A few weeks ago I sat next to an investment banker on a long flight. He works hand in hand with some of the super-quants on Wall Street who perform high-wire arbitrage through mathematical techniques so arcane that “I’d have to get two more math degrees just to understand them,” as my seatmate put it.
“Basically what they’re focused on is predicting the next 30 minutes,” he said. (Actually it may have been “the next 30 seconds,” I forget. Anyway, day-trading for the Big Bucks, with lots of Other People’s Money).
At my destination, I heard a senior exec of one of the world’s high-tech success stories talk about their business model—“30 cents a transaction times billions of transactions, pretty soon you’re talking real money.” (How many of you remember Everett Duerksen, the originator of that line? Hey I’m not old, just well-read!).
30 minutes, 30 cents, 30 billions. Not your father’s bizmodel.
There is no shortage of economists who will gladly tell you the wonderful role these business models play. They mitigate risk; they lower costs; they create greater liquidity; they globalize geographically fragmented businesses.
Gosh, is there no downside? Of course there is. And it’s one of those two-sides-of-the-same-coin things.
The business world of today is heavily driven by two trends—fragmentation of processes, and globalization of scale. Break everything into tinier and tinier processes, and scale them globally. You get all the benefits listed above, but—what happens if no one has the big picture anymore?
You occasionally get myopic consultants and bankers—for a great example see this blog post from last year.
But more importantly, you get situations where everyone is transaction-oriented, and no one has a stake in the integrity of the entire process.
The airline industry, many decades ago, was largely financed by insurance companies. The insurance companies tended to have ties to multiple airlines, partly to hedge their own risk. Then the banks got into the business. Each bank picked a favorite—and given the peculiar economics of the airline industry, all the airline-bank pairs began to beat each other into the ground with excess capacity. The industry hasn’t made money for decades.
For a more current example, of course—subprime mortgages. When an industry gets dissected, disaggregated, and disintermediated, there may or may not be a problem. If a regulatory agency is there to see the big picture, that may be OK. If a risk-assessing industry is in place (bond ratings, accounting firms), that may serve to keep things in check.
But if none of those things are true—if Glass Steagall has been eviscerated, financing products escape regulatory purview, if financial institutions are selling off and collateralizing loans and if credit card companies are chasing fees (read transaction) instead of loans (read relationship)—then watch out. No one’s minding the business store.
In such cases, business becomes a combination of Russian roulette and musical chairs. He who gets in and gets out fast wins. He who stays is a sucker.
How fast is 30 minutes? How small is 30 cents? Small, and getting smaller.