:: The Park Paradigm ::

Markets for the Digital Generation

Regular readers will know that I have a healthy skepticism with respect to the supposed benefits of ever-increasing size in corporations and in particular with respect to financial services firms. Given the preponderant importance of human capital to creating and maintaining a competitive advantage in financial services, the exponential increase in complexity arising from imposing traditional hierarchical organizational paradigms on tens or hundreds of thousands of employees quickly outweighs the benefits of economies of scale in infrastructure and financial capital in today’s hybrid / universal banking and insurance giants.

Until now however, I have been without an elegant and robust metaphor for this thesis. But when I read Michel Bauwens’ essay (thanks to a pointer from Gordon Cook) comparing the current fundamental, secular changes in societal organization driven by the revolution in information and communications technologies, I knew I had found my meme:

…there is also the emergence of a new form of horizontality, no longer local and disconnected and unable to compete with hierarchical forms, but able to scale globally, through the global coordination of a multitude of small teams, outside of a logic of command and control. I think this is the significance of peer to peer (and peer production specifically), and that it points to the concept of Peak Hierarchy.

In my view, we have already reached the point in history, where ‘peer to peer plays’, i.e. interconnected horizontality, outcompetes hierarchical and diagonal plays. The two examples we have are of course Linux and Wikipedia.

In other words, we have reached a point in history, a true turning point, where a new form of social organization, starts to outcompete hierarchy. (But of course, just as early hierarchy was a hybrid with the system out of which it arose, so the new early forms of p2p are hybrid forms within the dominant system)

If this is true, and I of course believe it is, then we have indeed already reached Peak Hierarchy. It should be historically situated at the mid-point between the moment that Linux became the dominant technological force in the internet, and that the Wikipedia was outreading and outproducing the Brittanica. From that moment on, faced with these undeniable examples of success, the scramble for adaptation to distributed forms of organization, to integrating participation in the very heart of hierarchy, has started to make itself felt. There has been a magnetic reversal of the poles. The chaotic attractor has become the peer to peer mode. Hierarchy is still dominant, and will stay so for a determinate amount of time, but social forces are already looking elsewhere, mostly unconsciously, but nevertheless.

This is unprecedented, and is changing the whole course of human history. Of course, it will take time to play out, see how difficult it was to realize the truth of Peak Oil, how adamantly the forces of biospheric destruction fought and are fighting back. But we can also see that it is ultimately a losing battle for them.

Not only does this thesis capture the essence of the issues facing the prevailing global political and economic paradigm but it neatly frames the diminishing returns characteristic of the twilight of a golden age and the accompanying bewilderment of the existing elite who either fail or refuse to understand the tectonic changes inevitably undermining their comfortable sinecures. Shades of the fall of the Roman Empire? Listen to Michel’s take on this:

Not only is the concept of ‘Peak Hierarchy’ an important pillar in our investment thesis, but it also directly colours how we think about building and organizing our own firm over the coming years. We are convinced that this will give us an additional competitive advantage, especially as many of our potential competitors are likely to continue operating more traditionally for many years to come.

So I’m adding it as a category here at the Park Pardigm and expect to read more of my thoughts on its meaning and implications on business and finance going forward.

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One of the main failings of much (most?) mainstream reporting and commentary on financial markets and financial services is that all too often it reduces the issue to a black or white caricature of the reality. Absolutist headlines are more compelling I guess… And at the risk of sounding elitist, I suspect that too many journalists writing on the subject of financial derivatives and financial engineering more generally, are not sufficiently comfortable with the subject to form more nuanced analyses. It must also be said that ‘Wall Street’ has been content to perpetuate the aura of mystery that surrounds derivatives; this attitude was a natural consequence of their traditional business model which was predicated on information arbitrage - aka ‘knowing more than your customers.’

