January 18, 2009
Career Couch
Making the Most of Your Workplace Mistakes By PHYLLIS KORKKI
Q. You realize that you made a terrible mistake at work. Your first instinct is to deny that it happened or to cover it up. Then you feel angry and defensive, and want to blame other people. Then you want to hide. Are these reactions normal?
A. It is only human for people who have made a mistake to have any or all of these initial reactions.
A mistake can contradict your view of yourself as an effective worker, creating cognitive dissonance, said Carol Tavris, a social psychologist and co-author of "Mistakes Were Made (but Not by Me)." You think, "On this dimension where I pride myself on my abilities, I screwed up? Not possible," Dr. Tavris said.
To reconcile these opposing views, the mind tries various forms of self-justification. Dr. Tavris said that this is "the protective process by which we get to keep seeing ourselves as ethical, smart and competent, and reject, ignore, dismiss or minimize the evidence that we were wrong."
That's when the lies, the blame and the defensiveness erupt. But these self-protective responses don't help you or your organization because they block any understanding of what went wrong, she said.
Not only that, but covering up one error can lead to more — and bigger — mistakes, until you are entangled in a mess you never intended, she said.
One key to handling errors effectively is to recognize they aren't necessarily a reflection of your native abilities and intelligence, Dr. Tavris said. Once you have separated the action from you as a person, you can work quickly to correct the error and move on.
Q. Still, you can't help thinking, "How could I have let such a stupid thing happen?"
A. "Mistakes will happen; that's a given," especially in complex work environments, said Amy C. Edmondson, Novartis professor of leadership and management at the Harvard Business School.
In any job that requires continuing thought and judgment, we need to be "aware of the huge potential of things to go wrong," Professor Edmondson said, because "we all can handle only so much cognitively at a time."
Because layoffs have shrunk the staffing of many businesses, "we need to recognize that we're more vulnerable than usual to mistakes," she said. "We should be encouraging people to speak up sooner rather than later."
Q. How do you start dealing with your mistake?
A. First, go to the people who are affected by it and apologize, Professor Edmondson said. Then work with them to correct the situation and come up with changes you can make so the error won't happen again. The sooner you come clean, the better — both for your peace of mind and the good of the organization.
"Stand up, turn around, do it now," she said.
Acknowledging a mistake is hard because of the fear of being perceived as stupid or incompetent, Dr. Tavris said, but keeping it inside can be an enormous psychological burden. "People are often surprised to learn that when they admit the mistake, not only do they feel better, but the response is often much better than they expected," she said.
Q. Can your manager affect the way you deal with your mistake?
A. Your manager and company can make all the difference in the world in the way mistakes are handled. If your manager is the type who will become angry at you for a mistake, you will be less likely to disclose it — and that wastes valuable time, Professor Edmondson said.
The best companies make it a policy to show gratitude and reward employees for revealing their mistakes, Dr. Tavris said. Workers and managers need to view a mistake "as an inevitable human step on the path to improvement," she said.
David D. Woods, a professor of human systems integration at Ohio State University, said managers need to make clear that "it's more important to share the information than it is to identify the culprit."
Occasionally, if a person makes many mistakes and cannot reduce them, a manager may realize that "this person is not well placed in this role," Professor Edmondson said. "That's not fun but it is a leadership job." Still, she said, she has found that this situation is rare.
Q. Can a mistake be a sign of a larger problem in your organization?
A. It's possible. You may view your error in very personal terms, but it may reflect a fundamental flaw in a company, a system or a product.
Professor Woods gave an example of someone who inadvertently hits "Reply to all" in an e-mail message, sending confidential information to a large group. This could well reflect poor design of the e-mail system, with "Reply" and "Reply to all" placed too closely together, he said.
Other examples of flaws, he said, are a breakdown in communication among departments, a fear among subordinates to question higher-ups and a failure to incorporate crosschecks — the way airline workers do for safety reasons — or checklists.
