A Sunday Lecture
It’s almost 10am on Sunday and I am killing time before I am supposed to give a guest lecture in a course being given at the University of San Diego graduate business program. The Sunday morning time is a little unusual, but in these days of virtual education and even more so in graduate business education, there are more and more courses that are given on weekends and since Sunday is half of the weekend, it is inevitable that it will occasionally come into play. Nonetheless, I spent some time on Friday reviewing with the course professor, with whom I share a common bond in that we both did our graduate business work at Cornell and even had the same professors, people who went from being my teachers to my colleagues when I taught there. I also have my notes from a similar guest lecture I gave for this same class last year at about this time and fortunately, I kept good notes so that I didn’t need to reread the book that the course is predicated on. My notes also gave me a good head start on what I would be saying to the student. This is less a lecture and more a Q&A session drawing on the fact that I lived through the period and the issues that they are learning about in the book.
The book is called The Number by Alex Berenson and it is about how earnings releases by companies (as verified and endorsed by their accountants) impact both the actual accounting and the market psychology surrounding them. These are issues that lead to and are prone towards a great deal of exaggeration and manipulation. At times, these issues cross the line and potentially become downright fraudulent. And, of course, the worst part of it all is that the built-in motivations through incentive compensation and high professional fees of the corporate leadership and professional oversight have tended to occasionally weigh in and make matters even worse. The book charges this all as a systemic failure of both corporate governance and regulatory oversight. This is a big accusation and it is leveled at the American financial complex that is generally thought to be the most reliable system on earth.
Needless to say, this is fertile ground for discussion with students and my role is that of a practitioner who lived through the times being covered by the book. The book is mostly centered around the technology boom of the late 1990’s and the ensuing tech bubble burst in the start of the new millennium. That timeframe puts the events squarely in the middle of my career on Wall Street so I have lots and lots of stories to illuminate the points of view that are being discussed. I suppose that is what makes me a good guest lecturer. I lived the life and I walked the line that is under scrutiny. I can tell stories about good people who went bad and good people who got caught up and accused of doing bad things that they never did. I have, myself, been put under the hot lights of regulatory review on several occasions and as I like to say, the bullets may have parted my hair a few times, but they never laid a glove on me otherwise. I tend to wear this more as a badge of courage and honor than something I am sheepish about. But it does all cause me to more than a little introspective.
I believe that fundamentally, financial intermediation is a necessity of modern life and that, on balance, it does far more good than bad. I believe I can claim the same for financial innovation and what is often termed financial engineering. Everything is prone to excess, especially when it revolves around the root of all evil, money. As an example, the proper functioning of markets is a good thing for sure and the more fluid the price discovery mechanism the fairer those markets are in accurately reflecting investor perceptions of value. That means that having the ability to go short those markets is an important element of that system. But shorting is a complex mechanism in market terms because it is prone, by its very nature, to manipulation and possible exaggeration. So the regulatory world puts in guardrails to keep the shorting mechanisms in check. The best example is that you cannot short something in excess of that which exists (otherwise it would be like insuring a house for more than its worth against catastrophic risk). Doing so makes an undue incentive for a catastrophic risk to occur (say, for instance via arson). That is an untoward reaction to something like insurance that is generally a societal good because it is intended to mitigate risk. The challenge is to allow for risk mitigation without inducing manipulation that actually does the opposite and increases risk.
That’s a simple example to understand, but the financial markets have much much more complex versions of this that seem like good ideas in theory and they become hard to manage in reality. This is especially so when there are fewer and fewer people who truly on der stand the mechanisms. Complexity is therefore also a culprit even though it seems like its and advancement of a kind with good intent. That brings me to one of the great lessons I always try to teach and that is that all good things that flow from innovation are also subject to and, indeed, prone to abuse. The Greeks understood this long before I ever observed it. Too much of a good thing often turns into a bad thing.
I am now getting back to this post as I have held the lecture, which was far less a lecture and far more a quick summation about the book and its relevance to the real world through which I travelled and which I experienced. That summation and stage-setting was then followed by almost ninety minutes of Q&A from sixteen young and curious minds. These students love speakers who bring the real world into the classroom. I think they really appreciate someone who is prepared to talk of real life in the fast lane and the good things and bad things that tend to happen. I have very little shame in talking about any and all of my experiences and try hard to give them a very real and granular appreciation of what one goes through in the senior leadership ranks of the rough and tumble. I pull few punches and often surprise them with how candid I am prepared to be. I feel it is important for everyone to understand the benefits of humility and the dangers of hubris.
The hardest part for me is staying on point. I tend to go off on tangents, but that may be where the most value lies in my humble opinion. The Number speaks to the accounting misrepresentations and how they contributed to the tech boom and bust at the turn of the millennium. I think it is valuable to explain why that particular set of issues, while very familiar to me and certainly not without some impact on me, was far less a big deal in my career and life than other events that surrounded it on the timeline. I had just sold out my position in Bankers Trust to Deutsche Bank in what was the most lucrative transaction of my business life and I was starting a tech-based venture capital fund (just as the NASDAQ died), which went on to be the second most lucrative transaction of my career. It’s not that the tech boom/bust didn’t impact the outcome, it most certainly did. It’s that I was able to wait it out and things came back for us. It also allowed me to remind people that the newest trend in business may be less about public companies and the reporting misrepresentations discussed in the book and more about private companies and the challenges in managing that reality/fiction complex.
In any case, it was a fine way to spend a Sunday of my retirement, reminiscing, pontificating, and passing on wisdom as best I know how to do.