Winner, Silver Medal, Axiom Business Book Awards 2018
FOREWORD BY NOURIEL ROUBINI
$UPERHUBS is a rare, behind-the-scenes look at how the world's most powerful titans, the "superhubs," pull the levers of our global financial system. Combining insider's knowledge with principles of network science, Sandra Navidi offers a startling new perspective on how superhubs build their powerful networks and how their decisions impact all our lives. $UPERHUBS reveals what happens at the exclusive, invitation-only platforms - The World Economic Forum in Davos, the meetings of the International Monetary Fund, think-tank gatherings and exclusive galas. This is the most vivid portrait to date of the global elite: the bank CEOs, fund managers, billionaire financiers and politicians who, through their interlocking relationships and collective influence are transforming our increasingly fragile financial system, economy and society.
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How the Financial Elite and Their Networks Rule Our World
By Sandra Navidi
Nicholas Brealey PublishingCopyright © 2017 Sandra Navidi
All rights reserved.
The Financial Universe
An Innately HumanSystem
THE STRATOSPHERE OF POWER: DAVOS
It was a gray January day in New York. The frenzied holiday season had passed, the tourists departed, and the traffic deadlock dissolved. The city's famed energy seemed frozen and its residents hibernating. I, however, was engaged in a flutter of activity, preparing for my most important trip of the year — to the World Economic Forum (WEF) in Davos, Switzerland.
The exclusivity of the event and its high-profile attendees have shrouded "Davos," as it has become known, in legend. Set in a small ski resort in the Swiss Alps, the Annual Meeting attracts 2,500 global leaders, including heads of state, billionaire investors, managers of trillion-dollar funds, multinational CEOs, and elite academics. There they discuss the world's most pressing challenges, cut deals, and, most importantly, network. Attendance is by invitation only, and competition over tickets is fierce. The conference has limited capacity, and every year people pull all kinds of strings and call in favors to be admitted, despite the steep price tag. I had first been invited based on my capital markets expertise. Among other contributions, I served on the Council on Systemic Financial Risk, co-authored a study on international financial reforms, and have subsequently remained engaged with the WEF network through the people and firms I have worked with over the years.
Upon arrival at JFK Airport, I checked in at the provisional Swiss Airlines counter that had conveniently been established right beyond the revolving entry doors, exclusively for Davos travelers. Ground staff, clad in stylish dark-gray uniforms, was particularly accommodative and eager to cater to this special clientele. The airport lounge was filled with a cross section of Davos attendees: here George Soros, there Credit Suisse CEO Brady Dougan, and in the back Washington Post heiress Lally Weymouth. They, among many others, relaxed on the heavy leather armchairs, nibbling on delicatessen from the buffet to allow for uninterrupted sleep during the flight. The panoramic windows opened the view on the deepening dusk and a fleet of planes featuring the red-and-white Swiss cross. Conversations among the passengers continued on the plane until seats were reclined and eye masks pulled down. Eight hours later we disembarked in Zürich, where the highest-profile attendees rushed to their $10,000 helicopter rides, bank executives were collected by shiny chauffeured cars, and I, along with the rest, boarded the WEF shuttle bus.
The winding, snowy mountain road was a bumper-to-bumper convoy of limousines, their passengers obscured behind darkly tinted windows. As we reached higher altitudes, the snow deepened and powdered pine trees glistened in the sun. Almost three hours later, we arrived at the alpine resort. Any expectations that Davos might bear some resemblance to Thomas Mann's description of a timber-chalet-dotted ski resort in his classic novel The Magic Mountain are doused as soon as the village's dull, flat-roofed concrete buildings come into sight. Luckily, most of the architectural eyesores are covered in snow and dressed up with large event banners announcing the WEF.
Davos is a study in contrast. More basic than sophisticated, it presents a curiously juxtaposed backdrop for the power and riches of the participants. Many hotels are rather outdated — it's a bit like being caught in a time warp. Only a couple of years ago, rotary phones, which are particularly inconvenient when dialing lengthy international numbers, and faxes in the form of endless paper rolls were still the rule rather than the exception. Amenities generally taken for granted, like Wi-Fi, were more a function of luck than a matter of course, and the stoic Swiss hoteliers met complaints mostly with an indifferent shrug. Even the ultrawealthy must tolerate rooms they would ordinarily consider below their standards. I once witnessed a billionaire complain, in an exasperated mien, that his room at the five-star Steigenberger Belvédère was like a casket with a light attached to its lid.