See a mistake as an opportunity, Professor Woods said. All of these events, he said, "are opportunities for the system to learn and change."
E-mail: ccouch@nytimes.com.
http://www.nytimes.com/2009/01/18/jobs/18career.html?sq=&st=cse&%2334;making%20the%20most=&%2334;=&scp=5&pagewanted=print
http://snipurl.com/by5e2
Showing posts with label Business. Show all posts
Showing posts with label Business. Show all posts
Sunday, January 18, 2009
Meetings Are a Matter of Precious Time By REID HASTIE
January 18, 2009
Preoccupations
Meetings Are a Matter of Precious Time By REID HASTIE
THE meeting spills over into its second hour. We are discussing an employee productivity initiative. At the moment, our most talkative committee member is describing a similar effort at another company. Her descriptions are peppered with self-consciously clever turns of phrase and images.
Another participant chimes in with the idea that we need some kind of incentive system to reward employees for behaviors we want from them. This is the same solution he offers for every problem, at every meeting.
Then, our self-appointed parliamentarian interjects a long story about a previous institutional effort — to make the point that our team is not the proper entity to recommend the kinds of changes we are proposing.
I, meanwhile, contribute nothing useful.
Finally, the woman who set the meeting calls it quits and tells us we'll continue the discussion next week. We drift back to our offices wondering what went wrong and how to make up for the wasted time.
This meeting occurred many years ago, but others that are distressingly similar happen at companies everywhere, every day.
Part of the problem at such meetings is that the leader has not set clear objectives or an agenda, and didn't assign pre-meeting preparation tasks. Instead, the leader seems to hope that magic will occur, producing a serendipitous solution to some of the problems addressed. Of course, that doesn't happen. As a general rule, meetings make individuals perform below their capacity and skill levels.
This doesn't mean we should always avoid face-to-face meetings — but it is certain that every organization has too many meetings, and far too many poorly designed ones.
The main reason we don't make meetings more productive is that we don't value our time properly. The people who call meetings and those who attend them are not thinking about time as their most valuable resource.
In business, we like to convert time to money, and the reverse. But in practice, time and money are different. We can get more money, save it, move it between accounts and use it on demand. These operations don't apply easily to time.
Time is the most perishable good in the world, and it is not replenishable. You can't earn an extra hour to use on a busy day. Nonetheless, we usually have a vague feeling that there is plenty of time — somewhere in the future — so we waste it now and carelessly steal time from our families, friends or ourselves when we come up short at the end of a workday and need to stay an extra hour.
Probably most important, we are blind to lost time opportunities. When we choose where to invest our time, as opposed to where to invest money, we are more likely to neglect what else we could have done with it.
And, once meetings are over, we don't effectively assign responsibility for a bad meeting or take personal responsibility as we should. Sure, someone called the meeting, but we all leave it unhappy and blaming everyone, including ourselves. Psychologists call this "diffusion of responsibility" and one consequence is that no one thinks it's his or her job to fix it the next time.
I USED to be the disengaged participant — one who had good ideas about how to solve a problem or conduct a meeting, but didn't contribute. I now take a more active role, aiming to make meetings more effective. Here are simple principles I use.
•
Whoever calls a meeting should be explicit about its objectives. This means specifying tangible goals and assigning responsibility for creating, summarizing and reporting on them. Ask yourself this question: Specifically, what do we want accomplished when we walk out of the room?
•
Everyone should think carefully about the opportunity costs of a meeting: How many participants are really needed? (Almost all business teams and committees are too big.) How long should the meeting last? Set a definite ending time. Anyone who doubts that the meeting is necessary, or thinks it's too long, should speak up.
•
After productive or unproductive meetings, assign credit or blame to the person in charge. Then, if people have track records of leading ineffective meetings, don't let them lead future sessions. When their expertise is essential, make them subordinate to an effective meeting leader.
