Ethical Houston

          We will now explore the some reasons for cultures being in isolation.  I am currently reading Andrew Sorkin’s book entitled Too Big to Fail, which chronicles the rise and fall of wall street and the world economic meltdown in 2007-2008.  Even though the reasons for this fall have some unique qualities they also have common features of other cultures in isolation.  Some common qualities of these organizations are closed loop vision, lemming behavior, and a tight knit loyalty to either the organization, the principles or the leader.  Note that I did not mention greed, hubris, and unethical behavior.  These all contributed to the problem, but don’t really reflect the deeper contributors to cultural isolation.  In many cases they adhered to the concept that they were facilitating the greater good of the free market and its benefits to humanity as a whole. 

The sub-prime loan market and the over heated housing market are most notably blamed as the catalyst that almost brought the world economic market to its knees.   But who could be against putting millions of people into homes that previously could not afford a home?  But there’s little indication that the thinking went that deep.  In financial quarters it was not that altruistic or if it was the possible unintended consequences were not well thought out.   Without going into any great detail, the crux of the problem was a result of taking millions of sub-prime loans and bundling them into packages with better loans and then selling them as packages to investors.  Many of the large banks not only did the packaging, resulting in tremendous profits but also bought packages of these loans from their competitors, again making huge profits on brokering the packages to other investor groups.  Supposedly, by packaging good loans with riskier loans you made the packages into high quality instruments.  The rating agencies that told investors what the risks were to these packages, tended to rate them as triple A rated.  And to insure that the packages were highly rated, the sellers would buy insurance guaranteeing the packages.  Never mind that the insurance had very little behind it to pay off in case of default.  As it has become stated elsewhere, it became a house of cards.

            In most cases, these transactions were not illegal or even unethical.  But leveraged securities at 30-1, in hindsight do not seem prudent.  But everyone who was anyone on Wall Street was doing it, so it must be okay.  And anyway, the profits were tremendous.  In reading Sorkin’s book you quickly get the picture of a closed loop system that by its nature is myopic.  These were supposed to be some of the smartest financial brains in the world and yet even a high school economics student, given enough factual information could see the repercussions.  Money was certainly a factor and motivation for creating and perpetuating the system.  But I think it was more than that.  First they could not/ did not look out beyond the closed loop.  And two, there was nothing from the outside to give them a compass to follow.  And even though there were regulations in place to keep much of this from happening, many of the framers of the regulations were the ones reaping the profits.  And government was complicit  in facilitating legislation that would be a set up for eventual failure.

            Many years ago I was involved in commercial real estate development.  Because financing was always challenging for smaller developers, I was always looking for windows of opportunity to borrow at rates that made sense economically.  During one of the periods of high interest rates, I had a young man visit me offering to broker loan money for new commercial properties that I might want to build. He said that he had outlets for short term money at a floating rate of 2 points over prime.  Prime at the time was 14%.  At that time my rate would be 16% with a two point origination fee.  The usury rate in Texas had been raised to 22% from 18%, so you can see the mentality of the market.  I told him that we were out of the market since rates were so high and I couldn’t see how the economics would work.  He became somewhat belligerent and badgering, stating that this was the market and that rates were only going to get higher and I needed to borrow, since others were doing the same.  He pointed out that other companies were doing similar deals and flipping them to investment groups and making huge profits.  He even said that these kinds of loans were available on raw land, a non income producing property and people were staying in the project for six months and then selling to another investor.  I told him I just couldn’t see it; that it was too risky and sent him on his way.   In was not many months later that the real estate market tanked and billions of dollars were lost, savings and loans around the country closed, and banks by the hundreds either went under or were bought out by bigger banks. 

            We had not taken the bait and had survived.  At other times in my career, I was not quite so prudent and made financial mistakes because I followed the other lemmings into the sea.   We survived these financial crisis in the real estate market, but they required years to recover.

            The other factor to be considered in The Too Big to Fail scenario has to do with loyalty.  Successful organizations tend to generate great loyalty among its members.  We generally consider this to be a positive attribute of the organization.  There is a sense of togetherness and connection to have common goals and objectives.  But in creating this internal loyalty there is a tendency either to blindly adhere to the leaders wishes or become blind to the realities outside the group.  Sorkin relates an incident that could be generalized to any successful organization, whether the military, a government, the church, or business.  He states that in a meeting with executives at Lehman Bros., who were in an internal fight in the company and  before he died, Lewis L. Glucksman in order to maintain solidarity came to the meeting with a handful of number 2 pencils and gave each of them a pencil and told them to bread it.  Of course, no one had any difficulty in doing so.  He then handed a handful of pencils to Richard Fuld, who later became CEO of Lehman and instructed him to break them.  Because there were so many, he couldn’t.   Glucksman then said “Stay together, and you will continue to do great things.”  This is a story that has been repeated throughout history in one form or another and shows the power of loyalty to a cause.  But sometimes it’s necessary to step back and reappraise the situation, ask ourselves whether it make economic sense, or whether it’s legal, ethical, moral or responsible.  That takes great leadership and a sense by those under the leader that input and reflection are permissible and in fact are expected.