Simply blaming the bankers or “institutions” for the financial crisis is all too easy. Distancing our personal behaviour from institutional behaviour makes us feel safe.
As investors we were hungry for yield, ready to pull money in and out of funds/investments that didn’t offer something extra. We subcontracted our risk analysis to rating agencies. If there hadn’t been any demand for mortgage backed-securities (MBS), banks wouldn’t have issued them. (It takes two to tango.)
We had a false sense of security after years of prosperity, forgetting what happens when speculation (or “over exuberance” as Mr Greenspan referred to it) drives the market. Speculation is nothing new. During the Tulip Crisis in the 17th century investors used their life savings to gamble in a market where one tulip could have cost as much as £17,000.
As borrowers we were eager to bet that property prices would continue to go up, allowing us to take on more debt and live beyond our means. We assumed low interest rates were never ending. Some of us borrowed money that we knew right from the start we couldn’t afford to pay back. (What would our parents or grandparents have to say about that?)
As lenders we were happy to lend money without doing proper due diligence, without any credit checks. ‘No doc’ loans were a sure sign that we had lost our minds! As lenders we then offloaded the mortgages to arrangers, who then repackaged them into securities and sold them onto investors. Neither as lenders nor as arrangers did we have any “skin in the game” –i.e. any exposure to the poor credit quality of the loans. (Did we care?)
As politicians we encouraged banks to lend into poorer communities (where voters live), not accepting the consequences of lending money to people who couldn’t afford to pay it back. Our central banks presided over historically low interest rates, watching an enormous asset bubble develop in the property and MBS markets.
As rating agencies we assigned AAA ratings to securities which became junk overnight, having built faulty models and perhaps misguided by conflicts of interest? As regulators we allowed institutions to create systemic risk and become too big to fail.
We all contributed to this mess. We lost our way. Integrity needs to be re-established within ourselves as individuals and within our organizations as professionals. As leaders, this is the challenge.
We had a false sense of security after years of prosperity, forgetting what happens when speculation (or “over exuberance” as Mr Greenspan referred to it) drives the market. Speculation is nothing new. During the Tulip Crisis in the 17th century investors used their life savings to gamble in a market where one tulip could have cost as much as £17,000.
As borrowers we were eager to bet that property prices would continue to go up, allowing us to take on more debt and live beyond our means. We assumed low interest rates were never ending. Some of us borrowed money that we knew right from the start we couldn’t afford to pay back. (What would our parents or grandparents have to say about that?)
As lenders we were happy to lend money without doing proper due diligence, without any credit checks. ‘No doc’ loans were a sure sign that we had lost our minds! As lenders we then offloaded the mortgages to arrangers, who then repackaged them into securities and sold them onto investors. Neither as lenders nor as arrangers did we have any “skin in the game” –i.e. any exposure to the poor credit quality of the loans. (Did we care?)
As politicians we encouraged banks to lend into poorer communities (where voters live), not accepting the consequences of lending money to people who couldn’t afford to pay it back. Our central banks presided over historically low interest rates, watching an enormous asset bubble develop in the property and MBS markets.
As rating agencies we assigned AAA ratings to securities which became junk overnight, having built faulty models and perhaps misguided by conflicts of interest? As regulators we allowed institutions to create systemic risk and become too big to fail.
We all contributed to this mess. We lost our way. Integrity needs to be re-established within ourselves as individuals and within our organizations as professionals. As leaders, this is the challenge.
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