Archive for the '2010 Archives' Category

A Question for Summer Interns: Who Are You?

Published on July 18, 2010 in 2010 Archives. 0 Comments

“I think, therefore I am.”  — Descartes

“I yam what I yam.”  — Popeye

The recruiter tried to tell me why the MBA summer intern wasn’t given an offer of permanent employment: “She seemed to be technically proficient as did the other candidate.  She was nice enough as a person.  But we had two interns and were able to hire only one.  The decision came down to “fit.”  It wasn’t that she would have been a bad fit, but we just didn’t know her well enough to say that, in this tight employment environment, she would be a good fit.  We knew what she could do; we just didn’t know who she was. The other candidate got the offer; there was less uncertainty about how well she would fit in.” [1]

Let’s face it: some eight months after the end of the Great Recession, this is still a tough employment market for MBAs.  The MBAs headed into this market—many of whom are smart and ambitious—tend to expect employers to figure out the Millennial Generation for themselves.  But this is a buyer’s market in which employers expect to be sold.  Simply proving that you know the stuff of good business isn’t enough: the intangible “fit” with the company’s culture can become a deciding factor.   In short, to get a job offer, you must not leave your employer guessing about who you are; what you stand for; and the extent to which all this is congruent with the values and culture of the firm.

A year ago, I blogged on the importance of “closing the sale,” of finishing strong, and of asking for an offer in an appropriate way—this message is still highly relevant (if you have not seen it before, read it now).  To that earlier posting, I add the advice here: leave an impression about who you are.  Most summer internships for MBAs will end in a couple of weeks or so.  This is late—but not too late—for you to put this advice to good use.  The careful judgment is not whether, but what to say, and how to do it.

What to say. The average twenty-something MBA candidate is still figuring out the finer points of his or her identity [Note: it is not clear that a sentient being ever stops reflecting on his or her identity]; if you seem to be a work-in-progress, it may feel awkward to say frankly and sincerely something about who you are and what you value.   But if you are already in an MBA program, the odds are that you’ve had some practice at this: most applications to selective MBA programs require some insightful disclosure about yourself in those essays.  Been there, done that.  As a general rule, you should focus on relevance and truth.

Think about your listener and what he or she might be interested to learn about you. The vast catalogue of your attributes may not be very interesting to your prospective employer.  Based on your summer internship, what seems to matter most to this firm and its competitors?  What about who you are would be most relevant to the things that matter?  Whom and what do you serve?  What sense of purpose gets you up in the morning?  Is there anything in the mission statement of your employer with which you especially identify?  If you work for a firm in the health care industry, do you feel a commitment to health and wellness?  Companies in the food industry may express a commitment to wholesome nutrition.  In entertainment, it tends to be delight.  In media, it is informing the public.  And so on.

Tell the truth. It will be tempting to say something about yourself that is gauged to please the listener, but is not wholly accurate.  The less diverse the culture (and the more you want an offer) the greater may be the temptation.  But take it from me: it is a very bad idea to deny who you are, and even worse to represent yourself as something different.  The best corporate cultures embrace diversity.  In fact, the company may be interested in you precisely because you bring a different point of view that in the future might help them.

How to say it. “I am” statements are the blunt instruments of helping someone get to know you.  These are really powerful and tend to draw a line in the sand.  Such statements range from the sublime to the ridiculous so be careful.  Descartes tells us he is a thinker; Popeye tells us to look at him and judge for ourselves.

Alternatively, you can tell some stories.  If “I am” statements are the blunt instruments of impression-making, stories are the stilettos: subtle, and highly effective.  Daniel Willingham, a professor in UVA’s psychology department, has written, “The human mind seems exquisitely tuned to understand and remember stories—so much so that psychologists sometimes refer to stories as “psychologically privileged,” meaning that they are treated differently in memory than other types of material.” [2]  He says that stories are easy to comprehend because the audience helps to interpret the action; and stories are much more interesting, which makes them easy to remember.  Willingham says that stories consist of several elements:

·         Causality. Events in the story have some linkage.  “Both of my parents worked, so I spent a lot of time at home alone.  I became adept at entertaining myself.”

·         Conflict. The main character in the story encounters an obstacle on the way to a goal.  “I invented a new software application, but had no idea how to bring it to the market.  I approached some investors and eventually raised some Angel money from family and friends.”

·         Complications. A good story offers some tension: will the protagonist succeed?  “Then Megacorp threatened to sue me for patent infringement and at the same time gave me a low-ball offer to buy all the rights to my software.”

·         Character. Ultimately, a story says something substantive about one or more people—this is the point of telling the story, to say something memorable about you. “I fought the lawsuit, and won.”  Or “I saw how rapidly the field of applications was changing.  So I sold them the software and used the money to bootstrap the founding of my next company.  We invented—and successfully patented—the second generation of application software.”

Close well. Whatever you decide to say, do not lose the opportunity to link who you are with the company you seek to join.  Why is a job with this company consistent with where you’ve come from and who you are?  It would help if there were some joy and enthusiasm in your closing.  In my experience a strong expression of who you are—in a way that is consistent with what the company needs–helps to clinch a job offer.

