Chapter 8
Why Government and Institutions Get Suckered into Debt Binges
The whole problem with the world is that fools and fanatics are so certain and wiser people are full of doubts.
—Bertrand Russell
The development of financial bubbles and subsequent busts I have described in previous chapters now looks surprisingly obvious and predictable. Unfortunately, economists used almost none of these rather obvious tools in their prediction of the downturn. There are predictable danger markers and these should be included in all models used to identify and head off dangerous financial bubbles. The market is not designed to self-correct; it is designed by bankers to maximize profits at the expense of the commonweal. Greed does not have a built-in moral compass. So, economists and ratings agencies need to incorporate the credit markers noted in previous chapters and do a better job of downgrading banks and/or publicizing hidden dangers so consumers and policymakers have a chance to react. Examples we looked at are:
- Loan/deposit ratios (LDRs) above 1.15 are dangerous. Let's put it this way: Find a financial crisis that was not preceded by a financial system with a loan/deposit ratio of 1.15. You can't.
- Market cap/deposits of banks above 30 are high and problematic. These high valuations tend to indicate bubbly overvaluation for banks and are more a sign of danger than a sign of health.
- Bank market cap/total market cap of a country above 25 percent is a warning. In most banking crises, it is important to watch the market cap of banks relative to the market cap of the entire stock market. When the banks get close to 30 percent of market cap of the total market, then there is danger. This is also a sign of extreme valuation. A safe number should be 12 percent to 18 percent of market cap of the entire stock market.
- Entities such as the International Financial Accounting Standards Board should never have been allowed to actively advocate for the creation of offshore investment vehicles to create hidden leverage. Liabilities should only ever be found squarely on the balance sheet of a financial entity and not hidden away in some obscure vehicle.
- Ratings agencies should be forced to include market-based mechanisms in their consideration of ratings. Take the example of Petrobras, the national oil company of Brazil. The market currently is showing that the stock is trading at 0.4× book value for several quarters. This is indicating extreme distress in the company, yet S&P as of February 2015 is indicating that the company is investment grade. Equity and fixed income investors are all too often baffled about why ratings agencies are so far behind the curve when market signals are showing loud and clear that there is a problem.
Current account deficits of 3.5 percent to 4.5 percent of gross domestic product (GDP). The flipside of any excessive LDR is always a high current account deficit. The United States in 2007 had a current account deficit of more than 4 percent and a budget deficit of more than 3 percent and no one was warning the investor community. If this were a developing country, the IMF and World Bank would have been screaming about such conditions. There needs to be equal treatment for developing and developed countries—standards that apply to one group need to be applied equally to all. Too often, however, economists dismiss a large current account deficit if it is funded by “high-quality” capital account inflows. They do not realize that these capital account inflows (loans, short-term investments in stocks and bonds, foreign direct investments or FDIs) are almost always pro-cyclical and reinforce frothy domestic activity. When the going is good, capital account inflows rush in. When times turn bad, turning around a large current account deficit will require a devaluation of the currency (just when the LDR and high debt loads peak out) and then the capital account drains as international investors are scared off by recession, devaluation, and falling asset prices. The system is a setup for suckers who are both wholesale lenders and late to the game in equity and fixed income. High current account deficits and high LDRs together are toxic. Look at Spain in 2007. No one was raising the alarm bells when the LDR was above 1.60 and the current account was 6 percent of GDP. This was not a Spanish miracle. It was a Spanish nightmare waiting to happen. The balance of payments system we have in place for the world is not self-correcting. It is pro-cyclical in that capital account inflows will tend to rise as the current account deficit rises (in a boom) and fall when the current account turns to surplus (in a bust).
- Bank stock prices that inexplicably start to fall for a protracted period of time in the midst of an otherwise-rosy credit cycle. Look at the stock price of Citi in 2005. It peaked and began going sideways one year before the crisis was unfolding. The stock prices of banks are fairly smart indicators of things to come. No one was asking questions when the stock price of Lehman Brothers began to go sideways and fall in 2006 despite record profits, yet it was telling us important information. The quality of earnings for banks is far more important than the quantity of earnings.
- Leverage below 20. When the aggregate tangible leverage (leverage minus goodwill) is above 20, problems arise. Again, show me a banking crisis and I will show you a banking system with leverage of 30× or more. The leverage of Lehman was 40× when it collapsed in September 2008. The leverage of Bear Stearns was about the same. Currently, the German banks (Deutsche Bank in particular) and Swiss banks still have quite high levels of leverage, so this merits close examination.
