What price the wisdom of Luke Johnson, when his own company Patisserie Valerie tanks?

Catherine Bennett in The Guardian

The Patisserie Valerie chief should look to himself before lecturing others again

 

Self-styled ‘risk-taker’ Luke Johnson at a branch of Patisserie Valerie in London.


‘Unfortunately,” Luke Johnson wrote recently, “financial illiteracy permeates society from top to bottom. Too many ordinary people do not understand mortgages, pensions, insurance, loans or investing.”

Johnson, the entrepreneur whose biggest asset, Patisserie Valerie, now needs bailing out, was being generous. Even after the 2008 financial crisis confirmed that corporate incompetence warranted unwavering public scrutiny, too many ordinary people remain equally ignorant about the operations and capabilities of business leaders, even those, like Mr Johnson, whose influence extends far beyond his imperilled patisserie company.

Some of us, inexcusably, even struggle with the basic jargon of “black hole”. As in: “The owner of Patisserie Valerie has been plunged into financial crisis after it revealed a multimillion pound accounting black hole.” Is it the same sort of black hole that astonished managers at Carillion, following a “deterioration in cashflows”? Or an industry synonym for the “material shortfall” disclosed by the Patisserie Valerie board, “between the reported financial status and the current financial status of the business”.

Either way, does the black hole’s existence mean that Mr Johnson must also be financially illiterate? Or is that question better addressed to Patisserie Valerie’s finance chief, Chris Marsh, with whom Johnson has worked since 2006? Marsh was arrested by the police, then released on bail.

Regrettably, at the very moment when an ordinary person struggles to comprehend how £28m in May became minus £10m by October, and why one creditor, the HMRC, should be pursuing an unpaid tax bill of £1.4m – and what that tells us about the company’s leadership – it appears that Mr Johnson is taking a break from his weekly newspaper column. Its absence is the more acute, now that its author, expert on subjects such as red tape, Brexit and other people’s incompetence, has also fallen silent on Twitter; and his popular personal website seems, at the time of writing, to have vanished. With luck, it won’t be too long before he is sharing details of his mercy dash on Evan Davis’s The Bottom Line: “Providing insight into business from the people at the top.”

Happily, as others have noted, some of Mr Johnson’s earlier columns have addressed related issues such as, recently, “a business beginner’s guide to tried and tested swindles”. Watch out, he warns, for non-payment of creditors, dodgy advisers and attempts to overcomplicate things, so as to baffle the many people – unlike himself – who “do not understand the technicalities of investing or accounting”.

Inevitably, that widespread ignorance makes it hard to judge how much of Johnson’s wide-ranging, pre-existing advice, which has recently focused on Brexit, we can safely discard as, if not consistently hilarious, worthless. His chairmanship of Patisserie Valerie has, after all, repeatedly been cited, in the same way as Dyson’s profits and Tim Martin’s pubs, as the main reason to listen to him deprecate the EU, with his own achievements (pre-black hole), proving that “this is a great country in which to do business and prosper”.

Although Johnson is no different from other business celebrities, such as Dyson, Branson and Trump, in having parlayed business success into guru status, he has, more unusually, further set himself up as a kind of entrepreneur-moralist, with a biblical line in rebukes. Here he is, against – I think – overpaid government regulators: “Political leaders who want to foster world-beating companies must act decisively and, as with any transformation, slash off the gangrenous limbs without mercy.” Critics of rich people are warned: “Envy is a ruinous trait – as well as one of the deadly sins – and a sordid national characteristic.”
 

Like any half-decent moralist, he alternates rants with hints for personal salvation, through thrift, reliability and, again, financial literacy: “I am surprised how many senior managers I meet cannot read a cashflow statement.”

By way of authority, even Johnson’s less scorching capitalist homilies are littered with references to the usual suspects – Napoleon, Samuel Smiles and Marcus Aurelius – less usually, the scriptures and “the 19th-century philosopher Herbert Spencer”, not forgetting, shamelessly, Ayn Rand. “Those who possess willpower,” Johnson echoes, “seize the day and actively control their destiny.” Less gifted individuals are dismissed as lazy idiots, fools, inferiors who will never get the chance to close down a chain of well-regarded bookshops or, as now, bail out their own patisseries.

That Johnson should, on the back of this stuff, and the cake shops, have risen to yet greater prominence as a notable Vote Leave backer, his blessing sought by Theresa May, is perhaps no more absurd than, earlier, was David Cameron’s promotion of the Topshop brute, Philip Green, or elevation of JCB’s Anthony Bamford (previously fined by the EU). The myth of the disinterested entrepreneur-consultant seems ineradicable.

In Brexit, Johnson and his like-minded entrepreneurs have, however, discovered a yet more rewarding platform on which to portray their regulation-averse interests as a purely patriotic project.

Entrepreneurs, Johnson has written, on this favourite subject, are “the anarchists of the business world. Their mission is to overthrow the existing order.” Every entrepreneur is “a disruptor and a libertarian”, or would be “if the state sets a sensible framework and gets out of the way”. He explains that the word “chancer” properly describes risk-takers like him, who are willing to make mistakes, probably through excessive impetuosity, or as others might think of it, recklessness. “Probably the most common and devastating mistake I’ve made,” he wrote, “is to choose the wrong business partners.” As for abiding by the rules of the game: “It is the nature of risk-takers to be in a ferocious hurry to become successful, which frequently means cutting corners.”

Thus, even before last week’s disclosures about Patisserie Valerie, Johnson’s own columns amounted to the best possible case for ignoring the entrepreneur lobby on Brexit – indeed, on every subject other than their own, risk-taking genius.

How to get away with financial fraud

Dan Davies in The Guardian


Guys, you’ve got to hear this,” I said. I was sitting in front of my computer one day in July 2012, with one eye on a screen of share prices and the other on a live stream of the House of Commons Treasury select committee hearings. As the Barclays share price took a graceful swan dive, I pulled my headphones out of the socket and turned up the volume so everyone could hear. My colleagues left their terminals and came around to watch BBC Parliament with me.

It didn’t take long to realise what was happening. “Bob’s getting murdered,” someone said.

Bob Diamond, the swashbuckling chief executive of Barclays, had been called before the committee to explain exactly what his bank had been playing at in regards to the Libor rate-fixing scandal. The day before his appearance, he had made things very much worse by seeming to accuse the deputy governor of the Bank of England of ordering him to fiddle an important benchmark, then walking back the accusation as soon as it was challenged. He was trying to turn on his legendary charm in front of a committee of angry MPs, and it wasn’t working. On our trading floor, in Mayfair, calls were coming in from all over the City. Investors needed to know what was happening and whether the damage was reparable.

A couple of weeks later, the damage was done. The money was gone, Diamond was out of a job and the market, as it always does, had moved on. We were left asking ourselves: How did we get it so wrong?

At the time I was working for a French stockbroking firm, on the team responsible for the banking sector. I was the team’s regulation specialist. I had been aware of “the Libor affair”, and had written about it on several occasions during the previous months. My colleagues and I had assumed that it would be the typical kind of regulatory risk for the banks – a slap on the wrist, a few hundred million dollars of fines, no more than that.

The first puzzle was that, to start with, it looked like we were right. By the time it caught the attention of the mainstream media, the Libor scandal had reached what would usually be the end of the story – the announcement, on 27 June 2012, of a regulatory sanction. Barclays had admitted a set of facts, made undertakings not to do anything similar again, and agreed to pay finesof £59.5m to the UK’s Financial Services Authority, $200m to the US Commodity Futures Trading Commission and a further $160m to the US Department of Justice. That’s how these things are usually dealt with. If anything, it was considered quite a tough penalty.

But the Libor case marked the beginning of a new process for the regulators. As well as publishing their judgment, they gave a long summary of the evidence and reasoning that led to their decision. In the case of the Libor fines, the majority of that evidence took the form of transcripts of emails and Bloomberg chat. Bloomberg’s trading terminals – the $50,000-a-year news and financial-data servers that every trader uses – have an instant-messaging function in addition to supplying prices and transmitting news. Financial market professionals are vastly more addicted to this chat than teen girls are to Instagram, and many of them failed to realise that if you discussed illegal activity on this medium, you were making things easy for the authorities.

The transcripts left no room for doubt.

Trader C: “The big day [has] arrived … My NYK are screaming at me about an unchanged 3m libor. As always, any help wd be greatly appreciated. What do you think you’ll go for 3m?”

Submitter: “I am going 90 altho 91 is what I should be posting.”

Trader C: “[…] when I retire and write a book about this business your name will be written in golden letters […]”.

Submitter: “I would prefer this [to] not be in any book!”

Perhaps it’s unfair to judge the Libor conspirators on their chat records; few of the journalists who covered the story would like to see their own Twitter direct-message history paraded in front of an angry public. Trading, for all its bluster, is basically a service industry, and there is no service industry anywhere in the world whose employees don’t blow off steam by acting out or insulting the customers behind their backs. But traders tend to have more than the usual level of self-confidence, bordering on arrogance. And in a general climate in which the public was both unhappy with the banking industry and unimpressed with casual banter about ostentatious displays of wealth, the Libor transcripts appeared crass beyond belief. Every single popular stereotype about traders was confirmed. An abstruse and technical set of regulatory breaches suddenly became a morality play, a story of swaggering villains who fixed the market as if it was a horse race. The politicians could hardly have failed to get involved.

