The question, "When will they ever learn?" -- asked musically by Pete Seeger in his folk classic, "Where Have All the Flowers Gone?" -- has been running through my head in recent weeks as I've tried to understand the mushrooming sub-prime mortgage lending crisis. Here we go again in the financial services industry with another cycle of poor decision-making and management actions, economic fallout, media and political reaction, corporate contrition, stricter regulation, and operational reassessment. Not unlike the sequence of events in the post-Enron/Tyco/WorldCom years (and the S&L and third-world loans debacles before that), the sub-prime crisis surely will get a lot bigger and more damaging before the dust finally settles.
A growing number of financial institutions -- not just lenders, banks and investment organizations, but insurance company investment units and carriers that offer D&O and E&O coverage, not to mention mortgage insurance -- will be sucked into the whirlpool of losses, stock declines and lawsuits. We're already seeing that some of these players won't survive -- and those that do probably will resort to layoffs and restructurings to make up for poor performance. Then there are retailers, such as Wal-Mart and Home Depot, whose sales are being hurt by the housing slump and related mortgage problems. And, of course, the individuals who lose their homes because they can't pay their mortgages will suffer tremendous financial and emotional devastation.
Just as Enron and WorldCom begat Sarbanes-Oxley, there will be new or at least more-restrictive regulations aimed at preventing this kind of economic meltdown from occurring again. And just as SOX inspired a marketing frenzy of compliance- and risk management-related technology solutions, there also will be an onslaught of software that promises to help financial institutions do a better job of analyzing and managing credit risks.
I'm already starting to get the press releases -- and I'm wondering, "What's the point?" These kinds of solutions aren't new or particularly bleeding-edge. Lenders and investors already have the tech-enabled abilities to assess risks, get comprehensive views of the financial status of customers and automate manual processes. It wasn't a lack of technology that led to the sub-prime crisis; it was a lack of perspective and good judgment -- and an inability to say, "No."
Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio