Archive for the ‘management’ Category


Cash and Glroy are Substitutes

Cash and Glroy are Substitutes

I don’t think that people only want to make money; I think that they also want prestige and status. Status achieved, for example, by working for a company that has a AAA and putting together big headline-smashing deals that everyone reads about and marvels over.

With ratings, in particular, I’m with Felix Salmon’s view that in these times, their departure is welcome. Ratings are not how money is made; in fact, as soon as you need your rating for its particular advantages in order to stay in business, you must lose your rating. It is a label, not a lever. I think rating agencies are shielded from competition, which would do a much better job of monitoring their work than the SEC (ha!) and, because of this, their edicts should be viewed only as a poorly informed opinion of a company’s ongoing stability, not the foundation of a business strategy.

Another way to soak in your own ego is to do a Big Deal that everyone can marvel at in the papers. The reason why (re)insurance and investment banking feeds egos is that employees are empowered to toss around millions of dollars every day. Some have the temperament to walk away from such a Big Deal but some do not. And these Big Deals are so carefully negotiated that it is almost guaranteed that “If you sit down at the table and can’t see the sucker…”

This, however, isn’t glorious stuff, but it’s how profits are made:

Aon Benfield has today confirmed that it will transfer further operational work to Xchanging, the global business processor, as predicted earlier in the week.

You can only make more money than the guy next door if you can do what he does more cheaply. Any other application of intelligence is likely to result in ruin.


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Tyler refers us to an interesting post on a peculiar kind of soft operating leverage at big Law Firms.

…firms increase their profitability by increasing the amount billed in respect of each equity partner. Since there is only so much time in the day, firms have tended to increase the ratio of attorneys per equity partner.  Without irony, this ratio is known as…”leverage,”

I call it soft leverage because it doesn’t seem to be particularly costly to lay these people off when revenue falls. Perhaps employment contracts for young lawyers are loose. If you need to lever up with highly skilled labour that demand gurantees or big severance payments or something, you’ve suddenly got more problems.

I’m reminded of the collapse of a reinsurance broker called Gallagher Re that loaded up with skilled employees (actuaries and the like) without the revenue to support them. When the business didn’t come, they couldn’t pay the bills.

We’re straying away from what I think of as leverage, though, because you’re arguably adding new capabilities, not just magnifying outcomes that would otherwise have happened anyway by applying fixed costs to variable/volatile revenue.

I like Tyler’s conclusion:

As I’ve already written, “[A] central lesson of this depression will be how many different ways there are to leverage.”

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Earning, Power

The normally very good Felix Salmon gets a bix mixed up today, I think.

But I still think it’s useful to draw a distinction between a bank’s top earners, on the one hand, and its top executives, on the other. Sometimes, they’re the same. But a lot of the time they’re not. And while it’s entirely justifiable to bemoan enormous bonuses for the former, it’s a lot easier to attack enormous bonuses for the latter.

He says that the people who make the most money at these investment banks are those that are presonally associated with the largest sources of revenue (as star traders or producers, say).  Fine.  For some reason he as a problem with that, which I don’t quite understand. 

The point I think he’s making is that these earners have been incentivized to take massive risks to generate personal paydays, risks which ultimately sank these firms. I actually don’t have much of a problem with this (aside from jealousy); I have a problem with the people who built the incentive system. The executives have the power/responsibility to build a wealth-generating system for shareholders and they screwed up. For that they should be pilloried.  The star producers will be needed in the future because they do their jobs well. The executives will not be because they do not.


Addendum: TED, as usual, is strong on the Merril revelation today. His focus can be summarized thusly:

If the generals salve their wounded pride on the beach with Mai Tais and cigars while the troops get slaughtered and the shareholders get bankrupted, you have all the conditions necessary for a revolution.

I can’t help but agree. The money should go to where the money was made and those that lose should be punished.

I think, though, that it’s easy to fall in the trap of judging deals hatched today that were conceived in a very different time. Ex post, obviously locking into all these kinds of employment contracts looks stupid, but ex ante, they were just another part of the game that everyone was playing. And will get fired for.  Hopefully.

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Professionally, I’m an intermediary. 

My job is to negotiate a deal between two or more partes. This job is stressful because I get paid if a deal is done irrespective of whether it was a good deal or not. 

The other counterparties’ job, in effect, is to maximize the number of good deals they do. This happens by employing three skills: 

1. The ability to generate the largest possible sample of the universe of deals.

2. The abilty to identify the bad deals.

3. The ability to discard bad deals without compromising #1.

The problem is that #1 is designed to give me hope and #2 is designed to crush most of those hopes. A rollercoaster indeed.  #3 isn’t actually all that important and #1 isn’t actually all that hard. #2 is where all the skill is, which means that people are much more likely to overcompensate at it to the detriment of #1.

This job requires a certain kind of emotional intelligence; you’ve got to be able to be sensitive enough to identify  and respond to peoples’ wants, cares and emotions but not sensitive enough to care too much them, or your own, for that matter. 

Intermediation carries an extraordinary amount of operating risk because if you’re no good at producing good deals, you can’t make any money. 

Our counterparties are exposed to the risks that others can’t do their jobs properly. As many an investor found out in 2008.

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Shift Shifting

I’ve been told that fire fighters and police officers all start their shifts one hour earlier than scheduled.

So if someone is scheduled to start at 8, the show up at 6:45 and start at 7 and the person they relieve leaves at 7. Why on earth is this? The common explanation is that once upon a time someone wanted to start early and so asked someone else to stay late (or early) and then everyone followed suit.

This doesn’t make sense to me.

The only explanation that makes sense to me is that there is some scheduling rigidity that prevents them from changing the rules and that the times they choose to work are more convenient (dropping kids off at school? avoid traffic? something else?). Efficient solutions emerge.

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