Gillian Tett on the real cause of the crash

The credit crisis of 2008 was nothing to do with greed – it was a simple case of tunnel vision. Merryn Somerset Webb talks to Gillian Tett.


Gillian Tett: people are hardwired to sort things into "mental and social buckets"

Watch the full interview with Gillian here.

The credit crisis of 2008 was nothing to do with greed it was a simple case of tunnel vision, says Gillian Tett.

There was huge excitement among Edinburgh's financial community at the end of last month. Gillian Tett was coming to town. Gillian is one of the best and best-known financial columnists in the UK and America.

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She's a regular at every important conference there is (no stage at Davos is complete without her); she has won every prize going in journalism (columnist of the year last year); and her first book, Fool's Gold, won Financial Book of the Year at the Spear's Book Awards.

She has now written another (The Silo Effect: Why Putting Everything In Its Place Isn't Such a Bright Idea) and, given that we have been firm friends since we met in Tokyo (she was bureau chief at the Financial Times, I was less impressively a junior stockbroker at what wasSG Warburg), I thought I would host its Edinburgh launch.

You can see how much fun that was in our video of Gillian's introduction and some bonus footage of interviews I did with some of the Edinburgh fund managers we like in the gaps between drinking and gossiping. But we also sat down for a more formal interview before our guests arrived, to talk about the new book.

Financial tribalism

So what's a silo, and why do they matter? The answer takes us back to 2008.It became generally accepted that bankers caused the financial crisis by being "mad, greedy and evil", says Gillian. But when she looked around at her own group of banker acquaintances, it seemed clear that this wasn't so most were perfectly nice and extremely bright. Looking deeper, she began to realise that the root cause of the crisis was not greed or nastiness, but in "the fact that the big banks and the big financial institutions the Bank of England and the Federal Reserve included were unbelievably fragmented marred by tribalism between different competing desks and departments".

Those working in them were caught up in the thinking of their own groups (their silos) and that "tunnel vision" made it impossible to see the big picture of which they were part. That made them do "really dumb things".

So at UBS, the management thought their risky assets were hedge funds and leveraged finance. But because "the people in London didn't talk to the people in New York, and the people in Zurich didn't know what London and New York were doing", they missed the ticking time bomb of subprime mortgage collateralised debt obligations (CDOs) sitting right under their noses.

The same was true at the Bank of England. One department looked at macroeconomic and monetary policy, another at the financial system in regulatory terms. A separate agency looked at individual banks. But no one was there to "join up the dots and look at what the different parts of the system meant for each other".

Take all the new financial entities appearing in the years running up to the crisis. They were "to a large extent being concealed by their complexity and opacity and the fact that these things sat off the radar screen of most regulators", but they were still creating huge amounts of credit. That was having an impact on the economy, which wasn't being recognised by those looking at the macroeconomic picture so they were "unable to see the scale of the credit bubble that was forming and subsequently were very ill-equipped to cope with a bust".

Hardwired for life in a bucket

Move away from the banks and you see the same thing everywhere. "When I started drilling into the reasons why bright people at BP had done some really dumb things on the seabed of the Gulf of Mexico, I found the same pattern. It was a real failure of people at the top or the bottom to try and join up the dots.

There was a similar pattern at General Motors and the scandal there with airbags and if you look at the White House and why the Obamacare project was such a disaster. If you ask why the NHS has been plagued by so many scandals and so much wasted money in recent years in terms of its IT projects, it's the same again.So, almost everywhere you look there is this problem of fragmentation, tribalism,and tunnel vision."

That's clearly not a good thing, I say. What's the answer? This is where Gillian's anthropology training comes in (she has a PhD). The key, she says, is that the human brain is hardwired to "the act of classification putting things into mental and social buckets". We live in "a world with so much information, so much stimulus, so much data, and such complex processes that we have to organise it, simply to be able to function". But in our organisation we also create unconscious maps of the world that "cause us to have tremendous tunnel vision and blindness and miss both risks and opportunities".

It is possible to counter this. But you have to understand it first. The good news is that since 2008 there has been a "real recognition that financial institutions and regulators have to try and join up the dots". There is "a tremendous initiative under way inside the Bank of England to bring together economic and financial policy-making" and to broaden the scope of staff to bring in a wider diversity of views. The big banks UBS, Citibank and the like are also "spending a huge amount of time trying to get a holistic view of risk management". There are also all kinds of tricks you can use to combat siloed thinking inside companies.

You can "try and keep the departments very porous, move people between teams use technology to ensure everyone can communicate or use architecture to try and ensure that people bump into each other and keep talking".

That sounds good to me (and a piece of research in the UK this week even suggested that the longer the walk to the loos in your company, the more likely it is to be successful). But can it really work in very big firms? The bigger a firm gets,says Gillian, the harder silo busting or even silo recognising becomes.