Yes, I know that some benefits of meetings aren't obvious if we look only at tangible progress toward organizational objectives. The person who called the meeting described above was probably interested in more than just finding definite solutions to problems she posed for discussion. She was interested in what solutions the group could generate at first, and maybe wanted to float some of her own half-baked solutions for initial evaluation before thinking harder.
Even if problem-solving is the objective, meetings can also serve other functions: sometimes, they can communicate a pre-ordained solution, make sure that there are no fatal flaws in it and give those who are unhappy with it a chance to voice their dissatisfaction.
And many meetings serve a cultural function, allowing participants to renew social connections, establish relationships, verify the social order and deepen a sense of belonging. So, it's possible to justify a few of those too-long and apparently unproductive meetings by finding hidden payoffs.
But, please, don't just call a meeting and hope the magic happens. Take charge and take personal responsibility for meeting its objectives, whatever they are.
Reid Hastie is Robert S. Hamada Professor of Behavioral Science at the University of Chicago's Booth School of Business. E-mail:
preoccupations@nytimes.com.
http://www.nytimes.com/2009/01/18/jobs/18pre.html?sq=&st=cse&%2334;=&%2334;meetings%20are%20a%20matter%20of%20precious%20time=&scp=1&pagewanted=print
http://snipurl.com/by565
Preoccupations
Meetings Are a Matter of Precious Time By REID HASTIE
THE meeting spills over into its second hour. We are discussing an employee productivity initiative. At the moment, our most talkative committee member is describing a similar effort at another company. Her descriptions are peppered with self-consciously clever turns of phrase and images.
Another participant chimes in with the idea that we need some kind of incentive system to reward employees for behaviors we want from them. This is the same solution he offers for every problem, at every meeting.
Then, our self-appointed parliamentarian interjects a long story about a previous institutional effort — to make the point that our team is not the proper entity to recommend the kinds of changes we are proposing.
I, meanwhile, contribute nothing useful.
Finally, the woman who set the meeting calls it quits and tells us we'll continue the discussion next week. We drift back to our offices wondering what went wrong and how to make up for the wasted time.
This meeting occurred many years ago, but others that are distressingly similar happen at companies everywhere, every day.
Part of the problem at such meetings is that the leader has not set clear objectives or an agenda, and didn't assign pre-meeting preparation tasks. Instead, the leader seems to hope that magic will occur, producing a serendipitous solution to some of the problems addressed. Of course, that doesn't happen. As a general rule, meetings make individuals perform below their capacity and skill levels.
This doesn't mean we should always avoid face-to-face meetings — but it is certain that every organization has too many meetings, and far too many poorly designed ones.
The main reason we don't make meetings more productive is that we don't value our time properly. The people who call meetings and those who attend them are not thinking about time as their most valuable resource.
In business, we like to convert time to money, and the reverse. But in practice, time and money are different. We can get more money, save it, move it between accounts and use it on demand. These operations don't apply easily to time.
Time is the most perishable good in the world, and it is not replenishable. You can't earn an extra hour to use on a busy day. Nonetheless, we usually have a vague feeling that there is plenty of time — somewhere in the future — so we waste it now and carelessly steal time from our families, friends or ourselves when we come up short at the end of a workday and need to stay an extra hour.
Probably most important, we are blind to lost time opportunities. When we choose where to invest our time, as opposed to where to invest money, we are more likely to neglect what else we could have done with it.
And, once meetings are over, we don't effectively assign responsibility for a bad meeting or take personal responsibility as we should. Sure, someone called the meeting, but we all leave it unhappy and blaming everyone, including ourselves. Psychologists call this "diffusion of responsibility" and one consequence is that no one thinks it's his or her job to fix it the next time.
I USED to be the disengaged participant — one who had good ideas about how to solve a problem or conduct a meeting, but didn't contribute. I now take a more active role, aiming to make meetings more effective. Here are simple principles I use.
•
Whoever calls a meeting should be explicit about its objectives. This means specifying tangible goals and assigning responsibility for creating, summarizing and reporting on them. Ask yourself this question: Specifically, what do we want accomplished when we walk out of the room?
