As I ponder the financial crisis that has gripped our nation, I find myself thinking about a story I heard at a lean conference a few years ago.
An automotive supplier was describing a meeting officials of his company had with officials from Toyota, which was one of its customers. To gain future business, the supplier was offering to lower its price. The Toyota officials asked how the supplier would compensate for receiving less revenue. The supplier replied, “We’ll eat that.”
But Toyota rejected the proposal, saying it would only hurt the supplier and damage the supplier’s ability to provide parts in the future. Instead, Toyota proposed working with the supplier to help him improve operations and reduce expenses, so that he could offer the lower price and still maintain his margin.
In a lean mindset, you treat your customers and suppliers as partners – people you work with to see that they succeed along with you, rather than adversaries or suckers you try to squeeze to your benefit.
What does this have to do with the financial crisis? The roots of the crisis lie in sub-prime mortgages. Too many banks gave too many mortgages that were too good to be true to too many people who couldn’t afford them.
When, for example, you give a couple with limited resources an adjustable-rate mortgage with interest-only payments for two or three years, it doesn’t take a genius to see that when the payments go up in two or three years, that couple may not be able to afford the mortgage and could lose their house.
But banks were so eager to cash in on the housing boom, they didn’t worry about that. They assumed that property values and/or incomes would always go up, and some way would be found to keep the money flowing. They concerned themselves only with getting new business, not with doing what would be best for their customers and themselves.
We know now how well that worked out.
I said the roots of the crisis lie in sub-prime mortgages. Actually, it would be more accurate to say the roots of the crisis lie in greed and a lack of respect for people.
Let’s hope we learn something from what happened.
Certainly some banks were more concerned with making loans and betting on property appreciation to bail them out in the event of borrower non-payment.
ReplyDeleteBut, Congress, in its infinite wisdom, also mandated the Community Reinvestment Act (CRA) which basically threatened banks with the loss of their charters if they did not make these loans to borrowers of questionable means. On top of that, activist groups such as ACORN aggressively pushed for funding of these subprime loans, loans which would never have withstood scrutinity without political cover.
And with Fannie and Freddie implicitly guaranteeing all this stuff with our tax dollars (and this has now become explicit, of course), no adult in authority was actually minding the candy store while loan funds were going out the door.
Oh and by the way, who changed the requirement that you needed 20% down in order to qualify for the other 80% from the bank?
Banks lend. Builders build. And investment bankers package and sell securities. But the moral hazard created by Barney Frank and his cohorts at Fannie, Freddie, ACORN and the like is at the root of this financial disaster. And now taxpayers (those people in the US who actually earn money and fork over a good chunk of it to the US Treasury) are again on the hook for this blatant political robbery.