Harvard Business Publishing

Bill - Thanks for this timely blog. Do you have a source for identifying the "square" lenders - a.k.a., the sounder financial institutions?

Thanks, Susan

a big problem is the inflation of the dollar which cant be accurate information given out by the Federal Government considering the high food prices, gas prices, over-inflated housing market, and the stock market on its death bed. I believe the US dollar is loosing its purchasing power because our money is not backed by any standards and the federal reserve keep the interest rate to low to allow a correction in market. We are in head over hills. Its only going to get worse when adjustable mortgages adjust and homeowners cannot afford the mortages and the rest of the global markets sell the inflated dollars.

I live in NE Ohio, and our role model for "old fashioned" mortgages has been Third Federal Savings (http://www.ThirdFederal.com), a bank that simply refused to lower their standards during the past several years. They went public a few years ago, and endured some degree of criticism from shareholders for not growing fast enough or looking "pretty enough" (their offices are open space, no offices). Chairman Stefanski just kept coming back and reiterating that TF is a responsible company, and they would not sacrifice quality for volume. AND they hold their mortgages -- they don't sell the paper.

Now, they are looking like geniuses, tho' as your article points out, that assessment is only relative to all the fast-profit-chasing banks that embraced creativity over sound financial practice. I hope this company gets credit for doing what was right during a time when many lost their heads.

(disclosure -- one of my children recently qualified for a mortgage thru TF, and they could have gotten a slightly better rate elsewhere -- but chose the more solid institution that will hold their mortgages for the entire 30 years. Responsibility paid off for TF in this case.)

Great to know that there still are banks that follow the right path. Obviously, running with the pack could be dangerous. Holding on to your values definitely holds you in good stead in the long run.

Suresh Kumar G.

I enjoyed the premise of the article but the author misses an entire category of "square lenders": Credit Unions! Credit unions have no incentive to participate in risky loans because decisions are made in the interests of their member owners. And the data shows that credit unions are winning. For the first 6 months of the year, overall US mortgage originations are down 17%, with thrifts posting a decline of 34%. Credit unions, on the other hand, increased originations 40%. The American public is voting with their actions--credit unions look out for their members.

Bill - thanks for this. Is there anyway you can share it with the decision makers in Washington? It is so timely and crystallizes, I think, at least part of the current national argument surrounding bailout.

Thanks again.

I am quite disheartened but not surprised. Corporate corruption is a disease that will live on as long as corporate crooks’ perceptual view of growth and success is not redefined. Though not as grave as current financial crisis, it seems we have forgotten too soon when Enron and others went belly up. To put this into prospective, I will recommend you read “The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America,” written by Alex Berenson. In the book, New York Times investigative reporter Alex Berenson scrutinizes the common string linking Enron, WorldCom, Halliburton, Computer Associates, Tyco and other corporate indignities. He presents an outline of how Wall Street and corporate America lost their way during the great bull market. Considering his experience, Berenson puts corporate accounting debacles into perspective.
As corporate misconduct continues to rock the markets, there is still an underlying assumption that citizens are still very leery of companies and their management styles. For instance; in the number, Berenson addresses two key issues that are also reflective of the financial markets today. (1) What degree of confidence will the stakeholders have that corporations are being run for the benefits of investors and not that of their own, and (2) what assurance will investors have that information provided by companies will be accurate and fair?
Even though the government enacted SOX to minimize misappropriations, companies need to focus not only on complying with the new requirements, but applying the highest standards of excellence and integrity to the way in which they make business decisions. Businesses also need to communicate those decisions to stakeholders, and in time, the public’s confidence might fully return. Finally, as Alan Greenspan, former chairman put it, “rules cannot substitute for character.”

A lot of folks with MBA's

looked like geniuses for many days.

They criticized the old, the tried and true

and gave those a scold, who really knew

that something never procedes from nothing

that substance is better than theorizing

ssj.

I loved this story and I loved the irony interleaved between the snippets from the other journalists. I think it is such a powerful and sobering story that I have posted the salient parts of this page on my own Blog (get there via the home page of my web site).

From a UK perspective, this crisis and story help to illustrate why Margaret Thatcher, whose economic and social policies helped to unleash the credit and other crises on this world, is more to be reviled than revered.

