Improving Performance: Subprime mortgages aren’t the only problem

We never seem to learn. The S&L debacle isn’t that distant a memory, and we’re repeating it on an even grander scale. In fact, this time we’ll be lucky if our entire financial infrastructure doesn’t crumble.

In 1977, President Carter signed the Community Reinvestment Act to help poorer Americans buy homes, instituting regulations that effectively forced financial institutions to give mortgages to people who really couldn’t afford them. In 1995, President Clinton put that act on steroids. Although both presidents may have been well intended, is giving mortgages to people who can’t afford them a good idea?

But there’s plenty of blame/credit to go around. While the real estate market was going up, these mortgages were quite lucrative. Maximizing profits is the name of the game, so forgetting about diversification and other sound business practices, some institutions loaded up. When the bubble burst, well…

And then there are the Realtors and mortgage brokers. I recently overheard a conversation between a broker and a would-be home buyer. After looking at an attractive property, they ran the numbers. Unfortunately, this buyer didn’t have enough of a down payment and said so. “No problem! We’ll borrow the down payment from another bank …”

How can we allow someone not being able to afford something to stand in the way of maximizing our commissions? As painful as this financial crisis may be, we still haven’t stopped the behaviors that created it in the first place. I wonder how long before the next bailout and how much it will be.

What’s interesting is the same malady that brought down Bear Sterns, Lehman Brothers, AIG, Merrill Lynch and possibly a host of others affects a lot of companies not in the financial sector. Possibly even yours.

Profit is king. The more the better, and we fail to question truly impressive numbers. The attitude is that if we’re making that much money, we must be doing something right. Don’t argue with success or even question it.

Yet most of us know that it’s not that difficult to look profitable, especially in the short run. The real questions should be: What are we sacrificing to produce those numbers?

Take our big three automakers. SUVs and gas guzzlers were far more profitable than more economical cars. Despite sudden rises in gas prices in the past, they didn’t learn. They bet far too much on a revenue stream that dried up as soon as gas prices started rising again. Now, survival is in question for Ford and GM.

I know of a company that is shipping product to make its numbers. Unfortunately, they have a reliability problem and are experiencing massive returns (and all the customer dissatisfaction that entails) as a result. Nobody is thinking about what they’re sacrificing to make those numbers.

The worst thing is that too many of us won’t learn anything from it, making it so much easier to repeat it again and again — not just in financial services, but in other industries as well.

As a consultant, I’ve found that questioning long-standing processes provides enormous opportunities for improvement. What may have been a good idea once upon a time may be silently wreaking havoc. Even if not, can these processes be holding us back from doing better?

Additionally, some mortgages are in arrears because people have lost their jobs. Yes, some problems are caused by other problems, which are not easily solved. In the words of Sir Walter Scott, “Oh what a tangled web we weave, when first we practice to deceive!”

Isn’t it interesting that we’re trying to solve a problem created by too much credit by providing even more? What that really means is we’ve painted ourselves into a corner, where we have few options.

Ray Stata, founder of Analog Devices, was often quoted as saying, “The rate at which organizations learn may become the only sustainable source of competitive advantage.”

Although many have doubts about whether our government is even capable of learning, I hope your organization isn’t following that example. nhbr

Ronald J. Bourque is a consultant and speaker from Windham. He has had engagements throughout the United States, Europe and Asia. He can be reached at 603-898-1871; fax 603-894-6539; bourq@att.net; bourqueai.com.