The Breakdown

Explaining Southern California's economy

Sallie Krawcheck on how to avoid JP Morgan-type blowups

33420 full
33420 full

Sallie Krawcheck, one of the most successful women to ever work on Wall Street, has a piece upcoming in Harvard Business Review about how institutional banking should be very concerned about returns that aren't sustainable. She points to JPMorgan's recent $2-billion disaster with a trader known as the "London Whale." And then she suggests how such disasters can be averted — by activating the bank's board of directors. Here's a sample, from Krawcheck's preview at HBR Blogs:

Because of the time constraints they face, boards can only focus on a limited number of issues. Corporate governance has to be one of them, and, in banking, regulation falls not far behind. After that, bank boards tend to spend their time on the problem children, the businesses that aren't doing well. These days there's an enormous amount of time being spent on the mortgage businesses, and now at JPMorgan likely countless hours to come to understand what went wrong at the chief investment office.

Yet this focus on problem children ignores that it's the good kids of today who in banking so often turn into the bad kids of tomorrow. The businesses that typically trip up are the ones that appeared to be great businesses, with much better than middle-of-the-road returns. While it's a fight against human nature, bank boards should allocate some of the time they spend on today's problem children to digging in to understand how the businesses with the highest returns on equity are sustaining them in businesses with low barriers to entry.

In these discussions, boards should ask things like, Why are the returns so good? What are we doing that's different? Why are the returns on this better than our competitors'? Why do we think this is sustainable? Spending that time may feel like a luxury given all the have-to-dos that bank boards have. But if you step back in history, it's clear that having done this could have averted any number of debacles.

What's interesting here is that just a few years back, you would never have encountered the concept of sustainability in a discussion of the banking business. It might be implied, in language like "long-term greedy," but what "sustainable" means these days has more to do with responsible business than ensuring enduring profits through devoted service to fee-paying clients.

What Krawcheck is arguing for was rather elegantly pointed out by the poet Robert Frost in 1923:

Nature's first green is gold/ Her hardest hue to hold./ Her early leaf's a flower;/ But only so an hour./ Then leaf subsides to leaf./ So Eden sank to grief,/ So dawn goes down to day./ Nothing gold can stay.

It's refreshing to see sustainability making its way into a discussion of running banks better. And it's equally exciting to see Krawcheck writing her thoughts down, after leaving banking last year (she was chucked out of Bank of America). Not everyone is happy with her new incarnation, especially David Weidner at MarketWatch, who labels her an "opportunist."

Maybe. She's been busy on the Twitter, and one could certainly interpret her thoughts about risk, banks and boards as coming from someone who should have been practicing what she now preaches more aggressively when she was actually running banking operations.

But she's worth following as she undertakes a re-invention.

Follow Matthew DeBord and the DeBord Report on Twitter.

blog comments powered by Disqus

Enjoy reading The Breakdown? You might like KPCC’s other blogs.

What's popular now on KPCC