Banks collapsed under Peter Principle

40 years ago, Dr. Peter Lawrence formulated according to which immodestly called in his favor. According to his own people generally find their level of incompetence. In other words, if you are good at a job, will grow in the hierarchy until you reach the position of which is no longer doing well.
Collapse of several financial institutions suggests similarity in their organization. It’s about diversification of activity to a level of incompetence. These businesses are growing in areas that are not so obvious to them, and finally one them stumble. Communication Bank Chelsea Building Society to large losses as a result of mortgage fraud was like a breath of fresh air – at least the problems were related to basic business. Most financial institutions, swayed on the brink of bankruptcy, reached as far as a result of loss of peripheral activities.
The principle of achieving a level of incompetence as a result of diversification is valid for all financial institutions – from the smallest to the largest. AIG was the leading insurer in the United States. The company was busy not only with credit insurance, but was the largest trader of swaps on insurance against credit risk. So the unit for its financial products, which employs 120 people in London, triggered the collapse of a business with 120 thousand employees.
Housing savings bank Dunfermline Building Society is a standard for knowledge, a basis is in the hometown of the most cautious among all Scots, Andrew Carnegie. For over a century treasury collected savings, which lend to home buyers cautious. God knows where their mind was, I decided that 2007 is the best time for aggressive growth portfolio of commercial loans.
Hypo Real Estate was the largest creditor in the property sector, Germany – probably the most boring, but the most profitable and dominant position. Then buy a business bank specialized in raising funds in the money markets, loans to government offices. Undoubtedly, the consultants have presented her twisted explanation of how such a thing can earn lots of money. Whatever were their arguments, the decision was wrong and led to the most expensive bank rescue in Europe.
Boredom factor is important. Much of the traditional banking is boring. Aiming for new challenges is a wonderful human traits, but shareholders pay quite expensive when you allow the chief executives to give her.
Public-sector bodies are usually restricted in their activities, so that deregulation bears often expensive experiments. In Britain, many of the benefits of privatization in terms of efficiency have been wasted in diversification – looking at how executives are losing 80 percent of their time on activities that generate a turnover of 1% and -10% of the profit. But it’s fun to go to Buenos Aires, rather than flowing pipes repaired.
To win the auction in which you do not know what to bid, often means to lose. This is a curse in many cases behind bad acquisitions, as the successful buyer most often is the one who is willing to pay unreasonably high price. This explains the competition between the Royal Bank of Scotland and Barclays which will cause bankruptcy, as buy ABN Amro. Ignorance of the products is also a problem. When you are novice and are not fully informed business gravitates to you that nobody else wants.
The main driving force, however, is arrogance. The study of Jim Collins’ How to ruin the big „is valid for every business that I mentioned. The financial services industry is particularly prone to arrogance, as in some sectors there was little competition and chance plays a big role in the outcome of speculative transactions. So for people in financial institutions is difficult to give the illusion that success is the result of exceptional skill, not just luck. There is nothing more natural than to believe that this incredible talent will find pots of gold coins in the other arcs. While the rule continues to bustle, to the diversification level of incompetence will remain a powerful force in business conduct.

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John Kay