It is not a pleasant thing to see your industry subjected to criticism that is at once overheated, ill-informed and entirely justified. In 2012, the financial sector finally got the kind of enemies it deserved. The popular version of events might have been oversimplified and wrong in lots of technical detail, but in the broad sweep, it was right. The nuanced and technical version of events which the specialists obsessed over might have been right on the detail, but it missed one utterly crucial point: a massive crime of dishonesty had taken place. There was a word for what had happened, and that word was fraud. For a period of months, it seemed to me as if the more you knew about the Libor scandal, the less you understood it.

That’s how we got it so wrong. We were looking for incidental breaches of technical regulations, not systematic crime. And the thing is, that’s normal. The nature of fraud is that it works outside your field of vision, subverting the normal checks and balances so that the world changes while the picture stays the same. People in financial markets have been missing the wood for the trees for as long as there have been markets.

Some places in the world are what they call “low-trust societies”. The political institutions are fragile and corrupt, business practices are dodgy, debts are rarely repaid and people rightly fear being ripped off on any transaction. In the “high-trust societies”, conversely, businesses are honest, laws are fair and consistently enforced, and the majority of people can go about their day in the knowledge that the overall level of integrity in economic life is very high. With that in mind, and given what we know about the following two countries, why is it that the Canadian financial sector is so fraud-ridden that Joe Queenan, writing in Forbes magazine in 1989, nicknamed Vancouver the “Scam Capital of the World”, while shipowners in Greece will regularly do multimillion-dollar deals on a handshake?

We might call this the “Canadian paradox”. There are different kinds of dishonesty in the world. The most profitable kind is commercial fraud, and commercial fraud is parasitical on the overall health of the business sector on which it preys. It is much more difficult to be a fraudster in a society in which people only do business with relatives, or where commerce is based on family networks going back centuries. It is much easier to carry out a securities fraud in a market where dishonesty is the rare exception rather than the everyday rule.

 

Traders at Bloomberg terminals on the floor of the New York stock exchange, 2013. Photograph: Brendan McDermid / Reuters/REUTERS

The existence of the Canadian paradox suggests that there is a specifically economic dimension to a certain kind of crime of dishonesty. Trust – particularly between complete strangers, with no interactions beside relatively anonymous market transactions – is the basis of the modern industrial economy. And the story of the development of the modern economy is in large part the story of the invention and improvement of technologies and institutions for managing that trust.

And as industrial society develops, it becomes easier to be a victim. In The Wealth of Nations, Adam Smith described how prosperity derived from the division of labour – the 18 distinct operations that went into the manufacture of a pin, for example. While this was going on, the modern world also saw a growing division of trust. The more a society benefits from the division of labour in checking up on things, the further you can go into a con game before you realise that you’re in one. In the case of several dealers in the Libor market, by the time anyone realised something was crooked, they were several billions of dollars in over their heads.

In hindsight, the Libor system was always a shoddy piece of work. Some not-very-well-paid clerks from the British Bankers’ Association would call up a few dozen banks and ask: “If you were to borrow, say, a million dollars in [a given currency] for a 30-day deposit, what would you expect to pay?” A deposit, in this context, is a short-term loan from one bank to another. Due to customers’ inconvenient habit of borrowing from one bank and putting the money in an account at another, banks are constantly left with either surplus customer deposits, or a shortage of funds. The “London inter-bank offered-rate” (Libor) market is where they sort this out by borrowing from and lending to each other, at the “offered rate” of interest.

Once they had their answers, the clerks would throw away the highest and lowest outliers and calculate the average of the rest, which would be recorded as “30-day Libor” for that currency. The process would be repeated for three-month loans, six-month loans and any other periods of interest, and the rates would be published. You would then have a little table recording the state of the market on that day – you could decide which currency you wanted to borrow in, and how long you wanted the use of the money, and the Libor panel would give you a good sense of what high-quality banks were paying to do the same.

Compared with the amount of time and effort that goes into the systems for nearly everything else that banks do, not very much trouble was taken over this process. Other markets rose and fell, stock exchanges mutated and were taken over by super-fast robots, but the Libor rate for the day was still determined by a process that could be termed “a quick ring-around”. Nobody noticed until it was too late that hundreds of trillions of dollars of the world economy rested on a number compiled by the few dozen people in the world with the greatest incentive to fiddle it.

It started to fall apart with the onset of the global financial crisis in 2007, and all the more so after the collapse of Lehman Brothers in 2008, when banks were so scared that they effectively stopped lending to each other. Although the market was completely frozen, the daily Libor ring-around still took place, and banks still gave, almost entirely speculatively, answers to the question “If you were to borrow a reasonable sum, what would you expect to pay?”

But the daily quotes were published, and that meant everyone could see what everyone else was saying about their funding costs. And one of the telltale signs that a bank in trouble is when its funding costs start to rise. If your Libor submission is taken as an indicator of whether you’re in trouble or not, you really don’t want to be the highest number on the daily list. Naturally, then, quite a few banks started using the Libor submission process as a form of false advertising, putting in a lowballed quote in order to make it look like they were still obtaining money easily when, in fact, they could hardly borrow at all. And so it came to pass that several banks created internal message trails saying, in effect, “Dear Lowly Employee, for the benefit of the bank and its shareholders, please start submitting a lower Libor quote, signed Senior Executive”. This turned out to be a silly thing to do.

All this was known at the time. There was an article in the Wall Street Journal about it. I used to prepare PowerPoint slides with charts on them that had gaps for the year 2008 because the data was “somewhat hypothetical”. Even earlier, in late 2007, the Bank of England held a “liaison group” meeting so that representatives from the banks could discuss the issue of Libor reporting. What nobody seemed to realise is that an ongoing fraud was being committed. There was a conspiracy to tell a lie (to the Libor phone panel, about a bank’s true cost of funding) in order to induce someone to enter into a bargain at a disadvantage to themselves. The general public caught on to all this a lot quicker than the experts did, which put the last nail in the coffin of the already weakened trust in the financial system. You could make a case that a lot of the populist politics of the subsequent decade can be traced back to the Libor affair.

Libor teaches us a valuable lesson about commercial fraud – that unlike other crimes, it has a problem of denial as well as one of detection. There are very few other criminal acts where the victim not only consents to the criminal act, but voluntarily transfers the money or valuable goods to the criminal. And the hierarchies, status distinctions and networks that make up a modern economy also create powerful psychological barriers against seeing fraud when it is happening. White-collar crime is partly defined by the kind of person who commits it: a person of high status in the community, the kind of person who is always given the benefit of the doubt.

In popular culture, the fraudster is the “confidence man”, somewhere between a stage magician and the trickster gods of mythology. In films such as The Sting and Dirty Rotten Scoundrels, they are master psychologists, exploiting the greed and myopia of their victims, and creating a world of illusion. People like this do exist (albeit rarely). But they are not typical of white-collar criminals.

The interesting questions are never about individual psychology. There are plenty of larger-than-life characters. But there are also plenty of people like Enron’s Jeff Skilling and Baring’s Nick Leeson: aggressively dull clerks and managers whose only interest derives from the disasters they caused. And even for the real craftsmen, the actual work is, of necessity, incredibly prosaic.

The way most white-collar crime works is by manipulating institutional psychology. That means creating something that looks as much as possible like a normal set of transactions. The drama comes later, when it all unwinds.

Fraudsters don’t play on moral weaknesses, greed or fear; they play on weaknesses in the system of checks and balances – the audit processes that are meant to supplement an overall environment of trust. One point that comes up again and again when looking at famous and large-scale frauds is that, in many cases, everything could have been brought to a halt at a very early stage if anyone had taken care to confirm all the facts. But nobody does confirm all the facts. There are just too bloody many of them. Even after the financial rubble has settled and the arrests been made, this is a huge problem.

 

Jeffrey Skilling and Sherron Watkins of Enron at a Senate commerce committee hearing in 2002. Photograph: Ron Edmonds/AP

It is a commonplace of law enforcement that commercial frauds are difficult to prosecute. In many countries, proposals have been made, and sometimes passed into law, to remove juries from complex fraud trials, or to move the task of dealing with them out of the criminal justice system and into regulatory or other non-judicial processes. Such moves are understandable. There is a need to be seen to get prosecutions and to maintain confidence in the whole system. However, taking the opinions of the general public out of the question seems to me to be a counsel of despair.

When analysed properly, there isn’t much that is truly difficult about the proverbial “complex fraud trial”. The underlying crime is often surprisingly crude: someone did something dishonest and enriched themselves at the expense of others. What makes white-collar trials so arduous for jurors is really their length, and the amount of detail that needs to be brought for a successful conviction. Such trials are not long and detailed because there is anything difficult to understand. They are long and difficult because so many liars are involved, and when a case has a lot of liars, it takes time and evidence to establish that they are lying.

This state of affairs is actually quite uncommon in the criminal justice system. Most trials only have a couple of liars in the witness box, and the question is a simple one of whether the accused did it or not. In a fraud trial, rather than denying responsibility for the actions involved, the defendant is often insisting that no crime was committed at all, that there is an innocent interpretation for everything.