•
Everyone should think carefully about the opportunity costs of a meeting: How many participants are really needed? (Almost all business teams and committees are too big.) How long should the meeting last? Set a definite ending time. Anyone who doubts that the meeting is necessary, or thinks it's too long, should speak up.
•
After productive or unproductive meetings, assign credit or blame to the person in charge. Then, if people have track records of leading ineffective meetings, don't let them lead future sessions. When their expertise is essential, make them subordinate to an effective meeting leader.
Yes, I know that some benefits of meetings aren't obvious if we look only at tangible progress toward organizational objectives. The person who called the meeting described above was probably interested in more than just finding definite solutions to problems she posed for discussion. She was interested in what solutions the group could generate at first, and maybe wanted to float some of her own half-baked solutions for initial evaluation before thinking harder.
Even if problem-solving is the objective, meetings can also serve other functions: sometimes, they can communicate a pre-ordained solution, make sure that there are no fatal flaws in it and give those who are unhappy with it a chance to voice their dissatisfaction.
And many meetings serve a cultural function, allowing participants to renew social connections, establish relationships, verify the social order and deepen a sense of belonging. So, it's possible to justify a few of those too-long and apparently unproductive meetings by finding hidden payoffs.
But, please, don't just call a meeting and hope the magic happens. Take charge and take personal responsibility for meeting its objectives, whatever they are.
Reid Hastie is Robert S. Hamada Professor of Behavioral Science at the University of Chicago's Booth School of Business. E-mail:
preoccupations@nytimes.com.
http://www.nytimes.com/2009/01/18/jobs/18pre.html?sq=&st=cse&%2334;=&%2334;meetings%20are%20a%20matter%20of%20precious%20time=&scp=1&pagewanted=print
http://snipurl.com/by565
Tuesday, October 28, 2008
The Behavioral Revolution By DAVID BROOKS
October 28, 2008
Op-Ed Columnist
The Behavioral Revolution By DAVID BROOKS
Roughly speaking, there are four steps to every decision. First, you perceive a situation. Then you think of possible courses of action. Then you calculate which course is in your best interest. Then you take the action.
Over the past few centuries, public policy analysts have assumed that step three is the most important. Economic models and entire social science disciplines are premised on the assumption that people are mostly engaged in rationally calculating and maximizing their self-interest.
But during this financial crisis, that way of thinking has failed spectacularly. As Alan Greenspan noted in his Congressional testimony last week, he was "shocked" that markets did not work as anticipated. "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."
So perhaps this will be the moment when we alter our view of decision-making. Perhaps this will be the moment when we shift our focus from step three, rational calculation, to step one, perception.
Perceiving a situation seems, at first glimpse, like a remarkably simple operation. You just look and see what's around. But the operation that seems most simple is actually the most complex, it's just that most of the action takes place below the level of awareness. Looking at and perceiving the world is an active process of meaning-making that shapes and biases the rest of the decision-making chain.
Economists and psychologists have been exploring our perceptual biases for four decades now, with the work of Amos Tversky and Daniel Kahneman, and also with work by people like Richard Thaler, Robert Shiller, John Bargh and Dan Ariely.
My sense is that this financial crisis is going to amount to a coming-out party for behavioral economists and others who are bringing sophisticated psychology to the realm of public policy. At least these folks have plausible explanations for why so many people could have been so gigantically wrong about the risks they were taking.
Nassim Nicholas Taleb has been deeply influenced by this stream of research. Taleb not only has an explanation for what's happening, he saw it coming. His popular books "Fooled by Randomness" and "The Black Swan" were broadsides at the risk-management models used in the financial world and beyond.
In "The Black Swan," Taleb wrote, "The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup." Globalization, he noted, "creates interlocking fragility." He warned that while the growth of giant banks gives the appearance of stability, in reality, it raises the risk of a systemic collapse — "when one fails, they all fail."
