Wednesday, January 21, 2009

Such an Unnecessary Crisis

Optimism suffused the ether just about everywhere on Inauguration Day, including in a Wharton School lecture hall. 

Famed finance professor Jeremy Siegel (pictured) started off a special lecture on the financial crisis by asking the class, a mix of undergrads and MBA students with a few invited outsiders, to what extent they agreed or disagreed with this statement: "I am confident that President Barack Obama will lead us back to prosperity in his first term." Using their handheld instant-recording devices, a tool becoming familiar in many business conferences, the answers soon splashed up on the screen: 9% strongly agree, 13% agree, and 31% somewhat agree. Okay, not a commanding majority — but this is, after all, an analytical bunch of number-crunching financiers in training. At least their tempered optimism was better than the raspberry the stock market blew the incoming President by sinking over 300 points on his swearing-in day.

If you are like me, you're seriously wondering if this crisis was really necessary. And your ire is getting pretty up there with each shovel of government billions into the banks. What we're basically doing, aren't we, is paying off Wall Street's gambling debts? For a raging outburst of ire, see my Jan. 15th post below about WaMu and its boiler rooms.

It seems that Prof. Siegel would concur that this crisis didn't have to happen. Here is what the good professor has fingered as the cause of the mess: "The financial institutions buying, holding and insuring large quantities of risky mortgage-related assets on borrowed money." That's it, in one sentence. And you know what? This is the killer — "Banks didn't have to hold those assets," Siegel declares. They could have flipped them, he says — much as the investment banks flipped the risky IPOs they brought to market in the 1998-2000 tech bubble. When the tech crash came, the banks weren't holding onto those IPO securities; they had flipped them off their ledgers.

Why didn't the banks flip these real estate securities? After all, as Siegel explains, most of the profit was generated through creating these securities. But no, in their infinite wisdom, the banks "decided these were great assets to hold" — and then compounded this deadly decision by greatly underestimating the risk of these assets. 

It's just all so maddening. If he had to pick the No. 1 culprit for this crisis, Siegel aims his laser pointer right at the CEO's office. It's the CEO's responsibility "to stand back and look at the big picture," he says. To which I would add: That's what the board should be doing, too; that is the value-added of a board.

If it was a lack of big-picturing that got us into this morass, boards may need to do what the country has just done — get themselves a new leader with a new vision of how to get us back on the road to prosperity. Some have already done that, documented by Joann Lublin in the Wall Street Journal, and more changes at the top are happening each day. And they certainly need to refresh their own board composition by adding members with a knack for "seeing around corners," as I like to say. 

As our new President declared on Tuesday, "For the world has changed, and we must change with it." Boards, make your move to help reverse this unnecessary crisis.