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09 October 2008

Intelligence and financial crisis, historical edition

It is our contention that troubled times demand increased investment in intelligence activities by private firms, who cannot rely upon the agencies of government or the media to adequately address their interests. This is by no means a new phenomenon – rather, it is a rediscovery of much older principles that were in common practice prior to the 20th century.

The debate over intelligence failures in the current financial crisis thus continues to attract our attention. There are those serving, or having served, in a variety of institutions which claim that intelligence may have indeed staved off the worst of the impact to a specific firm or another. We shall see what to make of these claims once the business schools begin to compile their histories.

It is clear, however, that good intelligence served financial institutions well in earlier times. We find quite early reference to this in a text on the Theory and Practice of Joint-stock Banking, dated from 1836.

“The system of mutual espionage and rivalry which exists amongst joint-stock banks is another source of security to the public. That a system of espionage exists upon every joint-stock bank, at least in Scotland. by their sister banks, who exchange notes and checks with them, must be admitted, after what took place with regard to a joint-stock bank establishment in the west of Scotland. The agents of the joint-stock banks, both in London and Edinburgh, being in constant communication with each other, have early intimation of any departure, by any joint-stock bank, from the true and safe principles of banking. In fact, so long as a joint-stock bank can maintain its credit and good opinion with its sister banks, the public are tolerably safe; and so satisfied are the public in Scotland of this circumstance, that no run took place during the severest period of the panic, in 1825, on a single Scotch bank — the public being well assured that the other banks would give (by a refusal to accept the notes and obligations at the exchange) a clear and distinct notice, that danger was to be apprehended.”

This forthright discussion of commercial espionage would not doubt send many of the current practitioners of competitive intelligence into hysterics. One must note that no distinction was made at the time between the collection of information by overt means versus that of illicit provenance. The legal status of such information, and its use, was also far less clear than in today’s environment. (We must remind our more genteel readership that the first case in law on such a matter – at least that we are aware of - for the first time conclusively draws the line between legitimately obtained information from public or private sources, versus unspecified illegitimate methods, only in 1916.)

Regardless of the means by which it might have been obtained in accordance with the standards of the day, the precedent of relying upon intelligence to avert financial crisis has long been a maxim within the financial industry. Given the perspective of time, one may look back on the recent troubles as much as a failure of institutional memory as a failure of the profession itself.

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