Taleb believes that our brains evolved to suit a world much simpler than the one we now face. His writing is idiosyncratic, but he does touch on many of the perceptual biases that distort our thinking: our tendency to see data that confirm our prejudices more vividly than data that contradict them; our tendency to overvalue recent events when anticipating future possibilities; our tendency to spin concurring facts into a single causal narrative; our tendency to applaud our own supposed skill in circumstances when we've actually benefited from dumb luck.
And looking at the financial crisis, it is easy to see dozens of errors of perception. Traders misperceived the possibility of rare events. They got caught in social contagions and reinforced each other's risk assessments. They failed to perceive how tightly linked global networks can transform small events into big disasters.
Taleb is characteristically vituperative about the quantitative risk models, which try to model something that defies modelization. He subscribes to what he calls the tragic vision of humankind, which "believes in the existence of inherent limitations and flaws in the way we think and act and requires an acknowledgement of this fact as a basis for any individual and collective action." If recent events don't underline this worldview, nothing will.
If you start thinking about our faulty perceptions, the first thing you realize is that markets are not perfectly efficient, people are not always good guardians of their own self-interest and there might be limited circumstances when government could usefully slant the decision-making architecture (see "Nudge" by Thaler and Cass Sunstein for proposals). But the second thing you realize is that government officials are probably going to be even worse perceivers of reality than private business types. Their information feedback mechanism is more limited, and, being deeply politicized, they're even more likely to filter inconvenient facts.
This meltdown is not just a financial event, but also a cultural one. It's a big, whopping reminder that the human mind is continually trying to perceive things that aren't true, and not perceiving them takes enormous effort.
http://www.nytimes.com/2008/10/28/opinion/28brooks.html?sq=Behavioral%20Revolution&st=cse&scp=1&pagewanted=print
http://snipurl.com/7sioj
Op-Ed Columnist
The Behavioral Revolution By DAVID BROOKS
Roughly speaking, there are four steps to every decision. First, you perceive a situation. Then you think of possible courses of action. Then you calculate which course is in your best interest. Then you take the action.
Over the past few centuries, public policy analysts have assumed that step three is the most important. Economic models and entire social science disciplines are premised on the assumption that people are mostly engaged in rationally calculating and maximizing their self-interest.
But during this financial crisis, that way of thinking has failed spectacularly. As Alan Greenspan noted in his Congressional testimony last week, he was "shocked" that markets did not work as anticipated. "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."
So perhaps this will be the moment when we alter our view of decision-making. Perhaps this will be the moment when we shift our focus from step three, rational calculation, to step one, perception.
Perceiving a situation seems, at first glimpse, like a remarkably simple operation. You just look and see what's around. But the operation that seems most simple is actually the most complex, it's just that most of the action takes place below the level of awareness. Looking at and perceiving the world is an active process of meaning-making that shapes and biases the rest of the decision-making chain.
Economists and psychologists have been exploring our perceptual biases for four decades now, with the work of Amos Tversky and Daniel Kahneman, and also with work by people like Richard Thaler, Robert Shiller, John Bargh and Dan Ariely.
My sense is that this financial crisis is going to amount to a coming-out party for behavioral economists and others who are bringing sophisticated psychology to the realm of public policy. At least these folks have plausible explanations for why so many people could have been so gigantically wrong about the risks they were taking.
Nassim Nicholas Taleb has been deeply influenced by this stream of research. Taleb not only has an explanation for what's happening, he saw it coming. His popular books "Fooled by Randomness" and "The Black Swan" were broadsides at the risk-management models used in the financial world and beyond.
In "The Black Swan," Taleb wrote, "The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup." Globalization, he noted, "creates interlocking fragility." He warned that while the growth of giant banks gives the appearance of stability, in reality, it raises the risk of a systemic collapse — "when one fails, they all fail."