In the last couple of years, however, the village has grudgingly given in to progress. It now even features a futuristic luxury hotel, the Intercontinental, which is owned by Credit Suisse and has been compared to a golden spaceship. Guests who prefer more privacy and space rent chalets; prices start at $150,000 for the duration of the conference — not including staff. A friend of mine, a Swiss investor, rents out his enormous chalet to "the Russian government" every year because they pay him any price he asks. Other friends rent out their two luxury apartments for $6,000 each.
I checked into my cozy, family-run hotel, a fifteen-minute walk from the conference center. Generally, the conference organization assigns hotels, and participants have little or no say in the decision. However, if attendees dole out extra money for a high-level membership, their chances of being assigned accommodations closer to the Congress Centre increase. VIP guests — along with several dozen heads of state — reside at the Steigenberger Belvédère Hotel, which — other than the Congress Centre — is the most important hub of activity during the event, where many major networking parties take place. The less fortunate might be assigned hotels in neighboring villages, requiring a time-consuming and expensive commute.
Despite being sleep-deprived, jet-lagged, and at the brink of exhaustion, I did not want to miss a single second of mingling at the event. After checking in, I trudged through deep snow in mind-numbing, subzero temperatures to pick up my badge. The precious conference badge gives attendees access to restricted and highly secured areas. During the WEF, Davos is the number-one terrorist target in the world: 5,000 heavily armed police officers and soldiers guard the village and man barbed-wired checkpoints. Masked snipers parole the rooftops, and fighter jets sit on alert to protect the no-fly zone. The security team controls the chaos with Swiss precision. Only officially credentialed participants are granted access, all of whom — except heads of state — must leave their bodyguards at the door and wait in line with everyone else. There is no preferential treatment for the upper echelons here.
Equipped with my new badge, I headed for the modern Congress Centre — a big, bright, state-of-the-art concrete maze of a building — where most of the WEF's formal activities are held. On my way, I crossed paths with Bill Gates, who gave me a friendly nod; IMF chief Christine Lagarde, who said hello; and private equity billionaire Steve Schwarzman, with whom I exchanged pleasantries. At the coat check, where I replaced my messy boots with elegant dress shoes, I ran into Larry Summers, former U.S. treasury secretary and Harvard economics professor, and Robert Shiller, Nobel laureate and one of the most influential economists in the world. Although I have attended the WEF several years in a row, I am still regularly amazed by the fact that everyone around me is famous, and that every financial titan who is regularly featured in prime-time news and on the front pages seems to have materialized simultaneously in front of me.
I was familiar with many who were there, and after some meet and greet, I withdrew from the babel of languages into a quiet corner, where I scoured the database, deciding on which of the roughly 300 sessions I would attend. The choices ranged from talks on the global economic outlook to more unconventional topics, such as the importance of being happy and the human brain. The multitude of opportunities, choices, and people is both invigorating and draining at the same time, and over the years I have learned to allocate my energy prudently. Every first-time attendee is completely overwhelmed, and although the village is small, it takes time to acclimatize and figure out how everything works. Initially, the density and approachability of powerful and famous attendees feels surreal, but as if by gravitational force, people are sucked into this parallel universe before being released into the world again five days later.
THE ORBIT OF THE FINANCIAL ELITE: THE GRAVITATIONAL FORCE OF NETWORKS
The official purpose of Davos is to foster critical discussions to find solutions for pressing global problems. In the past, the meetings have been described as the world's largest focus group, a method for taking the global geoeconomic temperature. With dozens of Nobel laureates and hundreds of the world's most esteemed academics and industry leaders, the intellectual firepower is nothing short of breathtaking, with hundreds of sessions, workshops, and interdisciplinary exchanges. Although I can rarely pinpoint at the time what exactly I have taken away from the meetings, I feel that shortly thereafter the information and ideas form a bigger picture, a better understanding and a clearer sense of what lies ahead.
But the real reason why heavy hitters spare no effort or expense to attend? The endless peer-to-peer power-networking opportunities. The WEF is one of the most famous and efficient fora for connecting leaders in the financial industry, with seven hundred journalists present, who broadcast their importance to the world. Contacts made here ripple through professional and personal lives like concentric circles. As the Davos saying goes, "Three days of attendance saves three months of travel." This is a key benefit for people who can always make more money but can never make more time.
