Financial Stew

As America waits for the auditors to sift through the wreckage of the JPMorgan investment bungle, I have been trying to get my mind around the $2 billion “error in judgment.”  Changing lanes without looking over your shoulder is an error in judgment.  Having too many drinks is an error in judgment.  Wearing a striped tie with a plaid shirt is an error in judgment.  A $2 billion dollar loss in an unstable financial market has the potential to grow into a cataclysmic financial tsunami.  As the markets closed down today, I wondered how many aftershocks we would endure because of this “mistake.”

 As a young child, my parents were fond of teaching the meaning of the word “consequences.”  We all know that you don’t “cry over spilled milk,” but at the same time my father made it clear that “if you shoot a man dead, he’s dead.”  There is no “oops,” you don’t get a “do over,” and you cannot undo the damage by saying it was a mistake.   This was underscored by the anthem from one of my favorite TV shows of that era, Baretta, which reminded “Don’t do the crime if you can’t do the time.”

For the last several days, news chatter has resumed the talk of reform in the industry, but one word I never hear mentioned is “consequences.”   It seems to me that the pundits have missed the obvious solution:  tie executive bonuses to company performance.   No chief officer should reap a huge compensation payout if the institution fails to perform on their watch.  In much the same fashion as a captain that goes down with the ship, a CEO’s fate should reflect the consequences of his or her leadership.   Even better, bonus compensation should be escrowed—two, three, even five years—to ensure that published results stand up over time. 

I have never been a great financial risk taker.  Long ago I was told that only through great risks can you reap great rewards.  I used to be an executive at a Fortune 100 corporation.  We were always told that the people who made the most money in the company were the ones who took the biggest risks.   The CEO at the time evaluated the future prospects of his employees by looking at how close they lived to the edge. He loved sales people who were commission based, especially those who sunk all of their commissions into a new home they could not afford.  He looked for people who had expensive tastes like Rolex watches, Mont Blanc pens, and hand tailored suits.  He made it a point to walk through the company parking lot, finding out who drove the newest and most expensive cars. He admired and rewarded those who were "hungry" because he knew that these were the people who would help him drive up the stock price to his bonus target.

One day I was told that the CEO inquired to one of my colleagues about my husband’s career, wondering why he chose to work in academics rather than going into private practice.  He asked, “Couldn’t he make much more money in private practice?”  The answer was, ‘yes,’ but that my husband enjoyed the rewards of research and teaching.  By report, this made him shutter visibly with disgust. 

I spent almost thirteen years at this company.  It was gratifying to see our industry change in direct relation to the work we did.  I loved collaborating with clients and helping to forge the company’s strategic vision.  As I worked my way up the corporate ladder, the CEO kept questioning my “worthiness” as a key employee because my family’s humble lifestyle, to him, indicated that I was not hungry enough.   He did not understand concepts like intellectual fulfillment or personal integrity.   On the other hand, he certainly depended upon me to craft the company story that he related to the investor community. 

I admire those who have the ability to make sense—and money—out of investments.  I will never have the stomach to be a financial high flyer.  I need to see a direct relationship between the work that I do and what I get to put in my pocket.   I cannot help but think that a big windfall always comes at someone else’s expense.   I blame my father and his many lectures on consequences for this self-limiting ethos.

There is someone else I know who is spending a lot of time these days thinking about consequences.  That “former” CEO is serving four concurrent ten-year sentences in federal prison for securities fraud.  Clearly his aversion to my business values was an “error in judgment.”

Tomorrow's blog:  Bald Mountain