NEW AND IMPROVED

This blog is now sugar FREE, fat FREE, gluten FREE, all ORGANIC and all NATURAL!!

Saturday, July 28, 2012

SOMETIMES “EXPERT” IDEAS SUCK

SOMETIMES “EXPERT” IDEAS SUCK

Warning, some sections of this post may be extremely boring, go ahead and skip a bit if you want, you will not be quized.

I took my first job out of college with a brokerage firm, Goodbody and Company.  It was 1968 and the New York Stock Exchange volume was exploding to almost nine million shares traded every day.  Brokerage firms were only starting to move from clerks with pencils and green shaded visors to giant computers.

Starts to get more boring here

Trading volume was too much for the antiquated operations and Wall Street was experience what was called a paper crunch.  One of the results of this paper crunch was what was called “Daily stock record breaks.”  A stock record break was anytime the daily deliveries and receives of a given security did not net to zero.  Without resolving these breaks a firm did not have control of their actual inventory.

Even more boring

In 1968, Goodbody was experiencing over one thousand “breaks” per day.  Even with extra clerks working overtime and weekends most firms were falling behind in resolving their positions.  To help catch up, there was no trading on Wednesdays and hours for trading were 10-2.  Still many firms were losing control of their positions.

ZZZZZzzzz

Goodbody hired experts to resolve this problem.  The experts determined that most breaks were caused by errors in booking securities from one location to another i.e. (just to put you to sleep) One hundred shares of General Electric booked out of one location gets booked into another location as 100 General Motors.  This error would cause two breaks which needed to be researched.

This is just terrible, one more snoozefest paragraph (skip if you want)

The “experts” decided to eliminate breaks of this sort they would change the booking method.  Entries showing security movement would be 1 two-sided entry instead of 2 one-sided entries (WAKE UP!!).  Old timers pointed out to the experts that this would eliminate breaks, but if booked incorrectly the non-break would result in inaccuracies which would NEVER be found.  There was a reason for breaks…to pin point mistakes and allow research to resolve those mistakes.  The experts sought to eliminate the breaks, not the mistakes.

Are you bored to tears yet?  Here comes the point:

The expert’s solution was to have not one, but three clerks to double check every entry.  Surely if General Electric was booked as General Motors, one of three checkers would spot and correct the error right at the point of entry.  With this solution in place, breaks were drastically reduced; the real result?

Checker number one did not take his job seriously…after all there were two other checkers behind him.  Checker number two casually passed the security and related paperwork along…after all, the first clerk has already checked everything and there was another checker behind him.  Checker number three casually passed the security along confident that the previous checkers would have caught any error.

In 1970, Goodbody’s bookkeeping was hopelessly out of control.  The company had no grip on their actual security inventory.  They did, however suffer very few paper breaks. 

Wall Street in general was out of control.  Two of the biggest firms Goodbody and E. I. DuPont were about to go bankrupt.  If confidence failed in these firm’s accounting, customers would have demanded delivery of their security certificates from all the firms.  This “run on the bank” might have brought the entire brokerage/banking system to a halt causing a bigger “Crash” than 1929.

H. Ross Perot (yes, the Ross Perot that ran for President) stepped in and bought DuPont, and Merrill Lynch bought out Goodbody to stave off the collapse of Wall Street and the Capitalist System as we knew it.

The “Expert’s” simplistic solution to an accounting problem almost brought down Wall Street and created a Worldwide depression like we have never seen before.

To be fair there was other bad stuff going on as well.

That is why I do not trust “Experts!”

5 comments:

  1. A lovely post. It never occurred to me that a brokerage firm would balance its trading at the end of the day to be sure there were no errors. Nothing has changed; the unknown factor in any application is the people who apply it.

    Still not a robot.

    ReplyDelete
  2. "Expert"....break it down. An "ex" is a has-been. A "spurt" is a drip under pressure. Therefore an "expert" is a "has-been drip under pressure".

    Doesn't exactly inspire confidence, does it? (OK, a few liberties taken, but you get my point.)

    S

    ReplyDelete
  3. Oh, and that was actually a very interesting, informative history of how things worked behind the scenes on Wall Street. And I didn't know Ross Perot bought DuPont.

    S

    ReplyDelete
  4. Very informative. I love expanding my knowledge on finance and economics, two subjects I know little about. Thanks for the education.

    ReplyDelete
  5. Since I just retired from working full time at a brokerage I found this very interesting. You have certainly underscored the fact that our trust in experts in any field is often misplaced.

    ReplyDelete

I love comments, especially some of my commenters are funny as heck!

Oh, and don't be shy, Never miss a Cranky Post.

Sign up for an email of every post...over there...on your right...go on!