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Choose experience over the resume line
A regulator's access
As a state banking regulator at 21 and 22, Todd Combs could sit down with the CFOs of huge companies like Barnett Banks, Raymond James, and American General Finance and fire questions at them for hours, until a CFO asked where it was going. He was a know-nothing kid with full access, and he was the regulator, so he was effectively the boss in the room.
Resume versus experience
Friends who landed at the Big Eight accounting firms and consulting giants had better resumes and made slightly more. They worked in siloed niches, looking at accounts payable or collections. He spent a day with the CFO of Raymond James.
Whose interests count
Prestigious employers have interests that can differ from the interests of the person they hire. It is a GP-LP problem, the same split as between a fund manager and its investors: what is good for the general partner is sometimes not good for the limited partner. A football program wants five five-star offensive linemen five deep, and the fifth-string lineman might be far better off at a school where he can start.
How do regulators examine a bank's health?
US bank examiners rate banks on the CAMELS system: capital, assets, management, earnings, liquidity, and sensitivity to market risk. Federal regulators adopted the Uniform Financial Institutions Rating System in 1979 as CAMEL, with the S for sensitivity added in 1996. Each component gets a score from 1 to 5, and the composite score determines how closely a bank is watched. Examiners can review loan files and meet with executives on site.
How did the Big Eight become four?
The Big Eight accounting firms were the dominant auditors through the 1980s. Mergers from 1989 through 1998 reduced them to the Big Five. Arthur Andersen then collapsed in 2002 after the Enron scandal, leaving the Big Four of Deloitte, EY, KPMG, and PwC.
Why do advisers' incentives differ from clients'?
Economists call this the principal-agent problem. Michael Jensen and William Meckling formalized it in a 1976 paper, describing the costs that arise when one party acts on behalf of another with different incentives. Common cases include managers and shareholders, and agents and the people they represent. Contracts, monitoring, and shared ownership are the usual ways of narrowing the gap.
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