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Covey on Trust

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I am remiss in reviewing Steven MR Covey’s The Speed of Trust: the One Thing that Changes Everything. 
Remiss because it came out over a year ago, because the book (and associated events) has been quite a success—and because it deserves that success.

The book itself is organized according to “waves”—from self-trust, to relationship trust, then on to organizational, market and societal trust (at this last level, it echoes  Francis Fukuyama’s seminal work, Trust, from a decade earlier, subtitled "the social virtues and the creation of prosperity.")

Covey’s section on self-trust—what I would call the realm of “personal trust”—centers around credibility, which he suggests consists of integrity, intent, capabilities and results.  This covers territory similar to my own (with Maister and Galford) in The Trusted Advisor:  (credibility + reliability + intimacy, all divided by self-orientation), except for his inclusion of integrity.

His linking of integrity and credibility remind me of another interesting piece of work—Integrity: a Positive Model…, by Michael Jensen and Werner Erhard.  Both take an end-run around “ethics” toward a more practical approach which still yields similar results without the whiff of theology.

But while Covey is theoretically sound, his real focus is on the practical, as befits someone who ran his father’s highly successful business (as in  Seven Habits of Highly Successful People).

Most of the book, and I suspect most of his lectures and seminars, are aimed at corporate audiences—in particular, what people can do to become more trusted. He lists 13 behaviors, all of which make perfect commonsense (which is not to say they are common): listen first, talk straight, meet commitments, etc.

It goes without saying—though I’ll say it—I couldn’t agree more with him.

I think Covey’s greatest contribution, however, may lie in his forcefully advancing the simple proposition that Trust Matters.  In one of his emails promoting a webinar, he rhetorically asks, “Is Trust more important than Vision? Strategy? Systems? Structure? Skills?” and proceeds to answer in the affirmative.

Linked with some effective framing (don’t pay a trust tax, earn a trust dividend), he makes a case that business hasn’t heard often enough: trust pays off, not just in some mufty-flufty New Age calculus (though that’s true too), but as well in the conventional, traditional business language of ROI, efficiency and effectiveness.

I have some minor quibbles—his emphasis on measurement, for example—but they are not critical to his contribution.  It’s a fine piece of work that moves forward our understanding and appreciation of the critical role of trust, particularly in business.

Selling in Three-Part Harmony

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I am fascinated by sales.

The sale is the point at which the personal meets the commercial. How we view the personal / commercial relationship informs how we look at business in general.

So it’s instructive to read those who write on sales. The reigning sales author of our time has to be Jeffrey Gitomer. As of this writing, on Amazon’s best-seller list of Sales and Selling, he has books at the numbers 5, 9, 13, and 17 slots.

Popularity doesn’t necessarily mean quality, nor does quality guarantee best-seller status.  But both hold true in Gitomer’s case.

Some sales people write about sales process, management and strategy. Gitomer is an unabashed throwback to the “old” sales gurus—he speaks to the individual who sells. He speaks about the intersection between the commercial and the personal.

Here’s an excerpt from his new Little Platinum Book of Cha-Ching!

I’m certain you have seen or heard the information about “typing” people. Driver, amiable, creative, whatever. And then you’re told ways of manipulating what you do or say to be able to communicate with them.

Go back to the Dale Carnegie book How to Win Friends and Influence People, and you’ll see the two words that explain harmony: “Be yourself.”

Selling is about understanding the other person. Each person has different motives to buy based on personality and needs. Salespeople cannot give the same presentation all the time. You’ve got to adapt the presentation to meet the needs and the personality of the potential customer without compromising your standards or altering your personality to a point where you have to remember the way you acted or spoke.

I’m against systems of selling. They teach you a way, usually a manipulative way. And you gotta use that way. The problem is the probable purchaser may not want to buy that way. Which way do you sell?

Why people buy is ONE BILLION times more powerful than how to sell…

Harmony is understanding, sensing the tone and comfort level of the customer, and using your character skills and interpersonal skills to harmonize. Your job is to take the characteristics of the probable purchaser and blend them with the reason they are buying so that it motivates them to act and gives them enough confidence to buy.

THINK! about harmony in music. Your notes blend with other notes to create harmony.

Think of it the same way in sales. Think of it the same way in business.