I have to admit, I can understand why - given the egregious behavior of so many ‘financial engineers’ over the past 5 years or so, and the very real and unfortunate consequences now being borne indifferently by guilty and innocent alike - the public might rally around the pitchfork journalists and the witches’ coven they claim to expose. And my frustration is aggravated as this reminds me that through their reckless actions, a bunch of greedy, cynical, cowardly so-called professionals have put in peril the very real and tangible benefits modern financial technology can bring to the global economy and human society; something I passionately believe in. Think of the jerks you knew when you were a kid: the ones that didn’t know when to stop, the ones that pushed until the adults were forced to intervene, the ones that ‘ruined it for everyone else’. (I suspect it’s not just a metaphor: it wouldn’t surprise me if many of the worst offenders were these kids growing up…)

And so, given this context, I hope you’ll understand why I was especially heartened when I read about JPMorgan’s simple but innovative use of carbon derivatives to drive sales of more efficient cooking stoves in east Africa:

JPMorgan (JPM, Fortune 500) is quietly pushing the boundaries of the carbon market - a sprawling international experiment to reduce the greenhouse gases that cause global warming - by subsidizing the distribution of efficient cooking stoves in poor countries. Because the new, improved stoves save fuel and produce less carbon dioxide than traditional stoves, they generate so-called carbon credits that can be sold to companies or individuals who want to offset their own emissions.

The business is complicated, controversial and potentially very profitable.

How profitable? If all goes according to plan, JPMorgan will expand its support for cook stoves from Uganda into Kenya, Ghana, Cambodia and beyond. Each stove is estimated to reduce carbon dioxide emissions by two to three tons a year; each ton generates a credit worth $10 or $15 a year, and potentially more, for the bank.

“If you can distribute 10 million stoves, you are talking about a substantial tonnage of carbon,” says Odin Knudsen, who oversees JPMorgan’s carbon finance business. Do the math - you could be looking at a business with modest costs and between $200 million and $450 million a year in revenues.

But even here we run into the biases I highlighted above - “…complicated, controversial…” How? Why? Completely unsubstantiated. But I suspect most readers will read this and involuntarily nod their heads in agreement, conditioned to accept these assertions as given. Complicated? The author misses the irony, given that within the article the trade is succinctly and accurately described. I suspect most readers understood. Controversial? How so? To whom? The author fails to back this up with any real evidence or even a compelling example of what could go wrong. (Even though there are a few fairly obvious ways such an initiative could ‘go off the rails’, that would be worth reporting.) I assume it is just a knee-jerk assumption that any big bank making money from poor people is doing something evil.

Putting that meta-analysis aside…what a great initiative. While only scratching the surface, this kind of transaction is typical of what I believe we will see more and more of as we move to the sixth paradigm. The really exciting part is how this illustrates what is possible when you start to marry global financial markets to local, micro-economic outcomes. Take it one step further and you can start to provide credit secured on individual carbon allowances, to finance efficient capital investments. Or imagine not just selling a stove, but a fix-price fuel contract in tandem. And where the stoves are used for heating, embedding weather derivatives in the contract as well.

I hope they have much success with this initiative. I look forward to hearing more about it in the next few years (and maybe getting involved in some way…) I just hope the individuals at JPMorgan driving this project weren’t those immature jerks in high school!

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I have to admit it’s always exciting to see validation points for strongly held convictions. As you know I firmly believe that the confluence of technology and emerging - or in the new jargon more precisely ‘frontier’ - markets will generate significant and exciting new innovations and opportunities, and I remain convinced that fundamentally new and robust business models will emerge as a result. The fact that this might improve the human condition in some of the world’s heretofore least fortunate corners is of course icing on the proverbial cake. And so I was happy to read that Google, for example seems to share (at least some of my) sentiments on this:

We believe that the Internet is a transformational force for societies. And it’s making us all much more powerful as individuals, regardless of whether one is in New York, Stockholm, Bujumbura, Ouagadougou, or Cape Town. Regardless of background, education, social status, gender, age or economic situation, online access to information enables people to create opportunities for themselves. Seeing a student in a cybercafe doing his research using a search engine, a businessman chatting with a colleague abroad with instant messaging, or a young woman posting her photos to a social networking site - it’s clear the extent to which academic, business and social life is fundamentally changing all over Africa.”

