No EMH Believers in a Foxhole

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"No EMH Believers in a Foxhole"

As mentioned earlier, we spoke with some German investment bankers yesterday. One group of them mounted a spirited and somewhat convincing defense of their profession’s behavior during the bubble years that I thought was interesting. Basically they were saying we should blame the clients. “We give the customer what he asks for” they say, and (someone sarcastically) maybe “more regulation is needed on the investor side” rather than on the bankers. They say that after the crisis hit, people got very conservative but already “clients are coming back and asking for emerging market bonds and hedge funds. Banking is a customer service industry that like any customer service industry is grounded in human nature and “human nature is driven by greed and fear.”

This is plausible stuff I think. But it’s also strikingly far afield from the Efficient Markets Hypothesis and the idea that greasing the skids of the financial sector is the key to the economic promised land.

These guys worked at the German subsidiary of a US firm and they explained that when the Frankfurt office first opened it was largely staffed by people from the US and UK because there weren’t enough local people with the requisite expertise. But over time that shifted and nowadays it’s staffed by 80 percent Germans, Austrians, and Swiss. Why? Well, because the Frankfurt office deals mostly with German-speaking clients and being able to speak to the German-speaking clients in their native language “puts them at ease” at makes it easier to drum up business. That makes perfect sense, of course, but again it doesn’t look much like efficient markets.

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