If Gitomer is in your town (and he will be), treat yourself to a ticket to one of his seminars.  He’s a showman.  His schtick is a working-class, red Staples-type sweatshirt gruff cigar-chomping straight talking regular guy. The last guy to get all philosophical on you. But he does get philosophical on you; he just does it in the vernacular.  (He is a regular guy—and regular like a fox).

Gitomer’s view is clear. Business is personal. It is not just about systems and forces and corporate battles.  It necessarily involves people relating to people—as full people, not just as cogitating neurons.

And his metaphor is powerful. Business as music. In particular, the harmonic element of music; the element that speaks to collaboration. Business in his view is inherently about collaboration, interaction—not a series of parallel solos.

Think of business as commerce—a relationship that is either competitive or collaborative.

It’s up to the seller, more than anyone else, to choose which it shall be.

Trust with the Ex: Taking Insanity Out of Divorce

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A good rule of thumb if you’re going through a divorce: at this time, every thought and instinct you have is wrong.

Most divorces I know of are breeding grounds for resentment and bad behavior. The desire for revenge overwhelms most decent and sensible instincts.

There are two reasons divorce so often turns out this way: human nature, and legal nature.

Our baser natures, I think, are focused on self-preservation—including psychologically. That means we react from fear—never a good thing. And nothing hurts like the one who said “I do” saying “I don’t.”

Lawyers operate in a profession where there is no concept of truth—there is only evidence. And marriage—being a civil contract—has grown to be subject to the usual legal framework—opposing interests, plaintiffs and defendants. Husband meets wife in a court of law, to determine a winner and loser. A worse formula for amicable separation is hard to imagine.

Some argue this is fine: it is in society’s interest for it to be difficult to divorce. Maybe—but when you’re the individual, it doesn’t feel good taking a bullet “for society.”

Paradoxically, divorces—if navigated well—can be enormous opportunities for personal growth. To retain one’s self-worth, to choose the long-term over the short, to remain magnanimous under stress, and to choose compassion over revenge—these are all higher-order acts.

Some initiatives within the legal profession move in a more human direction—in particular, mediation and collaborative divorce. In Keen Interest in Gentler Ways to Divorce, AP reporter David Crary lays out the case.

Both mediation and collaborative divorce are far cheaper, for one thing:

[The Boston Collaborative] analyzed 199 of its recent divorce cases, and found that mediation, collaborative divorce and litigation all produced high rates of successful settlement. Mediation was by far the least expensive option, with a median cost of $6,600, compared to $19,723 for a collaborative divorce, $26,830 for settlements negotiated by rival lawyers, and $77,746 for full-scale litigation.

It also gives lawyers a way out of a nasty business:

Most of us had that moment where we realize the adversarial process is so damaging for our clients — and there’s a recognition that we can do better," said Talia Katz, a former divorce lawyer who is executive director of the International Academy of Collaborative Professionals.

The forces of Good also seem to be winning a few rounds:

Supporters of collaborative law were dismayed last February, when the Colorado Bar Association declared such arrangements unethical on grounds that they prevented a lawyer from exercising undivided loyalty to a client. But in August, the American Bar Association’s Ethics Committee weighed in, endorsing the collaborative process as long as clients were fully informed about its provisions.

People have written that divorce is bad for children; I think it’s the typical divorce that is bad for children. A mediated or collaborative divorce offers the possibility of continued respect between mother and father, thereby not confusing their children for life.

I’ve written elsewhere (Trust in Business: the Core Concepts) that trust can be deconstructed into four components. The most powerful of them is a low level of self-orientation of the one who would be trusted.

I can think of few things that drive us more toward self-orientation, and therefore untrustworthy behavior, than the whirlpool of divorce—as usually practiced.

Sometimes Spouse A suggests collaborative or mediated divorce; yet because of resentment, low trust, etc., Spouse B rejects the opportunity—precisely because it was suggested by Spouse A. Little do they know how much that first sip of poison will infect the rest of their lives.

If you know someone who’s getting divorced, urge them—strongly—to read up on mediated or collaborative divorce.

If you’re getting divorced, and your spouse has suggested it—thank your stars that the one you used to be in love with still has enough respect for your marriage to consider ending it decently.

If you’re the one in a position to initiate it, do yourself and everyone else a huge favor. Mediate, collaborate—don’t litigate.

 

 

European Fish, the Commons, and Business

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The sea and its denizens have long been fertile subjects for myth and metaphor. That tradition continues in The Economist, December 15-21, “A Fishy Tale”.

