A True Prisoner’s Dilemma

Banks are no strangers to controversy – we only get a glimpse of their colossal levels of errors of judgement during times like the great financial crash of 2008.

Most big banks have a mandate (without your consent) to use funds deposited to trade and participate in complex and highly risky investments like stocks, currencies, futures and derivatives – but to what extent?

This also brings to the fore a potential issue of what is known as the principal-agent problem. Where the agents – bank employees, are given a ‘license to “ deal’ in all sorts of investments, often under the radar of both local and global financial authorities.

When one of such agents makes an overwhelming error in judgement, causing a large chunk of investment monies to be lost;  the agent is said to ‘go rogue’.  Questions arise as the agents often do not operate alone without supervision or consent from their seniors/managers.

A good example is that of a convicted bank fraudster; imprisoned and released on good behaviour, 38-year-old Kweku Adoboli who was eventually deported from Britain to Ghana.  A country he has lived in for 26 years in comparison to Ghana where had lived for a mere 4 years. This ends a long-protracted appeal process to allow him to remain and continue living in the UK after serving his sentence.

Some say he was a scapegoat for the deportation policies in the UK and argue that the colour of a person’s skin has no bearing on the immigration policy of Britain. This assumption holding some substance after what happened with the Windrush scandal

Others have also contended that he was the perfect scapegoat to throw in jail as a warning shot that the UK was willing to crack down on fraudulent bankers especially after the 2008 financial collapse which banks played a significant role in.

N26_banner-300x250-ENThis is also the reason why no top manager went to jail at UBS. Had Adoboli believed regulators did not know about money laundering and illegal trading in central London? The banks want to continue raking in profits and the last thing they wanted was a former insider with an appetite to take them on. These are the practices that have made them powerful. Adoboli failed to recognise that.  

“Adoboli did not syphon money to a private personal account, he did not pay himself a golden parachute, he did not launder money for terrorists or drug cartels, he did not manipulate interest rates and did not cause financial loss to the UK government. Other UK bankers who were never prosecuted however did.”

The word scapegoat is applicable because the banks that needed bailouts like RBS were savings banks, unlike UBS which was at least at that time, an investment bank. Adoboli did not syphon money for himself, he did, however, recklessly trade to make money for the Bank.

UBS is a bank which ordinary folks do not readily have access to. The very practices by Adoboli that lost the bank $2 billion led them to eventually record an overall profit of over $3 billion that same year. We, therefore, need to deprive our minds of the fact that Adoboli defrauded taxpayers of the UK and was a rogue agent of the bank.

He was, however, not alone in this practice and UK taxpayer bore no responsibility for the money that he lost. Therefore, in several ways, the own architect of his misfortune; either advertent or inadvertently.  

Let us, however, turn our attention to finance because this is what this post is about. And even before that, it is essential to get some perspective before jumping on to ‘lynch’ Adoboli. The Royal Bank of Scotland which manages cheque accounts of ordinary workers had to be given taxpayers money of £45,5 billion as a bailout.

It appears that the government will not get the money back according to the current chair of UBS, Sir Howard Davis. Interestingly enough, no one was arrested for causing financial loss to the state (that happened). UK taxpayers had to take a hit for this.

 Another interesting issue worth considering is the LIBOR scandal which was the manipulation of interbank lending rates by a host of global financial institutions. These banks, incidentally, including UBS by the way, have been implicated in manipulating interest rates for profit sharing. This was as far back as 2003 according to the counc39935_1200x628il of foreign relations. Again, no one was jailed for this ‘heist’. Before addressing Adoboli ’s case again, some large multinational banks were publicly known to launder money (for terrorists and drug cartels) guess who was convicted? That’s right, no one.

We do not refute that what he did constituted a crime –  it apparently was and perhaps he deserves the jail time he got. But the way he was plastered all over the newspapers in the UK in 2011 as some poster boy for out of control banking in the UK was why the term “scapegoat” was used.

  In investment banking, trading of commodities and currencies can go wrong which is why he should have insured his bets. But then, what no one is willing to talk about is the reward associated with high risk (uninsured) betting in the financial markets. That is the modus operandi of these banks; which does not make for sufficient juicy material for the corporate press. 

This is the height of the power of the big financial institutions and what they can get away with. Lose taxpayer’s money and there is no consequence. Fund terrorist or drug cartels and you will just be fined a fraction of your profits; fix international interest rates and all you receive is a fine. However, dare to lose their money through a risky bet and you will be undone just like Adoboli was.

Until the current financial framework is considerably changed to end monopolies of big financial institutions, the risky bets will continue. With blockchain and cryptocurrencies, who knows what the future hold? All the best to the “rogue trader” in his future endeavour nonetheless.

**This is a summarised section of a column by Julius Owusu-Paddy.  He is a staunch advocate for challenging social norms that elevate the powerful and suppresses the powerless. The full article can be read here. This section attempted to cover the issue of principal-agency problem and related issues in the financial industry.