At the same time, a couple of days ago, a very interesting article in the NYTimes also leant support to my thesis that the infrastructural constraints and challenging business environment of sub-Saharan Africa would engender innovative and resourceful approaches and a unique approach to harvesting the potential of information and communications technologies:

Still, Nairobi is home to a digital brew that invites optimism about its chances for creating unusual innovations. The city has relatively few wired phone lines or networked personal computers, so mobile phones are the essential digital tool. Four times as many people have them as have bank accounts. Text messages are far more popular than e-mail. Safaricom, the dominant mobile provider, offers a service called M-pesa that lets customers send money with text messages. Nokia sells brand-new phones here for as little as $33.

While engineers in the United States lavish attention on expensive phones that boast laptoplike features, in Kenya there are 10 million low-end phones. Millions more are used elsewhere in Africa. Enhancements to such basic phones can be experimented with cheaply in Nairobi, and because designers are weaned on narrow bandwidth, they are comfortable writing compact programs suited to puny devices.

“Applications are heavy in America,” says Michael Wakahe, a Nairobi code writer. “Here we have to make them light,” because simpler hardware requires smaller programs. These can have advantages in wireless systems…

…The prospect of marrying low-end mobile phones with the Internet is earning Nairobi notice from outsiders, who wonder whether the city might emerge as a test-bed for tomorrow’s technologies. One intriguing possibility is broadcasting local television programs on mobile phones.

In Nairobi’s highest-profile validation, Google opened a development office here last September. “Africa is a huge long-term market for us,” Eric E. Schmidt, Google’s chief executive, said by e-mail. “We have to start by helping people get online, and the creativity of the people will take care of the rest.”

One of the most obvious - yet no less powerful or potentially transformational for it - themes is the combination of mobile communications, internet and geo-location technologies to disseminate information and increase connectedness from the bottom up. This emergent collective intelligence is all the more remarkable, given the typical history of entrenched ‘top-down’ politico-economic structures in place in these countries. Much of the early innovation is centered around information gathering and crisis management with tools like Ushahidi (quickly developed in response to the post-election political unrest in Kenya earlier this year) and FrontlineSMS being quickly adopted by citizens and NGOs and having an immediate positive impact on the ground. It doesn’t take much imagination to start dreaming up additional - more commercial - potential applications for these kinds of platforms. Ken Banks, the man behind FrontlineSMS describes his view as developing the ‘long-tail’ of mobile applications as the right approach for not-for-profit “social mobile”:

low-end, simple, appropriate mobile technology solutions which are easy to obtain, require as little technical expertise as possible, and are easy to copy and replicate. From my own experiences the number of NGOs present in this space is by far the greatest, making it the area to focus on if we want to create the highest amount of mobile-enabled social change. Add up all the value here, and it easily outweighs the rest along the higher (more lucrative) parts of the tail.

I would suggest that this approach might work equally well to enable commercial, for-profit, applications as well. Indeed on the other side of the continent you find Mark Davies esoko/TradeNet: Africa’s first mobile2mobile peer2peer trading platform and market information network:

…designed to provide the very latest agricultural market information to stakeholders. Accessed via SMS, fax, web, PDAs, farmers and traders can get daily price information, download video/audio files, access research documents, post buy/sell offers to the community, and contact other market participants. The concept is to make african markets more transparent and efficient, improve intra-regional trading, and provide stakeholders with enough recent and accurate information to make better decisions on bringing products to market and at what price.

I’m sure it won’t be easy or without enormous challenges but the opportunity is vast. Africa: it just might be the new new new thing.