Excerpts:

The [EC’s] Court of Auditors recently found that the European Union’s Common Fisheries Policy does not work…A survey found 81% of fish stocks to be dangerously over-exploited.

…the commission proposes quotas that are larger than those recommended by its scientific advisers. National ministers then expand the quotas once again [by about 50%]. And then national fishing fleets break even these higher quotas.

To most Eurocrats, the problem is selfish national interests, and the solution is tougher EU-wide controls…but if countries parceled out the fish among themselves there would be none left, says one official…some fishermen quietly discard lots of fish so as to pack their holds only with the most valuable.

Many fishermen cheat because they believe the scientists are wrong, or because everyone else is, or because they cannot make a living otherwise.

And so it goes.

Economists know this as “the tragedy of the commons,” based on the problem a few centuries ago of sheep overgrazing the town lands held in common. The problem is that people’s individual search for economic self-interest ends up, paradoxically, destroying everyone’s self-interest.

The airline industry knows this dilemma well. Any given airline on any given route is incented to have a plurality of available-seat-miles. This leads to endemic over-capacity, hence lower profitability for all. The only sure-fire route to airline profitability is not clever marketing, a la Southwest Airlines—it’s domination of routes, something Southwest also knows a thing or two about.

But back to fish. Issues of the commons show up first in government, later in business, because government by default gets the un-economic propositions. But the issues are increasingly not unique to government.

The business world has its own version of the commons. When every company seeks to gain sustainable competitive advantage, maximizing its own shareholder value, driving that logic into every transaction, you end up with systemic suboptimal results.

Example: mortgages. In the old days, savings banks held the loans, lived in the community, knew the borrowers; the borrowers kept the house, and kept the mortgage company. Inefficient, yes; but the common interest was enforced.

Today, we got efficiency—but at the cost of a common interest. The players in the subprime mortgage game ended up just like Portugal, Britain and Poland duking it out over declining fish stocks. The only losers were the fish. Until the fish disappear.

Business is diving headlong into certain practices—the slicing and dicing of business processes, the slicing and dicing of securities into finer and finer tranches of ownership, the rapidly diminishing time of ownership, and the establishment of myriad markets where ownership and time can be freely exchanged.

Lots of markets, lots of efficiency—and very little overlap of the common good.

The ideology of competitive separateness is precisely the wrong ideology in a world of increasing interdependence.
Ironically, since the “commons” problems first show up in government, it is government that must provide examples for business to follow—yet we are saddled with an ideological bias that says business has nothing to learn from government, only the reverse.

The Economist’s conclusion about fish is as right as it is predictable: Europe needs to “ponder the example of one of the EU’s few uncontested triumphs, the single market, and apply its lessons to the seas. That would be rational. It might even be good for the fish.”

And for business at large. It’s difficult to believe that a global economy built on the theory of sustainable competitive advantage is going to solve the energy problem. Or the health care problem. Or the immigration problem. Or the trade problem.

We need an ideology of trust. A set of beliefs that link, rather than divide.

Destroying Shareholder Value: One Quarter, One Customer at a Time

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I spoke with a mid-level consultant at a medium-large American consulting firm. His project had an overrun. Question was, how to handle it.

Me: How big an overrun?

Him: $80K—a 50% overrun.

Me: A big percent, but not a big dollar number. Tell me about the client.

Him: Medium sized for us; decent relationship; we do 5-6 projects a year with them.

Me: What do you each say?

Him: They agree they signed a contract saying they were responsible for the disputed work. We thought their interpretation was wrong. We ended up doing the work, but disagree about who’s responsible.

Me: Of the $80K, how much would they agree is their fault?

Him: Maybe $20K of the $80K.

Me: And you?

Him: We think $70K of the $80K.

Me: That is a mere $50K issue. You’re a big company, this is a good client relationship—$50K is chump change.
Why don’t you go to them and say, ‘Look, we value this relationship. There is an $80K overrun here; why don’t you pick the number between $0 and $80K that you think is most fair, and we will pay it.’ Give them total choice. Let their choice reveal their character and their intent, and show good faith on your part. Work the relationship, not the negotiation.

Him: Well, they might take advantage of us.

Me: Of course they could. And if they do, you’ll know if these are people worth trusting in the long haul, or whether henceforth you get tighter controls and/or give this client over to a competitor. Do you want a relationship, or a petty quarrel? How much do you think they would offer?