One unanswered question is why investigators never scrutinised the practices of the entire UBS bank rather than just hauling two comparatively low-level managers to court (the afore-mentioned Kweku Adoboli and another Ron Greenidge). UBS did, however, make a profit that year despite the loss of $2 billion attributed to Adoboli.

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Accountable Supervision

Leadership values are not only confined to the running of a political campaign, party or country for that matter, however, like in any venture that has an objective and deals with human beings – it forms the backbone of a successful any business.

Consequently, what leaders such as CEO of Tesla Elon Musk, for example, say or does, have a positive or, in the recent unfortunate case, a negative impact on the shareholdings of his business.

The share price can decline sharply and worse yet, it can lead to the exit of senior staff members and thus undermining the business, its leadership values and objectives.

This why it is critical for companies to adopt the right practices and responsible leadership to enable them to address both internal and external issues affecting them.

This is even most relevant when dealing with a company that has a multinational operational facet such as the Murray and Roberts Group – a South African company that operates in a global setting.

This specific multinational company was used in a case study for a research paper because it is firmly entrenched in the construction and engineering industry.

More specifically, they service the global natural resources market sectors of underground mining; Oil & Gas; Power & Energy.

Such a diverse set of operations requires a varied set of objectives spearheaded by a solid leadership path.

New model of leadership

We have covered the topic of Emotional Intelligence before. It now surfaces again within a brand-new leadership model known as the ARCHES model.

The name derives from a key characteristic of the physical structure of an arch and its durability. Coupled with its diversity in models and materials and its depiction as symbols of triumph, it represents an apt analogy of what responsible and effective leadership should be.

The model was especially derived by an academic* for a syndicate group assignment and is based on six key characteristics that should be imparted in a leader.

An effective and responsible leader is one who is attuned to their followers, responsive, possesses the necessary competencies, serves with humility, is ethical and adopts a sustainable approach to leadership.

A leader who possesses all these attributes is one who can rise above adversity and lead their followers in a way that promotes innovation, motivates, develops skills, promotes personal growth and encourages improved performance – B.Moyo

Application of the model

The model defines attuned leadership as the act of being self-aware, informed and  aware of the environment in which you exist – servant leadership.

Employees should be encouraged to take responsibility for their actions because responsibility and effectiveness are complimentary. The demise of US energy company Enron, for example, was due to a failure of management to execute communication-based responsibility, internally and externally.

ARCHES

A volatile, uncertain, complex and ambiguous environment in which a business operates can result in many potential projects not coming to fruition.

In such an environment, leaders that are attuned, responsive and possess the right competencies can expert power as their way to influence followers to exhibit the same traits.

Referent power develops out of admiration of another and a desire to be like them. Expert power on the other hand, is a person’s ability to influence others’ behaviour because of recognized knowledge, skills, or abilities.

This requires the leader to have a tolerable level of humility. This is defined as a personal quality reflecting the willingness to understand the self (identities, strengths, and limitations). That combined with a purpose in the self’s relationship with others.

Once again, the emphasis on Emotional Intelligence coupled with traditional leadership competencies is needed to steer multifaceted companies.

Even more so when dealing with diverse cultures and work ethics across borders and continents.

Direct consequences

Being the largest employer in the locality directly implied that Murray and Roberts had to be consistent with the idiomatic Zulu expression of “Umuntu ngumuntu ngabantu”. This means: I am because you are, you are because we are.

Good leadership in the Ubuntu philosophy is based on the engagement with communities and defines a well-led organization.

Not paying attention to ethical issues surrounding a community or the environment can have an adverse effect on your values. This would also affect your staff and the image of the company you steer.

A bitter consequence of the failure of ethics was evident in the $4.2m (64.1 million ZAR) fine to the said company. This was for its involvement in sector collusion related to construction projects for the 2010 World Cup.

Finally, a practical leader will also consider any upcoming projects with the lens of understanding the environment that surrounds them to incorporate the concept of sustainability.

These traits might sound like they need to be learned but most should be already ingrained or come naturally to you or your leaders.

If not this is not the case, you need to quickly install the right personnel with such to help steer your business enterprise or economy for that matter, to success.
*This blog post contains excerpts and is derived from a master’s research paper. It was conducted by Bonnie Moyo for the Rhodes University Business School.

Criminal mindedness

One fundamental and often ignored view within economics is that humans have the propensity to display irrational behaviour in the decision-making processes.

Based on this notion, one can conclude that we have a fundamental tendency to act corruptly and be generally criminally-inclined except maybe the virtuous few.

How advanced our economy or society is, depends on what measures or incentives we enforce to deter or punish criminals.

In most cases, we find that in countries where punishment is severe (e.g. in Central Europe or Nigeria), the criminals end up moving to less strict countries.