- Banks need to be chastened about self-involved profit motive. Savvy politicians should know that a credit crisis will drive them from office and prevent banks from getting out of control for their own self-preservation. When banks go down, governments go down soon afterwards.
The markers I have described above are like human temperatures or blood pressure. They are entirely objective and offer guides to health and danger. Why do these booms and busts keep happening if there are independent, verifiable, and repeatable markers? After 25 years of watching people fall into leverage traps over and over again while working for many financial institutions on three continents, I began reading many books on the psychological elements of how humans make financial choices.
Why Are We Comfortable Crawling into Bubbles and Staying There Despite Dangers?
The puzzling question is simple: How and why do individuals and groups get suckered into one financial bubble after another (usually at the top of the market) that ends up popping and subsequently causes vast societal damage, instability, painful unemployment, and often war? More importantly, why do the policymakers in charge of maintaining a civil and stable society enact rules and policies that are inherently unstable and lead to great human misery and political chaos?
The simple, correct, and ridiculous answer is that humans love bubbles. We love making them and we love climbing inside them. While we are in a bubble, we will actually attack anyone who points out that we need to get out of the bubble or dangerous events will befall us. We are all too often the authors of our doom. This sounds preposterous, but it is absolutely true. We love moving into bubbles, bringing in the furniture, and decorating them. We are social animals who need to belong, and bubbles give us the feeling of belonging. They make sense because the group says so. We end up using excessive leverage and buying overpriced assets for the very simple reason that everyone else is doing the same thing, so it can't be a bad idea.
We engage in irrational behavior because we want to belong and fail to ask questions.
Let's take a couple of texts that I think are seminal works that try to understand why people—as a group—take collective decisions that were smart at the beginning but end up being against the collective self-interest. For this is what happens in financial catastrophes. The group at first sees an aim or an objective that is ostensibly smart, but then it pursues some distorted idea of the initial process and the endeavor ends up being a disaster. All kinds of folly befall people when they are in a bubble (military, political, religious, or financial, for they are all the same) and use all sorts of absurd justifications to maintain a course of action that leads to human misery. (Recall the papers produced by the U.S. Federal Reserve in 2007, which said that there was no indication that the real estate market was in danger!)
The two-time Pulitzer Prize winner Barbara Tuchman wrote the seminal work The March of Folly to describe how large groups of people (in fact, she was only interested in horrendous decisions made by large groups that turned into multigenerational catastrophes) make unbelievably stupid decisions that, at the time, seemed perfectly rational and, indeed, full of alleged self-interest. Among other historical examples, she cites the folly of World War I, the Vietnam War, and the destruction of the Catholic Church by the Medici Popes.
Another woman who offered illumination on this issue is Margaret Heffernan, who wrote a bestseller called Willful Blindness. She uses more modern anecdotal evidence to show how delusional and deranged thinking enters institutions quietly and silently through the floorboards, causing incredible damage to humans during perfectly preventable situations such as financial catastrophes, offshore oil explosions, or death from unheeded cancer-causing substances. It goes on and on. As with Tuchman, Heffernan demonstrates that corporate, financial, religious, or health-related phenomena in which groups engage in deranged thinking have remarkably similar dynamics.
In the context of financial markets, let's weave together some of the thoughts of Tuchman and Heffernan. Why do we make mistakes when it comes to processing perfectly objective financial data that can be easily calculated by one and all in repeated experiments? The easy but absurd answer is that we seek out data to satisfy our desires. Indeed, the research departments of many banks were looking for data in 2007 and 2008 to show that things were fine. Central banks were doing the same. This is a natural human weakness not only in financial fiascos but also in corporate, religious, and health-related issues. We use our five senses to receive sensory data that is in fact subjective and that can satisfy inbuilt biases and beliefs about ourselves. As Martin Heidegger put it in a profoundly simple way, “Desire creates perception.”
Why do we seek data to support our desires? We have a genetic fear of being left out!
What is the starting belief about ourselves that is inbuilt, genetic, and all too natural? We are social creatures and we want and need to belong. Therein lies the foundation of financial bubbles. So much research points in the direction of the stark reality that we just do not want to be left out. We would rather be wrong than alone. We need the group to make sense of ourselves, so without the group we are missing something. Heffernan goes into fascinating detail on the genetic foundation of belonging in her book. We are, all too often, at the mercy of our genes without knowing it. It takes a great deal of strength and insight to go against the tide. Warren Buffett said you should buy when others are selling and sell when others are buying. Alas, Heffernan makes the fascinating claim that our genetic makeup tells us to belong and fit in. This is the core of so much human misery. We do things because others are doing them and not because they are smart or wise.
