Saturday, March 31, 2012

Lecture Tour of six US cities, April 2 to 18

I leave tomorrow morning for a lecture tour of Houston, Chicago, Atlanta, Philadelphia, New York and DC. Details:

Follow up tour being planned for *other* US cities in the Fall (October or so), and IndUS Forum is reaching out to partners right NOW for that: temples, universities, business groups interested in learning about Indian spirituality

If interested in partnering with IndUS Forum for a lecture in the Fall, please contact: Sphere: Related Content

Thursday, March 15, 2012

Will Goldman Sachs respond to criticism - or does it need to?

Is the future of Goldman Sachs in two sets of hands: its own, and those of the market? No, the future of the firm is actually in three sets of hands!

Here's the background: yesterday, something like $2bn were wiped off the market value of the firm after Greg Smith, one of its own Executive Directors, described the firm's culture as having become 'toxic' (in his very public resignation from the firm, in his open letter published in the New York Times a few days ago, where he claimed that the company now cares more about its own profit than about what is good for its clients as it did earlier).

Smith's accusation of that decline in the firm's moral fibre parallels the decline in most other financial services firms. That may explain why its shares plunged only 3.4 per cent in New York trading yesterday.

So does the future of the firm depend on two sets of hands (its own and those of the market), because the firm can choose to reform itself (probably unlikely given that the damage is only 3.4% and could lessen over time) and the market which clearly has a role to play (it could penalise the company even more if it is seen not to reform)?

Well, whether the market actually does so will be an important indicator of whether the disease is in fact as widespread as I suggest (the market is not going to do much more if there are no firms that have a better corporate culture; portfolio theory-based financial allocation means that a certain proportion of every portfolio is going to be invested in the financial services sector anyway - and, if every firm has similar moral toxicity, that gives portfolio allocators little choice).

That is why the future really lies in the third sets of hands: legislators and regulators. What can legislators and regulators do? They can try and get at the systemic roots of a public and financial services culture which is now anti-commercial and anti-human.

That is what legislation such as Dodd-Frank is about, however clumsy it may be.

However, regulators are still trying to negotiate their way between the requirements of such laws (and common agreement about the sorts of things that are necessary) and intense lobbying by the industry, in additon to its public bleating about how much it is going to cost and how it is going to slow down growth.

Is it going to be costly? Yes. But there is a certain cost to being in any sort of business, and if the costs hits the whole industry uniformly, then it is not going to be a factor changing the fortunes of the industry as a whole or of individual firms within the industry.

Is such legislation growing to slow down growth? Marginally, yes. But the legislation and regulation is equally, or to much more than that extent, going to put the economy on a more stable basis and actually even out corporate earnings by putting them on a much smoother path.

It really boils down to this: the financial services industry would rather that we have the equivalent of the wild swings in the weather that we have seen over the last few weeks in Switzerland. By contrast, those of us in favour of commonsense would rather have more stable and predictable weather conditions.

If the overall environment is conducive because of a more stable environment, financial services firms will be much more likely to be able to modify their culture to suit. On the other hand, if the overall environment is not conducive because of wild swings in economic and financial conditions, then it is not only Goldman Sachs that will continue to have a toxic culture but all financial services companies, because "toxicity" is a precondition for success in the existing environment. Sphere: Related Content

More "pay for NON-performance" or employing the right kind of people?

It is quite striking that almost all new hiring at Board-level continues to be for higher and higher sign-on bonuses and for bigger and bigger salaries, even BEFORE the person has proved herself or himself in her or her new job!

The British call this the "fat cat" syndrome.