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Having coffee with a common friend and TEDster Juliana, I had the pleasure to meet David McQueen this afternoon. He does a lot of work - counseling, mentoring - with young people in London, and said something that really struck a chord. He said that one of the biggest issues he faced when trying to help these teenagers was a lack of aspirations, or aspirations unnecessarily (and unrealistically) narrowly defined: model, footballer…big brother housemate…

as*pi*ra*tions - a hope or ambition of acheiving something.

I’m not suggesting this is some incredible non-intuitive insight, but it made me think. Because it was so obviously true. Because it is so obviously sad. Because it only takes a second to realize that without aspirations, the world takes on a completely different hue. Our society, our world is built on the assumption that its citizens aspire to achieve in some way, in some context. It doesn’t work otherwise. Alienation is a logical outcome. Think of everything you do, every day. Now ask your self how these things make sense devoid of your own aspirations. Exactly, they don’t.

I’m not an anthropologist but I suspect that a child’s aspirational abilities are not predicated on genetic pre-disposition, but are shaped by their environment, especially their parents. It’s unsurprising that there doesn’t seem to be any easy, obvious, scaleable solutions to fixing bad parents (based on a long history of governments trying to find such a solution and so far failing…) But I wonder (I hope) if perhaps there are ways to use the power of the web, social media, ubiquitous and cheap communication to open previously closed horizons to young people who haven’t had the good fortune to be born in the right place, to the right parents. To afford them the self-evident right to have ambition. To dream. To allow them to discover possible futures beyond ‘footballer’ or ‘model’ or bust. To swim in the sea of possibilities that surrounds us constantly but - unlike for readers of blogs like you - is invisible, seemingly unknowable to these kids. To let them discover the dignity of a job well done, no matter the job. Aspirations should naturally be a “long tail” distribution, not an all-or-nothing ultimatum. And yet it seems that for many children, this is what they see.

As JP would say, this is a very provisional post: unfortunately I don’t have any clever ideas to illustrate my thinking.

But I can’t wait until I do.

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Those that aren’t prediction / event / outcome market affectionados, might not have realized that the CFTC recently asked

…for public comment on the appropriate regulatory treatment of financial agreements offered by markets commonly referred to as event, prediction, or information markets.

During the past several years, the CFTC has received numerous requests for guidance involving the trading of event contracts. These contracts typically involve financial agreements that are linked to events or measurable outcomes and often serve as information collection vehicles. The contracts are based on a broad spectrum of events, such as the results of presidential elections, world population levels, or economic measures.

As you might have expected my immediate reaction was - it’s about bloody time! (Or more cynically, that the CME had finally figured out / got around to working out how to monopolize compete in these emerging markets.) The deadline for comment was July 7th and although I haven’t had the time to look closely at many responses (available here from the CFTC), I was heartened to read John Delaney’s (InTrade CEO) contribution thanks to Chris’ posting of it at Midas Oracle (incontournable for keeping up with all the latest news and gossip on the subject of prediction markets.) It’s too bad the CFTC’s website doesn’t have a Digg/Shashdot-type mechanism* for people to vote up (or down) contributions. If it did I would certainly have endorsed this contribution - well crafted, robust, articulate and (imo) stating the blindingly obvious (which btw is a good thing in this Kafka-esque context.) My thoughts as to the contradictions implicit in the increasingly anachronistic US regulatory system are on record, and I hope this first baby step by the CFTC is a prelude to more great modernization to come. Jed - another good source of event market news and analysis - thinks it will happen only very slowly if at all. I wonder if we can get Obama’s staffers to put this in the ‘Yes We Can’ column!

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It has come to my attention that in at least one large European bank, access to The Park Paradigm is blocked. I wasn’t sure whether to laugh or cry. After the initial 5 seconds of paranoia, it dawned on me that (despite my ego wishing it was otherwise) this was most likely due to my blog running foul of some generic web-content filtering software that the bank in question is running. Although my direct experience of such things is now a couple years old, these filters were pretty dumb / blunt and needed to be over-ridden continuously.