The corollary to this is that if the group says something is good for me, then the group knows better than I do. Both Tuchman and Heffernan make the point that we are designed to obey and fit into the group whose decisions we would rather adhere to than be exiled. So, when a financial bubble comes along, we jump straight into the center of it and we ride it into oblivion for the simple reason that everyone else is doing the same thing. Myriad examples in Heffernan's book show that we are genetic lemmings whether we like it or not. One striking example is an asbestos mine in Montana which Heffernan visited. Even with overwhelming evidence that asbestos is bad for humans—and with many of the town's population dying of lung cancer—the vital need for employment and the power of the group astonishingly caused the people of the town to continue to work in the mine until it was shut down by the government. Heffernan asked many of the townspeople why the owner of the mine offered to give free lung X-rays each year. The people she interviewed thought it was because the mining company was looking after the miners' interests. This is a chilling example where the group can cause people to take action that is in direct opposition to their own interests.
Human Folly: Believing in Something Is Better than Believing in Nothing, and Injustice Is Better than Disorder
Let's dig down a little further and see what other forms of crowd delusionality are at work in bubbles. Many other absurd forms of thinking can be derived from following the group without any reflection. We saw that the group offers a context for meaning. It offers safety. It offers a belief system of what can be seen as good and bad. So—the group should direct us. Right? Most of the time this is correct. But often this can go off the rails when it comes to excessive greed, religious fervor, racism, or plain cruelty.
The common misperceptions that cause people to be dragged into financial bubbles revolve around a few core beliefs. People are not so much gullible as they are designed to believe that the group knows better than they do. The corollary of this is that the group should direct us. Furthermore, we are designed to avoid conflict. Another corollary is that wrong beliefs are better than no beliefs. If all of my friends believe that house prices will go up forever, then we should go along with this.
In bubbles, there is an air of invulnerability, and the naysayers must be discredited.
Another of these core human beliefs is the following: Injustice is better than disorder. Order, therefore, is better than justice. If people think that orderly accumulation of as much credit as possible for as long as possible is a good thing, then so be it. If society says that the accumulation of credit is a social good that is to be pursued for its own sake, then why question this? In bubbles, there arises an air of invulnerability. The project, the bet, the trade, and the investment simply cannot go wrong. So, why not borrow and use leverage to increase the bet? (When I was inside Lehman Brothers in 2007, this is exactly the way it felt.) Those who are on the outside and warn about the consequences of an excessive buildup of debt can be ignored because they do not understand the “group.” They just don't get it. Those who protest can be ignored, delegitimized, and pushed away as being fools. “We get it and they don't.”
When this group psychosis takes over, issues of prudence and justice are thrown out the window. And as principles are thrown out the window, as Tuchman demonstrates with many examples throughout history, when the group makes mistakes, a delusional psychosis takes over and the group protects itself against mistakes at all costs. No one wants to find the source of the problems or to learn from past mistakes. So, any mistakes are covered up, dismissed as random pitfalls. Or, they are called black swans, which can't possibly happen again. The ex post facto justifications in financial bubbles are precisely a sign of the bubble and not an excuse for why thinking went wrong.
While in these financial bubbles, the group psychosis becomes very rigid. In his prescient article in the New Yorker on the Chicago School of Economics, John Cassidy makes exactly this point.1 The Chicago school had gathered so much credibility and confidence over several decades that it became a power unto itself, with no one around to ask questions. No one was asking why a school so famous and revered kept on failing at predicting recessions and downturns. No one asked why the Chicago School did not even use credit in its models. No one was asking questions—and they were living in a bubble. When I wrote about the dangers of a rapid buildup of debt prior to the bursting of the Asian bubble in 1997, people in my firm wanted to have me fired and the financial secretary of Hong Kong called me a “second-rate hack analyst.” The group will go a long way to destroy those who point out the bubble. This is true in finance, religion, health care, auto safety, and many other endeavors. The Cassandra or whistleblower needs to be destroyed for the group's delusionality to be maintained. (Cassandra was the daughter of the King of Troy and warned him not to let the Trojan Horse enter the walls of the city or Troy would face total destruction. Cassandra was thrown from the walls of Troy, and Troy was destroyed when the Trojan Horse was allowed into the city. We always kill the messenger.)