In January this year, the construction giant Carillion collapsed. Although they had issued a profits warning last summer, they continued to land government contracts. It was assumed that, since they had been audited by KPMG, one of the big-four accounting firms, any serious problems would have been spotted.
At the time of writing, nobody has been prosecuted over the collapse of Carillion. Maybe nobody will and maybe nobody should. It’s possible, after all, for a big firm to go bust, even really suddenly, without it being a result of anything culpable. But the accounting looks weird – at the very least, they seem to have recognised revenue a long time before it actually arrived. It’s not surprising that the accounting standards bodies are asking some questions. So are the Treasury select committee: one MP told a partner at KPMG that “I would not hire you to do an audit of the contents of my fridge.”

In general, cases of major fraud should have been prevented by auditors, whose specific job it is to review every set of accounts as a neutral outside party, and certify that they are a true and fair view of the business. But they don’t always do this. Why not? The answer is simple: some auditors are willing to bend the rules, and some are too easily fooled. And whatever reforms are made to the accounting standards and to the rules governing the profession, the same problems have cropped up again and again.

First, there is the problem that the vast majority of auditors are both honest and competent. This is a good thing, of course, but the bad thing about it is that it means that most people have never met a crooked or incompetent auditor, and therefore have no real understanding that such people exist.

To find a really bad guy at a big-four accountancy firm, you have to be quite unlucky (or quite lucky if that was what you were looking for). But as a crooked manager of a company, churning around your auditors until you find a bad ’un is exactly what you do – and when you find one, you hang on to them. This means that the bad auditors are gravitationally drawn into auditing the bad companies, while the majority of the profession has an unrepresentative view of how likely that could be.

Second, there is the problem that even if an auditor is both honest and competent, he has to have a spine, or he might as well not be. Fraudsters can be both persistent and overbearing, and not all the people who went into accountancy firms out of university did so because they were commanding, alpha-type personalities.

Added to this, fraudsters are really keen on going over auditors’ heads and complaining to their bosses at the accounting firm, claiming that the auditor is being unhelpful and bureaucratic, not allowing the CEO to use his legitimate judgment in presenting the results of his own business.

Partly because auditors are often awful stick-in-the-muds and arse-coverers, and partly because auditing is a surprisingly competitive and unprofitable business that is typically used as a loss-leader to sell more remunerative consulting and IT work, you can’t assume that the auditor’s boss will support their employee, even though the employee is the one placing their signature (and the reputation of the whole practice) on the set of accounts. As with several other patterns of behaviour that tend to generate frauds, the dynamic by which a difficult audit partner gets overruled or removed happens so often, and reproduces itself so exactly, that it must reflect a fairly deep and ubiquitous incentive problem that will be very difficult to remove.

By way of a second line of defence, investors and brokerage firms often employ their own “analysts” to critically read sets of published accounts. The analyst is meant to be an industry expert, with enough financial training to read company accounts and to carry out valuations of companies and other assets. Although their primary job is to identify profitable opportunities in securities trading – shares or bonds that are either very undervalued or very overvalued – it would surely seem to be the case that part of this job would involve the identification of companies that are very overvalued because they are frauds.

Well, sometimes it works. A set of fraudulent accounts will often generate “tells”. In particular, fraudsters in a hurry, or with limited ability to browbeat the auditors, will not be able to fake the balance sheet to match the way they have faked the profits. Inflated sales might show up as having been carried out without need for inventories, and without any trace of the cash they should have generated. Analysts are also often good at spotting practices such as “channel stuffing”, when a company (usually one with a highly motivated and target-oriented sales force) sells a lot of product to wholesalers and intermediaries towards the end of the quarter, booking sales and moving inventory off its books. This makes growth look good in the short term, at the expense of future sales.

Often, an honest auditor who has buckled under pressure will include a cryptic-looking passage of legalese, buried in the notes to the accounts, explaining what accounting treatment has been used, and hoping that someone will read it and understand that the significance of this note is that all of the headline numbers are fake. Nearly all of the fraudulent accounting policies adopted by Enron could have been deduced from its public filings if you knew where to look.

More common is the situation that prevailed in the period immediately preceding the global financial crisis.Analysts occasionally noticed that some things didn’t add up, and said so, and one or two of them wrote reports that, if taken seriously, could have been seen as prescient warnings. The problem is that spotting frauds is difficult and, for the majority of investors, not worth expending the effort on. That means it is not worth it for most analysts, either. Frauds are rare. Frauds that can be spotted by careful analysis are even rarer. And frauds that are also large enough to offer serious rewards for betting against them come along roughly once every business cycle, in waves.

Analysts are also subject to very similar pressures to those that cause auditors to compromise their principles. Anyone accusing a company publicly of being a fraud is taking a big risk, and can expect significant retaliation. It is well to remember that frauds generally look like very successful companies, and there are sound accounting reasons for this. It is not just that once you have decided to fiddle the accounts you might as well make them look great rather than mediocre.

If you are extracting cash fraudulently, you usually need to be growing the fake earnings at a higher rate. So people who are correctly identifying frauds can often look like they are jealously attacking success. Frauds also tend to carry out lots of financial transactions and pay large commissions to investment banks, all the while making investors believe they are rich. The psychological barriers against questioning a successful CEO are not quite as powerful as those against questioning the honesty of a doctor or lawyer, but they are substantial.

And finally, most analysts’ opinions are not read. A fraudster does not have to fool everyone; he just needs to fool enough people to get his money.

If you are looking to the financial system to protect investors, you are going to end up being disappointed. But this is inevitable. Investors don’t want to be protected from fraud; they want to invest. Since the invention of stock markets, there has been surprisingly little correlation between the amount of fraud in a market and the return to investors. It’s been credibly estimated that in the Victorian era, one in six companies floated on the London Stock Exchange was a fraud. But people got rich. It’s the Canadian paradox. Although in the short term, you save your money by checking everything out, in the long term, success goes to those who trust.

Bread-makers, Brexit and the power of the least-bad option

In politics, as in marketing, offering a third choice can be a game-changer writes Tim Harford in The Financial Times

Imagine that you sell bread-making machines. Your task is complicated by the fact that most people have only a hazy grasp of what a bread-making machine does, let alone the joys and sorrows of owning one. 

Nevertheless, there is a simple trick that will help these machines to fly off your shelves: next to what seems to be a perfectly adequate $150 bread-maker, place a $250 bread-maker with a long list of bewildering extra functions. Customers will think to themselves: “I don’t need all that nonsense. The cheaper, simpler bread maker is the better option.” Some of them will buy it, even though they would not have otherwise. 

Itamar Simonson, a marketing professor at Stanford University, attests that the kitchenware company Williams-Sonoma doubled their sales of bread-makers in the early 1990s using this sort of technique. Mr Simonson, along with Amos Tversky, one of the fathers of behavioural economics, demonstrated similar preference reversals in a laboratory setting. 

Mr Simonson and Tversky showed that when people are wavering between two options, you can change what they choose by offering a third, unattractive option. A $1,000 camera might seem extravagant unless there’s a $5,000 camera sitting next to it. The grande sized cup at Starbucks seems restrained when put next to the venti, a Brobdingnagian vat of flavoured warm milk. 

All this brings us to Brexit. What we voters feel about different flavours of Brexit (hard, soft, train-crash) depends in part on facts, in part on propaganda, and in part on our prejudices. But it also depends on the comparisons that come readily to mind. 

That means that the re-appearance of the European Economic Area is an intriguing development in the debate. The House of Lords recently voted to keep the UK in the EEA, and therefore the single market, after leaving the EU. This “Norway option” seems a popular enough plan: a BMG opinion poll in January found 52 per cent of people in favour of staying in the single market, and only 14 per cent of people against. In these polarised times that is as decisive a margin as one might expect for anything. Nevertheless, both prime minister Theresa May and the leader of the opposition, Jeremy Corbyn, have rejected the single market option, making it unlikely. 

This might seem illogical. Why not go for a popular compromise that respects both the close vote and the fact that the Leave campaign won the referendum? But, remembering the tale of the bread-maker, it makes perfect sense that Mr Corbyn and Mrs May, both Euro-sceptics, should fear the Norway option being placed in front of voters. 

To most voters, the EU is like a bread-maker: we don’t really understand what it does and we don’t know what to think about it. The Norway option clarifies matters in a way that does not help Leavers. It is very much like being in the EU, except just a little bit worse. If it becomes a salient possibility, it makes staying in the EU look rather attractive by comparison. 

A hard Brexit will probably go quite badly for the UK, but it does have the merit of being a very different path to remaining in the EU. A Norway-option Brexit might well work out smoothly, but it is almost guaranteed to underperform the option of not leaving at all. No wonder Brexiters — so cavalier about having their cake and eating it before the vote — are now determined to ensure that the Norway option is taboo. They realise that if the British public decides that staying in the single market is a plausible plan, they might eventually reach the conclusion that staying in the EU itself would be even wiser. 

This sort of preference reversal can occur in other circumstances, too. A hard Brexit offers temptations to many voters: control over immigration; an independent trade policy; no more membership fees to Brussels. It also offers obvious risks: leaving the largest single market in the world; damage to the political settlement in Northern Ireland; setbacks to scientific and diplomatic collaboration. Staying in the EU merely offers business as usual. 