Him: I’d guess they’d offer us maybe $40K. And I think what you say is the right thing to do. But my [service offering] leadership team won’t go for it.

Me: Why not?

Him: They think we deserve more, and they can get most of it by holding out.

Me: For how much?

Him: They think they can get $70K.

Me: You realize, that is only $30K of difference between the two of you.

Him: Yes, but they are really under pressure to make their profit bogeys. There’s really nothing I can do.

If you’re not sickened by this dialogue, let me break it down.

It sounds like a bad divorce settlement. Two large firms wasting time and creating bad blood—over $30K. A true imbalance.

But it’s worse.

This was probably a good relationship.  Let’s assume it might have generated five projects a year for 8 years going forward. Further, that benefits to the client would have increased as the consultants gained more familiarity and expertise over the years.

Suppose that amounts to a present value of, say, $10M in fees.

Assume that the bad blood generated results in lower trust—more haggling over fees, lower fees, more competitive bidding, more audits, more skepticism over advice—all resulting in, say, 30% reduction in the present value of expected fees.

That’s $3M reduction in present value. For $30K on a quarterly P&L.

Many think it doesn’t matter because it doesn’t hit the P&L. It’s true that FASB rules don’t book present value, at least not through the income statement.

But it is real. The eagle eyes on Wall Street know very well how to discount future streams. Private equity firms know the value of customer retention rates.

In other words, the financial metrics that matter most—those of the market, not of the accounting books—do know the cost of this firm’s decision.

You may think the young manager is at fault for not standing up for what he knew was right. Or, you may think his bosses are to blame.

I think the real culprit is endemic bad business thinking. Business thinking that mindlessly focuses on short-term metrics of short-term behavior, linking the two by short-term incentives. The solution doesn’t lie in more short-term thinking ("I know, let’s analyze imputed market discounts and allocate them across quarterly bonus pools for each decision!").

The resulting behavior is value destruction by any sensible definition. Bad business. They call it financial management. It is anything but.

Yet this way of thinking, as anyone in the corporate world knows, is the rule, not the exception. Anyone who believes in perfect market theory need only look at daily management behaviors to find their disproof; everywhere managers behaving in ways that destroy value. Believing that they’re creating it.

Bad thinking.

Trust and Corporate Change

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Close your eyes and make a mental list of models for corporate change.

There are models of “what is needed.” One such model posits three needs: pressure, vision and first steps.

There are models of “types of change.”  For example, linking participative management to incremental change, and directive leadership to transformative change.

There are models of tools to leverage for change: a favorite of mine is People, Structure, Systems, Culture.

There are "how to" models.  One  emphasizes leadership; another, vision or intent; a third, alignment.

Then there are descriptive models—they use OD frameworks, or industrial economic models, to classify and distinguish types, levels and genres of corporate change.

But you don’t hear much about linking trust to corporate change. Nor is corporate change the first thing most of us think of when we think of trust in business.

Which is curious, because the presence or absence of trust within an organization can greatly affect a company’s ability to change.

Let’s say you need to make an acquisition; or enter a new business; or up your growth rate by four percentage points. How would a low-trust organization go about it?  How would a high-trust organization go about it?

Low-trust organizations are typically run on the basis of either consensus, fear, or contracts. All three have their problems.

—Consensus-based organizations can be very thorough, but slow to adapt—since trust doesn’t exist between parties, it has to get re-created by consensus each time.   If fast change is required, that’s a drawback.

—Fear-based organizations can be efficient at implementing change, but there is a big burden on the few fear-drivers to be right—they are deprived of the value of direct input from others, who fear them. The more complex and fast the change, the greater the risk of the leader getting it wrong.

—Contract-based organizations substitute a market in place of consensus. For any given transaction it may be more efficient than consensus.  But there get to be an awful lot of contracts and transactions made, all of which require time and people to track them.  It’s an expensive model to maintain, and even more expensive to tweak.

Then there are trust-based organizations. In such an organization, if your partner says he’ll do something, that’s it.  You don’t need a consensus session. You just trust he’ll do it. And your partner  will do what he said, because that’s how you get to be trusted.

You also tend to trust your partners’ judgment—because you trust they will tell you if they don’t know something. You take their word at face value.

Unlike a fear-based organization, you trust that you partners will raise issues that need raising; and they won’t raise issues not worth it.

Best of all—unlike a market-based organization, you trust that everything your partners think and do will have your interests at heart for the long run; they will not be distracted by the short-term transactional commissions, bonus points or other "incentive" schemes based on the improvement of an individual’s own short-term self-interest.

In such organizations, you don’t need nearly as many contracts to make sure your partner will do what he says. You don’t need so many measurement systems to track and distribute agreed-upon incentives and outcomes.  And the whole organization is not hostage to the judgment of a few people.

Which kind of organization will most easily change on a dime, and get it right? The answer is pretty clear.

Trust pays off when it’s time to change.

 

Digital and Analogue Social Networks and Pharma

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Here are two big trends in marketing:

Trend 1. Companies organize programs around the customer. This is often called customer-centricity.

Trend 2. Customers are in charge of interactions. This also gets called customer-centricity.

When two phenomena get called by the same name—opportunities for merriment—and suffering—ensue.

Case 1—the occasionally obtuse but always interesting Harvard Business School Working Knowledge series.  In Authenticity over Exaggeration: The New Rule in Advertising,  Julia Hannah explores HBS professor John Deighton and Leora Kornfeld’s "Digital Interactivity: Unanticipated Consequences for Markets, Marketing, and Consumers."  An extract:

5 new rules of digital interactivity:

• Thought tracing. Firms infer states of mind from the content of a Web search and serve up relevant advertising; a market born of search terms develops.

• Ubiquitous connectivity. As people become increasingly "plugged in" through cell phones and other devices, marketing opportunities become more frequent as well—and technology develops to protect users from unwanted intrusions. A market in access and identity results.

• Property exchanges. As with Napster, Craigslist, and eBay, people participate in the anonymous exchange of goods and services. Firms compete with these exchanges, and a market in service, reputation, and reliability develops.

• Social exchanges. People build identities in virtual communities like Korea’s Cyworld (90 percent of Koreans in their 20s are members). Firms may then sponsor or co-opt communities. A market in community develops that competes on functionality and status.

• Cultural exchanges. While advertising has always been part of popular culture, technology has increased the rate of exchange and competition for buzz. In addition to Dove’s campaign, Deighton cites BMW’s initiative to hire Hollywood directors and actors to create short, Web-only films featuring BMWs. In the summer of 2001, the company recorded 9 million downloads.

These 5 aspects show increasing levels of effective engagement in creating social meaning and identity, Deighton suggests, noting that the first 2 (thought tracing and ubiquitous connectivity) change the rules of marketing but don’t alter the traditional paradigm of predator and prey.

In the last 3 (property, social, and cultural exchanges), the marketer has to become someone who is invited into the exchange or is even pursued (as in the case of the BMW films) as an entity possessing cultural capital.

Exactly.

This is Trend 2 type customer-centricity–-recognizing that the consumer is actually in charge.  It means moving away from a “predator and prey” model of control and one-way monologue, to a genuinely interactive two-way model of dialogue.  In this model, the role of centralized control drops drastically, because the marketer and customer collaborate—even blend.

Hmmm.  D’ya think that model might work in the analogue world too?

Case 2. Pharma Voice Magazine, The Forum for the Industry Executive: The Salesforce of the Future  quoting Bill Pollock, CEO of Pharmagistics:  An excerpt:

In the future [of pharma], salesforces will be much more focused, and they will have the ability to look at each touch point, determine what’s the most effective way of communicating with a practitioner, and do so in a personalized way.

As a result, marketers will have to integrate their sales and marketing efforts into everything they do, treating each and every touch point as part of their total sales and marketing mix. This includes their e-portals, inside telesales efforts, Internet-based virtual sales reps, literature, and direct-mail programs—all of these tactics will be considered a part of the entire salesforce effort and must be integrated via the entire marketing program.

Such a trend would mean that pharma companies will need the ability to track everything that is done and monitor the impact of their efforts on their prescribing customers.

This is Trend 1 type customer-centricity.  It retains the predator-prey model and focuses on making sure all the guns are pointed in the right direction—at the customer.  The problem is perceived as one of alignment and control.  The new world isn’t qualitatively different, this model says, just quantitatively more complex.  It retains the focus on centralized control because it’s still an us-vs.-them view of the world.   It is restricted to the first two levels in the HBS piece—there is no conception of becoming "someone who is invited into the exchange or is even pursued…" much less of becoming "an entity possessing cultural capital."   This kind of  "customer-centricity" is not collaborative.  It is customer-centric  in the way a vulture is customer-centric—laser-focused on its prey.

