An article in today’s NY Times claims that a major danger to investment banks is the empowerment and growth of whichever division happens to be benefiting from transitory financial cycles. Since members of a particular department have specialized skills that are less valuable in other areas, they tend to be biased in favor of excessive investment of resources in their areas. If the mortgage market booms for too long you will wind up with a high frequency of mortgage people in the executive corps and reduced ability to cut loose if risks appear dangerously high for the firm.
Supposedly, part of Goldman Sachs’ chart-topping success during the recent credit crunch (although it has been very successful for more or less its entire history) comes from the creation of a powerful independent institution with veto powers and less bias towards particular investment classes.
http://www.nytimes.com/2007/11/19/business/19goldman.html?pagewanted=2&ei=5087&em&en=a3db4f1df6a297ef&ex=1195621200
“At Goldman, the controller’s office—the group responsible for valuing the firm’s huge positions—has 1,100 people including 20 PhDs. If there is a dispute, the controller is always deemed right unless the trading desk can make a convincing case for an alternate valuation. The bank says risk managers swap jobs with traders and bankers over a career and can be paid the same multimillion-dollar salaries as investment bankers.”
On the Enron point:
An article in today’s NY Times claims that a major danger to investment banks is the empowerment and growth of whichever division happens to be benefiting from transitory financial cycles. Since members of a particular department have specialized skills that are less valuable in other areas, they tend to be biased in favor of excessive investment of resources in their areas. If the mortgage market booms for too long you will wind up with a high frequency of mortgage people in the executive corps and reduced ability to cut loose if risks appear dangerously high for the firm.
Supposedly, part of Goldman Sachs’ chart-topping success during the recent credit crunch (although it has been very successful for more or less its entire history) comes from the creation of a powerful independent institution with veto powers and less bias towards particular investment classes.
http://www.nytimes.com/2007/11/19/business/19goldman.html?pagewanted=2&ei=5087&em&en=a3db4f1df6a297ef&ex=1195621200 “At Goldman, the controller’s office—the group responsible for valuing the firm’s huge positions—has 1,100 people including 20 PhDs. If there is a dispute, the controller is always deemed right unless the trading desk can make a convincing case for an alternate valuation. The bank says risk managers swap jobs with traders and bankers over a career and can be paid the same multimillion-dollar salaries as investment bankers.”