[FoRK] It's worse than you imagined

Bill Stoddard wgstoddard at gmail.com
Thu Sep 24 10:58:07 PDT 2009


March 8, 2009 at 5:27 pm · Filed under Business, China, Economy

Warning: If you are easily frightened, upset and can get depressed, 
please do not read this article. The content is strong not in its 
language, but in its implications.

On Twitter I have acquired a reputation for my “Tweets of Doom”. For the 
most part, I do not consider myself to be a pessimist but a realist. My 
main area of interest in the unfolding financial crisis is how 
economics, history, demographics and politics come together and give us 
hints about future trends and show us where we are heading to.

Recently, I have read a fine article by Michael Lewis in the April 
Vanity Fair, Wall Street on the Tundra (also called “How Iceland Went 
Splat”), about how the crisis unfolded in Iceland, first transforming it 
from an economy based on fishing, to a country based on investment 
banking at the peak of the boom, then when the economy collapsed, back 
to fishing again.

Three paragraphs in particular stuck in my mind:

Back in 2001, as the Internet boom turned into a bust, M.I.T.’s 
Quarterly Journal of Economics published an intriguing paper called 
“Boys Will Be Boys: Gender, Overconfidence, and Common Stock 
Investment.” The authors, Brad Barber and Terrance Odean, gained access 
to the trading activity in over 35,000 households, and used it to 
compare the habits of men and women. What they found, in a nutshell, is 
that men not only trade more often than women but do so from a false 
faith in their own financial judgment. Single men traded less sensibly 
than married men, and married men traded less sensibly than single 
women: the less the female presence, the less rational the approach to 
trading in the markets.

One of the distinctive traits about Iceland’s disaster, and Wall 
Street’s, is how little women had to do with it. Women worked in the 
banks, but not in the risktaking jobs. As far as I can tell, during 
Iceland’s boom, there was just one woman in a senior position inside an 
Icelandic bank. Her name is Kristin Petursdottir, and by 2005 she had 
risen to become deputy C.E.O. for Kaupthing in London. “The financial 
culture is very male-dominated,” she says. “The culture is quite 
extreme. It is a pool of sharks. Women just despise the culture.” 
Petursdottir still enjoyed finance. She just didn’t like the way 
Icelandic men did it, and so, in 2006, she quit her job. “People said I 
was crazy,” she says, but she wanted to create a financial-services 
business run entirely by women. To bring, as she puts it, “more feminine 
values to the world of finance.”

Today her firm is, among other things, one of the very few profitable 
financial businesses left in Iceland. After the stock exchange 
collapsed, the money flooded in. A few days before we met, for instance, 
she heard banging on the front door early one morning and opened it to 
discover a little old man. “I’m so fed up with this whole system,” he 
said. “I just want some women to take care of my money.”

This made me ask myself a question: Maybe it was not enough to look at 
how economics, history, demographics and politics come together in this 
unfolding crisis? Maybe I should also take a look at human psychology 
and the role it played in the financial services industry? Were there 
certain personality traits which made it to the top of the financial 
services industry, making individuals with these personality traits 
captains of industry?

Armed with this question, I went to Wikipedia and looked up the term 
psychopathy and found this definition:

The psychopath is defined by a psychological gratification in criminal, 
sexual, or aggressive impulses and the inability to learn from past 
mistakes. Individuals with this disorder gain satisfaction through their 
antisocial behavior and lack remorse for their actions.

Now some of the characteristic symptons are:

Factor1: Aggressive narcissism
Glibness/superficial charm
Grandiose sense of self-worth
Pathological lying
Lack of remorse or guilt
Callous/lack of empathy
Failure to accept responsibility for own actions
Factor2: Socially deviant lifestyle
Need for stimulation/proneness to boredom
Parasitic lifestyle
Poor behavioral control
Promiscuous Sexual Behavior
Lack of realistic, long-term goals
Juvenile delinquency
Early behavior problems
Revocation of conditional release
Traits not correlated with either factor
Many short-term marital relationships
Criminal versatility

This was getting interesting, so I went to a Time magazine article which 
listed the 25 people to blame for the financial crisis. The behavior of 
some of these individuals is, to say the least, very interesting.

