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.


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§ One Response to Kick the Can is a Dangerous Game

  • Paul Clermont says:

    Thinking about this and the life-cycle-related postings, the common element is the need to fight complacency. When things are going well—business is growing, profits are pouring in—one of the hardest things to do is to look for problems and pitfalls in order to get in front of them. It goes against human nature, almost. Yet much of successful management is really about fighting the less helpful aspects of human nature like complacency and procrastination. The alternative is ever more sloppy execution and thinking—remember General Motors? “If it ain’t broke, don’t fix it” is one of the worst pieces of so-called wisdom ever put forth.

    Eeyores (or Cassandras, take your pick) aren’t popular in the executive suite, particularly in an American business culture that rewards sunny optimism, but they’re necessary. The mutually reinforcing group-think in the financial industry brought us to the edge of the abyss. The question going forward is whether we’ll learn anything from it by recognizing that it was more than just a technical failure of product design or record-keeping but something quite fundamental.

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