Taleb believes that our brains evolved to suit a world much simpler than the one we now face. His writing is idiosyncratic, but he does touch on many of the perceptual biases that distort our thinking: our tendency to see data that confirm our prejudices more vividly than data that contradict them; our tendency to overvalue recent events when anticipating future possibilities; our tendency to spin concurring facts into a single causal narrative; our tendency to applaud our own supposed skill in circumstances when we've actually benefited from dumb luck.
And looking at the financial crisis, it is easy to see dozens of errors of perception. Traders misperceived the possibility of rare events. They got caught in social contagions and reinforced each other's risk assessments. They failed to perceive how tightly linked global networks can transform small events into big disasters.
Taleb is characteristically vituperative about the quantitative risk models, which try to model something that defies modelization. He subscribes to what he calls the tragic vision of humankind, which "believes in the existence of inherent limitations and flaws in the way we think and act and requires an acknowledgement of this fact as a basis for any individual and collective action." If recent events don't underline this worldview, nothing will.
If you start thinking about our faulty perceptions, the first thing you realize is that markets are not perfectly efficient, people are not always good guardians of their own self-interest and there might be limited circumstances when government could usefully slant the decision-making architecture (see "Nudge" by Thaler and Cass Sunstein for proposals). But the second thing you realize is that government officials are probably going to be even worse perceivers of reality than private business types. Their information feedback mechanism is more limited, and, being deeply politicized, they're even more likely to filter inconvenient facts.
This meltdown is not just a financial event, but also a cultural one. It's a big, whopping reminder that the human mind is continually trying to perceive things that aren't true, and not perceiving them takes enormous effort.
http://www.nytimes.com/2008/10/28/opinion/28brooks.html?sq=Behavioral%20Revolution&st=cse&scp=1&pagewanted=print
http://snipurl.com/7sioj
Monday, September 22, 2008
Goldman, Morgan Stanley Bring Down Curtain on Wall Street Era By Christine Harper and Craig Torres
Goldman, Morgan Stanley Bring Down Curtain on Wall Street Era By Christine Harper and Craig Torres
Sept. 22 (Bloomberg) -- The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc. and Morgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is broken.
The Federal Reserve's approval of their bid to become banks ends the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and caps weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America Corp.
``The decision marks the end of Wall Street as we have known it,'' said William Isaac, a former chairman of the Federal Deposit Insurance Corp. ``It's too bad.''
Goldman, whose alumni include Henry Paulson, the Treasury Secretary presiding over a $700 billion bank bailout, and Morgan Stanley, a product of the 1933 Glass-Steagall Act that cleaved investment and commercial banks, insisted they didn't need to change course, even as their shares plunged and their borrowing costs soared last week.
By then, it was too late. As financial markets gyrated -- the Dow Jones Industrial Average whipsawed 1,000 points in the week's last two days -- and clients defected, executives at the two firms concluded they had no choice. The Federal Reserve Board met at 9 p.m. yesterday and considered applications delivered that day, said Michelle Smith, a spokeswoman for the central bank. The decision was unanimous, she said.
`Blood in Water'
``There's blood in the water in the industry and the sharks are circling,'' Peter Kovalski, who helps oversee about $10 billion at Alpine Woods Capital Investors LLC, said at the end of last week. ``It all comes down to perception and the current trust within the community.''
Wall Street hasn't had such a shakeup since the 1980s, when firms including Morgan Stanley and Bear Stearns Cos. went public and London's financial markets were altered forever with the so-called Big Bang reforms implemented in 1986. Bear Stearns disappeared in March, when it was bought by JPMorgan Chase & Co.
The announcement paves the way for the two New York-based firms, both of which will now be regulated by the Fed, to build their deposit base, potentially through acquisitions. That will allow them to rely more heavily on deposits from retail customers instead of using borrowed money -- the leverage that led to the undoing of Bear Stearns and Lehman.
