Kick the Can is a Dangerous Game
October 18, 2010 § 1 Comment
by Doug Brockway
Whether you’re working on day-to-day operational efficiency and effectiveness, or the long-term value of the products and services in your portfolio, it is almost never advisable to put off a decision about a difficult problem. There are situations when either the resources or the time to deal with a problem are not immediately available. And, you can’t profitably fight all battles at all times from all comers. You must choose when and where to take your shots. But, the continuously festering US mortgage crises are an example of what happens when people leave a mess for others to clean up.
As of this writing in October 2010 the rate of foreclosures on mortgage in the US is now one in every 21 mortgages. Just two years ago it was one in every 100 mortgages:
Similarly, the number of mortgages that are past due has skyrocketed as the combination of variable interest rate jumps in an economy that stubbornly fails to create sufficient new jobs for the people ready, willing and able to work:
Like the proverbial frog in the incrementally heating pot of water, you can imagine the managers and executives on Wall Street, in the mortgage banks, the public policy makers, even individual homeowners, incrementally “loosening the screws” on underwriting and documentation, telling themselves that it will be OK. You can imagine regulators convincing themselves that the business is solid. Rating agencies basking in credit for analysis “well done.” As Citi’s former CEO Charles Prince said during the height of the sub-prime boom, “”As long as the music is playing, you’ve got to get up and dance.”
Throughout the mortgage value chain, from borrowers and brokers through to bankers and investors we were not actually examining the value, import, and risk of our business bets. As the foreclosure snafu makes clear, we were busily assuming we had everything under control and not actually checking. Attending mortgage industry conferences in the 2000’s the mood increasingly went from hopeful to aggressive to an outward euphoria. But if you asked people how all that credit and all those loans would work out you could tell that they didn’t know and they also didn’t want to, couldn’t personally afford to be the one to start asking around.
Don’t kick the can down the road. If you have a product that is growing year-over-year but you’ve put off decisions to fundamentally improve it “until you have to” then you’re too late already. If you have managers and sales people who create revenue just by the uplift of “market action” then you had better be actively preparing for a change in the market that deflates revenues (but likely leaves egos intact). If you detect a chink in your armor but things are good, fix it. Either the market or your competitors won’t be forgiving.