As a (somewhat geeky) MD, I (a) knew of this problem and (b) wouldn’t give a second thought to firing off a quick email to IT security to get whatever website I needed to see ‘unblocked’. (And no this did not include dodgy non-work related sites…) The problem is that the vast majority of (non-IT) employees (a) don’t know that the filters are known to be blunt/fallible and exception requests are perfectly reasonably, and (b) if they do know, are put off by overly-complex (ie more than 60sec) form filling and/or time-lags for unblocking. As a result, it is not surprising that most bank employees when faced with a (I might add usually very scary) message stating “ACCESS DENIED. THIS WEBSITE MAY CONTAIN INNAPPROPRIATE MATERIAL”, fail to pursue the issue further.

Why does this matter? It means that they can’t access information and opinion that is outside the mainstream ‘channels’. It means that serendipity is unlikely to pay them a visit. It means that they are at risk of being flatlanders in a 3-dimensional world. It means that they are cut-off from a rich stream of ideas, data and opinions. This is pure conjecture, but I suspect that the probability of The Park Paradigm (or any other blog) being blocked at a hedge fund is much much lower than the probability of it being bocked in a big bank… Just saying. Draw your own conclusions…

“All of this because they can’t read your blog???” (I hear you groaning.) No, not my blog. All blogs. All non-traditional infomedia? It would be nice (for my ego) to think in this instance that I had been singled out, but sadly I doubt that is the case; I’m sure this site has just been generically lumped into some undesirable category or another, probably algorithmically. (Love the irony.)

So in the interests of some market research, please let me know if access to The Park Paradigm is blocked where you work (no not oxymoronic, assuming you read this at home) or where you used to work, and if you know why that is/was. And thanks for reading, although I’m sure you’ll enjoy it even more now that you know you are reading ‘banned’ material! (Getting that meme around will do wonders I’m sure for site traffic!)

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…oh to be a credit/bond trader again, if only for one month…

I’ve been watching the GSE train wreck unfold from afar over these past few months with some fascination, like a Hollywood remake of an old French movie: not the same, bigger, flashier, more. But the story is the same. Only in America the hero is well, a heroic character, while in the original it was more ambiguous, more of an ensemble cast. That’s the French for you. Enigmatic in their certainty.

The year was 1996. July even:

“Ruined by its commitments in real estate and a deficit of internal controls,” he said, the firm was faced with a negative cash flow and had failed to attract an outside investor, and the state had no choice but to step in…

…whose officers are appointed by the state and whose main line of business was government-backed loans, was considered a quasi-state institution and a haven for savings and retirement funds. Its decay and collapse over the past year surprised investors, many of whom thought that the shares were the equivalent of government-backed securities…

Eerily familiar? I remember. Vividly. I was in Paris. We were long their bonds. It was pretty much impossible not to be.

Euromarket veterans will know I am talking about none other than Credit Foncier de France… The IHT reported at the time:

Ending a year of uncertainty, the government said Friday it had failed to find a buyer for the nearly bankrupt property lender Crédit Foncier de France SA and would take the bank over and dismantle it.

Under a plan announced by Finance Minister Jean Arthuis, the state-run bank Caisse des Depots & des Consignations will buy more than two-thirds of Foncier’s shares at 70 francs ($13.99) each and transfer its assets to another state-run entity, which will liquidate them over 10 years.

Mr. Arthuis also said the state would guarantee as much as 270 billion francs of bonds issued by Crédit Foncier, which was France’s second-largest borrower after the state itself.

