Corporate Eye

Subprime Mortgage Crisis Musings

As I write this Lehman Brothers and Merrill Lynch, two of Wall Street’s legendary giants have succumbed to the subprime mortgage crisis. But, the end is not in sight. There is no shortage of commentary on what caused this crisis and what to do in the future. C-suite greed, poor governance and corporate governance failing to keep up with the increasingly complex business environment, have been offered as reasons why the crisis emerged. All are to some extent correct. I see that this crisis will be a watershed of ideas for future posts.

Investopedia has a comprehensive review of the crisis. If you want some comic relief see this humorous video on the crisis.

Despite all the wrongdoing, there is an example of a company that flies in the face of the mismanagement, lack of leadership and greed that embodies the mortgage crisis: Shorebank.

First, note their mission plastered right at the top of their homepage. This shows their social responsibility and they applied it to some good corporate governance in how they handled the mortgage crisis —

Fallout from the subprime crisis has been enough to make most bankers run, tails between their legs, away from any mortgage that carries the slightest whiff of risk. Then there’s ShoreBank Corp., which last September, just as the depth of the crisis was unfolding, hired a third-party firm to comb property records in some of Chicago’s poorest neighborhoods, identifying 10,000 homeowners at the highest risk of default due to predatory loans. It then began offering many of those folks a chance to refinance into fixed mortgages at reasonable rates.

By the end of 2008, CEO Joseph Hasten, 56, expects to have originated about 1,000 such loans, with a total exposure of $150 million on the books. “That’ll put a dent in that 10,000 number,” he says. “We weren’t going to stand around and let the effects of this subprime problem make its way through our neighborhoods.” 
Bank Director Magazine – Monday, July 28, 2008

If more companies followed ShoreBank’s approach, the subprime crisis might have been avoided.

T. Rowe Price was another bright light. As early as 2006, their fixed-income analyst Sue Troll, had the insight to see something was wrong — “You could see that something was going to happen,” Troll recalls. “Credit spreads were tightening while fundamentals were deteriorating. It became apparent that the situation was going to get ugly.” At the time Troll’s position was not popular, but apparently her bosses had the integrity to guard the safety of their investors. I wonder how many times this might have been replicated in other companies to no avail.

There will be, no doubt, some fallout from the crisis —

  • Efforts to scale back Sarabanes-Oxley will end
  • There will be a push for more regulation
  • Corporate Governance consultants will have a feeding frenzy
  • Corporate Governance Officers will get more clout
  • There may be a chance that corporate ethics will finally get serious attention

More to follow.

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Ed Konczal has an MBA from New York University's Stern School of Business (with distinction). He has spent the last 10 years as an executive consultant focusing on human resources, leadership, market research, and business planning. Ed has over 10 years of top-level experience from AT&T in the areas of new ventures and business planning. He is co-author of the book "Simple Stories for Leadership Insight," published by University Press of America.

I seem to remember some one saying,

We have a contract on America !

See video on new book Transparency — focus on the “missing link” in Corporate Governance
One of authors is Leadership Guru Warren Bennis;col1

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