Among the Davos attendees are many titans of finance who pull the levers of the global financial system. This system is not simply interlinked by institutions and transactions, but it is fundamentally a human system, because on the most basic level it is the result of human interaction. Understanding the interconnections of the key players is vital if we want to understand the system as a whole.
Why should we care? Because the actions of a relatively small group of individuals influence everything from national economies to the stability of the system as a whole. The heads of banks, private equity firms, hedge funds, and central banks make fundamental strategic decisions that directly impact industries, jobs, and living standards — our industries, our jobs, our living standards. Yet, despite their pervasive power, these moguls are still simply human. They make mistakes, and they get lucky. They are motivated by honorable or less than honorable goals. And they are driven by ego and emotion, not dissimilar to the rest of us.
Who are these people who reside at the center of the network? How have they achieved their status, and how do they retain it? What are their weaknesses, and what are their strengths? What kind of power do they wield within the global financial system, and what does that mean for the rest of us? These are the questions I set out to answer. Based on four years of research and many more years of personal experience, I realized that network science paired with stories from the lives of influencers can help us understand the complex structure of relationships in the financial world — and what they mean to the overall system.
The Financial System: Applying the Lens of Network Science
What do the brain, ant colonies, and the financial system have in common? They are all complex self-organizing systems. The brain is a network consisting of billions of neurons connected by synapses that cooperate with one another in a way that creates consciousness. The brain does not have a master cell that tells it how to work — it self-organizes out of millions of electrical and chemical interactions. Another example is ant colonies, which function on the basis of collective, decentralized behavior. An individual ant, through communication with other ants, receives instructions on how to behave. There is no "leader-ant" that determines the dynamics of individual interactions or the colony as a whole; together, all ants contribute to a well-functioning and efficient system.
By the same token, in the global financial system, the actions of autonomous individuals lead to collective activity. Who are the players in this system? They are executives at financial institutions, such as banks and investment funds; leaders of public-sector institutions, such as central banks and the International Monetary Fund; and many other formal and informal actors who interact in complex transactions across national borders. There is no global "central command" that determines how the system works. It self-organizes out of countless connections, interactions, and decisions.
Decision makers influence the system's dynamics with their actions, but they have no control over the system itself. No one person can change the price of commodities or the fluctuations of the global economy. But by their interconnections and interactions, they produce large-scale effects. For example, the individuals who lead major financial institutions have enormous network power. At the same time, they are subject to systemic forces and governing rules. Essentially, the "game" of finance has rules that influence how they play. In turn, the way they play impacts the rules and the nature of the game itself.
The Human Factor: The Power of Personal Connections
Previous analyses of the financial system and its risks have focused primarily on the interconnectedness of financial institutions, the validity of macroeconomic theories, and the power of quantitative models, while giving less consideration to the networks of people who preside over the institutions that comprise the system. Yet, in the end all comes down to people, because it is they, not abstract entities, who make decisions on institutions' behalf, who devise theories and decide which models to use. This human dimension adds another level of complexity, because the dynamics of human relationships that result in seemingly amorphous and elusive networks, are not strictly formulaic, and difficult to quantitatively measure.
However, since human networks are also subject to the laws of network science, we can use these laws to help us understand how relationships form and how they are structured. A better understanding of those who have the greatest influence on the system and their connections to each other will help us understand the system itself.
Network science explains the organizational structure of all systems. It has gained popularity in recent years, mainly because of the growing importance of social networks. But it can also help explain how some investors have made billions of dollars, such as hedge fund superhubs George Soros and John Paulson. Or why it seems like no one has been held accountable for the events or decisions that led to the Great Recession.
In network science, "[it's] the pattern that matters, the architecture of relationships, not the identities of the dots themselves." The key players understand that the ultimate competitive advantage relies on the extent and depth of personal bonds and alliances — the network of links or connections that gives a person influence. They understand the system itself, the complex relationship architecture, and the "magic formula" of developing powerful connections. From their superior perspective, they can see how their networks provide them with unprecedented opportunities, resources, and support, and thus a greater ability to influence the system as a whole. The better they understand it, the more successful they are within it. This is exactly why we should try to understand it, because, as Douglas Rushkoff poignantly notes, "If you don't know how the system you are using works, chances are the system is using you."
