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

Another currency in financial markets is misinformation. Spreading rumors to induce others to trade has long been a tool of market manipulation and profiteering. A prime example is the fall of Lehman Brothers. Rumormongers, mostly short sellers, spread whispers that Lehman would be the next Bear Stearns, which led to a self-fulfilling prophecy: a run on the bank, a precipitous fall in share price, and the institution’s eventual demise. Today, rumors are ever more prevalent, with many more outlets and much faster travel routes. In a complex environment and crisis atmosphere, distinguishing fact from fiction can prove near-impossible, especially when there is a good chance—as in the case of Lehman—that enough fiction over time will be perceived as fact.

Hence, personal contacts as key conduits for information have become more valuable than ever. Firsthand knowledge is the needle in the haystack of information. The glue that binds original sources together is homophily—social ties based on shared backgrounds, personalities, and qualities that facilitate communication and trust. (More on this in Chapter 5.) Whereas people with strong ties are reliable and easily accessible sources, weak ties are equally important because they open up access to new information outside of established business and social circles. Another valuable source is dormant ties, longtime contacts that may have been neglected but are easily resuscitated. Communication is a crucial means of forming network power. By virtue of their centrality, superhubs are nerve centers and information brokers, because they have access and control over the information flow. The information inundation, which makes it increasingly difficult to filter the signal from the noise, has only amplified their information power.

The Influence of Personal Connections

According to a Harvard Business School study titled Assess the Value of Your Networks, personal ties based on social, educational, employment, and gender backgrounds strongly influence the flow and quality of information. Often people distrust public information and prefer familiar and trusted sources. Particularly in recruiting and job searches, executives rely on each other’s opinion and discretion, which ensures better results and lower search costs.17

Another Harvard study called The Power of Alumni Networks examined how information flows affect stock prices by comparing the performance of investments into connected firms, where senior officials had common school ties, to nonconnected firms without such ties. Their results revealed that managers place larger and more successful bets on companies whose executives attended the same schools. They know and understand each other better, have long-standing relationships with a high degree of interaction, and because of their similarities are able to more accurately assess each other.18

Information Access and Proximity

Proximity to decision makers—particularly central bankers—is invaluable because information on monetary policies can be directly converted into profits. Central bankers often mix with financial industry executives to explain their policies and inform themselves on the state of the financial sector. The 2007 crisis caught central bankers by surprise because they had been unaware of the degree of leverage in the system and the scope of subprime mortgages. Staying in touch with the “real world” helps them to form a more complete picture of markets and design more efficient monetary policies.

However, at the same time, as guardians of the currency, central bankers are subject to strict guidelines and must provide equal and public access to information to ensure that no one gains an unfair advantage by trading ahead of the market. But central bankers are human, and lines can be blurry, which in the past has led to leaks and suspicion that well-connected financiers had monetized confidential information. Conflicts of interest are exacerbated by the revolving door as numerous central bankers eventually join the private sector. Former Fed chief Alan Greenspan has advised Deutsche Bank, PIMCO, and Paulson & Co., and his successor Ben Bernanke has acted as senior adviser to PIMCO and Citadel following his departure from the Fed. Similarly, the former head of the German Bundesbank, Axel Weber, went on to become chairman of UBS, and Philipp Hildebrand of the Swiss National Bank took on the position of vice chairman of BlackRock.

Anecdotes of inappropriately cozy relationships between central bankers and financiers are numerous. Such a relationship may even have cost Paul Tucker the job of governor of the Bank of England. As a respected and well-liked senior Bank of England official, he had been Mervyn King’s heir apparent. However, when investigations into the Libor-rigging scandal unearthed emails between him and Bob Diamond, the CEO of Barclays, evidencing their close relationship, Tucker was questioned by a parliamentary committee. The job ultimately went to Mark Carney.

Many research and consultancy firms unabashedly advertise their close relationships with the public sector. For instance, Medley Global Advisors, a macroeconomic and political research firm that provides research to the financial sector, proudly states that its network includes central banks and other public bodies. Though likely exaggerated, word on the street was that its founder, Richard Medley, had built the firm’s business model on being an “intelligence agency” for Fed measures. The firm came under scrutiny after it published details on Fed deliberations a day before the Fed made them public in 2012. As a result, Congress probed the Fed on the leak. Medley, which was purchased by the Financial Times in 2010, defended itself with the claim that it is a media organization, entitled to special protections under the law.19 At the time of this book’s completion, the investigation was still ongoing. Two years prior to the investigation, Ben Bernanke had warned policy makers about leaks of inside information to the press and consultants. He specifically stated that “there may be leaks to nonmedia outsiders, including market participants, former officials, consultants, and others, some of whom stand to make money by their inside access either to participants or to staff.”20

Another incident causing controversy was a conference sponsored by Brevan Howard, a hedge fund with $27 billion under management. The event was hosted by the Centre for Financial Analysis, the Centre for Economic Policy Research, and the Swiss National Bank at the posh Berkeley Hotel in London and attended by hedge fund managers, traders, and bankers. During the dinner, Benoît Coeuré, a member of the executive board of the European Central Bank, announced that the ECB would buy extra government bonds in the coming weeks. When his remarks were published on the ECB’s website over twelve hours later, the euro fell sharply and government bonds experienced increased volatility. Coeuré’s mentioning the ECB’s plans to a select group of financiers led to accusations that he had leaked confidential information. The ECB’s president, Mario Draghi, countered in Coeuré’s defense that increase in government debt purchases had already been obvious from the figures published on the ECB’s website over several preceding days but promised to improve the bank’s communication policy.

Asymmetrical or unequal access to information regarding the bailouts during the financial crisis gave rise to the suspicion that Wall Street capitalized on an unfair advantage. Particular attention was paid to the Fed’s 2008 hiring of four private asset management companies—PIMCO, Black-Rock, Goldman Sachs, and Wellington—to help implement its quantitative easing program. Lacking the necessary expertise and infrastructure to implement the enormous program itself, the Fed had to rely on third-party managers and provided the retained firms with nonpublic information so they would understand how to proceed. That posed a potential conflict of interest, because those firms traded in the same securities on behalf of their clients that they bought for the Fed. To avoid those conflicts, confidentiality agreements, “Chinese walls,” audits, and other control procedures were instituted.