Two interesting articles about Wall Street and the banking crisis appeared recently. A story headlined “It Wasn’t Me” in the October 10th issue of The Economist suggests that instead of declaring banks “too big to fail,” we should recognize such institutions as “too big to run.”
The story notes that many ousted bank executives seemed to have no idea what went on in the numerous divisions ostensibly reporting to them. “Bank of America’s assets are now ten times those of Exxon Mobil, America’s most valuable firm. A balance sheet of $2.3 trillion is beyond the ken of mere mortals.”
The other article was a humorous editorial by Calvin Trillin for The New York Times. According to a wise man Trillin met in a bar, Wall Street got into trouble when student loan debt drove top students to Wall Street, formerly the destination for the bottom third of his class. “That’s when you started reading about these geniuses from M.I.T. and Caltech who instead of going to graduate school in physics went to Wall Street to calculate arbitrage odds.”
The themes of these articles crossed paths as Trillin’s martini mate explained that the chief-level big shots on Wall Street were from the bottom-third-of-the-class generation. The new generation of whiz kids invented derivatives and credit default swaps, overcomplicating the business of banking beyond the understanding of their bosses. The Economist notes that “Citigroup’s boss reportedly learned of its $43 billion of toxic assets only in September 2007.” However big a company grows, it’s hard to imagine not knowing where $43 billion of the assets are invested. Banking and brokerage businesses need not be so complicated.
These articles remind us that the complexity of an organization matters more than its size. Exxon Mobil is indeed a huge enterprise, but a relatively simple business focused entirely on energy. We remain wary of General Electric, on the other hand, not because of its size, but because it is a complex web of seemingly unrelated companies that has a massive debt load and is heavily reliant on inexpensive borrowing. At some point CEOs must accept the role of the “mere mortal” and simplify the business to allow greater oversight, also known as management.