Financial Engineering

Bear Stearns, Washington Mutual, IndyMac, Lehman Brothers, AIG, Merrill Lynch. Arrogance and over confident management based on a work environment of a few chosen elitist managers are common for the preceding companies. About five years ago one of the companies above (that shall remain unnamed) sent one of their top executives to LA to tell the peons that all the stars were aligned for his division to begin making big profits and really matter to the bottom line for the group. He stressed strict allocation of resources and cost control. The entire three hours he was visiting and giving his lecture to the little people, his limousine was running outside on a main street waiting to take him two blocks away to a company sponsored reception with customers. Guess what he flew the private company jet from NYC to get to LA to boot. These so called executives get so enamored with their own vision of greatness they miss the point that financial services is about risk management. Risk management is boring; it is not financial engineering it is making hard decisions about not risking the firm. It's not based on some variation of a tri-nomial tree using the Hull-White model. Its about proportionality and reputation. Both need strong controls derived from an ethical core value to keep arrogance out of the system. The management of the above firms risked the livelihoods of all their constituencies by believing their own greatness and deserve to go down and go down hard.