And, according to this piece in the Financial Times, some interesting revelations,
"It emerged on Wednesday in testimony before the Financial Crisis Inquiry Commission in Washington that, partly on the back of a 2005 Oliver Wyman analysis of potential growth in the fixed-income market, Citi decided to ramp up its business in collateralised debt obligations, or CDOs, backed by high-risk or “subprime” mortgage loans.
This ultimately led to a US government bail-out after Citi racked up more than $50bn in losses in the wake of the implosion of the subprime market.
In the heady pre-crisis years, firms such as Oliver Wyman and McKinsey were frequently called in to assess how banks could bolster profits in underperforming divisions, as bank executives looked to stave off shareholder complaints about lagging returns.
Oliver Wyman, for example, marketed a yearly analysis of how banks were faring relative to each other in hard-to-measure areas such as fixed income and commodities, offering previously unavailable competitive intelligence.
Relying in part on the Oliver Wyman study, Robert Rubin, then chairman of Citi’s executive committee, and Thomas Maheras, head of capital markets, conducted a review of the fixed-income business. They then sought Mr Prince’s approval for an ambitious investment plan to ensure Citi would keep its edge as the debt markets evolved.
Citi would end up spending more than $300m in 2006 to hire traders, bankers and cutting-edge software systems. CDOs and other structured credit products were a part of that buildout.
“Based in part on a careful study from outside consultants hired by our senior-most management, the company decided to expand certain areas of our fixed income business that we believed at the time offered opportunities for long-term growth,” Mr Maheras told the Financial Inquiry Crisis Commission on Wednesday."
I recall, back when I was the first Director of Research at the then-independent Oliver, Wyman, that we produced and marketed a financial services sector "revenue map" each year. It sounds as if, over the years, the firm added data from its consulting engagements, in which it would get proprietary views of various firms' actual business data, to provide comparative information.
According to Prince's and Rubin's testimony, we see, once again, how a senior management team paid millions of dollars per year can't seem to have its own sense of direction. Instead, they hired Oliver, Wyman to do their thinking for them, with unfortunate consequences.
Rather like the unfortunate experience of Meg Whitman of eBay received from McKinsey some years ago with regard to Google as a competitive threat.
It's understandable, and a good idea, for senior or business managers to use consultants who have some particular informational expertise or knowledge about a product/market. It's rather surprising to me, however, that in the clubby, competitive world of fixed income trading and origination, a firm like Citigroup, composed, in part, of the old bond king, Salomon Brothers, wouldn't already know quite a bit about the market in competitive terms.
Further, there's a point at which management has to do its own thinking, beyond the data.
As I wrote in this post, way back in September of 2008, about the "fallacy of composition" in risk management,
"This is a topic on which I have seen almost no ink, whether physical or electronic, spilled. The tendency of major financial service trading houses to employ similarly-vintaged and -featured risk management systems virtually guarantees the fallacy of composition with respect to sudden windshears in markets.
When one model sees a need to dump a security, due to excessive risk, they all do. And what the models don't account for is other desks, using similar risk metrics, piling on with similar actions, all of which rapidly accentuate the pricing moves that first triggered the sales of risky instruments.
What people outside the financial services industry fail to understand is that, like most industries, vendors supply products and services- data, software, information, risk management methodologies- to as many industry competitors as possible. Further, there is a constant flow of people back and forth between vendors, consultants and financial services firms. For example, a former investment management business partner and one-time colleague at Oliver, Wyman & Co., recently left a senior position at Mercer Management Consulting, which acquired Oliver Wyman a few years ago, to join some of his former OWC colleagues at a risk management consulting firm in California. This will speed the dissemination of his observations on industry risk management practices, and weaknesses, to another major sector consultant."
Apparently, this occurred in the area of simple revenue generation and business expansion, too, for Citigroup. It evidently never occurred to Prince, Rubin and Maheras that if Oliver, Wyman were peddling the idea of jumping into exotic fixed income origination and trading to Citi, they were probably also walking the concept up and down the investment and commercial banking community.
After all, everyone in financial services knew, or should have known, that this has always been the manner in which OWC does its business. One by one, they sold essentially the same risk management technology to every major commercial bank in the 1990s.
Now, though, Oliver, Wyman's role has been brought into the national spotlight in the context of a federal panel investigating the roots of the recent financial crisis. This can't be good for the firm's image or subsequent business.
Perhaps, though, it will serve as a cautionary tale for future financial business executives. Rather than simply seize on a consultant's juicy picture of a market, and plunge in, they'll do some game theory and strategy work to consider the ramifications of multiple competitors entering the same product/markets with similar strategies, technologies, personnel, etc.
Oh, by the way? The other major discipline that OWC prides itself on possessing is....strategy consulting!
Guess they didn't get around to selling that strategy engagement to Citigroup, did they? Maybe Rubin and Maheras ran out of the room after the fixed income market presentation so fast, heading for the board room to recommend jumping into CDO trading and origination, that there wasn't time.....
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