Think Customers: The 1to1 Blog

The Democrats blame Republican-style deregulation, while the Republicans blame the Democrats' coddling of Fannie Mae and Freddie Mac. The truth is that no one is totally at fault - not even those greedy merchants of avarice on Wall Street - while everyone shares some of the responsibility, including politicians on both sides of the aisle. (My own opinion isn't germane to this posting, but if you want to see what I think about the political wrangling, you can click here.

Whatever the spark was that set it off, the fuel feeding this economic conflagration has come in the form of billions of dollars' worth of low-quality mortgages now at risk of default.

And it was a very familiar business impulse - the desire to generate short-term results, no matter what the long-term cost - that led to this over-supply of "toxic assets" now clogging our credit markets. Many mortgage lenders were so focused on booking the revenue from loan transaction fees that they paid little attention to the true risk of default. Some lenders actually encouraged borrowers to take on more mortgage than they could afford. Below-market introductory interest rates were a classic mechanism for what, in other industries, could probably be called "bait and switch."

This scenario was complicated by the fact that most mortgage lenders didn't actually assume final responsibility for collecting on the loans they made, but instead bundled these mortgages up into big packages (mortgage-backed securities), and sold them off to other investors, who were then on the hook if default actually occurred.

I'm sorry, but I feel like I've been here before. "It's déjà vu all over again," to quote Yogi Berra. Lenders were booking transaction fees without regard to their borrowers' long-term value or risk, in an effort to put as much short-term revenue on the books each quarter as possible. In a frenzy to sell sell sell, these transaction-hungry lenders offloaded a bunch of inappropriate products onto thousands of anonymous customers. Why? Because they could, that's why. Because the bonuses paid to company executives were almost certainly tied to the volume of loan transactions, and not to the value of the borrowers themselves, or to any back-end measurement of default rates.

The result: We now have a serious financial problem caused largely by short-termism, which is far and away the single most destructive business impulse today.

In the mobile telecom business, short-termism results in carriers scrambling so hard to acquire new customers that they substantially impair their customers' average lifetime values, and the result is they often destroy more in customer equity than they gain in new business. In the automotive industry, short-termism prompts companies to prop up quarterly sales by offering incredibly big discounts on new car models, even though they are largely cannibalizing future sales by doing so, and the result is that their long-term prospects dim even further, while their brands take a beating. In the mortgage lending business, the transaction fee from a bad loan generates just as much current revenue as a good one, but the result is a global financial crisis.

Don't let your own business get caught up in this crisis of short-termism. Break the cycle. Beat the crisis. Read our book: Rules to Break & Laws to Follow: How Your Business Can Beat the Crisis of Short-Termism.