Banks, systems and break-ups

Recently, I heard some arguments from bankers that proposed breakups are not feasible. They were adamant that dividing large financial institutions into retail and investment arms, or separating insurance from retail banking, was practically impossible because of the operational impact and complexity of separating out the systems.

This was intriguing because this area is something I am intimately familiar with, and I can see that what we have here is an uninformed or misinformed defense presented in the hope that it might bamboozle a political group even less knowledgeable of such matters.

I have a couple of main objections to their whole way of thinking.

One is that any cost or difficulty in changing their systems now is both :

a) Just desserts, and

b) An indication that their systems are ossified and inflexible and therefore mostly not worthy of preservation

Two is that their systems, their processes, their IT, their people, and the way they operate, fundamentally constitute and define the entity, and that by deriding their own systems, by condemning them as being inflexible, they are condemning themselves. It is a little different than b) above: The bankers have spent so long now living off the free lunch of synthesised rewards, that they have attached too much importance to soft nonsenses, like ‘brand’, ‘trust’, ‘size’ and so on. They have forgotten that the services they provide, the brand they have, the trust they have (or had), are secondary to the systems, teams and individuals that brought those things to life, and secondary to the way those systems operate.

Indeed, a problem that must be reversed today is that companies exist to benefit their anonymous shareholders. They don’t. They exist to benefit everyone and everything that belongs and contributes somehow to the company, especially the employees – and as an aside, it was labour unions that helped maintain that in the past (prior to the beginning of the end under Reagan-Thatcher). When companies don’t recognise this, then they are engaged in suicidal behaviour.

Getting back to the first point. Just desserts – the banks, and, to be true, most organisations that enjoyed growth in the post-Thatcher-Reagan era of neoliberal ‘freedom’, focused on growth. The mantra of the past 3 or 4 decades has been growth, growth, growth. This has not been a growth that mirrored economic development and real wealth creation. This has been a simple response to the exponential creation of debt and liquidity, that has been expanding exponentially since 1971, and most rapidly since the liberalisations and deregulations of debt creation that occured the following decade. Anyone who was worked in a mechanical, aeronautics, IT, or other engineering field (apart of 1980’s Japan perhaps), will tell you today that systemic quality has been forsaken for time-to-market, headlong rushes to the next big contract, whatever might have helped with the share price or help make the last stock repurchase a worthwhile maneuver. It’s all been a shortsighted headlong dash, only to lead us all to this today, which is a catastrophe.

Systems, (and by systems I mean the whole organisational structure, the departments, the employees, the computers, the programs, the management and the way as a whole it functions) have grown in precisely the same way as plants (another type of biological system) grow when you throw hormone into the pot every day. You end up with a mess, an overgrown mess, that is fragile, weak, structurally unsound, that would probably die soon despite its enormous size. (In direct contrast to say a Galapagos turtle, or a giant redwood, that grows carefully, slowly, and takes a similarly long time to pass on).

When you rush to build something quickly, you are focusing on grabbing the next thing to stick on to the existing structure. You aren’t willing to tear it down and start again. You aren’t willing to stop and think about optimisation. You don’t even have to because operational cost is not even a concern.

This was the case with many Western organisations that responded to the credit explosion since 1971. Especially the banks.

Now these organisations find themselves having to focus on operational costs. They can’t rely any more on continuously rising exponential credit growth curves and they can’t keep creating debt to fuel their own growth. It’s game over.

So in this light, when a bank says “I’m sorry, but changing our IT systems is practically impossible because the structures we have in place are so tentatively managed, so little understood, and the cost of making the slightest alteration is astronomical, never mind a simple departmental division,” it is clear that this is the price that these institutions will have to pay, whether it be in the face of government mandate, competitive threat or otherwise. I saw this before when a financial institution grew over time through acquisitions. When the aftermath of the Asian crises reached it in 2000/2001, the institution no longer had the resources to optimise its own internal structure. They downsized and nearly folded.

It’s a weak, feeble defense, and it really should be a case of “well, pay the price and learn the lesson – next time think carefully how you build your company and avoid short term bonus schemes.” The banks who can’t afford the systems change, should do one of two things:

a) Fold

b) Spend the money on completely new systems – build a new company from the beginning

After all, we bailed them out – why should they whine about actually doing something productive for a change?

But, I think, it would be best on the whole, if the existing banks and other large organisations that benefited from unsustainable credit growth, were to be allowed to just die. Bankrupt the banks and write off the debt.