Using Crisis Innovation, Strategy and Technology for Tomorrow’s Challenges
By Mark P. Dangelo
J.P. Morgan once stated, “No problem can be solved until it is reduced to some simple form. The changing of a vague difficulty into a specific, concrete form is a very essential element in thinking.” As he also noted and practiced, sustainable change rarely happens during periods of economic comfort.
So as markets, investors, politicians, and homeowners seek answers in a “simple form,” those practitioners within the discipline of crisis innovation are challenging, “Are we really asking the right questions for tomorrow’s problems in the face of trillions at risk?” As others have noted since J.P. Morgan’s time, just because the answer is simple does not mean it addresses the core issues.
Whereas innovation within the business markets has become a cliché, crisis innovation deals with non-traditional approaches implicitly demanded during times of great stress and uncertainty. Simply put, they question organizational “truths.” As you can imagine, their positions, strategies, and expert opinions have not been popular – until recently. The markets have ensured that crisis innovation is no longer esoteric or academic.
Along these lines, during times of prosperity crisis innovators and their approaches appear detached from reality. In business terms, they are “outdistancing” their markets and buyers. Their “radical,” complex approaches now are being reexamined under the growing weight of huge, multi-year industry and individual failures.
In an effort to stitch together new, innovative strategies, I asked retired Colonel John Warden, acclaimed master planner of Desert Storm and now CEO of Venturist, his insights on financial markets, risks, success, and strategy. “There are many factors which contribute to the real success or failure of any political, military, business, or personal enterprise. If the strategy is not good enough, the intelligence of the participants, the brilliance of the tools or weapons employed, and the prowess of execution will be to no avail for it is strategy that integrates all three to enable success. Without strategy, an organization is dependent on luck or genius–both of which are statistically unlikely and utterly undependable to be available when needed.”
As we will discuss later in this article, 21st Century crisis innovators are looking beyond archaic limitations today – in particular, innovators are seeking new methods to repurpose toxic assets, while creating a new securitization paradigm. But first, perhaps crisis innovators’ unorthodox questions make more sense during times of calamity? Foundationally, do organizations have the crisis leadership skills and insights necessary to deal with a 100-year event?
A Legacy of Distress
Where we often hear about the dire state of the domestic economy, the housing crisis, and the consumer sentiments, let’s set a holistic baseline on why this legacy of distress has provided a mandate for crisis innovators and the strategic and tactical solution sets that must be implemented.
Since the early 1990’s innovation for much of the financial and mortgage markets has been about gaining efficiencies. Striving for lower costs and greater throughput, the value chain of players (i.e., originators, servicers, aggregators, outsourcers, investors, and Wall Street firms) concentrated on lending, registration, standards, and fraud prevention actions. The process chains were a one-way pipeline that served the market needs during times of unprecedented euphoria and easy credit. Some argue that was financial innovation. Others believe that efficiency gains were merely incremental process improvement. Still more now believe it was an “innovative” recipe for failure and crime.
This legacy debate aside, the industry for years was concentrated on delivering solutions primarily around a common question or theme, “how can we improve the volume of lending to consumers to gain greater market breadth, wallet share, and profits?” In July 2007, just before the MBS / CMBS markets catastrophically fractured, a boasting of these “innovative” ideals were echoed by former CitiGroup CEO Chuck Prince – “we’re still dancing.” 20 months later, a U.S. Federal government injection of a trillion dollars, $2 trillion yet to be recognized and written down, loan programs and collateral exceeding $3 trillion, and a global wealth loss exceeding $40 trillion, those “innovative” financial products now resemble a terminal cancer.
Moreover, private securitization has virtually halted, the GSE’s are under conservatorship and demanding billions to stay afloat, 10 million homes are at risk of delinquency, millions more are in trouble, and hundreds of thousands are in active foreclosure. Consumer debt now exceeds $13 trillion or roughly the equivalent of the national U.S. GDP – a situation that last occurred during the Great Depression. Now let’s add insult to injury. Additional data from the government projects that if unemployment reaches 8% by mid 2009 coupled with declining home valuations, up to 35% of all homeowner’s may possess negative home equity (aka “upside down” loans). As of now, the national federal loan rescue plan looks like only a down payment on a broad and sustained rebalancing.
If there was a time for crisis innovation and new innovative leadership, the time would be now. So what can be done? What approaches should be undertaken? Are there any strategies or technology solutions that provide better efficacy as we rebuild a financial structure and stability from the ashes?
“To achieve system change, it is necessary to change a number of centers of gravity as operations against just one or two will rarely be effective,” states John Warden. “Contrary to popular wisdom, time is always the enemy of enterprise. It may take a long time to accomplish something but the longer the time from inception to completion, the lower the probability of success. For a high probability of success, parallel, time-compressed operations against multiple system centers of gravity are a necessity. As operations move from parallel to serial, the probabilities of success falls rapidly while the cost of operations mounts dramatically.”