Morgan Stanley has taken $15.7 billion of writedowns and losses on mortgage-related securities and other types of loans since the credit crunch started last year. Goldman's tally stands at about $4.9 billion. While both companies have remained profitable and avoided money-losing quarters suffered by Lehman and Merrill Lynch, their revenue from sales and trading and investment banking have been declining this year.
Depositors Rule
``Deposit-banking is king right now,'' said David Hendler, an analyst at CreditSights Inc. in New York. ``It's the only meaningful critical-mass way to make money.''
Morgan Stanley may feel it has more time to contemplate alternatives to the deal that it began to shape last week with Wachovia Corp., said Tony Plath, a finance professor at the University of North Carolina at Charlotte.
``This means Morgan Stanley is reassessing its plan for a merger with Wachovia,'' Plath said. ``Morgan Stanley is going to try to go it alone, and I expect it will try to buy a bank with a market-to-book ratio that is next to nothing. It means they are walking away from Wachovia.''
Morgan Stanley, the second-biggest securities firm until this week, had $36 billion of deposits and three million retail accounts at the end of August. The company plans to convert its Utah-based industrial bank into a national bank.
`Certainty'
``This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position,'' Chairman and Chief Executive Officer John Mack, 63, said in a statement last night. ``It also offers the marketplace certainty about the strength of our financial position and our access to funding.''
Goldman, the largest and most profitable of the U.S. securities firms, will become the fourth-largest bank holding company. The firm already has more than $20 billion in customer deposits in two subsidiaries and is creating a new one, GS Bank USA, that will have more than $150 billion of assets, making it one of the 10 largest banks in the U.S., the firm said in a statement last night. The firm will increase its deposit base ``through acquisitions and organically,'' Goldman said in a statement last night.
``Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources,'' Lloyd Blankfein, 54, Goldman's chairman and CEO, said in the statement.
Citigroup, JPMorgan
The Washington-based Fed is the primary regulator of bank- holding companies, which are firms that own or control banks. Citigroup Inc., Bank of America Corp. and JPMorgan are bank- holding companies regulated by the Fed.
Securities firms, by contrast, had been regulated by the Securities and Exchange Commission. The SEC's future becomes dimmer with the change in Goldman and Morgan Stanley's structures.
``You can't kiss goodbye to the last two important investment banks without noting that the house is empty,'' said David Becker, a former SEC general counsel who is now a partner at Cleary Gottlieb Steen & Hamilton in Washington. ``It's a downward spiral where the less significant the population you regulate, the less your available resources.''
Less Risky
The change is also likely to lead to less risk-taking by the companies and possibly lower pay for their employees. Both Goldman and Morgan Stanley held more than $20 of assets for every $1 of shareholder equity, making them dependent on market funding to operate.
Goldman, in particular, has been remarkable for the high bonuses it pays to its employees. Goldman's CEO and two co- presidents were each paid more than $67 million last year.
``They're going to have to protect their deposit bases by law, and the days of high leverage are gone,'' said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York, who wrote ``Wall Street: A History.'' ``The days of the big bonuses are gone.''
Sept. 22 (Bloomberg) -- The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc. and Morgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is broken.
The Federal Reserve's approval of their bid to become banks ends the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and caps weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America Corp.
``The decision marks the end of Wall Street as we have known it,'' said William Isaac, a former chairman of the Federal Deposit Insurance Corp. ``It's too bad.''
Goldman, whose alumni include Henry Paulson, the Treasury Secretary presiding over a $700 billion bank bailout, and Morgan Stanley, a product of the 1933 Glass-Steagall Act that cleaved investment and commercial banks, insisted they didn't need to change course, even as their shares plunged and their borrowing costs soared last week.
By then, it was too late. As financial markets gyrated -- the Dow Jones Industrial Average whipsawed 1,000 points in the week's last two days -- and clients defected, executives at the two firms concluded they had no choice. The Federal Reserve Board met at 9 p.m. yesterday and considered applications delivered that day, said Michelle Smith, a spokeswoman for the central bank. The decision was unanimous, she said.