Do we tend to find a mix of stark risks and clear rewards appealing? That depends on whether the costs or the opportunities seem more salient. During the referendum campaign, the opportunities opened by Leavers seemed expansive, while the costs (“lower GDP by 2030!”) were vague and dull. During the negotiation process, it is the opportunities that are starting to seem vague while the costs are becoming vivid, at least to the small number of people who are paying attention. 

None of this makes it likely that Brexit will be reversed. The simple fact that Leave won the referendum is likely to be proof against all sorts of psychological subtleties. Yet these seem to be nerve-racking times for the Brexiters. 

It was always clear that asking an absurdly simple question about an absurdly complicated decision was unlikely to work out well. There is one ironic consolation: however befuddled our referendum decision might have been, the divided cabinet is now doing its best to make us, the great British public, seem like philosopher kings by comparison.

The “Inefficient” State Mops up the Disasters caused by “Efficient” Private Companies.

George Monbiot in The Guardian


Again the “inefficient” state mops up the disasters caused by “efficient” private companies. Just as the army had to step in when G4S failed to provide security for the London 2012 Olympics, and the Treasury had to rescue the banks, the collapse of Carillion means that the fire service must stand by to deliver school meals.

Two hospitals, both urgently needed, that Carillion was supposed to be constructing, the Midland Metropolitan and the Royal Liverpool, are left in half-built limbo, awaiting state intervention. Another 450 contracts between Carillion and the state must be untangled, resolved and perhaps rescued by the government.

Fire services ready to deliver school meals after Carillion collapse


When you examine the claims made for the efficiency of the private sector, you soon discover that they boil down to the transfer of risk. Value for money hangs on the idea that companies shoulder risks the state would otherwise carry. But in cases like this, even when the company takes the first hit, the risk ultimately returns to the government. In these situations, the very notion of risk transfer is questionable.

Nowhere is it more dubious than when applied to the private finance initiative projects in which Carillion specialised. The PFI was invented by John Major’s Conservative government, but greatly expanded by Tony Blair and Gordon Brown. Private companies finance and deliver public services that governments would otherwise have provided.

The government claimed that the private sector, being more efficient, would provide services more cheaply than the private sector. PFI projects, Blair and Brown promised, would go ahead only if they proved to be cheaper than the “public sector comparator”.

But at the same time, the government told public bodies that state money was not an option: if they wanted new facilities, they would have to use the private finance initiative. In the words of the then health secretary, Alan Milburn: “It’s PFI or bust”. So, if you wanted a new hospital or bridge or classroomor army barracks, you had to demonstrate that PFI offered the best value for money. Otherwise, there would be no project. Public bodies immediately discovered a way to make the numbers add up: risk transfer.


Nurses might be laid off, but the walls will still be painted


The costing of risk is notoriously subjective. Because it involves the passage of a fiendishly complex contract through an unknowable future, you can make a case for almost any value. A study published in the British Medical Journal revealed that, before the risk was costed, every hospital scheme it investigated would have been built much more cheaply with public funds. But once the notional financial risks had been added, building them through PFI came out cheaper in every case, although sometimes by less than 0.1%.

Not only was this exercise (as some prominent civil servants warned) bogus, but the entire concept is negated by the fact that if collapse occurs, the risk ripples through the private sector and into the public. Companies like Carillion might not be too big to fail, but the services they deliver are. You cannot, in a nominal democracy, suddenly close a public hospital, let a bridge collapse, or fail to deliver school meals.

Partly for this reason, and partly because of the inordinate political power of corporations and the people who run them, governments seek to insulate these companies from the very risks they claim to have transferred to them. This could explain why Theresa May’s administration continued to award contracts to Carillion after it had issued a series of profit warnings. Was this an attempt to keep the company in business?

If so, it was one of a long list of measures designed to privatise profit and socialise risk. PFI contracts specify that if there is a conflict between paying the private provider and delivering public services, the payments must come first. However deep the crisis in the NHS becomes, however many people must have their cancer operations postponed or be left to rot on trolleys, the legal priority is still to pay the contractor. Money is officially more valuable than life.

If a PFI consortium is contracted to deliver maintenance and ancillary services, these non-clinical functions are ringfenced, while the clinical services delivered by the public sector must be cut to make room for them. This forces public bodies to respond perversely to a funding crisis: nurses might be laid off, but the walls will still be painted. Many of the contracts cannot be broken for 25 or 30 years, regardless of whether or not they still meet real needs: again, this insulates the private sector from hazard, leaving it with the public. The risk lands not only on the state but also on the people. Carillion leaves behind a series of scandals, such as the food hygiene failure at Swindon’s Great Western Hospital, and the failings at the Surgicentre clinic it ran in Hertfordshire, revealed in a horrifying report in the Observer. Similar crises have attended many other deals with private providers: operating theatres flooded with sewage, power cuts which have left nurses to ventilate patients on life support by hand, school buildings falling apart, useless services continuing to be delivered while essential services are cut.

None of this was unforeseen. Some of us warned again and again during the New Labour years that this programme would prove to be an expensive fiasco. Even the Banker magazine predicted, in 2002, that “eventually an Enron-style disaster will be rerun on a sovereign balance sheet”. But the government didn’t want to know. Nor did the Conservative opposition, whose idea it was in the first place. Nor did the other newspapers, now apparently scratching their heads and wondering how this happened. There is no joy in being proved right, just immense frustration.

Risk to a company is not the same as risk to those who own and run it. The executives keep their payoffs. The shareholders take a hit on part of their portfolios, but limited liability ensures they can walk away from any debts. The company might disappear, but ultimately it’s just a name and some paperwork. But the risks imposed on the people – including the company’s workers – are real. We pay for these risks twice: first, when they are nominally transferred to corporations; then again, when they are returned to us. The word used to describe this process is efficiency.

What military incompetence can teach us about Brexit

David Boyle in The Guardian

A fascinating article by Simon Kuper has proposed a parallel between Brexit and the strange cargo cults of Melanesia, when societies suddenly destroy their economic underpinnings in search of a golden age, because they perceive the tribe is in some kind of decline.

It is particularly relevant now that corners of the Conservative party appear to be baying for a non-negotiated Brexit. And unfortunately, as the countdown ticks by, that may well be what they get.

There is another parallel, but it comes from psychology not anthropology. It derives from an influential theory by a former military engineer-turned-psychologist, Norman Dixon. His book, On the Psychology of Military Incompetence, was published in 1976, and has been in print ever since. His ideas may draw too much on Freudian concepts for current tastes, but there are worrying parallels to the phenomenon that he identified: the syndrome that seemed to lie behind so many British military disasters. 

His thesis was that the old idea that military incompetence was something to do with stupidity had to be set aside. Not only were the features of incompetence extraordinarily similar from military disaster to military disaster, but the military itself tended to choose people with the same psychological flaws. It led soldiers over the top to disaster, or to a frozen death, as in the Crimea.

These characteristics included arrogant underestimation of the enemy, the inability to learn from experience, resistance to new technologies or new tactics, and an aversion to reconnaissance and intelligence.

Other common themes are great physical bravery but little moral courage, an imperviousness to human suffering, passivity and indecision, and a tendency to lay the blame on others. They tend to have a love of the frontal assault – nothing too clever – and of smartness, precision and the military pecking order.

Dixon also described a tendency to eschew moderate risks for tasks so difficult that failure might seem excusable.

Therein lies the great paradox. To be a successful military commander, you need more flexibility of thought and hierarchy than is encouraged by the traditional military – or the traditional Conservative party, as the xenophobes inch their way into the driving seat.

But it was Dixon’s description of the disastrous fall of Singapore in 1942, almost without a fight, because the local command distrusted new tactics and underestimated the Japanese, that really chimes. And his description of too many second-rate officers repeating how they wanted to “teach a lesson to the Japs”.

None of this suggests that Brexit is somehow the wrong strategy, but that the agenda has been wrested by a group of people showing the classic symptoms of the psychology of military incompetence, including a self-satisfied obsession with appearance over reality and pomp over practicality, and a serious tendency to talk about European nations as if they needed to be “taught a lesson”. 

Never was imagination and a sophisticated understanding of a changing world so required. Read Dixon, and you begin to worry that the more we hear fighting talk as if the continent were filled with enemies, the more we might expect a hideous capitulation.

Dixon died in 2013, but he did leave behind this advice, originally given by Prince Philip to Sandhurst cadets in 1955: “As you grow older, try not to be afraid of new ideas. New or original ideas can be bad as well as good, but whereas an intelligent man with an open mind can demolish a bad idea by reasoned argument, those who allow their brains to atrophy resort to meaningless catchphrases, to derision and finally to anger in the face of anything new.” Right or wrong, it sounds like we need a few more Brexit mutineers.

Brexit 'more complex than first moon landing', says academic study

Philip Oltermann in The Guardian


Nasa photograph of Buzz Aldrin walking on the moon. Photograph: Swann Auction Galleries




Britain extricating itself from the European Union will be “incomparably more complex” than the first moon landing, an academic study has found.

Roland Alter, a professor at Heilbronn University in Germany who specialises in risk assessment, said he had been inspired to carry out his analysis after comments by the Brexit secretary, David Davis, that he was “running a set of projects that make the Nasa moonshot look quite simple”.

