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

Physicist Stephen Hawking termed the twenty-first century the “century of complexity.” Indeed, technologization, financialization, and globalization have created a level of complexity that we have a hard time keeping up with. To tackle contemporary problems, traditional linear, cause-and-effect thinking is of limited effectiveness. We should rather approach them with systems thinking, which focuses on the interlinked components of the entire system—particularly their connections. The superhubs of finance are amongst the most successful precisely because their advantageous position at the center affords them a wide-angle view, which enables them to see the system in its entirety. This superior perspective allows them to cultivate their extraordinary connections for tremendous actionable advantages. For instance, hedge fund magnate John Paulson made billions with a bet against the subprime mortgage market in 2007. Others—such as Larry Fink, Steve Schwarzman of the Blackstone Group, and Ray Dalio of Bridgewater Associates—have capitalized on their unique understanding by building billion-dollar fund empires.

CRISIS ALERT

Networks can be used as a force for good, but they can also have detrimental consequences. Interconnectedness is an indispensable component of our financial system, because the exchange of goods and services for money by its very nature presupposes connections. In fact, our ability to cooperate within networks distinguishes us from other primates and has made us the most successful species on the planet—so much so that scientists have proposed calling our current time period the “Anthropocene,” the epoch of the human.

However, over time certain network dynamics—such as the “rich-get-richer phenomenon” and self-perpetuating feedback loops—will cause any system automatically to become more interconnected, homogeneous, and complex. Most systems are adaptive and self-correcting, so when they become too lopsided, circuit-breaking feedback loops kick in, restabilizing the system. Systems that fail to correct themselves ultimately self-destruct.

As the events of 2007 and thereafter have shown, networks can trigger and exacerbate financial crises. Yet it is the people at the top, rather than abstract institutions, who make decisions with enormous implications for millions of lives. In order to optimize the system for themselves and their organizations, they build ever more personal connections, driving further technological and geographical interconnectedness and thereby increasing complexity. Potentially corrective shocks—such as the most recent financial crisis—have so far not triggered the necessary “circuit breakers,” because in an effort to protect their vested interests, superhubs have successfully resisted change. The resulting systemic fragility manifests itself in increasing opportunity, income, and wealth gaps and social corrosion. If the system does not self-correct and balance itself out, it will eventually become so lopsided that it will likely collapse.

AUTHORS NOTE

This book, while being critical and raising controversial issues, is not a “bank bashing” book. It seeks to provide a balanced and unbiased analysis of the network dynamics that govern the financial system as the result of the cooperation of a small number of people at the top, so that readers can form their own opinions. Naturally, since I am part of this world, my account is filtered through my experiences, but it is this perspective that I would like to share with you.

By viewing the financial system through the lens of network science, zooming in on the connected elite with the most influence, I hope to inform and educate readers and stimulate a constructive discussion. Ideally, my approach will help empower readers to advocate for change and, taking a page from this book, to possibly build their own “counternet-works” to transform a skewed system into a more equitable and stable one.

I have focused mainly on the U.S. financial industry because the Anglo-Saxon approach is still, at least for the time being, the dominant driver of global finance, while also taking into account international interconnections. Since the top executives are too numerous to mention, I have featured a select group with greater name recognition to make it easier for the general reader to relate. I use “superhubs” as an umbrella term for the best-connected people at the network’s center, such as bank CEOs, fund managers, billionaire financiers, policy makers, and the like. While they have much in common—their relationships, pervasive network-power and high social standing, they differ greatly with regard to individual positions, personalities, and motivations. Accordingly, where applicable I may only make reference to a specific group, whereas in other more general sections I may use “superhubs” as a catchall term. But what these superhubs all have in common is that they are human, and—as you will soon see—finance is, above all, a human system.

CHAPTER 1

The Financial Universe

An Innately Human System

THE STRATOSPHERE OF POWER: DAVOS

It was a gray January day in New York. The frenzied holiday season had passed, the tourists departed, and the traffic deadlock dissolved. The city’s famed energy seemed frozen and its residents hibernating. I, however, was engaged in a flutter of activity, preparing for my most important trip of the year—to the World Economic Forum (WEF) in Davos, Switzerland.

The exclusivity of the event and its high-profile attendees have shrouded “Davos,” as it has become known, in legend. Set in a small ski resort in the Swiss Alps, the Annual Meeting attracts 2,500 global leaders, including heads of state, billionaire investors, managers of trillion-dollar funds, multinational CEOs, and elite academics. There they discuss the world’s most pressing challenges, cut deals, and, most importantly, network. Attendance is by invitation only, and competition over tickets is fierce. The conference has limited capacity, and every year people pull all kinds of strings and call in favors to be admitted, despite the steep price tag. I had first been invited based on my capital markets expertise. Among other contributions, I served on the Council on Systemic Financial Risk, co-authored a study on international financial reforms, and have subsequently remained engaged with the WEF network through the people and firms I have worked with over the years.

Upon arrival at JFK Airport, I checked in at the provisional Swiss Airlines counter that had conveniently been established right beyond the revolving entry doors, exclusively for Davos travelers. Ground staff, clad in stylish dark-gray uniforms, was particularly accommodative and eager to cater to this special clientele. The airport lounge was filled with a cross section of Davos attendees: here George Soros, there Credit Suisse CEO Brady Dougan, and in the back Washington Post heiress Lally Weymouth. They, among many others, relaxed on the heavy leather armchairs, nibbling on delicatessen from the buffet to allow for uninterrupted sleep during the flight. The panoramic windows opened the view on the deepening dusk and a fleet of planes featuring the red-and-white Swiss cross. Conversations among the passengers continued on the plane until seats were reclined and eye masks pulled down. Eight hours later we disembarked in Zürich, where the highest-profile attendees rushed to their $10,000 helicopter rides, bank executives were collected by shiny chauffeured cars, and I, along with the rest, boarded the WEF shuttle bus.

The winding, snowy mountain road was a bumper-to-bumper convoy of limousines, their passengers obscured behind darkly tinted windows. As we reached higher altitudes, the snow deepened and powdered pine trees glistened in the sun. Almost three hours later, we arrived at the alpine resort. Any expectations that Davos might bear some resemblance to Thomas Mann’s description of a timber-chalet-dotted ski resort in his classic novel The Magic Mountain are doused as soon as the village’s dull, flat-roofed concrete buildings come into sight. Luckily, most of the architectural eyesores are covered in snow and dressed up with large event banners announcing the WEF.