It certainly looks like the Americans are going to have to follow the French and engineer some sort of restructuring and government take-over of the debts of Fannie and Freddie. Buy the bonds and sell the equity…

Twelve years is a long time. My memory is a bit fuzzy around the edges. But I seem to recall CFF’s 10 year bonds trading down around 15-20 points at the very worst (we didn’t have CDS in those halcyon days…) That’s about 200-250 basis points. No real volume. Everyone (who cared) was long - so long there was no point trying to sell. So a few plucky outsiders with a clean ledger just kept offering lower into a vacuum. I know hindsight is 20/20 but believe me when I tell you that we knew that the government would step in. It was only a matter of when and figuring out how much to give, if anything to the CFF shareholders. And so it was that we (the bank - all CFF risk was brought together in the ALM book) kept our position, even added a bit more I think. Implicit becomes explicit: too big to default. Too big to even take a haircut. The goverment (and various linked agencies) knew it had a hell of a lot of debt to sell over the next few decades; blowing up their entire domestic underwriting and investor base was not an option. Not to mention the damage that would be done to the domestic mortgage market…

But CFF is tiny compared to Fannie and Freddie. 270 billion francs. c. $50 billion dollars. More than an order of magnitude smaller. And with very few international bond-holders. How do you think the various Asian central banks and Middle Eastern sovereign wealth funds who hold hundreds of billions of these securities would like it if they were to default. They are already down a fortune given the partial dollar default devaluation. The United States simply cannot afford to leave Fannie and Freddie to their own devices. I’m waaay too far away from the markets to get a sense of when might be the right time to buy Fannie or Freddie paper, CDS seems to be trading at around 75bp. Could go even wider if the decision on what to do drags on (which it well could), especially as an election is coming up. But at some point I suspect this will be a buy as Uncle Sam will need to follow the banks and take its own SIVs ‘back on balance sheet’.

Yes, history repeats itself…btw was thinking, how about Bruce Willis as Hank Paulson (the hero) in the movie?

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A year ago Nate wrote:

Finally, this is all assuming nothing changes with the way the carriers do business. Indeed the ball could be in their court on the subject of mobile payments, because if they set-up their own mobile payment option as a stand-alone service and turned the phone into a credit card, they could sign users up at the point of sale (POS) or any point along the way and really get into an interesting a lucrative business. I say stand-alone because the current set-up with SMS payments feels too much like how sketchy 900 numbers work (WTF is this charge on my bill!?).

Take home point: Phone bill must remain clean and consistant, and mobile payments must be as flexible as an AMEX. Meanwhile, carriers hold the key to this, but likely won’t move very soon and consumers won’t adapt too quickly, so your best best is extending your online presence to the “third screen” and streamlining payments on the back-end.

More recently he wondered whether or not the killer business model for Twitter wasn’t as a mobile payment platform:

Forget infrastructure, forget great partnerships: the most important place a mobile payments system can start with is ubiquity.

Twitter is far from being a ubiquitous mobile platform, but they have more penetration and usage than any other mobile service and their current user base is the same important group of technology early adopters that PayPal enjoyed when it convinced the world that you could send money to an email address.

Two and a half years ago, I asked if telcos were set to become the new banks:

…the mobile phone is likely to be the platform of choice in delivering financial services to hundreds of millions in the developing markets over the next decade. But this idea does not just apply to developing markets; mobile devices are already important platforms for commerce in developed economies and there is no reason to doubt that the growth of mobile commerce will not continue apace everywhere. Indeed the ability to reduce transaction costs to a point where you can easily and profitably transact micropayments, then you have the basis upon which to compete for any business.

Following which JP took me literally and left a bank to join a telco!

Well now ‘mobile’ is all the rage with the VCs and Twitter is the society phenomenon of the (mainly) West Coast digerati, so is Nate correct in mapping out payments as the silver bullet to convert tweets into dollars?

I’m not entirely convinced. Or more specifically, I think the $64k question is exactly how and where Twitter might position itself in this process. However, Nate’s thesis did get me thinking about how Twitter might go from a passionate but relatively small group of ‘early-adopters’ to a more lucrative long-term future out in the ‘real’ world. And it would seem to me that one path the management of Twitter should explore is licensing their service to corporates and other communities who might want to host such a service within a prescribed universe (for commercial and/or regulatory reasons.) This clearly could include banks and other payment providers. It could be sold as SaaS, hosted or as an appliance (installed behind the firewall for instance.) I have a few ideas as to examples of where this approach might make sense but will demur sharing these for the moment.

