Lesson in capitalism from ‘The Godfather’

Scene from The Godfather:

To set the scene, Michael Corleone (played by Al Pacino), the don’s war-hero son who was not ordained to enter the family business, nonetheless finds himself tapped to avenge the attempted assassination of his father (played by Marlon Brando). His mission is to shoot Sollozzo, who engineered the gunning down of the don on behalf of a rival gang. To carry out the deed, Michael is being given firearms training by Clemenza, the don’s trusted lieutenant. The whacking of Sollozzo will launch total war among New York’s rival gang families.

Michael: “How bad do you think it’s gonna be?”

Clemenza: “Pretty…bad. But that’s all right. These things gotta happen every five years or so, 10 years. Helps to get rid of the bad blood. Been 10 years since the last one.”

Jim Christie, “Bad Blood in the System”, Directors & Boards, December 2007

The Godfather is on many people’s list of favourite movies. Jim Christie, editor of Directors & Boards magazine, uses the film to make a point about the current turmoil in the world financial markets.

In his own words: “What we’re dealing with now in the credit markets is a cyclical purging of the bad blood…Every five or 10 years, the financial markets’ institutional memory and credit discipline lapse, and then it’s time for rival camps of buyers and sellers to go at it with a vengeance. What get whacked mostly are portfolios. But bodies get carried out too, from the sales floors up through the corner offices of banks and brokerage firms and all the way out to the hinterlands, where bagholders with toxic mortgages are drawn into the credit markets’ crossfire.”

This is perhaps the inbuilt tendency to excess in any capitalist system. When things boom, sooner or later the discipline goes. Success leads to its own unfortunate momentum: it must continue. The pressure to meet targets intensifies, and managers start chasing after bad customers.

As we have seen with the “sub-prime” meltdown, this has serious consequences. Christie tells us that US$ 50 billion has been written down by banks so far this year. Total losses may be ten times that before this particular purge plays itself out. That’s a lot of blood, on a lot of carpets. And due to the inter-connectedness of the modern world, the stains are spreading to countries and companies that had little to do with the initial excesses.

There are lessons here as we enjoy the first signs of a booming economy here in Kenya. It may not happen just yet, but sometime soon many companies are going to get carried away with the party and not want things to end. Many are going to indulge in immoderation: overdoing the hiring; paying too much for supplies; allowing pay structures to get bloated in the name of retaining talent; doing business with bad customers. And regulators are often reluctant to act as spoilers. If things get out of hand, we will witness sackings, bankruptcies and a stock-market crash. It’s capitalist nature’s way of cleansing the system.

Canny owners, customers, suppliers, employees and investors will recognise the signs, and take prudent action. Sometimes, it’s better not to be the life of the party, as Citi, Merrill Lynch, Bear Stearns and Northern Rock have just found out.

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