But after analysing the two situations Alter said he concluded that Davis’s analogy “missed the point”. “Both project moonshot and project Brexit are in their own way extremely complex projects. The key difference is that the USA was aware of the complexity of its undertaking.”

The paper, to be published in the journal of the German Society for Project Management early next year, analyses the comparative complexity of Britain’s withdrawal from the EU and Nasa’s first moon landing using a risk assessment model developed by the Canadian government in 2007 to determine the risk and complexity of public sector projects. 

The study singles out a number of factors that make the mission launched by Theresa May’s triggering of article 50 in March 2017 more complex than the 1969 moonshot. That mission was accomplished within eight years of John F Kennedy setting the goal “of landing a man on the moon and returning him safely to the Earth”.

While the then US president had been aware of the complexity of the task from the start and deliberately fudged the timetable of the mission by adding the words “before this decade is out” in his historic speech, developments in the Brexit negotiations had revealed an “ever-widening gulf between the complexity of the project and its organisational capacity”, according to the study.

The crucial difference between the two projects, according to Alter, was that the Nasa mission had a definable “landing zone”, namely the moon. In terms of complexity, its challenges had lain mainly in developing and applying new technologies.

“The situation in Great Britain is completely different in this respect,” his paper concludes. “The project was authorised by a referendum phrased in general terms and does not have a clearly defined ‘landing zone’.”

Alter, who previously worked as a strategist for Siemens, also teaches a course on catastrophically managed projects, which includes modules on Berlin’s much-delayed new airport, the over-budget Scottish parliament at Holyrood, Airbus’s ill-fated A400M Atlas aircraft and the Iraq war. “Brexit is not part of the course yet, but it’s a hot contender for the top spot,” Alter said.

Britain is being led to an epic act of national self-harm

Will Hutton in The Guardian

Every day in Britain, 14,000 trucks come from and head to the European Union. If there is no Brexit deal with the EU, is every one of those trucks going to be inspected as they bring vital food and goods into the UK to see that the right tariff is being charged and correct regulation observed? If some trucks get delayed or traffic volumes plummet, who will organise food rationing in our supermarkets? Five days before a general election called to give the government a negotiating mandate for leaving the EU, is anyone aware of the risks? 

Equally, a quarter of British exports with the EU pass through one single port, Calais – £3bn a month – with zero border controls or inspection. Who in Calais is going to inspect these goods to see if they correspond to EU rules if we crash out with no deal? Has France any interest in investing quickly in the customs structure to keep British exports flowing? The M20 and M2 will become gigantic truck parks as drivers wait to be inspected. You might think that, just as a precautionary measure, as the prospect of the exit talks collapsing is less than two years away, the UK government would be investing in customs inspection depots in our great ports and along the land border with Ireland and also offering to build similar structures in France to ease the inevitable congestion on UK roads. Surely someone, somewhere might have asked these questions?

Nothing is being done at all. Mrs May and her breezy lead negotiator, David Davis, offer platitudes about Britain embracing the globe and no deal being better than a bad deal, but even the most innocent negotiator in the EU team can see this is vainglorious posturing. They are betting on a deal being struck – negotiators with few cards, nor making sure they hold better ones. As matters stand, the consequence of no deal would be calamitous.

For there are multiple areas where the same logic applies. It could be landing rights at EU airports or the export of drugs, suddenly to be treated as needing regulatory approval because they will come from a foreign country. There is the vast trade in dealing in euros in the City of London, surely certain to be repatriated to an EU member state. British universities will be barred from bidding for research grants. Some 55,000 EU nationals work in the NHS: are they to return and who is to replace them? An estimated 5,500 firms in financial services hold 330,000 passports to allow them to sell financial products across the EU – one of our few successful exports – with no questions or inspections asked. Again, this privilege is about to go in under two years. Companies with multiple operations around Europe, including Britain, will find that freely moving parts, people and data suddenly cannot be done.

For more than 40 years, Britain’s industrial policy has, in effect, been membership of the EU; 485 multinationals have their global or regional headquarters in the UK and core parts of manufacturing have been revived by foreign investment. At best, that now stagnates; at worst, they leave. There is no corner of British economic life that does not face disruption bleeding into mayhem as a consequence of no deal. The politician who declares that no deal is better than a bad deal is either supremely ignorant – or lying.

Which is why any economic forecaster who looks coolly at the facts has to project a fall in British trade. The World Bank believes that if Britain switches from single market membership to trading with the EU on World Trade Organisation terms – the “no deal” option – then British trade in goods with the EU will halve and trade in services will fall by 60% as these effects work through.

Yet that is only the beginning of the disaster. To keep exports of goods and services flowing to the rest of the world on the same terms as now, even before negotiating new deals, Britain will have to renegotiate 759 agreements with 168 countries that are now held by the EU, as the Financial Times disclosed last week. That is 759 opportunities for other countries, knowing our plight, to try to negotiate something better.

The clock is ticking. Decisions on where companies place exports and source imports in 2019 have to be taken in 2018. In reality, Britain has to find solutions to all these issues in less than 12 months.

It simply can’t be done within the time, nor is any network of replacement deals going to be superior to the ones we already have. Britain’s growth rate is at the bottom of the G7 and investment is falling. The Conservative manifesto commitment to leave the single market and customs union and seek a trade relationship outside any of the EU’s frameworks – not the EEA or even Efta – is a declaration of economic war upon ourselves. We are heading towards a first-order economic debacle. In Whitehall, morale is at rock bottom. Any civil servant who dares brief the prime minister or her inner circle on these realities is frozen out.
The EU could negotiate a British specific trade deal if it chooses, but there will be a high budgetary price. Britain, in essence, will be required to carry on contributing to the EU budget at current or even higher levels if it wants to keep vital goods flowing into the country in a customs deal, no less vital exports flowing out and some transitional arrangement during which we can try to renegotiate 759 trade agreements. Services, ranging from finance to the creative industries, in which Britain has a competitive advantage, can just take their chance. All influence on EU decisions will be lost. Some “deal”.

Britain will have to accept whatever the EU offers at whatever price. If the right of the Tory party and its media allies declare it unacceptable, the EU will shrug its shoulders and walk away. In any case, the European parliament, whose assent is required under article 50, will want tough terms to deter others from leaving. Nor will the government find popular support for no deal: Leavers voted to take back control, not for economic calamity.

A YouGov poll reports that 50% believe Britain should stay in the single market – only 29% do not and a narrow majority would even accept freedom of movement as the price of staying in. On these questions, Mr Corbyn and his party have been limp.

Britain is about to embark upon a national act of self-harm on an epic scale. The country, as it makes its decision on who it wants to lead the most important negotiations since the war, deserves to be warned. Instead, silence reigns.

What To Do After You Graduate College

Gary Vaynerchuk

I’m scared. I’m scared because I know exactly what happens around this month every year. There are so many of you who have graduated (or will be graduating) and still have no idea what you want to do with your life. And you know what? That’s ok! Most people don’t. You shouldn’t be stressed about that. What I’m scared about is that you don’t realize that you are entering the greatest 5-year window of your life.

If you are 22 years old, regardless if you’re graduating from college or not, there are two things you should keep in mind. The first is to acknowledge that you are entering some of the greatest years of your life. The second is that this is the moment when you don’t go practical—don’t take the “safe” route. This is NOT the time to get the job Mom always wanted you to get. This is NOT the time to try to maximize as much money as you can make so you can save up to buy a sick ride. This IS the time, however, to realize that you have a five-year window (three for some, eight for others) for you to attack the life that you want to win.

Something else that scares me is the naïveté of what the world is like after graduation. I am by no means saying that “winning” is going to be easy. It’s not. What you’ve been doing for the last 16 years is easy. Classes and school are easy because they’re structured. The world? It’s hard. It changes every day.

The fact is that the world is going to be exactly the way it is going to be without regard to the way you thought it would be, think it should be, or whatever big plans you’ve already made for yourself. Your parents might have already told you it’ll be one way, but they don’t really know. They just want you to do what they think is best, which usually means avoiding big risks. But, what you need to recognize is that now is the time when you can afford to take those risks.

What I wrote above is going to contradict what I’m about to tell you now. Even though the real world is hard, the next five years of your life will be the opposite. These will be the best and easiest years of your life because it’s your chance to attack what you love and try out what you want to do. Why? Because you don’t have all the baggage.

Look, I understand you might have college loans. I respect that financial debt is a real hardship. You may have to live up to the expectations of your parents. That’s mentally hard—fake hard. You may have many other obligations, but this time is exactly when you can live with 4 roommates in a basement and eat fast food.

Most of you don’t have children yet. Most of you are not married and have not yet promised your life to someone else. So, this is the time before the world has sucked out all your hopes and dreams. You still have this window—the next five years to help you achieve your goals.

Time is the number one asset and now is when you have the most flexibility to use it.

I’m sure some people will leave comments about their loans or whatever other financial obligations they might have. Again, I respect that. But one way or the other, that loan is going to be there whether you build something for yourself or not in these five years. I truly believe that you can wake up on your 26th or 27th birthday, start being practical, and still pay off your loans and any other debts. While I’m sure those obligations might have compounded interest, leaving the opportunity of “going for it” in those five years (especially if you have entrepreneurial DNA) is a mistake and actually lacks practicality.