We jump into bubbles because we crave conformity. We are designed to adapt to the habits of our peers. (Heffernan makes the point in her book that belonging activates opioids for our brains as a genetic reward for “hanging in there.”) The group offers meaning. And the group actually does help, a lot of the time. But excessive fitting in, when taken to extremes, causes people to become blind to risks. The meaning offered by the group means I need to seek out data to confirm my beliefs. No one wants to be the bearer of bad news, and this goes right to the top. The top brass do not want to hear the bad news, so the Cassandras are killed off. The absence of vigilance and excessive risk-taking are, according to Heffernan, a kind of group derangement.
When we are tired, we are even more prone to join the group, because we are too tired to think for ourselves
In the workforce of banking, there has been a terrible ethic of overwork for the sake of overwork. This causes what Heffernan refers to as economized thinking. When we are tired, we economize, and the first thing to go is our social and ethical thinking. Tired minds are gullible and morally blind. So, believing is easier than doubting. A tired mind is obedient and unquestioning. We focus on order. We ignore consequences. Authority becomes our conscience. We follow the “true believers” and we learn the short-cut language to fit in. Is it any wonder why so many chronically overworked people in banking (and these people often come from great families and previously had well-functioning moral compasses) end up making terrible ethical choices that, over the years, have wrecked the reputations of one bank after another?
In this kind of deluded dynamic of chronic overwork and tiredness, we give up seeking out risks. Heffernan makes the case that this not only happened in banks but also at British Petroleum. We have selective bias. Our imagination fails us as we stop considering worst-case scenarios and we stop having contingency plans. This was in fact the conclusion of a government study that examined why the Federal Reserve failed to see the whole crisis coming. The conclusion of the report was that the Fed failed in that they had no contingency plans. Their collective imagination was nowhere to be found. They did not see it coming because they were in a collective psychosis, such as the ones described by Tuchman and Heffernan. No one has a monopoly on truth. And when we are overworked or tired—whether it is a derivatives trader in New York or an oil rig worker in Louisiana—judgment falters and we make mistakes.
11 Rules To Avoid Getting Pulled into a Bubble
When we attack the messenger or try to discredit any criticism of our own self-constructed bubbles, we are trying as a group to discount important data points that will help us make better decisions. This elimination of the facts that do not correspond to our worldview (or bubble or delusion, call it whatever you like) is referred to as cognitive dissonance. How do we avoid cognitive dissonance, and how do we avoid getting sucked into bubbles? Avoiding this pitfall is the key to long-term wealth creation. The reason is simple. Markets are designed to kick us in the teeth. They only ever bottom out and rise after every one has sold (i.e., when there are no more sellers). And they only ever peak and begin to fall after every one has bought the market (i.e., when there are no more buyers, markets cannot go up). Good investors must think counterintuitively and go against the grain. Susan Cain's book Quiet is also excellent in this regard, for she asks us to acknowledge the outsiders, the introverts, and the Cassandras who may have better insight than the noisy and overconfident alpha males. This is the same idea that Warren Buffett propounds: Buy when others are selling, and sell when others are buying.
If we combine the wisdom of Tuchman, Heffernan, and Cain, we arrive at some sturdy principles that can offer great wisdom to avoid getting sucked into credit bubbles at precisely the wrong time.
Rule 1: Listen to the Cassandras
Those people who have investment committees for private equity, long-only funds, or hedge funds can also benefit from the combined wisdom of these three women. As difficult as it is, every voice should be heard in the investment committee. The Cassandras should be included at all times. And those who are introverts should always be included, for it is often the introvert who has the best insights. Cain's observant insight is that something like 40 percent of us are introverts, and introverts often consider themselves outsiders and have a unique view on events and the interpretation of these events. Listening to the extroverts all the time is liable to get people into trouble.
Rule 2: Be Aware of the Limits of Your Knowledge
As with the Chicago School, it is wise to keep vigilant about the limits of knowledge. The group should always seek to identify its limits and should always have a devil's advocate to argue the opposite view. The Federal Reserve failed in this regard. The staff did not explicitly encourage opposing views. They did not scout the horizon.
Rule 3: Acknowledge Cognitive Dissonance and Be Disciplined in Debate
This does not mean that there should be an unfocused free for all. Dissonance needs to be structured and practical at all times. Cassandras need to be practical as well. Intellectual bullies should not be tolerated. They destroy the fabric of the group over time. Politeness and a sense of humor should dominate the group investment process at all times.