What do you think?

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(via BloggingStocks)

Citigroup (NYSE:C) will begin a new bonus plan aimed at getting its senior executives to work for common earnings improvement across the entire company instead of only driving profits within their departments. According to the FT, the new system is “an effort to increase co-operation and minimize in-fighting among the disparate parts of the sprawling financial services conglomerate.”

Readers won’t be surprised to see me rolling my eyes in disbelief… This is what passes for the leadership for which Citigroup shareholders are paying (hundreds of millions of dollars)?? Did Mr. Pandit expect the stock to bounce on the back of this latest additional coat of shiny eggshell-finish complexity?

However it’s nice to see Mr. Pandit despite living in a house entirely made up of glass (opaque of course) panels, finding the time to wax lyrical about the need for transparency in regulated financial markets. A little bird told me he may have actually just dusted off an old (c. 2005) executive committee strategy document and made a few adjustments to bring it more ‘in line with the prevailing environment’:

Yet transparency is difficult to avoid achieve. It requires continual vigilance to resist standardized products whenever possible appropriate, keeping them away from introducing them to exchanges, resisting creating counterparty clearinghouses and settlement systems and, finally, amassing accurate data on prices and transaction volumes for our proprietary use. Transparency must also include public disclosures to investors about pertinent risk and financial information that give the market the impression it has a chance to make informed judgments.

True, true. Inspiring stuff. Ok maybe not so much (as Felix notes):

If I were a Citigroup employee and I read this op-ed, all my fears about my bank being taken over by robots and consultants would have been confirmed at a stroke. Pandit simply doesn’t come across as human in this op-ed: instead he’s some kind of jargon-generation device, talking about “systemic risk umbrellas” and “alternative accounting approaches”.

I stand by my earlier views that - in it’s current configuration - Citgroup is too complex to be efficiently managed, at least using the prevailing standard corporate management paradigm.

I’m not suggesting that no economies of scale make sense in banking or financial services more generally, only that they are subsumed by complexity within these ‘integrated’ financial behemoths. I even have some sympathy for the seductive logic underlying integrated business models, however in my view the theoretical benefits of an integrated model - while possibly intellectually robust on paper - are impossible to exploit in reality. It ignores what I describe as corporate entropy: ie in any corporate process there exists an inherent tendency towards the dissipation of useful energy.

Indeed - sticking with the chemical analogy and without writing a book about it - it would be fair to say that giant bank mergers are at best an (intrinsically unstable) intermediate product in the reaction coordinate and to make any sense need to be followed by a subsequent division into multiple new end products (which individually release the benefits of economies of scale and synergy without the instability engendered by excessive complexity.) So Citigroup (or UBS or HSBC or RBS/ABN Amro, etc…) should naturally “decay” to form multiple specialist firms that are more focused and efficient than the multiple firms that had been combined first to form these giants.

I’m sure Mr. Pandit is an extremely intelligent and hard working person, my suspicion however is that will not be sufficient to ensure his success. I certainly don’t envy him, however I wonder if he could be more bold. And I forgive any Citi shareholders for hoping I am sadly misinformed. And I’ll admit that we are now (at 16 and change) closer to the bottom than the top, but I’ll abstain from considering a buy order until I see a material sign of reducing complexity…

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In case you still aren’t convinced, have a read of what the Consultative Group to Assist the Poor has to say on the subject:

Banking regulators still don’t get it: The best candidate for making access to finance truly universal in a developing country is the mobile phone.

…Globally, mobile phones will handle $587 billion in financial services by 2011, UK. consulting firm Juniper Research Ltd says. In many developing countries, mobile-phone companies are miles ahead of banks in using technology to cut the cost of processing a transaction. In India, for instance, phone companies have a 100-fold cost advantage…

…Real breakthroughs in financial inclusion may only occur when telecommunications companies lead the effort and regulation promises smooth running.

Why do you think I encouraged my friend JP to go ‘get some experience’ at a phone company?

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