The confusion around the term “customer-centric” isn’t just a matter of definition or market power.  Marketing is only one  battlefield in a much larger contest between a network-driven commerce-based view of the world and a command-and-control-driven competition-based view of the world.

Life imitates art.  Sometimes we learn more about the analogue world by observing pale avatars in the digital realm.
 

How To Get Your Industry Regulated, in 6 Easy Lessons

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On November 15, the US House of Representatives passed HR 3915, known as the Mortgage Reform and Anti-predatory Lending Act of 2007, mainly along party lines.

Led by Barney Frank, the impetus for this legislation was the disastrous subprime lending meltdown, whose implications are looking worse every day—right up to today, December 6, 2007.

To hear the mortgage industry tell it, this legislation is a classic big-government socialist disaster in the making. The Heritage Foundation says it will “put individuals of moderate incomes, imperfect credit histories, and limited wealth at an even greater disadvantage, leading to a decline in the home ownership rate,” and if they say that’s a bad thing, then of course it must be so.

A typical letter in the Originator Times, a mortgage broker publication, predicts “this [legislation] will cripple the economy and the livelihoods of thousands of people in this industry.” Brokers, that is; never mind the homebuyers.

Aubrey Clark, of Lendfast.com, says, “Lawmakers attempting to pass the Anti-predatory Lending Act of 2007 right now are effectively trying to tell lenders whom they can and can’t loan money. HR 3915 is vaguely written and enables borrowers to sue their lenders for giving them a loan should they decide not to pay.”

Well, Aubrey’s reports of impending communism are slightly exaggerated. This legislation has already been watered down, and may get still more diluted in the Senate.

But more importantly—the mortgage industry, and the two main industry associations (the Mortgage Bankers Assocation, and especially the National Association of Mortgage Brokers) have no one but themselves to blame. Anyone running a services industry association has just been handed a “teachable moment” in how to shoot themselves in the foot.

It’s classic—an industry association that sees its role as pursuing the short-term interests of its constituents at the cost of the customers’ interests—and therefore at the long term cost to everyone. The (predictable) end result is government regulation—about which they then bitterly complain.

Wanna get regulated? Follow these Six Simple tips.
 

1. Wrap Your Business in the Flag

Testifying in the house in 2003, Mr. A. W. Pickel, President of the National Association of Mortgage Brokers (NAMB), talked about “the dream of home ownership…the joy of home ownership…We believe the record levels of home ownership in the US can be attributed to the vibrant and competitive mortgage market.”

Therefore, “addressing abusive lending requires a balanced response…Any efforts to address abusive lending practices cannot cut off access to consumer credit.”

[Try substituting another industry here. “Addressing abuse of alcohol requires a balanced response…Any effort to get bartenders to address excessive drinking cannot cut off patrons’ access to more booze.”]

The Mortgage Bankers Association (MBA) in 2006 says: “More Americans own homes than ever before…Americans are building tremendous wealth.”

Throw in some free market talk stuff too: “If consumers did not feel mortgage brokers were delivering on what was promised, they would not reward them in the market.” Of course not. Who could think otherwise?

When threatened, repeat: "We cannot allow the American Consumer to be separated from the dream of home ownership."
 

2. Say You’re the Hero of the Underdog

NAMB: “Subprime lending often serves the market of borrowers whose credit history would not permit them to qualify for the conventional “prime” loan market.

MBA: “The subprime market has evolved dramatically in recent years, providing significant benefits to consumers. Non-prime borrowers commonly have low-to-moderate income, less cash for a downpayment and credit histories that range from less than perfect to none at all. Before the advent of this new market, these borrowers were either simply denied homeownership or…served exclusively by FHA or other government subsidized financing.
 

[Inconvenient truth: “In 2005, the peak year of the subprime boom, the study says that borrowers with [credit scores high enough to qualify for conventional loans with far better terms] got more than half—55%—of all subprime mortgages].

 

3. Deny Bad News

In August, 2006, the MBA said, “Default and foreclosure rates are low. Some argue that [they] are at crisis levels and that a greater percentage of borrowers are losing their homes. MBA’s data does not support this—instead, it tells a different story.”

[A scant 8 months later, this headline: US mortgage default rates hit an all-time high in the first quarter of 2007.