Then I went back to the article and read more about the traits of 
psychopathic behavior. Where appropriate, I have added emphasis. They are:

In practice, mental health professionals rarely treat psychopathic 
personality disorders as they are considered untreatable and no 
interventions have proved to be effective.[18] In England and Wales the 
diagnosis of dissocial personality disorder is grounds for detention in 
secure psychiatric hospitals under the Mental Health Act if they have 
committed serious crimes, but since such individuals are disruptive for 
other patients and not responsive to treatment this alternative to 
prison is not often used.[19]
Because an individual’s scores may have important consequences for his 
or her future, the potential for harm if the test is used or 
administered incorrectly is considerable. The test should only be 
considered valid if administered by a suitably qualified and experienced 
clinician under controlled conditions. [20][21]
Hare wants the Diagnostic and Statistical Manual of Mental Disorders to 
list psychopathy as a unique disorder, saying psychopathy has no precise 
equivalent[20] in either the DSM-IV-TR, where it is most strongly 
correlated with the diagnosis of antisocial personality disorder, or the 
ICD-10, which has a partly similar condition called dissocial 
personality disorder. Both organisations view the terms as synonymous. 
But only a minority of what Hare and his followers would diagnose as 
psychopaths who are in institutions are violent offenders.[22][23] The 
manipulative skills of some of the others are valued for providing 
audacious leadership.[24] It is argued psychopathy is adaptive in a 
highly competitive environment, because it gets results for both the 
individual and the corporations[25][26][27] or, often small political 
sects they represent.[28] However, these individuals will often cause 
long-term harm, both to their co-workers and the organization as a 
whole, due to their manipulative, deceitful, abusive, and often 
fraudulent behaviour.[29]
Hare describes people he calls psychopaths as “intraspecies 
predators[30][31] who use charm, manipulation, intimidation, sex and 
violence[32][33][34] to control others and to satisfy their own selfish 
needs. Lacking in conscience and empathy, they take what they want and 
do as they please, violating social norms and expectations without guilt 
or remorse”.[21] “What is missing, in other words, are the very 
qualities that allow a human being to live in social harmony.”[35]

This was getting very interesting. I would encourage you to search 
through Google or your search engine of choice and make your own 
observation whether these individual/s showed any psychopathic 
personality characteristics.

Basically, what the American financial services industry created an 
industry where individuals with psychopathic traits could rise to the 
top to positions of power, making decisions about billions of dollars in 
investments and assets.

Intelligent psychopaths exist in every society, and many become actors, 
politicians and lawyers. The genius of the American system was that it 
put them in charge of large sums of money.

But this is only the beginning. In the name of industry deregulation, 
they were given, by the US government the power to create financial 
instruments. In plain English, they were given the power, through 
leveraging, to make money out of thin air, out of nothing.

Over the past twenty years, using their talents and creativity, they 
have leveraged approximately every single US dollar 35-40 times, 
inventing CDOs, CDSs and other financial instruments in the process, all 
of which were interlocked. As if that were not enough, some of these 
personalities co-opted the whole financial media, earning their trust 
and selling their investment ideas directly to the American people over 
leading TV stations and print media. At no time did any of the financial 
media say “Wait a moment. These guys are shysters and are cheating and 
lying to the American people.” Instead, the media went along and played 
the game with them, becoming actors in the play when they should have 
questioned what was going on.

The lines between advertisers, corporations and media became completely 
blurred, and dissenting voices were simply not heard. It became a vortex 
which benefited all the players, who hyped the same worldview about finance.

What was missing in the whole equation? In one word, trust. The quants 
had created formulas such as the Gaussian copula formula to provide a 
rough measure of risk, but banks had become completely separated from 
their clients through a complex ecosystem which also included mortgage 
brokers, who originated loans, even for individuals who did not have 
work and had no chance of being able to make the monthly payments for 
the homes they bought.

The house of cards began to collapse in 2007 with the subprime credit 
crisis, and is continuing to unwind. At this stage, we do not know where 
it will all end.

What is even more interesting is that the personalities and personality 
traits which got us into the mess are still there, negotiating with US 
Secretary of Treasury Geithner in the belief that they should receive 
money from the government for their bad assets, which they believe will 
recover some value after the economy bottoms out. Others believe that 
these assets have no value, and the sooner the government recognizes 
this fact, the sooner recovery can begin.

American society had become one where competition and competitiveness 
were rewarded without regard to the implications for the society as a 
whole. The society was always looking for the next big thing, the 
instant hit without caring about the cost. Now it is paying the price 
for a screwed up values system. Now we know that there are no quick 
fixes, and none of the choices are good.

In the meantime, we are helpless in this world they have created for us.

If you haven’t poured yourself one already, maybe it’s time for a 
whiskey. A strong whiskey. Neat.

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