Yet, so many of you are so hungry for short term gains right after college. For example, you would rather take the job that maximizes your pay at $3,000 more a year, despite the fact that you would have enjoyed a lower paying job more suited for you. For what? For a new iPhone? A slightly nicer apartment? You get to live life one time.

(By the way, you can work at night! This is when you put in your 18 hours a day to make the life that you want happen. That’s practicality.)

Promise me, all you youngsters who are reading this, that you understand that the land grab for happiness starts right now. You don’t have to worry about getting “that job.” What you should do is go and travel and learn. Go and start that business you always wanted. Travel with those three friends and start that band. This is the time to be massively risk oriented. There will be plenty of time to be risk averse later. Now is the time to understand what’s actually happening and map your behavior to something that will impact you for the next 80 years of your life.

When you are in your early 20s, this is when you can grind at your highest level because you don’t have the baggage that comes later in life. It’s harder for the 42 years olds to listen to this advice. At that point, you can’t just wake up tomorrow and say “let’s go” because little Sally has soccer practice and you have a million other things that are holding you down.

If you are lucky enough to be graduating today without any clue what about what you want to do with your future, no one’s ever been luckier than you. Please recognize that.

Lucky Dip

by Girish Menon

Shiv is in a bind

Got no more options

Throws the ball to the leggie

Abdul save me from my plight

What should I do skip?

Flight or darts?

The game will be lost

In a jiff or in time

Do what you please

Take a risk if you wish

Take the field that you want

Save me from my fate

I will be deposed

My record exposed

Personally divorced

Abdul, take the risk

You don't have to worry

It is my flutter

Just get me a winner

Abdul flights the ball

Six runs to win

Twelve balls to play

Three wickets left

The ball slips from his grip

Dips and hits a divot on the pitch

Shoots along the mud

Hits the batter on his foot

The ump raises his finger

The crowd is happy

The experts begin to rave

At the great bowling change

I still have some hope

My record intact

My family safe

The match is won soon after

The experts sing my praise

The cup is saved

I will remain captain again

  

Many wins follow

Folks call me the greatest

Skipper and tactician

That ever played

But if it was not for Abdul

And the divot on the pitch

Daily I’d be walking to Tesco

To buy a lucky dip.

Are modern cricketers more open to experimentation?

V Ramnarayan in Cricinfo


It was a cool December evening in the early 1980s. Flute maestro Hariprasad Chourasia was about to enter the iconic Kalakshetra auditorium in Chennai to perform in a concert when a young enthusiast asked him, "Will you please play the raga Hemant for me?" His reply was quick - and surprising, coming as it did from a leading classical musician of several years' standing. He said, "Sorry, I haven't learnt the raga yet." Some years later, I had a similar conversation with TV Vasan, a percussionist who played the mridangam, a south Indian drum. He spoke about a conversation he once had with the doyen of Carnatic music, Ariyakudi Ramanuja Iyengar. Vasan, who had watched Iyengar practise a particular song some 500 times during the month, was eager to hear it in concert on the morrow. That was not to be. "I haven't mastered it," said the singer.

More recently I read about another old master's advice to young musicians. Semmangudi Srinivasier, grand old patriarch of Carnatic music, said to his disciples: "Practise every song at least a thousand times before you take it to the concert platform." MS Subbulakshmi, perhaps the best known south Indian voice, was famous for doing just that. She knew every lyric of every song backwards, regardless of language or complexity, and still had butterflies in her stomach before every concert. The rigour extended even to studio recordings, where she could well have resorted to external aids with nobody the wiser for it.

The situation is different today. Without criticising or condemning modern musicians, it can be said truthfully of most that they do not match the older generation in their preparation for performances. Many look into their iPads or cell phones while performing on stage, possibly because their song repertoires are far larger than those of their gurus were. It is not unusual for a song learnt in the morning to debut in the evening.

What has all this to do with cricket? It is that I find some parallels between the two. For instance, I remember watching Erapalli Prasanna, during his last Ranji Trophy match, I think, bowl in the nets a delivery that looked similar to the doosra of a later era. Bowling in an adjacent net, and fascinated by the new variation, I asked him how come I never saw the delivery in a match. "Haven't mastered it," was his reply.

In my experience, experiments were frowned upon in matches. You were sure to get a tongue-lashing from your seniors if you tried something novel in a game. Mumtaz Hussain, a successful left-arm spinner in first-class cricket, might have been even more successful if he had continued to bowl the chinaman and the googly as he had done in his university days, instead of turning into an orthodox spinner and serving his side in a risk-free manner. Though Bhagwath Chandrasekhar and Anil Kumble were unorthodox wrist spinners, much quicker than the norm, neither added variations - like a slower ball - to his armoury before he was well into his career. Similarly, most international bowlers were reluctant to try reverse swing until long after the Pakistanis unfurled it.

The second decade of this century has been a watershed in this regard, with both bowlers and batsmen increasingly ready to take risks. To the reverse sweep has been added the switch hit, and the likes of offspinner R Ashwin (among those whose actions have not been questioned) have been attempting numerous variations, including the legbreak, whose destructive potential is as yet unknown.

I shudder to think what choice French my captain might have resorted to had I resorted to such experimentation in my day. As a result of such a mindset - which most of my contemporaries shared - I was so cautious that once, after hitting Tamil Nadu batsman P Mukund's off stump in a Ranji Trophy match (by sheer fluke) with a delivery I bowled from round the wicket, gripping the ball with my palm, I never tried the variation in all 15 years of cricket that followed. However, lest I be misunderstood to be an advocate of the current trend of launching untested or insufficiently tested products, let me stress that I am indeed an admirer of the perfectionism of the old guard.

How the banks ignored the lessons of the crash

Joris Luyendijk in The Guardian

Ask people where they were on 9/11, and most have a memory to share. Ask where they were when Lehman Brothers collapsed, and many will struggle even to remember the correct year. The 158-year-old Wall Street bank filed for bankruptcy on 15 September 2008. As the news broke, insiders experienced an atmosphere of unprecedented panic. One former investment banker recalled: “I thought: so this is what the threat of war must feel like. I remember looking out of the window and seeing the buses drive by. People everywhere going through a normal working day – or so they thought. I realised: they have no idea. I called my father from the office to tell him to transfer all his savings to a safer bank. Going home that day, I was genuinely terrified.”

A veteran at a small credit rating agency who spent his whole career in the City of London told me with genuine emotion: “It was terrifying. Absolutely terrifying. We came so close to a global meltdown.” He had been on holiday in the week Lehman went bust. “I remember opening up the paper every day and going: ‘Oh my God.’ I was on my BlackBerry following events. Confusion, embarrassment, incredulity ... I went through the whole gamut of human emotions. At some point my wife threatened to throw my BlackBerry in the lake if I didn’t stop reading on my phone. I couldn’t stop.”

Other financial workers in the City, who were at their desks after Lehman defaulted, described colleagues sitting frozen before their screens, paralysed – unable to act even when there was easy money to be made. Things were looking so bad, they said, that some got on the phone to their families: “Get as much money from the ATM as you can.” “Rush to the supermarket to hoard food.” “Buy gold.” “Get everything ready to evacuate the kids to the country.” As they recalled those days, there was often a note of shame in their voices, as if they felt humiliated by the memory of their vulnerability. Even some of the most macho traders became visibly uncomfortable. One said to me in a grim voice: “That was scary, mate. I mean, not film scary. Really scary.”

I spent two years, from 2011 to 2013, interviewing about 200 bankers and financial workers as part of an investigation into banking culture in the City of London after the crash. Not everyone I spoke to had been so terrified in the days and weeks after Lehman collapsed. But the ones who had phoned their families in panic explained to me that what they were afraid of was the domino effect. The collapse of a global megabank such as Lehman could cause the financial system to come to a halt, seize up and then implode. Not only would this mean that we could no longer withdraw our money from banks, it would also mean that lines of credit would stop. As the fund manager George Cooper put it in his book The Origin of Financial Crises: “This financial crisis came perilously close to causing a systemic failure of the global financial system. Had this occurred, global trade would have ceased to function within a very short period of time.” Remember that this is the age of just-in-time inventory management, Cooper added – meaning supermarkets have very small stocks. With impeccable understatement, he said: “It is sobering to contemplate the consequences of interrupting food supplies to the world’s major cities for even a few days.”




These were the dominos threatening to fall in 2008. The next tile would be hundreds of millions of people worldwide all learning at the same time that they had lost access to their bank accounts and that supplies to their supermarkets, pharmacies and petrol stations had frozen. The TV images that have come to define this whole episode – defeated-looking Lehman employees carrying boxes of their belongings through Wall Street – have become objects of satire. As if it were only a matter of a few hundred overpaid people losing their jobs: Look at the Masters of the Universe now, brought down to our level!

In reality, those cardboard box-carrying bankers were the beginning of what could very well have been a genuine breakdown of society. Although we did not quite fall off the edge after the crash in the way some bankers were anticipating, the painful effects are still being felt in almost every sector. At this distance, however, seven years on, it’s hard to see what has changed.

