Hiring Alan Schwartz

Dear John Thain is very upset that Alan Schwartz, the last CEO of Bear Stearns, might get a good job elsewhere, now that he’s decided not to stay at JP Morgan. Indeed, he says that offering a job to Schwartz would be "unacceptable and unthinkable":

it completely destroys the entire notion of executives at firms, especially like Bear, as having any real personal risk…

Alan Schwartz, who is not a trader, vetoed the very trade(s) that would have saved Bear and was proposed by his senior traders. What happened from that decision was that thousands of people lost their jobs, the firm went out of business, and a lot of other, very bad, things. That’s fine that he made the decision. I almost don’t care that he was wrong. However, it’s a huge moral hazard/slippery slope/perverse incentive/etc. Alan Schwartz should be toxic right now.

There are two reasons why it makes sense to offer Schwartz a job. The first, as glossed by DealBook, is that he’s a very good dealmaker. You might recall the Peter Principle: in a hierarchy, every employee tends to rise to his level of incompetence. In the case of Bear Stearns, it’s actually quite understandable what happened: after Jimmy Cayne was ousted as CEO, the shortlist of possible successors was very short indeed. Schwartz was well-liked and an internal candidate — both important politically — and he wound up with the job despite the fact that he was an investment banker by trade, much better at dealing with clients than at managing traders.

I’m sure that none of the firms mooted as possible Schwartz employers are considering hiring him as CEO; most of them are probably not inclined to give him any executive responsibilities at all. Instead, he’ll be a rainmaker, doing what he’s good at. Which is fine.

But if he does get an executive position (I’m sure he wants to redeem himself), then in a sense Bear’s shareholders and employees have already spent billions of dollars training him — the hard way — how to do the job. In the "up or out" culture of investment banks, the people who survive tend to be as lucky as they are smart. If you get hit hard by an unexpected event, you’re out, generally. As a result, people with experience of being hit hard by unexpected events are relatively rare. But maybe that kind of experience is something which some employers might value — especially when they weren’t the ones having to pay for the executives lack of experience the first time round.

One thing ingrained in any executive is that "opportunity cost is paramount, sunk cost is irrelevant". The costs of Schwartz’s previous decision are, now, sunk. But if he’d be profitable for your firm if you hired him today, the opportunity costs of not hiring him could be large indeed.

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