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The Best Movie You Haven’t Heard Of: Inside Job

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Here are the ratings (% who liked) from Flixster for some of the movies playing this weekend:

90%            The Social Network

88%            Inside Job

81%            Unstoppable           

78%            MegaMind

78%            Jackass 3-D

77%            Red           

75%            Skyline

65%            Due Date

65%            Morning Glory

64%            The Next Three Days           

54%            Saw 3D

You know The Social Network. But how about the #2 movie, Inside Job? Ever hear of it?

96% of the critics liked it. Rotten Tomatoes rated it 96%.  It’s narrated by Matt Damon. Feeling out of the loop yet? Why haven’t you heard of this movie?

More on obscurity later, but here’s the official synopsis:

‘Inside Job’ is the first film to provide a comprehensive analysis of the global financial crisis of 2008, which at a cost over $20 trillion, caused… ‘Inside Job’ is the first film to provide a comprehensive analysis of the global financial crisis of 2008, which at a cost over $20 trillion, caused millions of people to lose their jobs and homes in the worst recession since the Great Depression, and nearly resulted in a global financial collapse.

Through exhaustive research and extensive interviews with key financial insiders, politicians, journalists, and academics, the film traces the rise of a rogue industry which has corrupted politics, regulation, and academia. It was made on location in the United States, Iceland, England, France, Singapore, and China.

There has been no shortage of books and articles about the meltdown. But most of those have had a reporter’s flavor to them—here’s what happened, then here’s what happened next.  I felt that no one had really pulled it together with a narrative theme and the data to back it up. Until this weekend, that is.  

The theme is now clear. Bad things happened. They were not an accident. They were the results of bad people behaving badly. They knew what they were doing. They did them anyway. And to this day, they refuse to acknowledge responsibility.  The issues of trust that became so manifest were not just about systems and markets; they were inescapably about people as well.  It’s one thing not to trust a system; it’s yet another to not trust those who inhabit it.

Think of this movie as what Michael Moore would produce if he had a PhD in economics and a career as a Federal Prosecutor. It’s the project of Charles Ferguson, who in fact does have a PhD in political science from MIT (he has also consulted to the White House and the Department of Defense, was a Senior Fellow at Brookings, and a member of the Council on Foreign Relations).

You may know Ferguson as the director of No End in Sight, a powerful documentary about the Iraq war. He’s confident enough to interrupt an economist and say, ‘You can’t be serious about that. If you would have looked, you would have found things.’ Or to tell a former Bush administration under-secretary of the Treasury, “Forgive me, but that’s clearly not true.”

Here is a review by A.O. Scott, in the New York Times.

Boston.com calls it “a masterpiece of investigative nonfiction moviemaking — a scathing, outrageous, depressing, comical, horrifying report on what and who brought on the crisis.

Here’s Kenneth Turan’s review in the LA Times.

Go see for yourself; see the trailer here.  

The Role of Ideology in the Meltdown

There’s much to say about this documentary; I’ll limit my thoughts to just one—the role of ideas in the meltdown. 

In this day and age of neuro-explanations and insistence that only measurable behavior is relevant for management, the role of ideas gets pooh-poohed. Big mistake. 

I’ve written before about the power of strategic doctrine taught in business schools to negatively influence our general business thinking. But after seeing this documentary, I’m newly persuaded. Ideas have huge power: especially when those ideas happen to greatly serve the economic interests of patrons.  

In the pharmaceutical industry, it’s become well accepted that a researcher or writer who takes money from a drug company is at the very least subject to rules of disclosure. Failure to do so constitutes an immediate presumption of conflict of interest.

Yet somehow, we have never held our nation’s leading economists and business school faculty to the same standards. One of the most eye-opening aspects of Inside Job for me was to put this issue front and center. 

Some of Fergusons’ hardest-hitting interviews are with the elite heads of academic institutions: Frederic Mishkin, a former Fed governor, now at Columbia Business School; his boss Glenn Hubbard, chairman of the Council of Economic Advisers under George W. Bush; John Campbell, Harvard’s economics department chairman; and fellow Harvard economist Martin Feldstein. 

