The "atmosphere of craven conformity" (30 April 2008)

This post is not about high school or hyper-brand-conscious hipsters but investment bankers. In a FT editorial yesterday, former investment banker Abigail Hofman blamed the current financial crisis on the culture of the banks. First and foremost, she argues, that culture is about greed:

Investment banks are all about making money. At the extreme, this means making money for employees not shareholders. The big revenue producers are revered. It is not considered prudent to upset them by asking too many questions. The subprime meltdown is a perfect example of the "emperor has no clothes" phenomenon. These were complex products, yet obfuscation was considered acceptable. Bank chief executives should have asked more questions. I suspect they saw the juicy profits and hoped underlings understood the risks.

But then in the next paragraph, she goes further, denouncing the "cult aspect" of investment banks: "If you work on Wall Street or in the City, you toe the party line. Despite lip-service to 'diversity', diversity of thinking is not encouraged." As a result, no one asks difficult questions or challenges the logic of various practices that are bringing in money. No one wants to blow the whistle, derail the train.

It's hard to see how it could be any other way, as asset bubbles in general require a uniformity of opinion, a sustained and unwavering effort of belief to keep them inflating, and investment banks seem to need asset bubbles to make the outsize profits they have become accustomed to since the 1980s. The discipline of staying on message, of not undermining the optimism that obviates risk, seems essential to the business model. And from there it filters out, through the business press via various quoted analysts interpreting the steady stream of economic reports, and then into the general-interest press, helping sustain consumer confidence. A climate of critical thinking and skepticism is not particularly conducive to money-making, to the Ponzi scheme-like nature of selling risk down the daisy chain. The wrong sorts of questions are only likely to jeopardize your opportunities -- critical thinking seems more often than not to undermine opportunities rather than exploit or discover them.

This is because the "logic" of asset bubbles can't bear careful scrutiny, so the energy that might otherwise go into critical investigation is instead invested in ideology, into explanations for why we shouldn't be skeptical: "the internet has birthed a New Economy and Everything Is Different," "We all need to belong to the Ownership Society, and home prices will never drop."

Another way to put this: Investment banks are haunted by entropy, by the sense that investment opportunities inevitably unravel, face diminishing returns, run into natural limits. Lockstep conformity militates against this entropy, generates a solution for something unsolvable. Capitalism, then, is this logic writ large, which is perhaps why America is the most congenitally optimistic place in the world and a place where there reigns an overarching conformity, masked by the quotidian kind of individuality that we trumpet as freedom. That kind of individuality -- the rebellion of self-fashioning within the larger context of a stable consumerist system -- comes at the price of surrendering the kind of critical thinking that Hofman laments the absence of in the banking world.