A typical education in the west leaves you with more insight into ancient Rome or Egypt than into our financial system – and while there are plenty of books and DVDs for lay people about, say, quantum mechanics, evolution or the human genome, before the crash there was virtually nothing to explain finance to outsiders in accessible language. The City, as John Lanchester put it in his book about the 2008 crash, Whoops!, is still “a far-off country of which we know little”.

As a result, ordinary people trying to form an opinion about finance over the past decades have had very little to go on, and many seem to have latched on to the images provided by films and TV. 

The British stereotype of the boring banker began to change in the 80s when finance was deregulated. Following Ronald Reagan’s dictum, “Government is not the solution to the problem, it is the problem”, banks were allowed to unite under one roof activities that regulation had previously required to be divided between separate firms and banks. They were able to grow to sizes many times bigger than a country’s GDP – the assumption being that the market would be self-regulating. The changes also meant that bankers became immensely powerful. Hollywood provided the City with a new hero: the financier Gordon Gekko, from Oliver Stone’s 1987 film Wall Street, who brought us the phrase “Greed is good”. In his portrait of bond traders’ raging ambition, Bonfire of the Vanities, novelist Tom Wolfe coined the term “Masters of the Universe”.

It all seemed innocent entertainment, before 2008: tales about a far-off country where boys behaved badly, scandalously even, but above all, reassuringly far away from the comfort and safety of our own homes, something like watching a Quentin Tarantino film or an episode of The Sopranos. This was the era when a Labour chancellor, Gordon Brown, could give a speech to a gathering of bankers and asset managers and tell them: “The financial services sector in Britain, and the City of London at the centre of it, is a great example of a highly skilled, high value-added, talent-driven industry that shows how we can excel in a world of global competition. Britain needs more of the vigour, ingenuity and aspiration that you already demonstrate that is the hallmark of your success.”

Those words were spoken in 2007, and a year later the world found itself in the middle of the biggest financial panic since the 1930s. In the end, it was only through a combination of pure luck, extremely expensive nationalisations and bailouts, the lowest interest rates in recorded history plus an ongoing experiment in mass money printing, that total meltdown was averted.

The post-Lehman panic was followed by a wave of investigations and reconstructions by journalists, writers and politicians. More than 300 books have been published about the crash in English alone. Every western country held extensive hearings and produced detailed recommendations. Everything you need to know about what is wrong with finance and the banks today is in their reports; the problem is that there is so much more that needs to be explained.

Most areas inside banking had little or nothing to do with the crash, while many players outside banking bore a heavy responsibility, too, including insurers, credit rating agencies, accountancy firms, financial law firms, central banks, regulators and politicians. Investors such as pension funds had been egging the banks on to make more profits by taking more risk. Unless you had a firm understanding of finance, the causes of the crash were very unclear, and this must be part of the reason why the clearest and most urgent lesson of all would get lost or buried: the financial system itself had become dangerously flawed.

After the crash of 2008, ignorance among the general public, reticence among complicit mainstream politicians and a deeply skewed and sensationalist portrayal of finance in the mass media conspired to create the narrative that the crash was caused by greed or by some other character flaw in individual bankers: psychopathy, gambling addiction or cocaine use. (A whole genre of City memoirs sprang up with titles such as Binge Trading: The Real Inside Story of Cash, Cocaine and Corruption in the City. Gordon Gekko returned for a sequel, Wall Street: Money Never Sleeps, and Leonardo di Caprio scored an immense hit playing the title role in The Wolf of Wall Street, about a whoring and cocaine-snorting financial fraudster.)

From there it was a small step to the notion that we can fix finance by getting rid of the “jerks”, as the plain speaking former Barclays CEO Bob Diamond put it. When Diamond was forced to resign in July 2012 over a scandal involving interest rate rigging by his traders, his successor, Antony Jenkins, also promised to focus on changing the culture. And so the same banks that brought us the mess of 2008 eagerly embraced the need for cultural change – which alone should arouse our suspicions. If there is one recurring theme in the many conversations I had with City insiders, it was the need for structural rather than cultural change; not so much different bankers, but a different system.

“Sometimes I feel as if finance has reacted to the crisis the way a motorist might after a near-accident,” said the City veteran at a small credit rating agency whose wife had almost chucked his phone into a lake at the height of the panic. “There is the adrenaline surge directly after the lucky escape, followed by the huge shock when you realise what could have happened. But as the journey continues and the scene recedes in the rear-view mirror, you tell yourself: maybe it wasn’t that bad. The memory of your panic fades, and you even begin to misremember what happened. Was it really that bad?”

He was a soft-spoken man, the sort to send a text message if he is going to be five minutes late to a meeting. But now he was really angry: “If you had told people at the height of the crisis that years later we’d have had no fundamental changes, nobody would have believed you. Such was the panic and fear. But here we are. It’s back to business as usual. We went from ‘We nearly died from this’ to ‘We survived this’.”


The City is governed by a code of silence and fear of publicity; those caught talking to the press without a PR officer present could be sacked or sued. But once I had persuaded City insiders to talk (always and only on condition of anonymity), they were remarkably forthcoming.

“I have the wrong accent and I went to a shit school,” said one City veteran, after explaining that for many years he had made millions at a top bank only to move to an even better-paying hedge fund. “Forty years ago, I wouldn’t even have been given an interview in the City. Finance today is fiercely meritocratic. Doesn’t matter if you’re gay or black or working class, if you can do something better than the other person, you’ll move up.”

He was a mathematician by training, and his direct manner reminded me of stallholders at the biggest open market in my hometown of Amsterdam – tough guys with a highly developed mistrust of pretentiousness. He fuelled himself with Diet Coke and coffee and teased me for ordering cranberry juice. Before he was recruited by the bank in the early 1990s, he had taught at a university; his only idea of an investment bank was based on two books he had read: Liar’s Poker by Michael Lewis and Barbarians at the Gate by Bryan Burrough and John Helyar. “Traders as loud, crass, bad-mouthed, macho dickheads. The sort of guys with red braces who shout ‘buy, buy, sell, sell’ into their phones and have eating competitions.” Many outsiders still believe that these are the people occupying the top positions in big banks, he said, and taking the biggest risks. “That’s over,” he told me. “Some of the best traders are now women. Totally unassuming, cerebral and talented. Trading is no longer a balls job. It’s a brains job. To be sure, the kind of maths traders now have to be able to do is not of the wildly hard variety. But it requires real skills in that area.”

He described the basic flaw in the banking system as it has evolved over the past decades: other people’s money. Until deregulation began to liberate finance from the constraints placed on it after the last major crash in the 1930s, risky banking in the City was carried out in firms that were organised as partnerships, which were not listed on the stock exchange. The partners owned and ran the firm – and when things went wrong, they were liable. Hence the system of bonuses: if you put your personal fortune on the line and things go well, it stands to reason that you deserve a big bonus. Because if things go the other way, you are personally liable for the losses.




Back in the days when his bank was still a partnership, the former banker had drawn on his gift for maths to build a complex financial product that he thought was very clever. “I was very new and maybe a bit cocky,” he said. “So I went over to the head of trading and showed it to him, saying, ‘Look, we can make a lot of money with this.’ The head of trading was a partner in the traditional sense. He looked at me and replied: ‘Don’t forget, this is my money you’re fucking with.’”

The problem with the way banks are now organised is not that they take risks – that is their job. The problem with today’s banks is that those who accept the risks are no longer those who get stuck with the bill.

A bank that is listed on the stock market loses control to the new owners; that is, the shareholders. When these shareholders, which can include insurers, wealthy dynasties or pension funds, start demanding ever greater profits, then greater profits are what you have to deliver. In 2007, in an inadvertent moment of candour, the then CEO of the megabank Citigroup, Charles O Prince, summarised this relationship: “As long as the music is playing, you’ve got to get up and dance.”

This dynamic became all the more dangerous as globalisation began to create a single market for finance. Not only were partnerships allowed to be listed on the stock exchange or taken over by a publicly listed bank, they were also allowed to go on a global shopping spree. Wave after wave of mergers and acquisitions meant banks could generate higher profits than the GDPs of their host countries, resulting in the institutions that we now know as “too big to fail” – so big that if they go bust, they can bring down the system with them. When excessive risk turns sour, it’s the taxpayer who suffers.

In a functioning free market system, incompetence and recklessness are punished by failure and bankruptcy. But there is currently no functioning free market at the centre of the global free market system. I heard City workers scoff at the employees of banks that cannot be allowed to fail – calling them overpaid civil servants who play a game they cannot lose. Risk-taking at a bank that will always be saved, they said, is like playing Russian roulette with someone else’s head.

In the old days, veterans told me, there was an office party almost every Friday: celebrating the anniversary of someone who had stayed with the firm for 20 years or longer. That is all over now, and in its place has come a hire-and-fire culture characterised by an absence of loyalty on either side. Employment in the City is now a purely transactional affair. It is exceedingly rare to find people who have stayed with the same bank for their entire career.

Many of the insiders I spoke to had stories about abrupt sackings: You get a call from a colleague, saying: “Look, could you do me a favour and get my coat and bag?” She is standing outside with a blocked security pass. One morning, you swipe your pass only to hear a beep and find your entrance barred. You turn to the receptionist who says, after a glance at her computer screen, “Would you please have a seat over there until somebody comes to fetch you?”