  1. I have a conversation of this sort at least annually.  Given here is a pastiche of such conversations.  Any implied reference to a specific person is unintentional. [↩]
  2. Daniel Willingham, Why Don’t Students Like School?  A Cognitive Scientist Answers Questions about How the Mind Works and What it Means for the Classroom” Jossey-Bass, 2009, pages 51-2. [↩]

Reform of the Financial System: The Limits to Limits

Published on July 13, 2010 in 2010 Archives. 0 Comments Tags: , , , , , , , , , , .

Something there is that doesn’t love a wall,…

The gaps I mean,
No one has seen them made or heard them made,
But at spring mending-time we find them there….

Before I built a wall I’d ask to know
What I was walling in or walling out,
And to whom I was like to give offence.
Something there is that doesn’t love a wall,
That wants it down.

Robert Frost, “Mending Wall”

Last March, my wife and I took a bicycling trip in southern Arizona.  Staying at an inn near the border with Mexico, we climbed up a hill to see The Fence, the barrier that runs along the border.  This fence is 15 feet high and consists of vertical steel tubes filled with concrete, quite imposing.  But both sides of the fence are littered with empty water bottles, left by immigrants crossing the border.  You see, the fence is surmountable with the help of a ladder.  More importantly, the fence does not run along the border from sea to shining sea.  Some parts of the border aren’t fenced.  When we got to the top of the hill, we saw the end of the fence in the middle of the desert.

U.S. Indian reservations abut the border; the reservations retain just enough autonomy to deny the U.S. government permission to fence their part of the border.  One would think that crossing the border at the Indian reservation would be preferable to surmounting the fence.  And sure enough, from our hilltop vantage point, we saw a file of 20 or so pedestrians a mile distant snaking their way toward the end of the fence.  A momentary transit by a U.S. government helicopter caused the pedestrians to dive under the scrub brush.  But my guess is that they weren’t deterred.  This impression was confirmed later by some officers from the border patrol.  They said that The Fence had slowed, but not stopped, the influx of undocumented aliens.

The Fence is a metaphor for what we are likely to experience after the likely passage of legislation in the U.S. and Europe aimed at tightening regulation of the financial system.  Any day now, the U.S. Senate will likely vote to approve the “Dodd-Frank Wall Street Reform and Consumer Protection Act,” which will

·         allow the Fed to inspect and regulate any institution (bank, hedge fund, insurance company) that is deemed systemically important. 

·          engineer a smoother process for the government to close down insolvent institutions through a process of orderly liquidation. 

·         create the Consumer Financial Protection Agency to fight fraud and abusive financial products and practices.  

·         give shareholders an annual, nonbinding “say on pay” for corporate executives. 

·         regulate the over-the-counter derivatives market.

The influential blog, ft.com/alphaville, opines that the legislation might actually help the hedge fund industry by putting a drag on the proprietary trading operations of large financial institutions.   On the other hand, the swaps and derivatives dealers are unhappy with the uncertainty the bill creates around future rule-making, and who will make them.  Most importantly, no one is ready to declare that this legislation will forestall the next financial crisis.  James Surowiecki, writing in the New Yorker, declares that the legislation is no “panacea.”  And Republicans generally have condemned the legislation as an “empty effort.” 

Doing nothing is not an option: a relatively stable financial system is in the public interest.  The whole debate, in my view, is around the cost of that stability.  Imposing regulation on an industry is like buying an insurance policy.  A savvy consumer should always ask about the price of the insurance and its effectiveness.  Two new books give excellent reviews of the need for regulation and the various proposals.  The Squam Lake Report by Ken French and others condenses the views of leading academic thinkers: it is succinct, dry, abstract, and yet persuasive.  French et alia are careful students of the modern financial system, not wild-eyed Tea Partiers.  The other book is Crisis Economics by Nouriel Roubini and Stephen Mihm, two economists—their outlook is edgier, more critical of one and all, and well informed by research, history, and current events.  Any reader will find at least something to disagree with in each book.  But comparing their discussions to the 2300-page Dodd-Frank Act, one has to conclude that the Act seems to address the important areas of concern. 

But think about The Fence.  Will the legislation prove to be effective at reasonable cost?  We don’t know.  Dodd-Frank gives great discretion to regulators to set rules in several important areas.

1.       Transparency.  In The Panic of 1907, Sean Carr and I argued that systemic instability has at its core an information problem: because of complexity in the system and in individual institutions, it is hard for decision-makers to know what is going on and to take effective action.  As a result, those decision-makers act out of fear rather than rationality.  Thus does a panic begin.  As the authors of The Squam Lake Report write, “Regulators cannot assess the status of the financial system without knowledge of the intersections between firms.  Currently, U.S. regulators do not systematically gather and analyze much of the information outlined above, and the information they do have is often difficult or impossible to aggregate across institutions.  This constrains the government’s ability to foresee, contain, and ideally, prevent disruptions to the overall financial services industry.” [1]     

2.       Adverse incentives.  Dodd-Frank does not resolve the huge moral hazard created by the government interventions of 2007-2009.  Many people supported those interventions on the principle that if your neighbor’s house is on fire, you should help to put it out, lest the fire spread to your house.  But now we must deal with the legacy of those rescues: creditors may now believe that the government will always rescue them—henceforth will they make riskier loans?  “Capitalism without bankruptcy is like Christianity without hell,” said Frank Borman, CEO of Eastern Airlines in the 1980s.  Will market participants devoutly observe sensible practices if there are no consequences?

