Left Open”.
The wisdom of Robert Shiller, described by the FT’s Clive Crook as ”one of the world’s outstanding economic thinkers”, is being brought to a wider audience.
Yale University, where he teaches, has just published online the 26 lectures that comprise Economics 252, his introductory course on financial markets. They can be viewed for free or downloaded as MP3 or video files. Transcripts are also available.
I’ve only had the time to dip into the lectures. Much has happened since they were filmed in the spring, so some of the content has inevitably been overtaken by events.
But if you look at lecture eight for instance – Human Foibles, Fraud, Manipulation and Regulation – there are lots of timeless insights into the psychological tics that influence investor behaviour (including one derived from a cruel experiment on pigeons).
Finally, if Prof Shiller’s lectures don’t appeal, you could always eavesdrop on a class discussion of Nabokov’s Lolita or a course of 24 lectures on France since 1871.
Technology – it doesn’t always make us more stupid.
Why has JP Morgan come through this recent period of turmoil in better shape than almost all its major competitors? CEO Jamie Dimon (MBA class of ’82) revealed all at the Harvard Business School centennial conference this morning.
“We suck less!” he declared.
This was perhaps one of his less controversial comments. If you have only one truly honest colleague out of ten around the top table with you, “Sack the other nine!”
Politicians had failed to get to grips with the energy crisis for over three decades. “We deserve $4 a gallon oil,” he said. (Sounds like a bargain to to my Brit ears.)
The whole mortgage business is “basically under-regulated”. CDOs were too complicated – “what were we thinking?!”
And he refused to accept the populist line of attack taken by politicians, that too many businesspeople were greedy and dishonest.
“These businesses are more charitable than the average Congressman – and probably more honest than the average Congressman”, he asserted.
This won the biggest round of applause of the morning.
We may never know who really wrote that internal Lehman Brothers memo of June 8 this year, but it certainly asked the right question. “Why did we allow ourselves to be so exposed?” it demanded.
By early June it was too late to start worrying about all that. And in theory it should never have been necessary to do so. When Dick Fuld, Lehman’s former chief executive, was interviewed by Euromoney magazine in July 2005, he explained why.
“I expect everyone at the firm to be a risk manager,” Mr Fuld declared. “All 12 of us [on the executive committee] are focused on all parts of the business. It’s all about risk management. If it’s just me then we’re in trouble.”
No wonder, if that statement was true, that Mr Fuld displayed such an air of pained bewilderment at his congressional committee hearing last week. His expression of regret at the collapse of his bank should be included in every MBA syllabus.
Continue reading “What failed? Ask management“.