Rule 4: Create an Atmosphere of Fun and Adventure, Not Fear and Intimidation
During times of great change, people are fearful and confused and are more inclined to allow the group to make decisions for them. A key virtue of the leader is to instill a sense of calm and remove fear as the driving force in decision making. This is because a fearful mind is in lockdown. It does not change, because it does not know how to change. Leadership in an investment committee—or in the battlefield—is all about getting people out of that fearful lockdown and motivating people to take sensible action. In this kind of environment, people need to feel rested and free of fear. A sense of humor is vital in the process of moving people out of fear and into action.
Rule 5: Always Use Examples and Be Concrete
Another vital element of getting people out of fear mode is to use tangible, concrete examples of action that can be taken and that will offer clear options. Putting forward clear examples of how to change and focused means of resolution of conflict is a key element of moving people from fear into a more relaxed mode of change.
Rule 6: Don't Fight a Mob! Have an Executive Committee That Makes Decisions
Openness, Cassandras, controlled conflict, and open disagreement are all important elements of change and healthy progression toward forward movement and smart decisions. There is another element to this as well: It is never wise to fight with a mob. Mobs have a will that can become unruly and destructive. They take on a life of their own and can trample common sense and wisdom. The head of an investment committee needs to have a cadre of trusted leaders who can draw from the resources and occasional wisdom of an unruly mob and come to sound conclusions in a smaller group away from the noise and the haste of conflict, disagreement, and controlled chaos.
Rule 7: Always Go Home at 6:30 P.M. to Prevent Exhaustion
It is becoming all too clear that long hours have a strong tendency to backfire. When we are tired, Heffernan contends, there is a strong tendency for the part of the brain that controls moral judgments and long-term thinking to go on strike. At the same time, the part of the brain that becomes very active is the “flight or fight” limbic system, also known as the “lizard brain.” This part of the brain focuses on conflict, short-term survival, and basic needs. Long-term planning and a solid knowledge of consequences go right out the window when we are tired. This is especially true when decision-making drags on late into the night. These kinds of sessions tend to backfire. It is always wise to let people go home early and have a chance to recharge and make decisions in the morning.
Rule 8: Volunteerism Is Vital to Keep a Moral Compass
There is another part of this discussion that is vitally important. Too many people in the financial industry work so much that they do not have any kind of outside interests. In particular, they fall out of society in very basic ways, in that they fail to maintain themselves as a part of a community. This includes giving back and offering some form of volunteerism during which people can both contribute to society and feel better about themselves. Volunteerism seems to refresh the soul and offer an improved sense of self-esteem, which feeds into better judgment, a sense of fulfillment, greater calm, less fear, more self-confidence, and a healthier outlook. All of these should be considered ideal outcomes in that they create more productive employees who are happier and create a work environment that is conducive to sound decisions, better cohesion, less selfish behavior, and an overall improvement in team spirit. No one loses from this ideal.
Rule 9: Watch Out for Telltale Signs of Insularity and Groupthink
A few other danger signs of group insularity that are indicative of an organization heading for trouble are:
- When people speak in coded language, and when the environment encourages anxiety about not fitting in.
- When there is a sliding scale of moral thinking and people begin to take unprecedented risks; this is all too common in the investment process and needs constant vigilance.
- When consensus is a desired outcome and when working for its own sake becomes the norm; people should remain focused at work and go home at a sensible hour.
Rule 10: Get The Data and Resources You Need to Make Good Decisions
When people do not have all the information and all the facts—and when they live in delusion or denial—they are impotent and powerless. They undermine the strength of the group and are bound to fail. This is a group that is blind to alternatives. It is a slave to events.
One of the great reality checks of all time comes from the political analyst and Pulitzer Prize winner Ted White. He wrote the seminal book on the 1960 U.S. Presidential election, in which John Kennedy beat Richard Nixon. His thinking on politics and international affairs, including disastrous decisions made by the U.S. government in Vietnam, led him to three conclusions about what constitutes good strategy:
- Do I have the right personnel and partners? If not, get them. Remove weak or ineffectual leaders quickly, as they can drag down an organization. Promote good talent quickly.
- Do I have the proper instruments and resources to succeed? If not, get them. If the resources at my disposal are insufficient to get the job done, then they must be acquired or the team will end up spinning its wheels and “working the levers” rather than working toward an attainable goal.
