The Contrition of the Bankers - the Rules can't save you now

Resign or go commit suicide...

"Come before the American people and take that deep bow and say I'm sorry. And then either do one of two things, resign or go commit suicide," said US congressman Chuck Grassley in a radio interview.

He was discussing AIG, a large US insurance company recently bailed out for billions of dollars, and apologised later for the heat of his language. Many people probably feel that he was too polite.

It must be very cathartic to lay all of the blame for the financial crisis at the doors of bankers and investment brokers. No-one has yet asked how it is that a single industry has managed to attract nothing but liars, lunatics, imbeciles and pathological hucksters while the rest of the world is filled with wide-eyed softies who have been taken for a ride.

Point is that the banking community is still comprised of people not unlike any other part of society; in parts filled with kind souls, mournful mutterers, soccer-moms, hipster wannabes, old-timers waiting for retirement and whatever other social class you can lay your hands on.

The disaster in the banking sector is deeper than the vapid demonization of a few men, and contemplation of that disaster should give thoughtful people the tremors.

Banking is no less a complex industry than are hospitals, schools, factories, and farms. Where ever large groups of people are managed in order to produce a product, or serve a customer, only a small number of people are at the coal-face.

Call it the Iceberg Enterprise. You only get to see a small amount of what is really going on.

In order to align all the people at various levels of the organisation with the bits that are visible, we use management theory. So we divide companies up into profit centres and set staff measurable targets, giving them incentives to hit those targets. Then people play by those rules.

All these rules seem sensible at the time they are written, but the net impact is small inefficiencies that degrade the whole.

Governments promote local business by raising tariffs on some imports, but that increases prices and hurts the poor. Subsidies are used to promote motor manufacturing, but leads to global overcapacity and lower profit margins for some companies. Buying cheaper products in one department causes lower quality device failures in another.

Sales-lead businesses are at even greater risk. Reps are given specific targets which they must reach or risk getting fired without pay. This is how banking got itself into trouble; massive targets for deal-closure. Staff hit them, at the price of making credit easier and easier to get.

So we demonise bankers.

But most businesses and organisations are structured this way. All of these actions lead to economies that lean dangerously out over the edge until, eventually, they fall.

Charities have professional fundraisers who collect cash in a similar way; no-one ever asks if the charity concerned can actually absorb the cash so-raised. Many cannot, and rot soon follows. The US health service is one of the most expensive and inefficient in the world. Medicaid is all but bankrupt, and will be finished off once the baby-boomers retire. France pays the highest agricultural subsidies in the world based on income from the EU, paid by Germany.

Everyone is hitting their targets.

Banking just happened to fail first. Unsurprising, really, since banking is at the cutting edge of all these bright new management ideas.

However, in singling out bankers, in treating the problem as if it is only to do with capital and finance, the underlying problem is being ignored.

The fundamental way in which complex organisations are organised and the way in which goals are set needs to be reviewed.

Otherwise, in a few years, maybe we'll be witch-hunting some other unfortunate industry who today are considered "Masters of the Universe".