hubris sucks
Posted by Jason Apollo Voss on Nov 10, 2008 in Blog | 5 comments
Hello everyone!
Wow! $150 billion for AIG! Unbelievable. That ‘s a hell of a lot of money. Who could have seen that coming? Well, interestingly enough there is one tell-tale sign that always underlies these sorts of colossal problems; from Enron, to Tyco, to Worldcom, to AIG. That tell-tale sign is: hubris.
Hubris is a behavioral disease that leads to extraordinarily bad judgments being made. Hubris is another way of saying that someone is extremely selfish and self-centered. What that means in the context of managing a business is that decisions are not made for the good of the shareholders, or even of the business. No, instead, decisions are made to feed the bottomless pits of very weak egos. The problem is that the holes in these executives’ lives come from within, but they have each decided to try and fill that hole externally. In the short and medium-term that’s a great thing for shareholders because these folks are usually very, very driven. That means that Jeff Skilling, Dennis Kozlowski, Bernie Ebbers and Hank Greenberg all did things to increase the success and, more importantly, grandiosity of their businesses. However, as the disconnection between a hugely successful business and a still deep-seated feeling of personal vacancy grows, the executives of these firms take even bigger chances. That is, they start doing things that are illegal in a desperate need to fill their hole. It’s as if they are ego-addicts and they need ever greater hits to feel good about themselves. [Feets don’t fail me now!]
In the case of AIG, and today’s situation, Hank Greenberg has been gone for 4 years, however he had nearly a half century to create the corporate culture that permeates the structure of AIG. Yikes! And how do I know all of this? I am a retired financial professional whose firm was one of the top 5 largest shareholders of both Tyco and AIG. While my firm was one of the largest shareholders of these two companies, I steered clear of Tyco in my mutual fund because Kozlowski always made me very uncomfortable. I wish that I could say the same thing about AIG, but I blew it for my shareholders there. I am confident that I would no longer make the same mistake, though. Why?
In our business-culture we love for our executives to have swagger. And there is a fine-line between swagger and hubris. But now I know definitively the difference and the signs that reveal the difference. Those executives possessed of hubris are derisive and insulting to those who question them, whereas those with swagger are not. I distinctly remember being a participant in AIG conference calls and having Hank Greenberg insult, cut down and chastise intelligent, experienced analysts that had asked good questions. This is inexcusable behavior. So as investors we should all be on the lookout for the evidence of hubris: insulting behavior whose intention is to degrade others in an effort to prop up the insultor. In AIG’s case hubris has cost the United States $150 billion! Buyer beware.
Smiles to you all!
Jason
Hello,
I picked up on your blog site after reading a comment left by you, on TMF web site; “AIG swings to 3Q loss, bailout is restructured”
I enjoyed your “Hubris Sucks” comment and blog post. I agree with your theory; comparing hubris to swagger, as it relates to a persons character / moral code, and give you an “atta-boy” for discovering / pointing-out the personality antonym. I’ve always been hung up / limited to “confident” vs “prick”. -smile-
Trying to better my education (at 52 years old), leaves me to bookmark your blog site.
I see in your intelligent writing, though early to tell, an ability called common sense. Rare these days, but necessary for my ability to relate.
Best Wishes,
Jon
Thanks for the kind words Jon about “common sense.” I hope to earn your continued trust.
Jason
Hi Jason, I’m glad you decided to start a blog. I’m certain there are many people that will find your experience beneficial and I hope that you enjoy blogging.
What do you think about the impact of the gold standard versus the fiat system of currency and how that impacts the advantages or disadvantages of ever increasing debt? (Not really even sure how to phrase the question, but Im relying on your economics skills to understand the question the Im tyring to ask.)
The reason I ask is that what comes to mind is that as we pump more money into the system Im thinking that asset prices will just simply rise, ie more zeroes on our dollars so that some day soon we might all be going to Vegas with $1000 bills in our pockets, what do you think?
Hello Steve W,
An interesting question and one that I was just asked by a New York Cabbie in September, so I have a semblance of an answer. I say, “semblance” because this is not an issue that I considered pertinent to my day to day job as a PM – I was, and am, a very “bottoms up” sort of investor. However, I do have an opinion on this.
The strengths of the “Gold Standard” system are typically described as being: gold is a real asset, not an invented asset; and that the supply of gold is fixed so the economy is less likely to be manipulated. Steve, is this sort of along the lines of what you were thinking? OK, so let’s address these points.
First off, although gold seems like a real asset of value, it really has limited utility. Its utility is limited to the degree to which it is coveted. Who covets gold? Fiances and electronics manufacturers predominately. In other words, the value of gold is that it is a pretty metal that resembles the glow of the sun. This is not very convincing to me.
