Delegation: The Pyle Principle

The Peter Principle is the name given to the notion that "in a hierarchy every employee tends to rise to the level of his incompetence." In turn, Peter's Corollary holds that: 

""in time, every post tends to be occupied by an employee who is incompetent to carry out their duties" and adds that "work is accomplished by those employees who have not yet reached their level of incompetence". "Managing upward" is the concept of a subordinate finding ways to subtly "manage" superiors in order to limit the damage that they end up doing."

But the suggestion that "work is accomplished" in such an organisation implies successful delegation by management, itself a sign of management competence. That can't be true of an organisation governed by the Peter Principle, since surely it is incompetent from the top down. In such an organisation, therefore, it is more likely that issues are delegated to the level of incompetence and less and less is accomplished. Accordingly, either we should re-define Peter's Corollary or (acknowledging that delegation to the incompetent could be a tactic employed in otherwise sound organisations, e.g. to kill an unpopular project) we should proclaim a fresh principle. 

How about the Pyle Principle?

Does Occupation Work?

Much is being written about Occupy Wall Street and similar expressions of mass dissatisfaction about our financial system. In particular, many are giving advice on more practical alternatives to occupation, which misses the point:

"Occupy Wall Street is [a] leaderless resistance movement with people of many colors, genders and political persuasions. The one thing we all have in common is that We Are The 99% that will no longer tolerate the greed and corruption of the 1%. We are using the revolutionary Arab Spring tactic to achieve our ends and encourage the use of nonviolence to maximize the safety of all participants."

In other words, this is what people do when their faith in all the immediately practical alternatives is exhausted. 

But why? Does mass occupation 'work'? I mean, is Egypt now a better place? Wouldn't it be better to withdraw completely and assume the foetal position under your duvet? 

 

While I don't believe these protests have any causal connection with the changes that are democratising the financial markets, they are critical insofar as they represent a peak in our society's dissatisfaction with its financial institutions. I mean, this is not intended to shock or wake people up, like a strike or a noisy protest march, or an attempt to get the attention of law-makers outside Parliament. Quite the reverse: pitching your tent in the beating heart of a giant city is a sign of utter confidence that every rushing passerby, every person who reads the paper or watches the evening news will understand exactly why you're there.

For this reason, such occupations are a sign that the majority of us have rounded the change curve. It means we've moved beyond 'shock' at how broken things are, through 'denial' and beyond 'anger and blame' - even though that appears to be what all the signs are about. Those people wouldn't be there if they instinctively sense that we all understand the world has changed for the worse. That something has to be done. In fact, the reason they're gathering is to figure out what is to be done.

Ironically enough, these occupations mean we're moving on.

EU Rescue Fund: Build It, And "They" Will Come

Source: Allianz. Hat tip: Financial Times

The Zerozone's life and death struggle may be painfully slow, but it's weirdly entertaining. Comical proposals abound as to how far the dwindling European financial stability facility ("EFSF") - now eroded from €440bn to €250bn - might be leveraged to cover the risk of Zerozone countries going bust. Metaphors to date range from 'a burning building with no exit' to holding on to a 'rising balloon', and I've mixed a few more below. 

The latest instalment, as it were, involves a proposal from Allianz, the insurer, that the requisite leverage could be produced by guarantees (see diagram), so that the steadily shrinking €440bn could magically cover €2.9 trillion of shonky southern sovereign indebtedness. A previous proposal involved CDO-style leverage to €4 trillion. Both appear to suffer from the flaws outlined by Satyajit Das: that the credit risk is massively concentrated and the default correlation is high.

This is like watching turkeys fight over who's next at Thanksgiving. Mr Das is not alone in assigning a high probability to the guarantees being called, or 'CDOs' defaulting - the facility is also a giant magnet for recalcitrant Greek bureaucrats, hedge fund managers and bond traders alike. 

The vultures aren't so much circling, as landing and fastening napkins around their necks.

I guess you could say this makes the creation of the facility a self-fulfilling prophecy. And this just happens to be the reason leading Zerozone banks give for resisting requirements that they recapitalise on the back of stress-tests that factor in the risk of sovereign default (French banks complain they would be forced to raise capital at valuations that are too low, but who are they kidding?)

In truth, the banks are just playing for time until the EFSF gravy train finally rolls into town.

That seems to be what banking is all about. 

A Good Year For Innovation In SME Finance

Source: Bank of England

As the headwind for UK banks stiffened today, we have news from MarketInvoice, the UK-based online invoice discounting platform, that it has enabled SMEs to raise £2 million against their invoices since February 2011, with £500,000 raised through the platform in August alone.

"Buyers" of each firm's invoices are institutional investors (such as asset managers and private investment funds) - who we know have plenty of cash in search of a home. They bid against each other on the platform to ensure some competition to provide cheaper funding. The types of deals done to date, and how the process works, are described here. In effect, this puts the traditional invoice discounting, or 'factoring', process online.

Of course, MarketInvoice is not alone in providing small businesses with alternatives to bank finance. Funding Circle, the peer-to-peer platform for small business lending, has also reported healthy interest. And Crowdcube facilitates equity investments.

So far, each of these new entrants has chosen to innovate around a specific funding instrument or process. No doubt other alternative providers, and further innovation, will emerge while the banks remain in complete disarray. Necessity, as they say, is the mother of invention.

Bank Bonuses, Dividends Impact The Economy

Source: Bank of England

Banks were recently warned by the Bank of England to cut bonuses and dividends ("discretionary distributions"), rather than to reduce lending, when faced with falling profits.

Interestingly, Angela Knight, chief executive of the British Bankers Association, welcomed the news. She is reported to have said, "This is the first statement I’ve seen from [UK] authorities that recognises that capital levels and regulatory changes ... can have an adverse impact on the economy.”

By implication, of course, this is also the first acknowledgement from UK banks that their bonuses and dividends will adversely impact on the economy, unless they are cut before lending shrinks.

Let's hope they continue to bear this in mind as their rate of lending continues to shrink...