The underpinning of sub-prime crisis

Culture remains when all has been forgotten” notably stated by Herriot, raises a compelling question; what happens when culture is lost. When it is lost, organisations simply can’t survive. Is culture terribly important? It is, since it fundamentally reflects theory of business and principally determines human actions. In simple words, culture is all about how we do things everywhere, the DNA, of an organisation.
Perhaps in first attempt, it is odd to analyse the sub-prime crisis through the corporate culture’s perspective since cheap money and complex financial products primarily swayed the expert’s thinking. Let’s just not jump at the sub-prime devil and flip history. The 1920s annals of the United States reveal that mortgage foreclosures had been increasing for several years before the advent of the Great Depression. What caused risky-mortgage lending in that period? Was it cheap money or lax lending standards? The latter case is more credible as literature reveals that in 1920s lending standards were unusually lax. If cheap money (discount rate remained low from 1920 to 1927) is to be assumed the driving force behind lax mortgage lending, then why were such bad deals run? Let’s hold this compelling question for a while.
Isn’t it surprising that the average discount rate in the United States was lowest during 1948-58 compared to forthcoming decades? Why didn’t the cheapest decade of money pave the way for lax lending that could bring economic disaster when interest rate rose? Now it is pertinent to open the chapter of sub-prime crisis to discuss the questions dropped in earlier lines.
Since early 1980s, mortgage companies and commercial banks have been principal players in the business of mortgage originations. It is interesting to note that in 1990s, an era of cheap money, commercial banks lending against mortgage originations declined. Contrarily in the same period, a big leap by mortgage companies could be seen from fig 2. Guess, who might stand at the top among ten sub-prime lenders? It is Countrywide Financial Corporation, a mortgage company whose sub- prime lending stood at $ 38.5 billion in 2006.
What led to the sub-prime mess? Cheap money and complex financial products? Yes that is one side of the picture. Let’s discover the other one. Generally business decisions are effected by external environment and the culture inside an organisation. The firm standing of an organisation in the long-run depends on striking a right balance between what the external environment demands and how it is supposed to serve (values) the society while allocating resources.
In our case a simple model could be set like:
Mortgage lending decision = f (interest rate, values),
where interest rate represents external environment and values demonstrate culture inside an organisation.
Since corporations are moral actors and have appetites, generous lending in 1990s and early 2000 make sense when cheap money was a compelling external factor which fueled material appetite of mortgage lenders on the back of voracious demand for housing, indeed Americans dream. But what about the values of moral actors? Did rebel business deals obsessive with hunger for money put ‘values’ aside since values regulate corporate appetite like humans? It simply reveals absence of a disciplined culture. Culture of discipline and opportunism can never walk together. Tenacity of values is the oxygen of a disciplined culture. In the sub-prime case, lending to someone who doesn’t satisfy credit criteria is a crystal failure to exercise a moderate balance between external environment (housing demand on the back of low interest rates) and lenders values (quality lending). The inherited factor of risk in business decisions should not be mixed with sub-prime lending. It is rather a ‘fair-risk’ which determines the right balance and it virtually comes from fanatic adherence to values. Corporate monsters bring economic disaster when their decisions say goodbye to the values as they brought sub-prime. Let’s be specific and see the core values of the Countrywide Financial Corporation. People, Passion and Principles stand out to be core values of the biggest sub-prime lender. Wasn’t sub-prime lending a rebel deal with its values since ‘responsible business practices’ and ‘do- the- right thing’ approach to all business decisions was flagged as one of Countrywide’s core values called Principles?
The bottom line of the entire but brief discussion is that a corporations’ appetite can only be controlled through strict adherence to values which are critical in maintaining a right balance between the external and internal environment in making business decisions. As long as corporate lending institutions would stick to earn money with values, we may hope to be safe from another sub-prime crisis.

The writer works in the financial sector