Hence, we will take a look at the financial world through the prism of networked systems, because our interconnected world requires a more comprehensive perspective. Technologization, financialization, and globalization have created an intricate web of interconnections within the financial world itself and between the financial world and other sectors such as the economy and politics. While new linkages are formed at an unprecedented speed, our capacity to fully grasp the resulting complexity has not quite caught up with the new system we have created — as was evident in the miscalculation of the impact of Lehman Brothers' failure or the challenges of dealing with the eurozone crisis.
Introduction: Meet the "Superhubs"
Davos epitomizes the principles of network science as they apply to human beings. These meetings tangibly demonstrate that similar people attract each other — and that those who already have the most connections attract even more. The Davos success formula? The resort is hard to reach, isolated, and difficult to navigate. Deprived of their usual environments, infrastructure, and privileges, leaders are crammed into a vacuum with nowhere else to go. Constantly caught in bottlenecks of security controls, coat checks, bus lines, and traffic jams, they have no choice but to become engaged in conversation. You literally cannot escape mingling, and it is this inefficiency that actually drives the über-efficient networking dynamics. Other conference organizers have tried to compete with similar concepts, yet so far none have succeeded.
Excerpted from $UPERHUBS by Sandra Navidi. Copyright © 2017 Sandra Navidi. Excerpted by permission of Nicholas Brealey Publishing.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
About This Book xxiv
The Financial Industry and the Power of Networks xxv
Applying the Lens of Network Science: Systems Thinking xxvi
Crisis Alert xxvii
Author's Note xxviii
Chapter 1 The Financial Universe: An Innately Human System 1
The Stratosphere of Power: Davos 1
The Orbit of the Financial Elite: The Gravitational Force of Networks 4
The Financial System: Applying the Lens of Network Science 6
The Human Factor: The Power of Personal Connections 7
Introduction: Meet the "Superhubs" 8
Fault Lines: The Fragility of Our Financial System 12
Chapter 2 Superhubs: The Financial Elite and Their Networks 15
The Superhub Prototype: Hedge Fund Titan George Soros 15
A Blueprint for Networks: Nodes, Hubs, and Superhubs-Bankers, Executives, and CEOs 18
Financial Superhubs: Network Equals Networth 21
Network Geography: Location Matters 21
Location: Reputation Matters 22
Reputation: Access Matters 23
Access: Social Capital Matters 25
Chapter 3 The Links That Connect Superhubs: Money, Information, and Opportunities 29
Network Nucleus: Larry Fink 29
Network Power: Money 31
The Printing Presses: Central Banks 32
Federal Reserve Chairman: In Charge of the World's Reserve Currency 34
Central Bank of Central Banks: The Bank for International Settlements 37
A Primer on Banks: Regular and Shadow Banks 37
The Perpetual Crisis Manager: The International Monetary Fund 38
Network Currency: Information 39
The Influence of Personal Connections 41
Information Access and Proximity 42
The Benefit of Connections in Tumultuous Times 45
Thought Leaders-Superhubs of Valuable Information 47
Network Investments: Social Capital 51
Money + Information + Social Capital = Infinite Opportunities 52
Chapter 4 The Matrix: Decoding the Superhub DNA 55
The Alpha Personality: Jamie Dimon 55
EQ: Connecting Emotionally 58
Master Closers: Steve Schwarzman 59
Inquiring Minds 62
Inventing Ideologies 63
The Cult of Failure 64
CEOs-Chief Ego Officers: Bill Gross 65
On a Monomaniacal Mission: Ray Dalio 69
Chapter 5 Homophily: Similarity Breeds Connection 75
The Charitable Superhub Network: The Robin Hood Gala 75
A Law of Nature: Why the Rich Get Richer 77
Global Conquest: The Transnational Financial Elite 77
Meeting of the Minds: Circle of Trust 78
The Hegemony of Homogeneity 79
The IQ Elite: A Masters Degree in Networking 81
Network Plutocracy: "'The Old Boys' Club" 82