Hitting the Reset Button
“One might ask, ‘How can highly paid business and government leaders with blue-chip business degrees create such a mess,’” said Michael Brooks, President of Checkmate Advisors and acclaimed business analytics and causality expert. “The more important question is, ‘Can we trust that they have what it takes to create the mess that they’ve made?’”
Crisis innovators and their pragmatic methods look beyond historical limitations and thought processes. Nearly 100 years ago J.P. Morgan said it best, “I don’t want a lawyer to tell me what I cannot do. I hire him to tell how to do what I want to do.” In fact, as in most cases today, taking the serious legal drawbacks away from potential discussions there are historic paradigm leaps that may be achieved.
We all know there are trillions in “toxic assets” still hidden in the balance sheets of many, many financial and non-financial institutions. We also know that these assets are not only thinly traded, but often lack robust documentation. Representing an “out-of-the-box” idea, a 21st century crisis innovator was seeking a new solution to the burgeoning toxic debt hangover enveloping global markets. Arguably “hitting the reset button” for crisis innovation sometimes leads to reassembling the best of ideas, organizations, and individuals in new and unique ways.
Ignoring “conventional” wisdom and domestic industry editors who ridiculed European debt instruments, he proposed a solution set using July 2008 Treasury and FDIC sanctioned debt into a value framework for the repurposing of existing assets. The end solutions, trustees, and governance structures weren’t common practice, but that didn’t mean it couldn’t gain robust domestic support in the future.
Thinking further, the 21st century innovator began aligning the multitude of needs and values of the non-for-profits, thinly traded or illiquid MBS markets, lenders, servicers, and investors. He openly proposed combining old non-performing tranches with modified and new loans, thereby properly assessing the risks, while instituting a “cover pool” for future non-performance. Bottom line, he proposed using the best value from each process participant and creating an acknowledged set of new asset classes that is higher rated (as compared to the old ones) and potentially has implicit government downside guarantees.
Taxpayers (aka Treasury and the Fed) would provide downside support in a similar fashion already developed for several banks. Private investors would benefit from upside and counterparty risk transparency along with instrument security. Lenders would be able to reinstate these assets into performing tiers, thereby freeing funds and paying back the government. Technologist and vendors would provide the “glue,” analytics, and dashboards needed for delivery. Securitization markets would again be more than GSE based. Private money would prime the pump of investment – controlled investment.
Like J.P. Morgan, this 21st Century crisis manager sought the simpler solution from those options that were already available. He thought, unlike many existing managers, “Since the rules of engagement no longer apply, why can’t I reassemble the best of the legacy pieces into something new?” He further mused, “If the government, associations, and lenders are seeking changes, why not address market, public, and regulatory heartburn with a positive twist on a known approach that already accounts for $3 trillion in worldwide debt?”
The above example is currently just that – an idea that has yet to gain acceptance as it runs counter to existing dogma and standing regulations. However, with vast changes are already in play, why not use a crisis innovation to achieve a new positive reality? If the worlds’ governments are rewriting the rules in an effort to remake the financial markets, why can’t a “simpler” solution be part of the reset efforts?
Mr. Warden concludes his belief on why crisis innovation is important during period of survival and great upheaval. “Every strategic endeavor will either fail in some manner, or less likely, succeed. In either case, survival and prosperity demand exiting the current strategy. In the case of success, it means moving on to a new endeavor that is appropriate for the next time increment whereas in the more likely event of failure, it means abandoning a strategy that is not working while there are still resources available to try something else. In many ways, end games and exiting are the most difficult parts of strategy; people don’t like to change and they don’t like to admit error so their tendency is to stick with something long past the point where doing so makes any sense at all.”
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For those who know my strategy and work, my ideals cannot be confused with those who represent the current “establishments.” My approaches seldom reflect conventional thinking or shackles of the “ordained” pundits. Unlike many within and around the industry, I hope I have demonstrated that crisis innovators don’t get their cues from talk radio shows or the limitations within struggling vendors and enterprises. You see, it is not singularly about principles, it is about sustainable survival. The slogans, analogies, methods, and the dogma that were promoted are dead or dying. We, collectively as a series of interrelated disciplines and experts, need to make sure that we are not part of the decay littering the landscape.
It should be clearly understood for strategy, process, and technology that crisis innovation is very uncomfortable for established organizations secure in “the way it has always been done.” However, survival and prosperity no longer reside in the minds and actions of a privilege few. The dawn of the crisis innovator is upon the worldwide economies and underpinned technology infrastructures. How will you innovate, and who, by name, are your crisis innovators within and outside of your organization?