46 “As long as the music is playing, you’ve got to get up and dance”

Posted on January 11, 2012 by

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Charles Prince, the former Citigroup chief, justified taking his bank to the edge of ruin with these words.

The man thus portrayed himself as being under twofold constriction. First it was the music playing, then the “others” dancing – so much for a CEO, who got hundreds of millions of $  per year for “deciding”. He admitted he was doing nothing more than follow the “piper’s tune”.

But is it true, is “following the piper” and “do as others do” – to the bitter end the only strategy worth pursuing?

When I was at UC Berkeley, Wells Fargo Bank was second to almighty Bank of America. In those days the signature of Wells Fargo was still the stage coach – now such nostalgia has yielded to a red square. The bank had a whiff of the AVIS slogan to it – you know “we try harder because we are Nr. 2”.

Many things have come and gone since then in the financial world. Financial wizards blitzed Wall Street with complex ways to make money from shunting it around, as if banks were not first and foremost pumps taking money where in the real economy it could best be used – like water in the desert, making it bloom. When you circulate water you worry that nothing get lost on the way – you do not expect it miraculously to swell up without end. It was like intending to feed the crowd with a few fish and lumps of bread.

Well, it was (once more) no more than gambling, trying to make money with money, rather than putting money to good use.

The costs have been horrific. Here just a few of the consequences:

  • Much capital was put into housing – durable goods, but consumption goods nevertheless. This capital did not go into making the economy more productive;
  • As capital went into banking and houses, industrial production migrated abroad, and labour skills were lost, not to be replaced;
  • The best brains went into delivering ever more complex financial instruments – rather than support innovation in the real economy;
  • When the bubble burst taxpayers were landed with the bill. The banking system was “too big to fail”;
  • As the value of their homes declined, what little capital workers had invested in their overpriced houses went out the window first. Selling and moving to where a better job is beckoning became well-nigh impossible – for they no longer have had starting capital to resettle with. Labor mobility, one of the great strengths of the US economy, seems to have declined significantly (Iam told from the trenches), making a recovery more difficult.

The bubble inflated greed. Creativity yielded to corruption – in massive amounts. At the moment law-suits for about 190 billion $ have been lodged, and litigation will keep fattening corporate lawyers for years to come[1]. Former employees, fearing jail, are revealing the gory details in exchange for immunity. This may represent a further drag on recovery, as provision is to be made somehow for judicial outcomes. Renewed trust will be hard to come by.

And where was Wells Fargo – the ever-striving Nr. 2 – in all this? 19 lead banks “followed the piper”- but not Wells Fargo.  The bank is free of lawsuits with regard to the subprime bubble. The former Nr.2 has meanwhile become the largest bank in the US in terms of capitalisation[2].

How come? I don’t know for sure, but my guess is that it has much to do with one man who did not “follow the piper” – but followed what he thought was right in the long term. The man is Warren BUFFETT, whose company is an important shareholder in Wells Fargo.

I argue sometimes uncertainty is so pervasive that action is little more than gambling. I argue often that we live in and of illusions. This may be true, but it seems also anecdotally true that one is able to see through the fog of the future and chart a strategy.

How? My guess is by letting the actor not stand in the way of the act – doing the right thing as reality – not one’s ego – tells it.

My hat off to you, Mr BUFFETT.


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