Sony is the classic example. The Walkman was one of the most brilliant products ever, and created one of the most iconic brands. It should have dominated the internet age, particularly given that Sony had everything you needed for a digital Walkman (content, electronics and computing). But no one is carrying around a super-smart Walkman these days. Why not? Because the "different departments were so siloed and so much at war... that Sony produced not one but three separate products, all of which competed with each other. It actually unveiled two different products at a major trade fair just as the century was turning, and those products cannibalised each other".

Its corporate culture prevented it from "bringing together its software, hardware and music". On the upside, every time a big firm silos itself out of existence "that creates a space for somebody else". In this case, Apple came up with the "magic sauce that got hardware, software, and music to collaborate" to create "innovative, boundary-busting ideas like iTunes, which didn't really sit in any bucket at all". That's why we're listening to iPods instead of Walkmans.

The lessons for investors

OK, I say. Let's look at this from the point of view of investors. How can we avoid siloed companies? There are three things to consider, says Gillian. The first is efficiency. You want some of this but not too much. The best way to combat silos is to "create just a little bit of slack in an organisation, which allows at least one or two people to roam, to communicate, to spend time trying to break down boundaries". A bit like a magazine having an editor-in-chief, I say hopefully. Yes, says Gillian. These silo busters can look like a pointless expense a lot of the time, but in the long-term, they can be crucial.

The second is about having entrepreneurs inside companies: "disruptors who are actually able to jump across boundaries in ways that other companies can't". The third is more nebulous. We each have our own areas of tunnel vision. "We might be tied together by the internet, by supply chains, by aeroplanes, by cell phones and by information being transmitted across the globe fantastically fast, but our lives and our minds are still very fragmented." Worse, the "internet actually can suck us deeper into cyber tribes because we choose just to listen to news or read about things that already confirm what we know and hang out with people like us. It's very dangerous and very deceptive".

So to be successful, you need to have an open mind. Ask how much you really know about oil, or China. You need to roam mentally and geographically. Gillian offers a simple first step on that road. "Just try for a week if you're on Twitter to look at who you follow and take off 20 people on that list who are people like you and put on 20 people from a completely different world and just try mentally roaming a bit. Break out of your silo; your intellectual ghetto try and see the world through someone else's eyes."

Gillian clearly does a lot of this. So I ask her how today's world looks to her.The good news, she says, is that overall the global economy is still growing.The bad news is "that there are a number of big risks hanging over the entire system". The main one is China, where the "economy is clearly slowing".

The government is "trying to manage a fantastically difficult transition from being an industrial exporting machine to a machine relying on domestic consumption". China has "overinvested in the past. Its financial system is one it's frankly outgrown, and managing that transition is going to be very hard". Then there is oil cartel Opec, which is "basically imploding". That is "incredibly significant in terms of geopolitics" and is also "very significant in terms of where the oil price is going and the knock-on implications of that".

Next up is the Fed. Gillian and I had this conversation before last week's Fed meeting, but at the time her view was that rates would rise in the autumn and that this would be the correct decision. Why? "Because of the bubbles that are being created in the US financial system right now." America, saysGillian, "needs to rediscover the price of money" and the fact that the price of money matters. Finally, there's one more thing investors must think about: the "dramatic changes" in how "shares are being traded.

These robo-traders, high-frequency traders, algorithmic programs now account for about half of all shares trading in the US. This kind of shift has the potential to affect the entire stockmarket in an interconnected system, yet again only a tiny pool of people understand what's going on. They're in a silo as much as the people who were creating CDOs back in 2006. Again we have a problem of the geeks in the corner doing something that can affect us all, but which few of us even bother to try to understand."

Look back at 2007 and "what's very striking is that the problems that causedthe big crisis were not concealed because of some kind of big plot. They were actually underneath our very noses, but people didn't look at them because of silos. The problems dogging the equity market today I suspect are very similar. People need to look at what they're not looking at, what they're not talking about." Robo-trading might seem "boring and geeky and technologically complex", just as CDOs were. But if no one looks at how it interacts with everything else, it is a crisis in waiting. Just as CDOs were.

That seemed a good point to end our chat. I needed a drink and our guests were just beginning to arrive. Gillian promised to be a tad more upbeat for the rest of the evening and we went to meet them. Watch out video to see what happened next.

Who is Gillian Tett?

Gillian Tett, 48, is an acclaimed author and financial journalist.In 1993 she received a PhD in social anthropology from ClareCollege at the University of Cambridge, but quickly switchedher career path towards journalism. She joined the FinancialTimes as a European correspondent, and rose through theranks as a markets and finance columnist. Within the FT,she has worked as an assistant editor, the Japanese bureauchief, deputy head of the Lex column and is currentlyUS managing editor.

She first predicted the 2008 financial crash in 2006 and shelooked in detail at the financial instruments and banking culture that lay behind it inher 2009 book, Fool's Gold: How Unrestrained Greed Corrupted a Dream, ShatteredGlobal Markets And Unleashed A Catastrophe. Her latest book, The Silo Effect (outnow, from Little, Brown), explores the problem of tunnel vision in business andpolitics, and how it might be overcome.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.