They come off, respectively, as incompetent, blustering, inarticulate, and smug. None of them seem to have noticed a disconnect between their laissez-faire ideas and the disasters engineered by those who quoted them; much less any sense of impropriety at the comfortable financial relationships they shared with those very firms. 

Somewhere there is a researcher at Harvard Medical School screaming at the injustice of his not being published in NEJM because of some disclosure requirements, while his academic counterparts in business and economics were happily and openly opining on the health of the Icelandic banking system and the liquidity of the US subprime mortgage market, all the while getting very well paid. (Note: b-school profs provide functional consulting services to companies all the time; I don’t see that as an issue. This is vastly different; more another time). 

Results of the Meltdown

Ferguson touches clearly, albeit briefly, on one enduring outcome of this decades-long debacle–the increased gap in the US between the haves and the have-nots. 

In 1976, the richest 1% of Americans had 9% of the income. Now they have 24%. From 1980 to 2005, 80% of the gain in income went to the top 1%. Guess what industry disproportionately accounts for that gain?

But the most significant casualty, I think, is a great old American belief: the belief that you can make it here in the good old USA, land of opportunity, where anyone can be what they want. You don’t have to be limited by the circumstances of your birth, like in all those Old World countries.

Sorry: no longer true. By one study, it is harder for someone to get ahead now in the US than it is in Denmark, Australia, Norway, Finland, Canada, Sweden, Germany, Spain, and even France. Only Italy and the UK are more class-bound, and I’ve seen other studies where even the Brits are less class-bound than we are. That decline in opportunity is another result of greater income disparity. Again, one of the legacies of the financial industry. One trust expert states very clearly that a key driver of low trust is high income inequality.  And here’s a good explanation of just why that is true.

You may disagree with a lot of what I’ve said here. You may think this movie won’t change your mind; and since it’s extremely hard to change people’s minds, you may be right. But if so, may I suggest you owe it to yourself to see it—if only to write back and point out the flaws in the movie.

HBS’s Bill Sahlman on the Financial Crisis: Why it Happened, How to Fix It

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Few people are more qualified to explain what went wrong in the financial industry than Harvard Business School’s Bill Sahlman.  His resume covers just about every aspect of the industry.

In an HBS Working Knowledge paper titled Management and the Financial Crisis (We Have Met the Enemy and He is Us …)  he gives us a very special view of what happened—broad and deep, and holistic to boot. He also gives us an idea of what should be done.

He gets an A+ for the explanation; for the recommendation, maybe not so much.

My summary cannot do his paper justice; but to whet your appetite, I’ll touch a few bases.

Managerial Incompetence Was the Driving Factor

Black swan theory fans notwithstanding, Sahlman argues this meltdown was not unique except in scope and scale. What we had was a massive failure of five largely managerial systems: Incentives, Control and Information Technology, Accounting, Human Capital, and Culture.

Sahlman also flatly says “Greed played a role but the bigger problem was incompetence.” What he means by competence largely comes down to managers. I find this hugely commonsensical, and rare at the same time. In other words, I think he’s very right.

He is inclined also to give a bye to some of the usual suspects: accounting firms, boards of directors, and regulators, to some extent. His reasoning is hard to argue with: the complexity of the products engaged in ran far beyond the relatively meager abilities of those in the aforementioned roles.

Sahlman singles out Goldman Sachs and JPMorgan Chase’s Dimon as examples of good managers who clearly avoided most of the damage caused by their inept competitors.
His diagnosis, refreshingly, puts the blame squarely at the feet of business itself—particularly management. A management that runs the company through over-leveraging and over-optimism is a management team that is grossly incompetent. Even they wouldn’t have generally wanted the results they ended up with.

