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C. DINESEN
Bad management causes failure of banks. Mistakes are made by management of banks and by management of other commercial organisations. Sometimes these mistakes result in the failure of the bank or organisation. Since the 2008 financial crisis bankers have been accused of greed and worse. Some of these accusations were justified. Some bankers had become bankers to make as much money as possible with little or no regard for the consequences. A few infamous individuals were traders rather than senior managers. They caused their banks such losses from unauthorised actions that their bank might fail, as Baring did in 1995 and Société Générale nearly did in 2008. The top management in the largest banks that failed were intelligent and hardworking people. They may have been greedy and ‘not here for the common good’. But it is difficult to believe that they managed so badly as to cause the largest banking and even corporate failures in history, destroying their institutions, causing devastation to their own and other countries and have their reputations tarnished forever. During the 2008 financial crisis some bank failures were devastating in terms of size and loss to the banks’ owners, employees, customers and other stakeholders. It seemed and still seems unfathomable that anybody would manage so badly as to lose over $50 billion as did Merrill Lynch by 2008. It seemed impossible that anybody would manage that badly. Bad management, mistakes, seemed unlikely to be the reason for many of the most spectacular failures in banks. If it is difficult to believe that anybody would manage so badly as to cause such major bank failures as were seen in the 2008 financial crisis, there is one other possible reason for these astounding bank failures. Perhaps some of these banks were not managed, perhaps there was absent management. There are two main reasons for absent management, complexity and inability to manage the complexity. Complexity partly comes about because it is allowed by regulation. Regulation has been much criticised for being the cause of bank crisis including the most recent crisis. But regulation does not cause bank failure. Regulation provides parameters within which banks are allowed to operate and to fail. But it is up to banks to fail. If regulation prohibits a certain action or approach and the bank proceeds anyway that is breaking the law. Sometimes banks do that and sometimes there is absent management involved in that. This was the case when Salomon submitted auction bids for Treasury bonds above what the regulatory rules permitted. But it was not regulation, but absent management, that caused heavy fines and that was close to causing a failure of Salomon.
