Connecting the Dots

The failure of IndyMac did not happen last week, but merely culminated. The failure occurred over the past several years as the management of the company abdicated its responsibility to appropriately manage risk in ways that are consistent with a federally insured banking institution. This was no surprise to those of us that thought the institution was being operated more like a mortgage brokerage than a bank. In fact, in the case of both Countrywide and IndyMac the companies were founded as mortgage companies and eventually they both added banks. Unfortunately, the management of those companies was not adapted or was not capable of operating a sustainable financial institution.

Most wise people know that they should not buy something they can’t afford. How is it that sophisticated managers of a financial institution are unable to discern that they ought not to lend money to people to buy houses they can’t afford? Having spent the majority of my career in managing risk, specifically by making the right lending decisions, I cannot begin to fathom how one of the basic tenets of lending, the capacity to pay back, could be ignored. Yet greed and arrogance never surprise me in their capacity to blind.

Unfortunately, the media through its ability and need to provide sensationalism to issues will speculate that the problems found at IndyMac, or that occurred at Countrywide, are wide spread. I happen to know they are not. Most banking institutions are well managed and capitalized. Most of the leadership in those organizations manage their institutions to avoid undue risk. Most of the management is seasoned and recall the lessons learned from the last crisis. But, don’t take my word for it, as you can look up the current condition of any FDIC insured financial institution through the web site FDIC.gov.

I am very proud of our bank. But, the strength of our institution is not accidental. For the past 10 years I, and the rest of our executive team, have managed the bank with a full appreciation of the responsibilities and burdens that come along with being the caretaker of depositors’ money and the faith of the federal government’s insurance. This is no light responsibility. It requires a continual vigilance to properly evaluate and assess risk. When that risk cannot be justified, you simply do not go forward, as was the case with Sub-prime or high risk mortgage lending.

This cycle will eventually pass. The mistakes that preceded it will be analyzed and preventative measures will be codified to avoid the same errors in the future. The banking industry will be made stronger, as it was in the period that followed each previous crisis. Good banks will always be good banks. Good management will always be good management. And, unfortunately, greed and arrogance will always continue to find a way to create problems.