The Wall Street Journal has officially sounded taps for the SIV bailout plan that once garnered front-page business news coverage:
This week’s decision by Citigroup Inc. to bail out seven investment entities and bring $49 billion in assets onto its balance sheet effectively killed one of the centerpieces of the Bush administration’s approach.
The balance of the article discussed other remedies under consideration as well as the notion that perhaps the best move is to let the housing market find its own level, since there may be no other way to get investors back in the water.
The subtext is that the measures proposed by the Administration may fall short, and if so, there will be calls for further action. The assumption in many quarters is that the cause is the Administration’s hands-off bent, which leads to minimalist policies.
While that is doubtless true, I’d like to submit another likely culprit, namely, Paulson’s problem-solving style. I don’t know Paulson personally, but I have a fair bit of experience working with investment bankers, and Goldman investment banking services types (the corporate client coverage group where Paulson spent much of his career) in particular. By all accounts (press and some comments from Goldman staffers) Paulson, aka “the Hammer” is an extreme version of a type, so I believe my generalizations aren’t a stretch.
While investment bankers like to think of themselves as creative, 95+% of what they do is shuffling around existing deal elements. It’s rare indeed to work on inventing and launching a truly new instrument, and smart bankers typically avoid it (much better to jump on the bandwagon if it proves out).
The problem is that investment bankers, temperamentally, are like people in the military. They live to take the hill. Even though they are often very smart, most of them aren’t cerebral by inclination. The tendency to drive quickly for resolution is great on deals, but a danger in a systems design or complex problem solving context. (An aside: Robert Rubin, a former risk arbitrageur, is by all accounts a very thoughtful, deliberate type, stylistically the opposite of Paulson).
The subprime bailout plan came together in about a week, and having worked on deals, that says there wasn’t much time for all that much thinking. I’m not at all certain what the process was, but there was a bit more disclosure on how the SIV rescue plan came about. The image was that Paulson got lots of senior people in a room and knocked heads together. In one meeting, a guy sketched out a vehicle that he had worked with before that was used as a blueprint for the SIV rescue plan. The reporting may be wrong, but it gave the impression that no ideas were developing, and when one proposal surfaced, everyone latched on to it to try to make it work.
Now it is actually very hard to design a process that will come up with good solutions to thorny problems, so in fairness, it isn’t surprising that the process Paulson gravitated towards wasn’t optimal. The reason I am bothering to write this that most people and organizations don’t bother thinking about how to go about undertaking activities that fall outside their normal operations. They use routine procedures by default, and those inappropriate processes often lead to hastily-developed ideas that fail or need substantial revision.
Although there are various ways to go about working though tough issues, one simple technique greatly improves outcomes, and isn’t difficult to implement: separate problem definition and analysis from problem solving. The big reason is not the most obvious: people become very wedded to positions once they’ve stated them. Our society values the appearance of consistency highly. So someone who throws out an idea early on will not be terribly open to other proposals, even if his has a fatal flaw, or even new information about the situation. The discussion can easily devolve into a competition between egos.
It takes some discipline, but the manager separates the problem-discussing and problem solving sessions. The facilitator must nicely but firmly squelch all efforts to propose answers in the first session and make sure people talk about the issues EXHAUSTIVELY. The participants will inevitably be thinking about remedies regardless, but by forcing them to keep them to themselves, they have to weigh them against the various considerations under discussion. Ideas they might have volunteered may be put aside or improved as the debate continues. The other big advantage is that the group shares information, putting everyone on a common footing, and will come to agreement on at least some elements of the situation. By contrast, jumpint to conclusions quickly also means the participants can have considerable disagreements about the nature and severity of the problem that haven’t been aired sufficiently, and arguments about the problem get muddied in arguments about the solution.
At the beginning of the problem-solving session, the facilitator should set aside 15 minutes to discuss any further thoughts about the issues before asking for proposals.
The implication is that even if Paulson & Co. come to embrace the need for government intervention and again go down the path of trying to devise new programs (rather than revive old ones) they are likely to wind up with a repeat of the SIV experience, of launching something that hasn’t been thought through sufficiently (my view: the fatal flaw was the conflict between the SIV owners’ desire to attenuate losses, versus the investors willingness to fund only paper that was priced at current market values. They lost time trying to finesse something that couldn’t be fixed, and lost critically valuable time).