What I also like about Sahlman’s view is that it treats impersonal tools like incentives not as exogenous dehumanizing variables, but as things completely within the realm of management—and he makes management squarely responsible for their use. As far as I’m concerned, this is the best of HBS talking; the old-school HBS that assumes managers have a responsibility to run organizations holistically, for the long run, and in the interest of stakeholders–not slavishly to a few slanted metrics.

The Solution–an Overseer?

After such a great analysis, I’m left a little cold with Sahlman’s solution. It is to have a sort of outside observer—not a government interveener, since Sahlman is not sanguine about government intervention, but a new kind of monitor. This monitor would have a scope to cover the five broad areas Sahlman outlined at the outset.

The problem is not with having a holistic view; I’m all for it. And while Sahlman is rather vague about the statutory authority of the “monitor,” I figure that could be figured out.

My concern is that, in the end, Sahlman sounds like the consummate insider; his specific knowledge of the situation runs the risk of blinding him to the system’s flaws.
In this case, the one flaw that worries me is the belief that one more systemic overview will finally get it right. It’s the idea that our problem is the lack of a comprehensive enough model; that if we just had a little more data and a better model, we could finally model the world.

Here I have to agree with Taleb’s Black Swan theory: the problem with models is that they never model what hasn’t been envisioned. And while you won’t get a better dose of commonsense in business than what Sahlman serves up, I’m still sceptical about this part.

A Different Idea: Management by Values

So do I have a better idea? Well, I do have another idea. And it lies in the one area Sahlman puts least emphasis on—culture. While Sahlman talks about ethical cultures, he seems generally to mean a focus on long-term risk management and an aversion to illegality. Necessary, but not sufficient, for a good culture.

Those traits are jacks for openers. We need to be cultivating belief systems, not just management control systems.  We need mental models that talk about relationships, that actually live out the idea of long-term relationships instead of relegating them to the thin air of risk management managers.

We need baked-in beliefs about the role of business in society, that get promulgated not by monitors and smart managers, but by high school teachers and b-school profs, by bloggers and journalists and marketing managers and bankers alike, and in the most mundane areas of business. That’s a culture: a set of beliefs that people unconsciously share about ‘big’ things like fairness, relationships and the value of one’s word.

One of the best insights I ever got from HBS could easily have been articulated by Sahlman himself, I suspect: as things get more complicated, you’re better off managing by values than by policies.
 

In Search of the Bottom Line of the Wall Street Implosion

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I have been reading a lot of opinion pages in search of the perfect insight about what’s happening on Wall Street, because it affects the world financial community and the economics of everyone globally.  This being written days after Lehman’s demise, and the morning of the AIG bailout, take-over, whatever.

John McCain and Joe Biden have both denounced Paulson’s decision re AIG. Knee-jerk reactions, and somewhat tone-deaf.

Jim Cramer says he had it right a year ago in his TV meltdown; that the worst is over, and that Paulson did the right thing because he had no choices.

Thomas Friedman calls it a bubble  and makes the case for systemic rewrite of regulations.

The Today Show led with Gordon Gekko clips—it’s all about greed.

Joe Nocera combines the bubble and greed themes and reminds us about denial—Wall Street is just Main Street, where home buyers keep hoping they can sell for more than the outrageous price they could have gotten (or, worse, bought at) two years ago. We are all Lehman.

These are all sensible–all blind men correctly sensing one part of the elephant.  But one person–I think–just flat nails it. No surprise, when you think about it—Tom Peters.

In 450 words, he cuts to all the chases. Peters is at that point in his career where his value to society is enormous. He’s seen this movie before—many times. He’s smart. He’s articulate. He’s still learning. He’s still got every one of his marbles.

And that’s what makes him wise.

His comment on greed? “Duh.”

On capitalism? “Good ideology run amok.”

On AIG? “Thank God for Paulson: it’d be worse without him.”

On hubris–he lists five deeply flawed beliefs that drove this debacle, each of them dead-on.

For a coherent view of things, just go read Tom Peters post of today.