PoMoCon, just across the toolbar, picked up on David Brooks’ paean to lack of imagination in the corporate world on May 21, aptly noting that it was a sequel to his earlier claim that anyone could be Mozart by practicing enough. I had excoriated Brooks for bait-and-switch, that is, claiming that Mozart’s genius was defined by the parlor-tricks he performed for money at a child, rather than by the compositional genius that unfolded in his twenties. No wonder Brooks has a big audience; the world is full of mediocrities who like to think that they might have been Mozart if they had practiced enough, or at least the CEO of a major company. According to a business consulting study Brooks likes,
The traits that correlated most powerfully with success were attention to detail, persistence, efficiency, analytic thoroughness and the ability to work long hours [...] warm, flexible, team-oriented and empathetic people are less likely to thrive as C.E.O.s. Organized, dogged, anal-retentive and slightly boring people are more likely to thrive.
Wrong, wrong, wrong. Mediocrity is what makes corporate America corrupt. I ran major departments of a couple of big financial institutions, including the global debt research division at one of the world’s largest commercial banks, with a professional staff of a hundred and thirty analysts. I also helped write the securities industry’s regulatory guidelines for fixed-income research, and hunted down offenders with the zeal of an Inspector Javert.
Reality is precisely the opposite of what Brooks’ consultants claim. Business consultants make their money by flattering management and Jonesing for its agenda. No intelligent person takes them seriously. Middle managers devour the work of “hot” business gurus the better to flatter their superiors, but that is a different matter.
Mediocrity breeds corruption. The business world is crawling with affable, industrious, intelligent people with nothing to distinguish them from ten thousand other affable, industrious and intelligent people, but who very much would like to be rich. Except by winning the equivalent of a lottery or marrying up, their chances of becoming rich are quite poor. They joint a fraternity at college to make contacts, and went to business school to network. They have no friends, only contacts, as their entire social life from freshman year onward has been a struggle to get to know people who might help them. They live in silent terror that they will fall off the corporate gravy train and never have the chance to clamber back on.
These are the people most inclined to cheat, for they know that they have nothing unique to offer the world, and their ascent depends either on luck or unfair advantage. They cheat in every way possible, whenever they have a chance. One way they cheat is to steal from the stockholders by front-loading profits and back-loading risks. That is what destroyed the banking system. At the top of the market in 2006-2007 when risk compensation was stupidly low, bank managers made their return-on-equity numbers by adding leverage on top of leverage. Every one of them knew that it was a dumb and dishonest thing to do, but they all hoped that they would be promoted by the time the problem blew up in someone else’s lap.
Dogged-as-does-it, steady-as-she-goes, unimaginative CEO’s of the sort Brooks’ praises sat in front of spreadsheets, demanding that their subordinates make their numbers. Without keen insight, they simply piled on risk just as the portfolio hit the fan. The most imaginative, intelligent, and daring firm on Wall Street, namely Goldman Sachs, took out massive short positions against the subprime market. So did J.P. Morgan. Wonder why they are coming out on top? About those who came out on the bottom, a respectable silence is appropriate.
There is only one truly effective way to control corporate corruption, and that is through creative destruction. Let the wild men, the warped geniuses, the chip-on-the-shoulder mad entrepreneurs loose on the established corporate world. Let big corporations go bankrupt right and left. Drive out mediocrity with the scourge of innovation. Let new companies emerge, and then go bankrupt when something better comes along. Real genius, as Heinrich Heine once rhymed, pays cash at the bar. The oddball entrepreneurial types don’t cheat. They see life as a game and want to play it by their own rules. They are out to prove that they are smarter than their peers, and to cheat would be to miss the point of the game.
For the average business school graduate, an entrepreneurial economy is a hell, presided over by a devil like Goethe’s Mephistopheles, whose job is to subvert complacency. This sort of economy has its own bubbles and crises, like the dot-com catastrophe of 2000. But that was a minor blip compared to the present mess, because it wasn’t done with leverage.