Duncan

We have known the mortage meltdown was coming for several years -perhaps over five years ago. And if my memory serves me well, many articles were written by HBR that gave the green light, or sort of, to the practice of selling mortgage loans to entities and giving loans to unqualified people. I just wonder why there was no intervention by regulators on this situation five years or so ago. Was it John McCain and his party that turned the lights off and sent the regulators home? Garrison Keillor of the Baltimore Sun writes, " McCain switches from First Deregulation Church to Our Lady of Strict Vigilance like you might go from decaf to latte. Where is the straight talk?"

Ahmed

The failed institutions tried to create wealth (for everyone) out of thin air and ably blinded the fraternity of auditors and regulators immersed in fulfilling reporting functions rather than real policing. Of course, the artificial wealth created lasted for sometime before the bubble was allowed to burst. This suggests that there were beneficiaries in the process and lame ducks waiting to foot the bill (tax payers).
The root cause for such magnificent problems stems from ‘greed to become rich in a hurry’ - a syndrome not decried by the society at large. Academic institutions also own moral responsibility in not brandishing 'practices' that injure the financial market systems and similar other economic systems. Isolated viewpoints and lone articles would not stop the hysteria (get rich quick) whereas reforms at the educational institutions imparting value systems can significantly contribute to reduce such mishaps.

Inre - AE The Free State - "Was it John McCain and his party that turned the lights off and sent the regulators home?" It was actually Chris Dodd, Barney Frank and the Democrat majority in Congress who refused to investigate Fannie and Freddie because they were receiving huge contributions and other perks. John McCain and George Bush were urging for reform of those two institutions and those in power turned a blind eye.

The real problem is a-political and driven by the greed from the lowest level of mortgage lenders to the higher level investors who traded in the mortgage-backed paper. Toss in the "tone at the top" coming out of both the Clinton and the Bush administrations that it is every American's RIGHT to own their own home and giving Fannie and Freddie the mandate to make that happen - at all costs, and you have a recipe for just this kind of disaster.

This quote from Mike Reed sums it all up:

"For Ego, the discussion forum is all about him, and he regards discussions that stray from that topic as trivial dalliances. Although tolerant of an occasional shift in focus, Ego grows increasingly restive when the forum's attention shifts away from his interests, and he will often provoke conflict to reestablish himself as the subject at hand. Ego is one the the fiercest of all the Warriors and will fight to the death when attacked."

...and so his death was realized, only after the death of so many casualties, families and futures affected by the greed and self-admiration of the egocentric CEO's, may they get what they caused.

Well what do you know. A bank with a radical approach to assets (loans) and liabilities (deposits). I bet there are other factors:
1. A balanced portfolio
How many times have we heard from investment advisors that we should have a balanced portfolio? How many times have been told to manage risk? Where were balanced portfolios for these financial institutions who defaulted?
2. Corporate Governance/Management Oversight
No matter what you call it, it's the same thing. But I have a question. Why did we have to legislate it with SOX legislation? And once legislated why was there no oversight?
3. Capitalism vs Greed
There is a huge difference. And I believe the pendulum has swung too far to the greed side of this equation. Time for some common sense.

Process beats values and discipline because it can be verified and validated. Credit appraisal and risk management are appropriate processes to manage non-performing assets and irresponsible resource deployment. The Basel norms were designed to prevent the very crises that have befallen the banks that opposed this multi-lateral regulation.

Just wondering what the fiscal connection might be that would want lenders to avoid doing a mortgage with a "flipper." Why would that matter when the mortgage still needs to be paid? Also, how would one verify/enforce not doing a mortgage with a "flipper?"...Matt

I am so proud of those managers, did not fall for quick money making games. We used to have discipline to earn money by 'old fashion way, earns it.’ Money earned by being accountable and deserved to earn it.

I wonder what happen to our moral values and principles. Whatever happened, so happened, I hope we learn from these practical examples and rebuild our financial structure on sound rock to withstand any kind of future turbulence so that few elite do not drawn many innocent people.

Great post Bill! The companies that you mentioned did not loose sight of their mission, they understand what purpose they serve and are clearly operating in their customer's and shareholder's best interests.

I identify with Kuhlmann's philosophy, my understanding of who I am, and my intent as a leader influences me to do and deliver what is best for the customer at all time. This requires me to be persistent about sharing my viewpoint consistently and frequently. As well as making sure that it is heard and acted upon.