This morning I had reason to recall the research done by Professors Margit Osterloh and Bruno S. Frey (both of the University of Zurich's INSTITUTE FOR EMPIRICAL RESEARCH IN ECONOMICS) which said:

"Corporate scandals are reflected in excessive top management compensation and fraudulent accounts. These scandals cause an enormous amount of damage, not only to the companies affected, but also to the market economy as a whole. As a solution, conventional wisdom suggests more monitoring and sanctioning of management. We argue that these efforts will create a governance structure for crooks. Instead of solving the problem, they make it worse. Selfish extrinsic motivation is reinforced. We suggest measures which clash with conventional wisdom: selecting employees with pro-social intrinsic preferences, de-emphasizing variable pay for performance and strengthening the participation and self-governance of employees. These
measures help to increase intrinsically motivated corporate virtue and honesty"
(published in: Ganna Grandori (Ed.) (2004). Corporate Governance and Firm Organization, Oxford; 191-211).

Apart from their own work in that chapter, here is just one piece of research quoted by them: "it is ...difficult to document that the increase in stock-based incentives has led CEOs to work harder, smarter, and more in the interest of shareholders.” (Murphy, K.J. 1999. Executive Compensation. In Ashenfelter, O., & Card, D. (Eds.), Handbook of Labour Economics: 2485-2563. Amsterdam: Elsevier) Sphere: Related Content

Monday, March 05, 2012

Response to my tweets about the situaiton in Libza

On Saturday, I twittered about the situation in Libya, drawing attention to a story that highlights not only the war on Muslims in Libya by Islamists, but also the desecration of war graves by Islamists in Libya, and the incredible ignorance of so-called "experts" in the UK, the USA and I suppose the West generally.

For the story, click

In response to my Tweets, the following response came in to me from Bradley Olson: "US / UK colonialism hand in glove with Wahhabi folks is working rather well in Saudi, I expect they hope they can do a similar thing in the wake of the "Arab Spring"". Sphere: Related Content

Friday, March 02, 2012

Switzerland may become the first country in the world to have only white money

Every country has a certain amount of black money, however small or large.

Under new rules proposed by Switzerland’s Finance Minister Eveline Widmer-Schlump, Switzerland could become the first country in the world to have only white money.

Swiss banks would be required not only to obtain a declaration from their foreign clients confirming that their assets held in Switzerland are correctly taxed, but Swiss banks would also be required to investigate cases of suspected tax evasion, or cases involving, for example, cash payments from an unknown origin.

How this will fully work in practice remains to be seen, but it has actually been increasingly the case anyway (see

Interestingly, this is so little known outside the world of banks that Wikipedia doesn't even have an entry on it.

For example, the concept of "politically exposed persons" (PEPs) was invented in Switzerland and popularised because Switzerland took it to other parts of the world, so that PEPs now find it increasingly difficult to park their money abroad.

The Swiss Finance Minister's proposals have been debated widely in the country and, so far as I can see, there is no opposition to them at all, though some people are concerned that Switzerland should not move unilaterally too fast. Of course, if Switzerland moves slowly and waits to have global consensus, that will still mean that Switzerland will have led the way, but it is better for it to move fast and become the first country to have such legislation for all clients.

There is a similar model already in operation in Liechtenstein, but that applies only to British clients.

Why is there so much support for the proposals from the Swiss banking community? Because Switzerland still has more of a moral sense from its Protestant heritage, and because the Swiss are convinced that, in a genuinely level playing field, they can outperform competition from other countries in terms of banking and financial skills, so that foreigners will continue to park at least a part of their assets here.

In fact, there is plenty of evidence that many people were earlier not putting their money into Switzerland at all, because of the popular suspicion that there was still huge amounts of black money here. Of course, there were always people who have declared their money and paid their taxes who put their money in Switzerland, but with the decline of suspicion regarding Switzerland, many more such people are feeling encouraged to put their money in Switzerland .

Why would they do that? Because commonsense tells you that it is not wise to have all your eggs in one basket. So white money will continue to flow into Switzerland on the best possible and only sustainable basis: portfolio diversification, currency diversification, political stability, and sheer quality of expertise and service.

In fact, many Swiss banks feel that much more money will flow into Switzerland once it becomes clear that all the money here really is white.

Meanwhile, the US is now (or soon will be) the largest holder of black money in the world. Who is going to force the US into cleaning itself up? Sphere: Related Content