Secondly, the primary difficulty with a “gold” standard is that it is subject to large distortions that typically exceed the distortions caused by a “fiat” system. With the principal distortion being that the gold standard is very sensitive to the supply of gold. So if there is a big gold strike in Siberia then the supply of gold will have increased tremendously.
Assuming that demand for gold is fixed, with increased supply, then you have deflationary pressures. Parenthetically, Russia also becomes more powerful. In fact the nations that are most powerful are those that have the most gold.
As you may know, deflation causes a few noteworthy problems. For example, if you are a borrower then you are legally obliged to make loan payments, and in a deflationary environment, that represents more and more purchasing power. How? Because your payments are fixed in an environment where prices are falling, so the asset you bought with the loan, say a house or car, is declining in price. So if you are the lender, chances are that your borrower will default the loan you’ve made. Does this make sense?
Another way of stating this is that deflation leads to a downward spiral. Businesses make less in profits. This means that they hire fewer people. This means that overall people will spend less money. That means businesses will make less money. And so on.
Imagine, too, you are in a deflationary environment as a consumer. Why buy that big ticket item now, when you know it will be cheaper in the future?
So what would intelligent governments do in a situation in which the supply of gold is sensitive to new discoveries of gold? That’s right they would hoard it so that they could control the supply and demand of gold. And hence the supply and demand of the money supply. This is not any different than the “fiat” system, except that in the “gold” system, the supply of money is ultimately fixed because the supply of gold is ultimately finite and fixed. But that is at the far extreme of: all the gold in the world has been discovered. However, because the supply of gold is finite, what would happen when people continue to invent great new business ideas and you and I discover new, better ways of managing our lives? The economy would continue to grow, but the supply of money would be fixed because it is tied to a fixed supply of gold. So what has to happen? That’s right, prices have to rise to accommodate the increased demand for money. So we have introduced inflation back into the system again. Does this make sense?
OK, so the first problem with the gold standard is that it assumes a fixed, and stable, supply of money. But it isn’t a fixed supply because it is subject to new discoveries of gold and manipulation by governments, too.
The second problem, is that gold is not as liquid as is cash. What that means is that its price is more easily manipulated. People do trade in currencies. However, those currencies are directly able to be exchanged into other goods and services. So, in other words, those cash assets are likely to eventually be spent and most currency market activity is actually due to international trade, not speculation. Gold, on the other hand, is not really directly exchangeable for other goods and services. This lower liquidity means that people hold gold as a speculative activity. The way to make money as a speculator is to hope and pray or to manipulate the market in some fashion. Thik DeBeers and the diamond market and how they keep diamonds off the market to manipulate their prices. I would prefer not to have the economy tied to an asset whose price is easily manipulated.
Of course, one of the underlying assumptions of the gold standard is that the public cannot trust government officials to adequately regulate the supply of money. There is certainly historical evidence of blunders. Interestingly enough, I argued on this blog earlier that Greenspan held interest rates too low for too long and that was the biggest reason for the real estate market implosion and resulting financial market meltdown. Effectively the Federal Reserve was printing money in excess of the eventual demand for the goods that that money was being used to create. In other words, ultimately the supply of houses, built speculatively with cheap money, far outstripped our demand for those houses. However, in general, I have confidence that economies adjust for such distortions…which brings me to my next point.
Economies adjust for the supply of money being changed. For example, if the supply of money is very high, or interest rates too low, then businesses will see large demand for their products. As a smart business owner, what do you do in this situation? You raise your prices. Witness the huge run up in home prices since the early part of the decade. When prices rise that usually chokes off demand and causes prices to stabilize. In other words, supply and demand mechanics usually work to equilibrate prices.
So what went wrong this time? Well, what went wrong is that interest rates were too low. So lending institutions took extraordinarily cheap money (as measured by low interest rates) and turned around to lend it to folks in the hopes of making more money. As we all know by now, lending instituions absolutely underpriced their risks. That’s a polite way of saying they were idiots. That’s a non-economists’ way of saying, “They acted irrationally.”
So to tie this rambling comment together. The idea behind a gold standard is that because we are dealing with a fixed supply of the asset, then money flow is restricted, this acts as a brake on irrational behavior. The problem is that makes the same assumptions as the “fiat” system. Namely, that people controlling the supply of money, or of gold, behave rationally. Neither system escapes the “irrationality” problem. However, the gold system introduces the problem of unanticipated distortion in the form of new gold discoveries as well as being tied to an asset whose price is able to be manipulated by speculators.
Whew! That is not the most succinct of answers. But it all boils down to: people are irrational and there’s nothing we can do about it.
Jason
…oh yes, and we hope that those who are irrational are not our leaders and bankers. Bummer for us!