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Daily Archives: June 7th, 2009

Rome could not be conquered. It destroyed itself from inside. The afterglow of Rome’s strength remained for about another 200 years, and kept the barbarians at bay.

Wall St., the New Rome, had reached the power and stature of old Rome, but on a much grander scale. And in 2008 New Rome fell from grace. Here are 3 inferences why.

Abuse of Strategy: Up to 2007, we thought of Wall St. firms as excellent well managed companies, the crème de la crème of American Capitalism, but as of 2008 we know that their management teams had bled their future sustainability by maximizing profits today at any expense. With hind sight, Wall St. firms chased mortgage products in the “mistaken” belief that they had securitized away all risk. Really? What happened to the risk-return relationship? I suppose that was conveniently forgotten?

In the strategy world this is known as harvesting. Harvesting is a correct corporate strategy in a mature dying industry, but not as a management game at shareholders long term expense.

Misuse of the Term Strategy: A few years ago, a very senior financial executive in the mortgage industry came up to me and said “you cannot use frequencies to estimate probabilities”! Makes you wonder if any of these finance types really had any understanding of the risks they were taking? History suggests that they did not.

The unfortunate reality in financial services, is that strategy is mistaken for a new formula (see Recipe for Disaster: The Formula That Killed Wall Street) or worse still a new IT system. Worse because without a design document and proper records and audits it is difficult to figure out what went into this IT system. These are not strategies.

At best they are tactics, more often they are business necessities. In the world of finance, understanding your formulae, your systems, and your risk methodologies are a pre-requisites of the business. These are not strategies. If anyone tells you otherwise they really don’t understand what they are doing. 

Finally, the really bad news, is that if a formula or an IT system is your company’s strategy, chances are somebody else on the other side of the market or the world has probably also figured it out and is using it against you.

Incorrect Strategic Implementation: Looking at Wall St., (not to blame them but they are rich with examples of how not to do it) many Wall St. firms had very high powered Market Risk, Credit Risk, and Operational Risk committees, and they still failed. This is like LTCM, with their two Nobel Laureates, all over again.

Lets not just point a finger at these committees. Wall St. collapsed in spite of Sarbanes Oxley Act of 2002. Wall St., collapsed 5-6 years after Sarbanes Oxley came into effect.

The point here is that implementation failed.

For Corporate Strategy advice, please contact Ben Solomon at QuantumRisk LLC. (Note fix email address)

Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.