mathbabe

Corporations may be legally protected like people, but they don’t act selfishly like people do.

I’ve written about this before here, when I was excitedly reading Liquidated by Karen Ho, but recent overheard conversations have made me realize that there’s still a feeling out there that “the banks” must not have understood how flawed the models were because otherwise they would have avoided them out of a sense of self-preservation.

Important: “the banks” don’t think or do things, people inside the banks think and do things. In fact, the people inside the banks think about themselves and their own chances of getting big bonuses/ getting fired, and they don’t think about the bank’s future at all. The exception may be the very tip top brass of management, who may or may not care about the future of their institutions just as a legacy reputation issue. But in any case their nascent reputation fears, if they existed at all, did not seem to overwhelm their near-term desire for lots of money.

Example: I saw Robert Rubin on stage well before the major problems at Citi in a discussion about how badly the mortgage-backed securities market was apt to perform in the very near future. He did not seem to be too stupid to understand what the conversation was about, but that didn’t stop him from ignoring the problem at Citigroup whilst taking in $126 million dollars. The U.S. government, in the meantime, bailed out Citigroup to the tune of $45 billion with another guarantee of $300 billion.

Here’s a Bloomberg BusinessWeek article excerpt about how he saw his role:

Rubin has said that Citigroup’s losses were the result of a financial force majeure. “I don’t feel responsible, in light of the facts as I knew them in my role,” he told the New York Times in April 2008. “Clearly, there were things wrong. But I don’t know of anyone who foresaw a perfect storm, and that’s what we’ve had here.”

In March 2010, Rubin elaborated in testimony before the Financial Crisis Inquiry Commission. “In the world of trading, the world I have lived in my whole adult life, there is always a very important distinction between what you could have reasonably known in light of the facts at the time and what you know with the benefit of hindsight,” he said. Pressed by FCIC Executive Director Thomas Greene about warnings he had received regarding the risk in Citigroup’s mortgage portfolio, Rubin was opaque: “There is always a tendency to overstate—or over-extrapolate—what you should have extrapolated from or inferred from various events that have yielded warnings.”

Bottomline: there’s no such thing as a bank’s desire for self-preservation. Let’s stop thinking about things that way.