How to define--and execute-- "innovation" in investment banking?

Posted by: Reena Jana on September 15, 2008

Walking to work each day from the subway station to my office, I pass the headquarters of Lehman Brothers. Usually, there are tourists outside, taking home videos of the eye-catching facade, which is covered with giant video screens showing enormous images of iconic American sights like the Golden Gate bridge. Today, after Lehman filed for bankruptcy, the tourists were replaced with news reporters and major-TV-media cameras and trucks with humungous satellite dishes on top. Today, employees of Lehman Brothers are shuffling in and out of the building as if celebrities entering and exiting a nightclub, avoiding swarms of paparazzi.

And with Merrill sold to Bank of America, and Goldman Sachs and Morgan Stanley gearing up to provide what they hope is relatively good(ish) news in their earnings reports tomorrow, isn’t it time we think about how to define and execute innovation in investment banking?

Bruce Nussbaum wrote a blog post in July examining the role of innovation in the Fannie Mae/Freddie Mac meltdown, bringing to the table the idea that innovation may have sparked the current financial-world debacle.

Other innovation specialists in the blogosphere, like Scott Berkun of Harvard Business, reacted to Bruce's post, questioning what "innovation" really means in the context of finance. Berkun concluded that the current financial-world disasters are the result of plain old "greed, ignorance, fools and their money, and downright lack of common sense."

How do you define innovation in the investment banking world? How should we execute it?

Could Goldman Sachs be our best example? It will be interesting to watch the company in the days and months ahead. As we all know, Goldman Sachs wisely saw ahead of the pack that the subprime mess was eventually going to occur. Intriguingly, it is the one investment bank represented in our Innovation Index and the only one in the top 25 of our annual BW/Boston Consulting Group list of Most Innovative Companies.

Okay, so now my head is spinning, too, with the repetition of the word "innovation" and its variations as an adjective and a verb in our coverage, including this post. So let's talk less about the buzzword and more about its definition and its execution. Especially in the world of investment banking.

Reader Comments

antonio d

September 15, 2008 2:02 PM

how can they say that they saw ahead of the subprime mess when they were the primary investor for New Century, the second largest subprime lender in the nation. When New Century went under, Goldman was forced to service the loans through Avelo. Then to top it off, at the end of 2007, Goldman bought Litton Loan Servicing, one of the biggest servicers of subprime loans. Unless I'm missing something, Goldman Sachs is the next major investment firm to fail.

Adam

September 15, 2008 4:38 PM

Reena:

Innovation cannot mean one thing in the context of finance and another in a different context. The concept is the same, the instantiation of the concept can, of course, vary.

Frankly, I think it is inappropriate to lay the blame for the financial debacles at the doorstep of innovation. Not because it is wrong, but because the proposition is meaningless. It is as silly to me as saying that the failure of a new product launch is the fault of Marketing - as if the entire discipline of marketing since the dawn of the ages should be called to task for the failure of vomit flavored potato chips. Instead, it's bad marketing that leads to failure. Here too, it is bad innovation that leads to failure. This is why I object to definitions of innovation that are limited to favorable outcomes. As far as I am concerned, innovation is the creation of market impact through novel ideas - whether the outcome is benign or malignant.

So how to define and execute innovation in investment banking? Well, the definition is the same, as I argued above, as it is in any industry. How to execute? Well, the method is also pretty similar. Check out any decent article on innovation process. It will likely apply pretty well to banking. In the end, it's about understanding the needs of your customers better than anyone else (including the customers themselves) and leveraging some capability for which you have an advantage to provide a unique offering. Easier said than done of course but I don't think innovation was the problem here. I think, as so many other commenters have said, that greed was the problem.

Maybe there ought to be a rule in finance that these products have to make sense to the average person. These incredibly intelligent quant jocks somehow get themselves worked up over some impressive spreadsheet and before you know it, they've devised a scheme that defies the laws of physics.

So let's not blame innovation or get ourselves thinking that somehow because finance is in a mess now that innovation just got more mysterious or hard to understand.

dr david hill

September 15, 2008 4:51 PM

I personally know that at least two years ago the global leaders of the financial world knew that the international monetary system was on a ‘knife’s edge’. Stemming from bankers in Zürich it was known that little could be done, but where over time, there would be a financial meltdown. From that perspective it took little more than 18 months for the tremors to start and where now the earthquake is well on its way. Unfortunately the effects from this financial earthquake that is now fully rumbling will last for at least a decade. During that time many leading institutions will have gone to the wall and where the domino effect is just beginning.
The greatest result of all this will be a global recession lasting at least ten years and which will engulf all societies, the richest in the West being hit the hardest.
Therefore isn’t it now quite clear, considering what is also on the horizon for humankind with epochal consequences through constantly depleting energy resources, collapsed capital markets and credit, increasing food shortage year-on-year, a growing population explosion, climate change, increasing likelihood of global conflict, an overdue pandemics et al, that the world has to create a world government before all these sad afflictions come to overpower all nations. For the management of the world as it presently is, is defunct in this future world epitomised by many horrors and which cannot possibly safeguard the futures and security of our loved ones. For all in all we cannot now guarantee the future for our children as time in now running out fast to do so. In this respect present governments and their static mechanisms around the world will be fully responsibly for this future state of affairs. Indeed, they and they alone through political and economic mismanagement of their nations in the context of the world-at-large will have created the dire possibility of the extinction of humankind by end of century. Therefore consequently the pre-eminent reason why now we have to create a unified world government before we are all clearly totally overwhelmed. For others and I now give no more than 25-years for this to be achieved and thereby safeguard the human experience for millenniums to come. Unfortunately on our present path we have little time left.

Dr David Hill
World Innovation Foundation Charity (WIFC)
Bern, Switzerland

Casey C

September 15, 2008 5:28 PM

I know normally bloggers do not feel called upon to react when they are challenged, but I do hope Reena will respond to Antonio.

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What comes next? The Bloomberg Businessweek Innovation and Design blog chronicles new tools for creativity and collaboration, innovation case studies in both the corporate and social sectors, and the new ideas that have the power to change the way things have always been done.

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