Sandra Navidi - SuperHubs - How the Financial Elite and Their Networks Rule our World

Bernanke worked tirelessly throughout the seemingly endless crisis, and eventually the stress of carrying the weight of the world on his shoulders took its toll. The curse of knowing too much coupled with great responsibility began to show. At meetings he sometimes appeared detached, almost robotic, and the vociferous criticism regarding his policies likely added to the pressure. Yet, he had made a deliberate choice to devote his career to public service, even serving a second term.

Central Bank of Central Banks: The Bank for International Settlements

Every other month, central banks meet at the Bank for International Settlements (BIS) in Basel, Switzerland. The oldest international financial institution in the world, the BIS is the bank for sixty central banks around the world and counts among its members the Fed, the ECB, and the Bundesbank. As the nerve center of the international financial system, it acts as a prime counterparty for central banks, supporting monetary and financial stability and conducting research and analysis. In addition, it provides a platform for the Basel Committee on Banking Supervision, the Committee on the Global Financial System, the Committee on Payment and Settlement Systems, and the Financial Stability Board (FSB).9 Set up in 1930 primarily to manage Germany’s World War I reparations, the BIS’s unusual history has to a large extent been driven by the strong personalities of central bankers.10 Its offices are located on sovereign soil not subject to Swiss law, and its employees enjoy quasi-diplomatic status and Swiss tax exemption.

A Primer on Banks: Regular and Shadow Banks

“Regular” banks take deposits and in turn pay interest to depositors. Then they put the deposits to work to generate revenue, usually by giving loans for which they receive interest or by investing.

Savings banks are focused on accumulating money, commercial banks on working with businesses, and private banks on servicing high-net-worth individuals.

Investment banks do not have banking licenses and do not take deposits from savers. Rather, they invest on their clients’ behalf, render investment advice, and engage in corporate transactions such as mergers, acquisitions, and initial public offerings. Their deals are usually a bit riskier because they deal with sophisticated clients.

Shadow banks is a catchall term for all financial service providers that lack a banking license, such as investment banks, broker dealers, investment funds, and money market funds. Shadow banks have recently come into focus as much business has fled from heavily regulated banks to the lightly regulated and nimbler shadow banks. In fact, they have received such large capital inflows that they are now considered a potential risk for financial stability.

Bank CEOs are amongst the most powerful individuals in the financial system due to the indispensability and pervasive power of their institutions. Because they are located in the center of a web of highly valuable connections, they are superhubs.

The Perpetual Crisis Manager: The International Monetary Fund

The International Monetary Fund (IMF) promotes global monetary cooperation, financial stability, international trade, employment, and economic growth. Established at the Bretton Woods Conference in 1945, today it has 188 member countries11 and holds regular Conferences around the world for its staff to meet with central bankers, finance ministers, policy makers and representatives of the private sector. Over the years, I have regularly attended the Annual Meetings and other IMF events, and they have given me an interesting glimpse into a world that is otherwise largely inaccessible.

One such meeting was the “High-Level Conference on the International Monetary System.” It was cohosted by the Swiss National Bank and the IMF at the storied Baur au Lac Hotel in Zürich, located in the center of the city with scenic views of Lake Zürich and the Alps. A relatively small event, it had a couple hundred participants, among them central bank governors, other senior policy makers, leading academics, and commentators. They included Philipp Hildebrand, governor of the Swiss National Bank; Dominique Strauss-Kahn, then managing director of the IMF; Christine Lagarde, French finance minister; Mark Carney, governor of the Bank of Canada; and Larry Summers, head of Barack Obama’s National Economic Council and former U.S. treasury secretary. By invitation only, the meetings were governed by the Chatham House Rule, meaning that information could be used but not attributed to any particular person.

Amidst a worsening crisis in Europe, the meetings featured tense debates on the reform of the international monetary system. Panel presentations on capital flows, reserve currencies, and global liquidity provisions were followed by controversial discussions between speakers and the participants. Christine Lagarde, elegant and energetic, keynoted during the luncheon, and Michel Camdessus of the Banque de France spoke during a traditional Swiss dinner at Zunfthaus zur Meisen in the old part of town.

From Zürich, I traveled to Germany for business meetings where I received a text message from Nouriel Roubini with shocking news. Four days after the conference in Zürich, Dominique Strauss-Kahn, who had been en route to Germany to meet with Chancellor Angela Merkel, had been arrested in at JFK Airport. He was charged with rape, perp-walked in handcuffs, and imprisoned in Rikers Island. We were incredulous, but more on that later.

NETWORK CURRENCY: INFORMATION

In finance, the most valuable currency is actionable information that can be converted into monetary gain. People with access to the right information to capitalize on business opportunities have an invaluable advantage—and the most efficient and reliable way to obtain information is to get it directly from the source.

All networks are systems of communication and feed off information. Evolution itself has been a continuous exchange of information between organisms within their networks.12 As the decisive catalyst for our thoughts and actions, information has enormous network power because its movement holds together the links and nodes that comprise the network and determine its operation.13 The times when obtaining information was the goal or challenge have long passed. Through the information revolution, more high-quality information is freely available than ever before. The Internet, the nerve center of modern society, contains any information that can be digitized. In the next few years, billions of more people will receive access to it and feed in even more information and insights. The Internet has become a democratic platform,14 and as Eric Schmidt, executive chairman of Google, notes, “We’ve gone from a hierarchical messaging structure where people are broadcast to, and information usually had local context, to a model where everyone’s an organizer, a broadcaster, a blogger, a communicator.”15 As a result, we are suffering from information overload, which makes filtering relevant information all the more challenging. Big data showing statistical correlations only adds to the inundation.

The challenge in finance is that—more often than not—it does not deal with tangible objects or straightforward services that are easily understood, but with abstract derivatives thereof. Since the results of these often elusive constructs only materialize in the future, verifiable information is all the more critical. However, publicly available information gives an incomplete picture at best and a skewed or inaccurate one at worst. The media covers finance from all angles, as do bloggers, tweeters, and other social media users, in addition to experts, pundits, and thought leaders. The research that financial institutions publish is naturally biased, because it is a vehicle for them to sell their products and bolster their reputations. Warren Buffett stated in a 2014 investment letter that managers’ top priority—trumping everything else, including profits—must be to “zealously guard Berkshire’s reputation.”16 In the information war, public relation agencies and corporations spend exorbitant amounts of money to surreptitiously invade traditional journalism. They have hired legions of journalists at attractive salaries, who often—under the guise of serious journalism—combine compelling storytelling with stimulating and entertaining multimedia content to present the company in the best light. Perception is reality, and the line between favorable reporting, spinning, and outright manipulation is blurry.