Mr. Pickel, of NAMB: “the incidence of abuse is very small relative to the whole industry…NAMB strongly advocates that our members never originate a loan to an uninformed consumer…”

[Counterpoint, Wall Street Journal: “A study done in 2004 and 2005 by the Federal Trade Commission found that many borrowers were confused by current mortgage cost disclosures and ‘did not understand important costs and terms of their own recently obtained mortgages,’” ]

 

4. Blame the Consumer and the Government

“Education is key…NAMB supports federal legislation that includes provisions to address financial literacy…NAMB urges increased enforcement of existing abusive lending prevention laws.”

“MBA believes that borrower education to help consumers navigate the home buying and mortgage finance process is extremely important…MBA and its members have developed a number of strategies to educate consumers about their options in the mortgage marketplace.”

“Some of the barriers to fair lending include…insufficient enforcement of existing laws…NAMB believes existing laws should be better enforced by state and federal regulators as a means to eliminate abusive lending practices.”

[In other words: the problem is consumers are too stupid to follow our fast-talk—and that’s not our fault. Feel free to use taxpayer money to educate millions of consumers—and boil the ocean while you’re at it. And we don’t need no more stinkin’ laws; get some FBI agents to bust criminals, and leave us good guys alone.]

 

5. Say Bad Things Are Not Your Fault

HR 3915 makes lenders more responsible for assessing borrowers’ ability to pay. Listening to the industry, you’d think this is the death of civilization. (“What!? I lend a guy money and he doesn’t pay—then sues me because I lent him the money!!”).

Sounds reasonable, until you substitute:

“Those kids don’t have to watch our (cereal/game) ads on TV on Saturday morning, they could be studying.”
“Those people didn’t have to move next to a chemical dump, no one forced them.”
“We’re not in charge of the nation’s diet, we just offer the high calorie high fat part of it; they can buy salads anytime they want.”
"Why should I have to drive slow just because some other folks are bad drivers, and can’t afford gas?"

 

6. Whatever You Do—Don’t Share Data

One of the biggest worries of the industry was that legislation might eliminate the YSP—yield spread premium. It’s money paid by the lending institution to the broker for higher interest loans.

The mortgage brokers howl at the idea of disclosing these numbers; the WSJ article shows a broker’s rate sheet with the footnote: “for wholesale use only. Not for distribution to the general public.”

In industries where the wholesaler’s payment to the retailer is disclosed, it goes by names like "advertising allowance." In industries where it’s secret, it’s called a kickback.

The brokerage association says it gives the broker flexibility to help the consumer. The Wall Street Journal calls it “a compensation structrue that rewarded brokers for persuading borrowers to take a loan with an interest rate higher than the borrower might have qualified for."

Mr. Pickel—now a CEO of a mortgage brokerage firm, and no longer head of the NAMB, says there is “a lot of play in the system. You have to operate with an ethical basis.”

He’s wrong. You don’t "have to." And not enough did.

Now they’re getting the results they in effect asked for—the prospect of regulation.

But don’t cry too hard for them: they’ve already succeeded in watering down the YSP restrictions. They have a few friends in congress—(curiously, all of them Republican—the House vote was 100% of the Democrats.)

So there’s your recipe. Are you listening, financial planners? Credit card operators? Insurance specialists? Stock brokers? Follow these easy rules, and you too can enjoy the benefits of greater federal regulation in your industry.

Of course, you could clean it up yourself.

Nah…

Ben Stein vs. Goldman Sachs: Market-Makers, Brokers, and Trusted Advisors

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Yes, that Ben Stein. Bane of Ferris Bueller. Droll protagonist of Comedy Central’s Win Ben Stein’s Money. Pitchman for beachball eyeball medication. And—lest you forget—economist.

In this Sunday’s NY Times, Ben Stein let fly with an article—The Long and Short of it at Goldman Sachs —that must have raised a few hackles even at that above-it-all Wall Street institution.

Stein’s breezy style is to write—as he would put it—all ‘round Robin Hood’s barn, until he ends at a very sharp point. So he does here; but he pulls his punch.

Background. Alone among Wall Street players, Goldman Sachs not only didn’t lose money in the subprime debacle—they made a great deal of money, by going short, or betting against, the very packaged subprime mortgage-backed securities they were selling to customers. (See Allan Sloan’s excellent Fortune article on a sample Goldman offering .)

Stein reminds us of Merrill Lynch analyst Henry Blodget in the last overdone market; Merrill hyped tech stocks to investors, while Blodget privately called them “junk” to his friends. In 2003, he was permanently disbarred from the securities industry.