The economics of crime, especially violent crime experienced in countries like South Africa and Brazil, is something that requires adept research if anything is to be done.

In the US, studies were conducted to access the impact of legalized abortion on the level of crime. This was discussed in detail in a best-selling book by Levitt and Dubner’s called Freakonomics.

The study found that legalizing abortion (seen by many as legalized killing equivalent to death sentences) reduces the level of drug abuse and subsequently other criminal activity.

The real problem

Perhaps there is no relevance here but for instance, abortion is legal in South Africa yet a high crime rate prevails. So, what’s the problem then?

Part of the problem lies in the fact that the incentives/benefits of committing crime far outweigh the “costs” and chances of being caught and convicted by the judiciary.

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John Nash through his renowned works (well at least amongst economists), devised what he called “game theory” or “the prisoner’s dilemma”.

Cheating occurs through degrees of severity from a classroom test or examination all the way to the plotting and execution of murder or indirectly killing individuals by selling users addictive drugs.

Then you have your white-collar crime such as insider trading, corporate espionage (unlawfully acquiring recipes, formulas, and technologies from rival companies).

Or simply ‘cooking the books’ or siphoning off profits from a company’s coffers.

Nash’s rationale for such cheating behaviour boils down to the attitude of: ‘if I don’t, someone else will, and leave me with the short end of the stick – so given the option, I’ll always cheat’.

His explanation is one ‘formally proven’ reason for human ‘irrational’ behaviour – or rather, could we say it is rational if the outcome is to favour the decision-maker in the short or long term? This is instinct is innate in human behaviour of not such a few.

Crime and law enforcement

Back to the subject of crime: higher than usual levels has often been blamed on the poverty caused by poor and exclusionary fiscal, social and monetary policies.

There are of course more layers and underlying factors unique to the history of political climate and resource allocation.

Further studies (such as that in the Freakonomics book) need to be carried out such as the potential effects of police presence in deterring crime in the diagram below:

Police officers per 100,000 population by regions and sub-regions (medians)

Crime deterrant

Source: www.unodc.org

Also, highly recommended if you are a law enforcer, economist, government official, or student, is a book entitled Economics of Crime by Erling Eide, Paul H Rubin & Joanna M Shepherd.

This book covers the theory of public enforcement including probability and severity, fines and imprisonment, repeat offenders, incentives of enforcers, enforcement costs and enforcement errors.

It might shed some light as to how criminally-inclined people can be dealt with once and for all. Because as we know – whatever government is doing to fight crime now is clearly not really working!

“When crimes are left alone long enough to fester, a second economy is borne.”

The proceeds from a ‘secondary’ economy because of criminal activity never benefit society. Even though people like Pablo Escobar were seen by locals (in his Colombian town) as philanthropists, their assistance came at a price. Such contributions which are naturally tax-free generally are referred to in economics as ‘social ills‘.

A third market is formed – one comprised of the need to feel secure.

Dealing with the scourge

But fighting fire with fire (with more guns & police who are sometimes corrupt themselves) will not alone solve the problem.

Criminals simply become more aggressive when met with a more confrontational approach as seen in South Africa. The Jeppestown (Johannesburg) shoot-out in 2006 for example, left several police officers and criminals dead.

It’s time to get ’smarter’ about crime and look to the accuracy and conclusive study of human behaviour and the use of incentives.

As crimes continue to ravage communities, cities and countries, we can question why government officials have relatives who own or have stakes in security companies.

It basically places less of an ‘incentive’ for officials to do much about crime.

So, conceivably, those with such vested interests in the third economy would need to be weeded out of the system for crime to be curbed.

That would be the first major step in order to bring about some rationality to society.

Nine Reasons Why Globalization Can’t Be Permanent

We spoke about globalization in an earlier post on some general terms – citing that it has taken a different shape or evolved.

This article below however, delves deeper and highlights on nine reasons why this evolution will be forced to happen.

It well written and covers all salient points and asks all the right questions – such as what you may have pondered on the validity of GDP as a measure of success.

The Intelligence Quotient (IQ) has of late been questioned as the main determinant of intelligence. This especially so with the growing popularity of Emotional Intelligence (EQ) and soon Artificial Intelligence (AI).

You must also question the accuracy in the way the success (or disguised failures) of a nation is presented.  This follows what you are told is required for this success to materialize.

We especially loved this analogy of the current world situation and if anything is to be taken from this article, this is it:

bicycle-analogy

Again kudos to the author Gail Tverberg for this in-depth piece (featured on her website on 31 Jan 2018).

In it, Gail touches on issues such as a population growth, a growing wage-disparity, heavy energy consumption, and the demand for cheaper alternative energy:

Read about the 9 reasons here:   https://wp.me/p3dRG-b4w

Also read more on how Globalization has evolved here

Hope you enjoy it as much as we did.  That it has the same effect it had – getting one to think outside the box and look at the big picture.