Proactively Managing the Risks

 

Greed

Greed

A financial institution manager shared with me last week that he is glad to be employed by a company that did not get embroiled in the greed which has led to our current global financial crisis.In recent years, many people around the world have been looking at the sub-prime mortgage practices in the United States with disbelief.The chances of future losses were obviously huge.What could be behind financing 100% of a home’s purchase price and approving monthly payments that did not even cover the accruing interest on the loan?

In many people’s minds the motivation was greed – pure unbridled greed.Many sub-prime lenders made countless such loans because the practice led to positive financial statements in the short-term.The mortgage origination fees for sub-prime loans greatly enhanced their current revenue.The lenders sold their sub-prime loans to others, reducing the risk remaining in their portfolios.The purchasers of sub-prime loans considered that they could generate a profit if the value of their security climbed before the borrowers ran into cash flow crises.Both the originators and the secondary market took huge risks for which the global economy is now paying the penalty.

Where were business ethics in all of this? (more…)

Where Have the Directors Been?

Amidst the current financial crisis, we ask “where have the directors been?” In recent years many companies in the financial sector have failed to effectively manage risk. Why did so many seem to be following the pack rather than making independent wise choices?

Lehman Brothers is feeling odd-company-out as considerations for industry help from the US government exclude it. The first major organization to bare its financial soul last month seems to be left to handle the direct consequences without special help.

A Wall Street Journal article indicated that many feel Lehman Chief Executive Richard Fuld Jr. “waited too long to raise capital and repair the firm’s leaky balance sheet”. These problems did not materialize overnight. Where were the directors? (more…)