If

RMA Journal, The, May, 2002 by Edward E. Furash

There's a big "if" attached to never having another Enron or similar disaster. If we believe that greed, convenience, and caving in to pressure will always trump doing what's right and taking pains to do it, we're sunk. It's up to each of us to become moral exemplars for our economic and personal lives, and this requires memory, courage, patience, and encouragement.

If you can keep your head when all about you
Are losing theirs and blaming you,
If you can trust yourself when all men doubt you...
If you can wait and not be tired by waiting,
Or being lied about, don't deal in lies,
Or being hated, don't give in to hating...
If you can talk with crowds and keep your virtue,
Or walk with kings--nor lose the common touch
If neither foes nor loving friends can hurt you,...
Yours is the Earth and everything that's in it,
And--which is more--you'll be a Man, my son!

excerpted from "If," by Rudyard Kipling

Albert Einstein defined insanity as "doing the same thing over and over again and expecting a different result." Over the past 45 years as a banker, banking doctor, consultant, and now a banker again, I have witnessed bankers and other financial services executives continually repeat the same bad judgments that put them in the same sad situations, all the while hoping that this time things will work out differently. And each time, the societal and economic costs have grown higher and higher because of the steadily increasing complexity and risk of financial transactions.

What is there in human nature that causes this to happen? In some cases it is an inability to see the essence of an older failure in a new event. However, my core conclusion is that greed, interpersonal pressures, and self-deception are the root causes. In the face of such pressures, it is easier and seemingly more profitable to practice self-deception than to live Kipling's admonition to "keep your head when all about you are losing theirs and blaming you."

Frail as we are, we all are susceptible to temptation as we engage in these high-risk/high-reward economic enterprises. So we must understand how everyday personal and business decisions, behaviors, and attitudes open the door to repeated disaster. We can break the cycle only when we recognize our propensity for self-delusion and have the backbone to resist it.

None of us wants to believe that periodic disasters are an unchangeable, inherent part of capitalism, although even the most idealistic among us realizes that there are people who deliberately commit financial crimes for profit. In an effort to finally break the cycle of mistakes, let's look at some of the ways we seem to deceive ourselves. Let's find the signals that should tell us how to change course or end bad practices before they do great harm.

Naked Emperors

Remember the fable of the emperor who was persuaded by a charlatan tailor that he was being dressed in the finest, most beautiful fabrics? Even though the emperor could not see any royal garments, he was unwilling to admit his eyes were not regal enough to view them. Thus, he envisioned the garments and paraded around in the nude. No adult in the kingdom had the courage to tell the emperor. But one day a small child said: "Hey--the emperor has no clothes!" And just like Don Quixote suddenly confronted with a mirror, all the emperor's subjects saw the truth, and the tailor was appropriately punished. The ostensible lesson of this parable is that only a child, with fresh eyes, can see how we blind ourselves. In the case of financial services, such self-deceptions can reach extraordinary levels and take many different forms. No wonder the world is bewildered after a financial stratagem crashes, asking, "How could they have gotten away with that?"

There are CEOs who make their colleagues afraid to express contrary views. Whether from fear of losing their jobs or working for a bully (who all the while usually believes that he is behaving as a leader), employees' free expression and ability to challenge the status quo dry up. "He doesn't want to hear what I have to say.

Or perhaps the CEO has unbounded faith in a certain lender or trader, to such an extent that no one will go against the anointed "expert." And so the bank follows his or her path into one project or trade after another with ever increasing risk and exposure--until the last trade or loan, when the losses typically eat up all the profits on all the prior transactions.

The CEO and the organization have deceived themselves into believing that the "expert" is beyond questioning. It takes great courage to stand up and say that what appears to be a winning strategy is dangerously flawed. Whenever one is told that a transaction should be left to the expert or "is too complex for you to understand," it's time to challenge the deal.

Banking is a simple business--only the complexity of the tools needed to produce results change (for example, the invention of derivatives). If a transaction cannot be explained simply and understood in the framework of how banks make money and control risk, it is time to say no, regardless of the temptation to make a buck.