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Q:
What can the average person do to help the economy?
Jane Brown,
St. Louis
A: Not
much that would surprise you, we’re afraid. Just hunker
down and don’t panic. Recessions happen and recessions
end. The main thing people can do in the interim is live
within their means.
Your
question, though, raises an interesting point. It was
hardly average people who got the economy into its current
mess.
First,
there were the frighteningly overzealous—or disturbingly
clueless—brokers who sold home loans to people who
couldn’t afford them. Then there were those people
themselves, who took the loans under the guise of too much
hope, too little personal responsibility or too vague an
understanding of finance, or all three.
And
meanwhile, far away on Wall Street, there were the
investment bankers, following on years of abundant easy
money chasing fewer and fewer deals, financing ever more
mediocre acquisitions that ended up not closing as credit
markets dried up.
And then
there was the cadre of financial engineers who really blew
things up. These very unaverage brainiacs, working at
firms around the world, spent the past two or three years
inventing increasingly complex and incomprehensible debt
instruments. You’ve heard the acronyms: CDOs, CDSs, SIVs...whatever.
Their names were as mysterious as their contents, a
strange brew of subprime loans, genuine triple-A stuff and
everything in between.
But
complexity was not the problem with these instruments.
Lots of innovations are complex. The problem was that
these newfangled products were sold into a yield-hungry
market without enough top management really understanding
why or how they made money. When they weren’t making it
anymore, it launched a fall-out that continues today with
unprecedented billions of dollars of write-offs.
Now, it’s
been some time since individual consumers have understood
all the products coming out of Wall Street. But the Wall
Street leadership buying and selling such products should
be expected to understand them, and our point is, we’re
not sure that happened this time around.
Everywhere
we go, we hear experienced executives surprised by the
now-revealed toxic nature of the alphabet-soup of new debt
instruments. They also seemed shocked by the size of the
hole they blew into the earth, and, with a few
high-profile exceptions, we doubt the depth of
understanding was much deeper at the companies dealing
them.
Indeed,
we’d speculate that managers at most firms allowed the
profits to pour in—they even encouraged and rewarded those
profits with huge bonuses—without being able to explain to
themselves, or anyone, how all that wonderful cash was
actually being earned.
Wrong?
Absolutely.
But you
can easily imagine how it happened. When the complicated
debt instruments started to debut, many top managers
probably did ask how they worked, and someone who got it
probably did try to explain, but both parties probably
shrugged off any gap in understanding. The products were
new, after all. Who knew how they would fare? Then the
products started faring very well, and pretty quickly,
managers just let the explanations go.
The
profits spoke for themselves, and the hefty bonuses they
spawned spoke even louder.
Just
briefly, compare that to what happens in a conventional
lending or industrial environment. When a product is
released—from a leveraged lease to an Apple iPhone—managers
know the business model they’re banking on. And if net
income unexpectedly surges, everyone can pinpoint why by
looking at what’s happening in the marketplace. Profits
may not come easy, but they make sense.
In the
lucrative frenzy over CDOs, CDSs, SVIs and all the like
over the past few years, such old-fashioned transparency
didn’t stand a chance. The financial engineers surely
understood what they were creating, but their managers
probably didn’t. And their managers’ managers—all the way
to board level—probably didn’t either. They didn’t dig.
They didn’t ask, “Whose going to finally end up owning
this paper?” or “How are these products getting such good
credit ratings?”
Recent
history has shown us that when it comes to management and
governance failures, ignorance is no defense. But we
didn’t need Enron, or this current credit crunch either,
for that lesson. Nor will we will necessarily need all the
legislation that is sure to arise from this mess.
In
business, it’s always been that if a profit stream seems
too good to be true, it probably is, and it’s a leader’s
job to get to the bottom of what’s going on. When they
don’t, too many people, average and not, end up paying the
price.
*****
Jack and
Suzy Welch are the authors of the international bestseller
Winning
(Collins). Their latest book is Winning: The Answers:
Confronting 74 of the Toughest Questions in Business Today
(Collins). They are eager to hear about your career
dilemmas and challenges at work and look forward to
answering your questions in future columns. You can e-mail
them questions at winning@nytimes.com. Please include your
name, occupation, city and country. |
