It is good to see the old blogs now transferred to the infrastructure. If you look under October 2007 you'll find my second ever blog was a metaphor for GS's position within Shell. Here is another metaphor, also a bit nautical. Hope it works.
But first an advert for my favourite museum, the Wasa (Vasa) in Stockholm. Visit if you ever get the chance. 350 years ago the Swedes built their most impressive warship, but it sank just outside the port on its maiden voyage. I wonder if that contributed to the Swedish feminine quality of humility? Anyway, some divers discovered the wreck in the 1960's, and, because the water was brackish, it was possible to restore the ship pretty well to its original form, and it is now a museum. It has something for everyone - the sheer majesty of the boat, the science and heroism of the restoration, the historical commentary of social, military, political, engineering practices of the 1600's.
But my favourite bit is the detective story about what went wrong. There is a chilling reading where it is explained that, while the ship was in dock, they asked 20 men to run from one side to the other to simulate a storm, and the boat just rocked around uncontrollably. If anyone had said anything to anyone it would have been completely obvious that this boat was doomed. But of course, the customer, the designer, the builders and the men themselves all had their reasons to be quiet. IPA benchmarking on this capital project would be interesting. I think they would have found that the front end loading was OK, but that there was no integrated team covering all key stakeholders and that execution discipline was lacking, in that scope and design changes (more guns etc) kept coming in. The fundamental lessons of projects were still applicable 350 years ago! Have we learned much?
Still there? Anyway, the long introduction is just about those 20 men running across the boat. Because the finance industry is a bit like people running across boats. The runners are trying to keep their balance in the wind and the waves, and trying to catch gold dust which is flying around them. The runners are often in the employ of masters who are sitting on the upper decks of the ships, who themselves are taking a gold dust cut from customers who have some reason to bet on a future wind direction.
20 years ago, there was a whole flotilla of boats, linked by chains, representing different financial markets. They all had their own runners, and people didn't really have much information so the running was a bit chaotic and they tended to cancel each other out most of the time.
Then a few big things happened, not overnight, but gradually, to change the system.
First, globalisation. Instead of a flotilla of boats, now we just have one global supertanker, with all the runners scampering around the same giant deck.
Then, information technology. Even though the end customers had varying views, everyone had so much transparent information that more and more of the runners started making the same runs. That turned out to concentrate the gold dust (betting with the market) so there was more yield overall.
Then, greed. Seeing that this gold dust collecting stuff was so easy, many talented people didn't bother with real work any more, but built another luxury cabin on the new deck of the boat and hired some runners. Whole countries decided to favour this approach (Iceland, UK) and some corporations (GE, ABB), as it was such an easy way to pick up gold dust without doing much work.
Finally, smart maths and models and liability insurance and hedge funds and that sort of thing. Some clever cabin owners worked out that by tying up lots of runners together with rope they could multiply their yields - the runners would move en bloc, trample lesser runners, and always move ahead of the new wave.
Brilliant. Until the boat sank in Stockholm harbour under the weight of all the roped together runners going in the same direction at once and the excess weight of the decks luxury cabins. Everyone was too busy collecting gold dust to think about the stability of the boat!
The scary part of the story is how hard it will be unravel. The developments were all global trends which can't be reversed. We can dismantle a few cabins and restrict the number of runners for a while, but that won't stop the trends, and the next wave of models will be even smarter and more dangerous than the last. Close the casino? Then the Cayman islands or somewhere will open a new one. This is truly a global conundrum, and I haven't heard any sustainable solutions yet.
It took 10 years to build the Wasa, 20 minutes to sink it, and 250-year years to restore it. I hope the global financial system can be recovered a bit more quickly - I'll need a pension one of these days and my daughter will need a job.
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