(personal note: this is the longest I’ve gone without much blogging activity. My apology — I had a little health set back {it seems ok now} — and I’ve been playing catch-up, not all that successfully, for a while. Hopefully, by next week, I’ll be back to normal).
——-
cro·ny·ism noun \-nē-ˌi-zəm\: partiality to cronies…without regard to their qualifications (emphasis added)
The expert or the crony?
Here’s the thing. We live in an interdependent, overly connected age. What happens in one place, in one company, in one organization, has very far-reaching ripple effects. So, whereas before, the hiring of a crony might hurt a few people, now, in this new world of so many intertwining connections. the hiring of a crony might hurt an avalanche of others.
So, here’s the story… I have presented my synopsis of All the Devils are Here three times in the last couple of weeks. I began each presentation with the story that opens the book. It is about John Breit, the top risk manager at Merrill Lynch in the 00’s. But Merrill Lynch was making too much money to pay attention to the risks – they just wanted to keep it going. So, Breit was removed, and replaced with a friend of the CEO, Stan O’Neill. A friend who did not have the right expertise, enough expertise – a friend who simply was not an expert at risk, he “didn’t seem to know anything about risk.” And when some in the firm understood his value and begged him to come back, he came back, but was denied access, shunted aside, ignored… he was too much of a pain to those with money to make and warnings to ignore.
If only they had listened – earlier.
So, here is an excerpt of the account from the book, All the Devils are Here: The Hidden History of the Financial Crisis by Bethany McLean and Joe Nocera:
It was September, 2007.
Slowly, over the years, John Breit had been stripped of his authority – and, more important, his ability to manage Merrill Lynch’s risk. First (Stan) O’Neal had tapped one of his closest allies to head up risk management, but the man didn’t seem to know anything about risk. Then many of the risk managers were removed from the trading floor. Within the span of one year, Breit had lost his access to the directors and was told to report to a newly promoted risk chief, who, alone, would deal with O’Neal’s ally. Breit quit in protest, but returned a few months later when Merrill’s head of trading pleaded with him to come back to manage risk for some of the trading desks.
In July, 2006, however, a core group of Merrill traders had been abruptly fired. Most of the replacements refused to speak to Breit, or provide him the information he needed to do his job. They got abusive when he asked about risky trades. Eventually, he was exiled to a small office on a different floor, far away from the trading desks.
(After telling Stan O’Neal of the serious and massive exposure of Merrill Lynch) John Breit walked back to his office with the strange realization that he – a midlevel employee utterly out of the loop – had just informed one of the most powerful men on Wall Street that the party was over.
Merrill Lynch was in an awful lot of trouble—and the company was still in denial about it.
So, after one of these three presentations, a man — a man who is used to paying attention to the fiscal health of large organizations — pulled me aside, and observed very simply that the opening story of the book is the most important part of the book. The head of Merrill Lynch replaced the expert with a friend, and thus lost the voice, the wisdom, the clear thinking of the expert. And when you replace the expert with a crony who is not an expert, the ball game is over.
And so, taken over by Bank of America because there were no other alternatives, the crony proved unequal to the task. And the ripple effects are still being felt.
It seems like quite a choice, but it should be no choice at all. The expert, or the crony? There is only one answer that is right – but, sadly, it is an answer rejected time and time again.
First Friday Book Synopsis 