`Blood in Water'
``There's blood in the water in the industry and the sharks are circling,'' Peter Kovalski, who helps oversee about $10 billion at Alpine Woods Capital Investors LLC, said at the end of last week. ``It all comes down to perception and the current trust within the community.''
Wall Street hasn't had such a shakeup since the 1980s, when firms including Morgan Stanley and Bear Stearns Cos. went public and London's financial markets were altered forever with the so-called Big Bang reforms implemented in 1986. Bear Stearns disappeared in March, when it was bought by JPMorgan Chase & Co.
The announcement paves the way for the two New York-based firms, both of which will now be regulated by the Fed, to build their deposit base, potentially through acquisitions. That will allow them to rely more heavily on deposits from retail customers instead of using borrowed money -- the leverage that led to the undoing of Bear Stearns and Lehman.
Morgan Stanley has taken $15.7 billion of writedowns and losses on mortgage-related securities and other types of loans since the credit crunch started last year. Goldman's tally stands at about $4.9 billion. While both companies have remained profitable and avoided money-losing quarters suffered by Lehman and Merrill Lynch, their revenue from sales and trading and investment banking have been declining this year.
Depositors Rule
``Deposit-banking is king right now,'' said David Hendler, an analyst at CreditSights Inc. in New York. ``It's the only meaningful critical-mass way to make money.''
Morgan Stanley may feel it has more time to contemplate alternatives to the deal that it began to shape last week with Wachovia Corp., said Tony Plath, a finance professor at the University of North Carolina at Charlotte.
``This means Morgan Stanley is reassessing its plan for a merger with Wachovia,'' Plath said. ``Morgan Stanley is going to try to go it alone, and I expect it will try to buy a bank with a market-to-book ratio that is next to nothing. It means they are walking away from Wachovia.''
Morgan Stanley, the second-biggest securities firm until this week, had $36 billion of deposits and three million retail accounts at the end of August. The company plans to convert its Utah-based industrial bank into a national bank.
`Certainty'
``This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position,'' Chairman and Chief Executive Officer John Mack, 63, said in a statement last night. ``It also offers the marketplace certainty about the strength of our financial position and our access to funding.''
Goldman, the largest and most profitable of the U.S. securities firms, will become the fourth-largest bank holding company. The firm already has more than $20 billion in customer deposits in two subsidiaries and is creating a new one, GS Bank USA, that will have more than $150 billion of assets, making it one of the 10 largest banks in the U.S., the firm said in a statement last night. The firm will increase its deposit base ``through acquisitions and organically,'' Goldman said in a statement last night.
``Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources,'' Lloyd Blankfein, 54, Goldman's chairman and CEO, said in the statement.
Citigroup, JPMorgan
The Washington-based Fed is the primary regulator of bank- holding companies, which are firms that own or control banks. Citigroup Inc., Bank of America Corp. and JPMorgan are bank- holding companies regulated by the Fed.
Securities firms, by contrast, had been regulated by the Securities and Exchange Commission. The SEC's future becomes dimmer with the change in Goldman and Morgan Stanley's structures.
``You can't kiss goodbye to the last two important investment banks without noting that the house is empty,'' said David Becker, a former SEC general counsel who is now a partner at Cleary Gottlieb Steen & Hamilton in Washington. ``It's a downward spiral where the less significant the population you regulate, the less your available resources.''
Less Risky
The change is also likely to lead to less risk-taking by the companies and possibly lower pay for their employees. Both Goldman and Morgan Stanley held more than $20 of assets for every $1 of shareholder equity, making them dependent on market funding to operate.
Goldman, in particular, has been remarkable for the high bonuses it pays to its employees. Goldman's CEO and two co- presidents were each paid more than $67 million last year.
``They're going to have to protect their deposit bases by law, and the days of high leverage are gone,'' said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York, who wrote ``Wall Street: A History.'' ``The days of the big bonuses are gone.''
Friday, September 08, 2006
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