3.       Global linkages.  The Act considers financial enterprises in the U.S.  But the potential sources of instability extend well beyond our borders.  Nouriel Roubini and others have explored the possibility of establishing a global regulator of financial institutions; but no country seems particularly willing to give up sovereignty to achieve the kind of comprehensive regulation that would be required.  If you want my nomination for the “End of The Fence,” this is it.  Asymmetries in the ways countries regulate the financial services industry will stimulate “regulatory arbitrage.”

4.       Executive compensation.  An annual, nonbinding “say on pay” vote by shareholders may well focus attention on the wrong aspect, the level of executive compensation.  Instead, the recent bubble and financial crisis were rooted in the heads-I-win-tails-you-lose payoffs embedded in the bonus compensation plans of some financial institutions.  The market for talent should dictate the level of compensation.  Let traders and managers be rewarded for excellent performance; but why not let their bonuses be paid in deferred compensation so that they must bear the longer-term consequences of their actions?  It may be that regulators will start to dictate the structure of bonus schemes.

5.       Institutions.  The legislation does not address the failures at Fannie Mae and Freddie Mac, institutions that formerly operated with an implicit government guarantee and were taken over by the government in 2008.  Henry Paulson, interviewed in today’s New York Times, said, ““The root causes of all this are housing policies — not just Fannie and Freddie,” he said, referring to the giant mortgage companies. “That hasn’t been dealt with.””  The Act does address the credit rating agencies, though the regulations may be too little, too late.  William Gross, the iconic investment manager and co-founder of PIMCO said that the NRSROs  “’no longer serve a valid purpose for investment companies free of regulatory mandates’ and urged investors to dismiss their judgments.” 

6.       Too big to fail.   The Act takes no position on busting up banks that are so big that their failure would endanger the stability of the financial system.  But the Act implicitly defers to the regulators’ powers to dictate reserve requirements and require the orderly dissolution of insolvent banks.

Any fence has its own limitations.  On many of the items listed above, Dodd-Frank grants significant rule-making discretion to regulators.  In one respect, it is fortunate that Congress chose not to micro-manage an incredibly complex system.   Even Barney Frank told NPR today, “”If you do it too inflexibly, you’re inviting the businesses to get around you. You need to give the regulators discretion. And people said, ‘What’s the guarantee that this discretion bodes well?’ And the answer is: In democracies, there are no guarantees. Elect good people.”

Might those regulators themselves become victims of “regulatory capture,” the co-opting of regulators by those they must regulate?  Much of the mentality of successful entrepreneurs and business people is aimed at surmounting obstacles in order to grow a business and fulfill its mission.  They will accept the laws and regulations as a constraint and then optimize within and around those bounds.  But the bounds are bounded: the regulations cannot anticipate the ingenuity of business people in the future.  I have sounded similar concerns before (see this, this, this, and this.) 

Above all, this legislation will not “fix” the problem of panics, crashes, and financial system instability.  The authors of The Squam Lake Report suggest that there may be no “fix”: “The economic hardships triggered by the World Financial Crisis have caused government officials and citizens around the world to demand regulatory reforms that will prevent financial crises.  There is no reasonable way to accomplish this goal.  Financial crises have recurred throughout modern history.  …We expect that financial crises will continue to happen for centuries into the future.  Our goal is not to prevent such crises but to reduce their frequency and severity.” [2]  Similarly, Roubini and Mihm wrote, “Far from being the exception, crises are the norm, not only in emerging but in advanced industrial economies.  Crises—unsustainable booms followed by calamitous busts—have always been with us, and with us they will always remain.” [3]

It is said that most dieters successfully lose some pounds—and eventually regain them.  For a person to shed weight and keep it off requires not merely the gimmick of the diet, but actually a transformation of one’s lifestyle, an internal discipline, a wall.  Most dieters aren’t willing to give up the way they used to live: too much food, too little exercise.  They circumvent the wall.  Like the overweight dieter, America is carrying too much debt, is running a negative trade balance, has huge fiscal deficits, and hopes that the dollar will continue to be the stable reserve currency of the world.  The Dodd-Frank Act may have some modest impact on our national health.  But in order for us to avoid the kind of financial instability we’ve just lived through, we’ll have to change our lifestyle: save more, consume and import less, retire later, and for a while, endure more unemployment and perhaps pay more taxes.  Whether Americans have the discipline for this is the main question.  Something there is that doesn’t love a wall.

  1. The Squam Lake Report, page 48 [↩]
  2. The Squam Lake Report pages 149-150 [↩]
  3. Roubini and Mihm, Crisis Economics page 4 [↩]