I have received some questions on my article "Information Management and the Financial Meltdown" so I thought I'd address them here. The article was written in September, after the meltdown of Fannie Mae and Freddie Mac and Lehman Brothers filing for bankruptcy. AIG had suffered a liquidity crisis, but had not received the government loans yet to come. Goldman Sachs and Morgan Stanley had yet to be converted to bank holding companies, Washington Mutual yet to be seized, Wachovia acquired, etc., etc. And now we see it spreading to the auto industry and probably eventually the airline industry will be front and center. In other words, it was and continues to be a moving target.
It is really difficult to tell the depth of the deleveraging and decoupling that the world economy will go through. The economy is wound up pretty tight and must let out the built up pressure. Questions remain about the approach and the timing, but there is no avoiding that pain has, and will, occur.
One point I made is that financial companies were motivated to get mortgages out the door and that they sold their toxicity. This was true, but why were they motivated as such? Some point to the Community Reinvestment Act of 1977, which required institutions to loan to those less qualified. 1994's Riegle-Neal act compounded the CRA's effect by rewarding banks with high CRA scores to bank across state lines. And then more ability to compound behavior was possible in 1999 with Gramm-Leach-Bliley, which allowed banks to combine investment and commercial operations.
There was also incentive to take undue risks with the dilution of executive accountability once the firms went public and the executives became more minority interests in the entities. This started with Salomon Brothers, important in Citi's heritage, going public in 1981. While I'm at it, the rating agencies' presentation of their business intelligence left some things to be desired. And over 100% home equity loans, combined with a real estate downturn, tossed more toxicity on the fire.
Another point is that the mortgages were put into complex packaging, which business intelligence did not keep up with. So, in context of business intelligence, did the financial companies know what they were buying? I think business intelligence has some room to grow in terms of that, as pointed out in the article. A better question may be did they care? In some respects they did, but in other respects business intelligence was relegated to secondary consideration given that the institutions were not incented purely by profitability and good business. As I said "full visibility into exposure and liquidity is going to be a must." Visibility and rewarding only good business are part of the "executive sponsorship" I mention that is required.
I had an MBA professor who went through some of the early lineage above with his students and predicted a dire outcome. I took his notes (early 1990's) and extrapolated the more recent events for this entry. Many probably could have seen this coming, but when times were going well, nobody wants to stop the music. Executive sponsorship and business intelligence will be critical to mend the markets as painlessly as possible.
What are your thoughts?
Posted November 30, 2008 5:34 PM
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