In the City, sudden dismissals of this kind have a name: “executions”. Add to these the quarterly “waves” when headquarters decides to reduce headcount and a certain percentage of staff worldwide are given the sack, all on one day. Some banks operate a “cull”. Every year, prestigious banks such as Goldman Sachs and JP Morgan routinely fire their least profitable staff. “When the cull comes ...” people would say, or: “Oh yes, we cull.”

“When you can be out of the door in five minutes, your horizon becomes five minutes,” one City worker told me. Another asked: “Why would I treat my bank any better than my bank treats me?”

If the threat of being culled influenced bankers’ behaviour through fear, there were also powerful motivations. Deregulation has allowed perverse incentives into the very fabric of global finance. People are faced with immense temptations to take risks with their bank’s capital or reputation, knowing that if they don’t act on them, their colleague across the desk will.

Before the deregulation of the 80s and 90s, the City was far from perfect: it was a snobbish, antisemitic and misogynistic place. But the City – and Wall Street – of old was a world that Gus Levy, head of Goldman Sachs in the 70s, famously described as “long term greedy”; you made money with your client and your firm. Because partners were personally liable, they had an interest in keeping their firm on a manageable scale and making sure their employees told them of any risks. In a few decades, this system has evolved into one that Levy called “short term greedy”; you make money at the expense of the client, of the bank, of the shareholder or of the taxpayer. This did not happen because bankers suddenly became evil, but because the incentives fundamentally changed.

Until the mid 80s, the London Stock Exchange’s motto was dictum meum pactum, “my word is my bond”. These days the governing principle is caveat emptor, or “buyer beware” – it is effectively up to the professional investor to figure out what the bank is offering. As one builder of complex financial products explained to me: “You have got to read the small print. You need to bring in a lawyer who explains it to you before you buy these things.”


Perhaps the most terrifying interview of all the 200 I recorded was with a senior regulator. It was not only what he said but how he said it: as if the status quo was simply unassailable. Ultimately, he explained, regulators – the government agencies that ensure the financial sector is safe and compliant – rely on self-declaration; what is presented by a bank’s internal management. The trouble, he said with a calm smile, is that a bank’s internal management often doesn’t know what’s going on because banks today are so vast and complex. He did not think he had ever been deliberately lied to, although he acknowledged that, obviously, he couldn’t know for sure. “The real threat is not a bank’s management hiding things from us, it’s the management not knowing themselves what the risks are.”

He talked about the culture of fear and how people are not managing their actions for the benefit of their bank. Instead, “they are managing their career”. He believed that the crash had been more “cock-up than conspiracy”. Bank management is in conflict, he pointed out: “What is good for the long term of the bank or the country may not be what is best for their own short-term career or bonus.”

If the problem with finance is perverse incentives, then the insistence on greed as the cause for the crash is part of the problem. There is a lot of greed in the City, as there is elsewhere in society. But if you blame the crash on character flaws in individuals you imply that the system itself is fine, all we need to do is to smoke out the crooks, the gambling addicts, the coke-snorters, the sexists, the psychopaths. Human beings always have at least some scope for choice, hence the differences in culture between banks. Still, human behaviour is largely determined by incentives, and in the current set-up, these are sending individual bankers, desks or divisions within banks – as well as the banks themselves – in the wrong direction.

How hard would it be to change those incentives? From the viewpoint of those I interviewed, not hard at all. First of all, banks could be chopped up into units that can safely go bust – meaning they could never blackmail us again. Banks should not have multiple activities going on under one roof with inherent conflicts of interest. Banks should not be allowed to build, sell or own overly complex financial products – clients should be able to comprehend what they buy and investors understand the balance sheet. Finally, the penalty should land on the same head as the bonus, meaning nobody should have more reason to lie awake at night worrying over the risks to the bank’s capital or reputation than the bankers themselves. You might expect all major political parties to have come out by now with their vision of a stable and productive financial sector. But this is not what has happened.

Not that there has been no reform. Banks are taxed when they get beyond a certain size, for example, and all banks must now finance a larger part of their risks with equity rather than borrowed money. American banks are banned from using their own capital to speculate and invest in the markets, and the European commission, or national governments, have forced a few banks to shrink or sell off their investment bank activities – the Dutch bank ING, for example, was told to sell off its insurance arm, ING Direct. But change has been largely cosmetic, leaving the sector’s basic architecture intact. If a bank collapses, the new European banking union – set up in 2012 to transfer banking policy from a national to a European level – is meant to step in and wind it down in an orderly fashion. But who is propping up that European banking union, if several banks should fail at the same time? The taxpayer. A bonus cap in banking was introduced by the EU, so instead of paying widely publicised million-pound bonuses, banks now simply offer higher salaries.

Perhaps the most promising change in the UK is the so-called “senior person regime” that makes it possible to prosecute bankers for reckless behaviour – but only after they have wrecked their bank. Virtually all big banks remain publicly listed or are doing everything they can to get back on the stock exchange. They have never allowed staff to talk openly about what went wrong before 2008 and why. The code of silence remains intact. The banks have not sacked the accountancy firms or credit rating agencies that failed to raise the alarm over the erroneous or misleading items on their balance sheets. Banks have certainly not joined hands to fight for a globally enforced increase in capital buffers (the minimum capital they are required to hold), which could help them absorb and survive severe losses. Indeed, they have spent millions lobbying to keep any increase in buffers as low as possible.

“Back to business as usual.” This is how many interviewees described the post-crash atmosphere in the City. As the senior regulator put it with chilling equanimity: “Is the sector fixed, after the crisis? I don’t think so.” What we have now, he added, is “what you get with free-market capitalism – consolidation of all wealth into fewer and fewer banks, which end up dividing up the market as a cartel.”


When it comes to global finance, the most startling news isn’t news at all; the important facts have been known for a long time among insiders. The problem goes much deeper: the sector has become immune to exposure.

“If I had a million pounds for every time I have heard a possible reform opposed because ‘it wouldn’t have prevented Northern Rock or Lehman Brothers going bust’, I might now have enough money to bail out a bank,” the Financial Times columnist John Kay wrote in 2013. “The objective of reform is not to prevent Northern Rock or Lehman going bust ... The problem revealed by the 2007-08 crisis was not that some financial services companies collapsed, but that there was no means of handling their failure without endangering the entire global financial system.”

Only last year Andrew Haldane, chief economist at the Bank of England, told the German magazine Der Spiegel that the balances of the big banks are “the blackest of black holes”. Haldane is responsible for the stability of the financial sector as a whole. He knowingly told a journalist that he couldn’t possibly have an idea of what the banks have on their books. And? Nothing happened.

It made sense in 2008 for those in the know not to deepen the panic by talking about it. Indeed, one of the most powerful figures in the EU in 2008, the almost supernaturally levelheaded Herman van Rompuy, waited until 2014 to acknowledge in an interview that he had seen the system come within “a few millimetres of total implosion”.

But because the general public was left in the dark, there was never enough political capital to take on the banks. Compare this to the 1930s in the US, when the crash was allowed to play out, giving Franklin D Roosevelt the chance to bring in simple and strong new laws that kept the financial sector healthy for many decades – until Reagan and Thatcher undid one part, and Clinton and Blair the other.




Tony Blair is now making a reported £2.5m a year as adviser to JP Morgan, while the former US Treasury secretary Timothy Geithner and the former secretary of state Hillary Clinton have been paid upwards of $100,000 a speech to address small audiences at global banks. It is tempting to see corruption in all this, but it seems more likely that, over the past decades, politicians as well as regulators have come to identify themselves with the financial sector they are supposed to be regulating. The term here is “cognitive capture”, a concept popularised by the economist and former Financial Times columnist Willem Buiter, who described it as over-identification between the regulator and the regulated – or “excess sensitivity of the Fed to financial market and financial sector concerns and fears”.

With corruption, you are given money to do something you would not have done otherwise. Capture is more subtle and no longer requires a transfer of funds – since the politician, academic or regulator has started to believe that the world works in the way that bankers say it does. Sadly, Willem Buiter never wrote a definitive account of capture; he no longer works in academia and journalism. He has moved to the megabank Citigroup.

The European commission president, Jean-Claude Juncker, memorably said in 2013 that European politicians know very well what needs to be done to save the economy. They just don’t know how to get elected after doing it. A similar point could be made about the major parties in this country: they know very well what needs to be done to make finance safe again. They just don’t know where their campaign donations and second careers are going to come from once they have done it.

Still, the complicity of mainstream politicians is not the whole story. Finance today is global, while democratically legitimate politics operates on a national level. Banks can play off one country or block of countries against the other, threatening to pack up and leave if a piece of regulation should be introduced that doesn’t agree with them. And they do, shamelessly. “OK, let us assume our country takes on its financial sector,” a mainstream European politician told me. “In that case, our banks and financial firms simply move elsewhere, meaning we will have lost our voice in international forums. Meanwhile, globally, nothing has changed.”

This then opens up the most difficult question of all: how is the global financial sector to be brought back under control if there is no global political authority capable of challenging it?

Seven years after the collapse of Lehman Brothers, it is often said that nothing was learned from the crash. This is too optimistic. The big banks have surely drawn a lesson from the crash and its aftermath: that in the end there is very little they will not get away with.