Nothing focuses management quite like ownership

Posted by Josh Friedlander | 1 Comment

Letter to HBS prof William Sahlman regarding this excellent paper:
“Management and the Financial Crisis (We Have Met the Enemy and He is Us”…)

This is a brilliant exposition on the management failures. I only take issue with the notion that the dot com crash had a smaller effect on the domestic economy, or that the dot com crash is fundamentally unrelated to the credit bubble. Aren’t they linked?

The malinvestment of the dot com bubble papered over declining productivity and stagnant wages. Paper gains/losses from the dot com bubble resulted in a political solution (low rates, tax structure) that caused further malinvestment into stocks, housing, private equity, hedge funds, and into derivatives tracking of all the above.

We’re looking at perhaps 30 years of misallocation of capital. That’s the broader macro picture. If VC or PE or real estate or stocks haven’t, for 10-15 years, been profitable relative to safer investments, what have we been doing? If they haven’t increased per capita purchasing power for 30 years then what — on a social level — was the point?

Our tax code preferences debt over savings and equity. Our legal system (with some help from Marty Lipton) made it less profitable or powerful to be an owner and more profitable and less risky to be a manager or agent. Oliver Stone, via his creation Gordon Gekko, was correct when he had Gekko note that management had no stake in the company!

Doesn’t this all start with the last inflated dollar commodities boom in the 1970s that allowed Phibro to acquire Salomon Brothers and rebrand it Salomon Inc., one of the first of many Wall Street partnerships to die? The death of the partnerships and increased clout of Wall Street lead to tax law changes that made it more profitable for banks to securitize debt than hold it, and made it better for the securitizer to trade it and tranche it (thanks Larry Fink!) than to hold it and down the line until no one had a clear stake in anything and the only currency was immediate profit, leading to the IBG/YBG culture.

None of this is recent or unrelated to the past. It has been a long long long ride. “Why did these people care so much about what came out of their computers and so little about what came out of their factories?” asked Burrough and Helyar in their stunningly moral book, Barbarians at the Gate, in 1989. We’re still asking the same question.

The credit boom relates to the dot com boom which relates to the excesses of the 1980s and to the malaise of the 1970s. We’ve been lacking insightful leadership for a while. It’s not a problem of some smart guys only recently coming to Wall Street or of the construction of CDOs. It’s a problem of disintermediation, the great scourge of the 20th century (see: Stanley Milgram). Quite literally, computers and electronics make this more feasible. We increasingly struggle with “can do” vs “should do.” That is the management challenge. When you own something, you take care of it. When everyone “just works here,” no one takes care of anything.

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