- Do I have clarity of objectives? If not, move on. One of the main themes of Tuchman's thinking about folly is that, all too often, institutions inherit thinking and ideas that are simply outdated, wrongheaded, or inappropriate for a new set of circumstances. New regimes should focus on questioning every one of the main assumptions and objectives of a previous regime to make sure that new developments, data, or important trends are incorporated. In this way, the organization can be free of outdated or idiotic assumptions. This is especially true for portfolio managers who take over the portfolios of discredited predecessors. A major overhaul of assumptions is often required.
Rule 11: Always Beware the Sunk Cost Theory and Change Course When Necessary
Ted White described in crystal clear language the idea of sunk cost theory. It matters not one single iota how many resources have been poured into a project if the means, the manpower, and the objectives are out of whack. Projects must be constantly reviewed on a quarterly basis, and new leadership, resources, and objectives should be put in place if the old ones do not make sense.
The whole point of promoting vitality in organizations is to encourage robust and dynamic decision making in order to keep the group on its toes and beat out the competition with better ideas, agile implementation, and smart thinking. The avoidance of bubble-think and delusionality precisely means allowing honest dialogue at all times. This means that a crucial way to avoid getting into bubbles is to welcome the whistleblower. The whistleblower is the Cassandra.
Conclusion: Cassandras must replace delusions with a new vision
Be a Cassandra when necessary, but be politically astute while doing it. Avoiding being suckered into a financial bubble or debt-fueled nonsense often means listening to the introvert. Introverts are often the outsiders. He or she may have had a difficult childhood or may have felt different his or her whole life. Introverts are observers and often have great insight vis-à-vis the happy-go-lucky extrovert who always seems to fit in. Susan Cain's book Quiet is an excellent description of this phenomenon. She lambastes business school models that train people to be aggressive and listen to the loudest voice in the room. In fact, the introverted quiet person may often have the better insight. They may have a truth worth knowing.
The problem with observant introverts and impolitic Cassandras is that, in their enthusiasm to bring forth painful truths, they trample on people's beliefs in ways that reinforce fear and cause people to get backed into a corner. Like a caged lion, people can lash out against those who are bringing forth the unvarnished truth. This can damage the organization. People who want to warn against stupidity, a bubble, a debt disaster, or plain bad thinking must have some political savvy and diplomacy, because they are bringing forth truth that destroys illusions. People whose illusions are destroyed must have something with which to replace the truth. The definition of an iconoclast is a person who “breaks an image.” There must be a new image or a new vision to replace the old one as it is broken apart. Cassandras have a role, but they need to be managed.
Are global banks in a delusional bubble with regard to a revolution in financial technology? Yes! In the next section of the book, we will see how being in a comfortable bubble (in a safe cocoon of status quo thinking) is getting many banks into very serious trouble. Imagine if banks like HSBC, Standard Chartered, or Deutsche Bank took the 11 steps outlined above after some senior changes in management. Imagine how much they might change if they revisited all of their assumptions! Imagine how much new life they could breathe into their organizations.
These banks speak in their own language. They have an insular culture and are disinclined to change. They do not review their core ideals and core values in order to see whether change is necessary. They are so big that many wonder if they have the DNA to change. They are closed off to alternatives. They are not interested in reform from the inside. (Contrast this to firms like Goldman Sachs, which are constantly exercising internal reforms, technology upgrades, and talent improvement.) Many of these large behemoth banks are not paying attention to the Cassandras who are warning about the threat from financial technology. In fact, these banks are dismissing or outright attacking pundits who warn about the threat coming from firms like Lending Club, Alibaba, Paypal, and Kickstarter. This is what happens when people are in bubbles. The behavior of the banks is precisely the behavior of entities in a delusional bubble. They are asking for inevitable decline without taking the 11-step test as shown above. It is bad banking not to know how to fix your financial institution. But the greater danger is delusional or deranged thinking, which includes (1) attacking the Cassandras; (2) using insular and coded language; (3) refusing to question basic assumptions; (4) being unable to implement major strategic reviews; and (5) not jettisoning what does not work in favor of new technologies.
John McFarlane is coming to the helm of Barclays in spring 2015 and is expected to make radical changes. I believe that the reputations of many banks have been tainted, and that the current leadership of many global investment banks needs to go. When new leadership enters the game, it is likely that a more radical agenda will be set and that banks will then adjust. Some banks are already doing this, and the equity market is rewarding them. That is what the next section of this book is all about. Who among the banks is ready to embrace the Cassandras, and who among the upstarts is coming along to drive those who live in comfortable bubbles out of business?