That's Rich: Superhubs and Super-Riches 85
The "Flocking Effect": The Superhub Habitat 89
Chapter 6 Executive Networking: Relational Capital 93
The Superhub of Superhubs: Klaus Schwab 93
Friends with Benefits: Capital Networks = Network Capital 97
More an Art than a Science: Attraction + Interaction = Transaction 98
Digital Bits versus Human Touch 99
Beyond Networking: How to Win Friends and Influence People 100
The Alchemy of Chemistry: Charm Offensive 102
The Lords of Networks and Their Creations 103
Negative Notions on Networking 104
Think Tanks: Network Motherboards 105
INET: Connecting the Connected at Bretton Woods 106
Chapter 7 Members Only: The Exclusive Networking Platforms of the Global Super-Elite 109
A Dinner of Consequence: Attack on the Euro 109
Conspiracy Theories: An Explanation for Attempted Explanations 111
Why Networks Need Platforms: Connectivity 112
The Annual Power Circuit: Dispatch from Davos 112
The Global Financial Power Center: The International Monetary Fund 117
Washington, D.C.: The Financial Shadow Capital 117
IMF Meetings in Istanbul: Dancing on the Titanic 118
Power Summit: The Bilderberg Conference 120
Stealth Power: Family Office Gatherings 122
Feeding Off Power: Power Lunches 124
Power Workout: Networking, Working, and Working Out 125
"Superhub-Nobbing": Private Parties 126
The Higher Purpose of Networking: The Charity Circuit 128
Chapter 8 Opportunity Costs: The Downside of the Upside 131
Missing Out on Memorable Moments 131
Stress Test: When Being a Superhub Is Not So Super 133
Married to Their Jobs: Work-Family Life Imbalance 135
Media Madness: Living Under a Microscope 136
Super-Sick: Paying the Ultimate Price 137
Clash of the Titans: Close Combat and Coups d'État 139
Triumph and Defeat: A Turbulent Career 141
Chapter 9 "Womenomics": The Missing Link 147
The Gender Gap: Women Missing in Action 147
The Access Gap: Exclusive Means Excluding 148
The Networking Gap: Schmooze or Lose 151
The Assessment Gap: Performance versus Potential 152
The Wage Gap: Selling Women Short 153
The Failure Gap: Demoting Promotions 154
The Mentoring Gap: Missing Out on Mentoring 154
The Sexism Gap: The Wolves of Wall Street on the Prowl 155
The Resilience Gap: Male Might and Female Feebleness 156
Closing the Gender Gap: Superhub Christine Lagarde 158
Chapter 10 Revolving Superhubs: Creating Network Monopolies 163
Psychological Kidnapping 163
The Revolving Door 164
The Oscillating Megahub: Robert Rubin 165
Open Doors: Tony Blair 170
Cross-Connections: Cooperating Constructively in Times of Crises 172
Launching a President 173
"Legalized Corruption": The Best Democracy Money Can Buy 175
Purchasing Political Protection 175
Relationship Power: Diffusing the Euro Time Bomb 176
Super-Entity: The Capitalist Network That Runs the World 178
Chapter 11 De-Linked: Expulsion and Comeback 181
Sent into Exile: Dick Fuld 181
Shock-Resistant: Larry Summers's Network 184
Meteoric Rise 185
Against All Odds 186
The Bull in Charge of the China Shop 187
Den of Thieves: Mike Milken 190
Complete Network Collapse: Dominique Strauss-Kahn 193
Ponzi Schemes and Sex Scandals: Buddy Fletcher and Ellen Pao 196
Omni-Connected: Michael Klein 203
Chapter 12 Super-Crash: "Executive Contagion" 207
The Crash of a Titan: John Meriwether 207
The Big Picture: Capitalism in Crisis 209
Debt and Financialization 210
Wealth Gap and Inequality 210
Globalization Winners versus Globalization Losers 211
Approaching the Tipping Point 212
When an Irresistible Force Meets an Immovable Object: Brexit 213
The Next Crisis: Systemic Failure and Contagion 214
The Culprit: The Superhubs or the System? 214
Disequilibrium: Superhubs Preventing the System from Correcting Itself 215
'Executive Contagion": Executives Becoming Super-Spreaders of Risk 216
Averting Collapse: Thinking Differently 218
The Growth Premise: A Paradox? 219
Culture: The Value of Our Values 220
Recalibrating the System: Revolution or Evolution? 221
The Law and Ethics 222
Corporate Culture: Psychological Detachment and Willful Blindness 223
A Sense of Purpose: Creating Value for Society 225
An "Evolving Revolution" 226
About the Author 233