Subprime Frogs and Other Financial Industry Wisdom

I loved Michael Rosenwald's analysis of consumers' frog-like behavior during a financial crisis. While it's dangerous to attribute all human behavior (economic and otherwise) to simple fight-or-flight brain processes -- we're not frogs -- it's also useful to understand these responses so that we can overcome our fear and panic. I've interviewed risk expert Paul Slovic, who's quoted in the story, on this very topic. He helped me rationalize irrational fears I had about killer sand holes on the beach.

But back to the the banking crisis: It's getting worse, not better. Harvard Business Review editor Steve Prokesch takes a hard look at our economic values, arguing that the bailout of Fannie Mae and Freddie Mac "should lay one myth to rest: that perfect free markets exist or are even desirable." Prokesch wrote one of my favorite blog entries on the subprime mortgage mess in April, suggesting that the real failure was leaders' not asking questions about lending practices they didn't understand.

I haven't spoken to Mr. Prokesch about his most recent entry in the HBR Editors Blog yet, but I sense under his controlled diatribe an angry observer of failed leadership in the mortgage industry. "Our goal is to make home ownership affordable and safe for the many," he writes, "and is not to turn homes into commodities that can be traded like pork-belly futures, right?"

Prokesch is not alone in broaching the bigger questions created by the financial meltdown. In his Edge Economy blog, Umair Haque posits that the banking crisis occurred because of a larger lack of strategic vision. He asks pointed (okay, brusque) questions about the financial industry too: "Why did everyone -- literally every single player in the financial value chain, from mortgage brokers to prop traders -- compete mercilessly to hoard benefits, and shift, hide, and obscure true costs?"

Because, Haque says, those companies are wedded to an unsustainable type of strategy, which he loosely defines as "ripping the other guy's head off." (Note: This is the the second time Haque has addressed the strategy disconnect head on. The first was equally fierce).

Others on HarvardBusiness.org have been looking askance at the industry as well, examining how technology amplified the mortgage crisis and how bankers are coping with mass layoffs and companies vanishing overnight.

I know, your reaction to the latter is "Poor little rich bankers!" That's what I thought, too, but author Gill Corkindale, who has interviewed hundreds of bankers, paints a detailed, human picture of an unmoored profession that seems to most of us to be "curiously inert and soulless."

And, as the crisis worsens, bankers will undoubtedly be the target of ever more seething criticism from all of us frogs.

By Scott Berinato  |  July 21, 2008; 2:30 PM ET
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Posted by: Paul Ritchie | July 23, 2008 11:25 AM

Posted by: Scott | July 25, 2008 9:31 AM

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