Then he pulls the trigger.

“How different would [the Blodget situation] be from selling short the junky stock that your firm is underwriting? And if a top economist at Goldman Sachs was saying housing was in trouble, why did Goldman continue to underwrite junk mortgages into the market? …

It is bad enough to have been selling this stuff. It is far worse when the sellers were, in effect, simultaneously shorting the stuff they were selling, or making similar bets…

Should Henry M. Paulson Jr., who formerly ran a firm that engaged in this kind of conduct, be serving as Treasury secretary? Should there not be some inquiry into what the invisible government of Goldman (and the rest of Wall Street) did to create this disaster…

Bracing stuff, that—simultaneously calling Goldman Sachs a bunch of salesmen, questioning the moral rectitude of the Secretary of the Treasury, and calling for an investigation of the investment banking industry.

If you like that sort of thing, you’re probably woo-wooing and high-fiving Ben Stein. But the truth is, by demonizing Goldman Sachs, Stein lets everyone off too easily.

Here’s what I mean: What’s the difference between a market-maker, a broker, and a trusted advisor?

A market-maker is socially and legally authorized, even required, to take the other side in a transaction in order to maintain liquidity in trading.

A trusted advisor has your best interests at heart—gives you advice based on what is best for you, not necessarily best for the advisor.

A broker is usually found somewhere in the middle—making markets, giving advice, and trying to avoid the perception that his own self-interest is driving the position. Which, all too often, it is.

Which was Goldman Sachs?

Some might say market-maker. You can’t be a viable institution if you don’t systematically manage risks. If you’re going to sell $100 billion in CMOs, you might also want to hedge your exposure. Goldman just hedged well.

Some will say Goldman is a trusted advisor. Some customers, perhaps. I suspect Goldman will, anyway. They point out that they were not the only ones to sell CMOs. True. Not much of a proof for trusted advisorhood, but true.

But broker sounds more likely to me. The question is only partly one of transparency. Were Goldman’s short positions really hedges, or separate bets for their own accounts? Did Goldman tell buyers of CMOs that Goldman was net short?

But transparency alone can get reduced to “letter of the law” stuff. Motives matter too. No one would accuse a pure market-maker of claiming that one side of the deal was “better” than the other—the market-maker’s job is devoid of advice.

And no one would accuse a trusted advisor of having shaded advice to suit his own ends—because his trusted advisorhood would be instantly shot.

Life in those cases is clear; there are the black hats and the white hats. And Ben Stein is pretty clear about the black hats.

The question comes when those motives are unclear. When you just can’t tell what role Goldman was playing—when Goldman itself isn’t clear, or sends out weak messages (others sold CMO’s too; we are not a crook)—or we ourselves don’t know what role we want from Goldman—that’s when we’ve got a social, institutional, broad-based trust problem.

Now that’s a real problem, Mr. Stein.

Would You Buy a Used Car From This Scientist? Not If You’re a Scientist!

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Peter Calamai is Science Writer for the Toronto Star. He recently wrote about the demise of society’s trust in its scientists. He’s got a lot of statistics that ought to cause scientists great concern about the level of trust in scientists.

And, as he says:

After two days of provocative ideas and spirited exchanges at an international gathering recently in Toronto, British museum curator Robert Bud neatly summed up the collective wisdom.

"The scientists are terrified."

Calamai’s most cogent point may be this:

Scientists might ask themselves about the erosion of the traditional trust relationships among researchers, who once readily exchanged things like specialized strains of mice or reagents, custom chemicals used in experiments.

Increasingly such exchanges are now circumscribed by material transfer agreements, complex legal documents that spell out details like liability and indemnification, due diligence and standards for care. Some even feature "reach-through" clauses, guaranteeing the supplier of the materials a share in any subsequent commercialization because of subsequent research done elsewhere.

Use of these agreements is exploding. In 1998, the University of Toronto handled about 30. This year, +*officials have reviewed 170.  Similar growth at U.S. universities prompted this wry workshop comment from Notre Dame’s Mirowski: "Why should the public trust science when it is becoming apparent that scientists less and less trust each other?"

Why indeed.

Let’s break this down. There’s a bigger trend going on here—two, actually.

One trend is the fragmentation of big things into little modules. The other is the re-connection of modules into big things again.

Take business processes. Companies used to have HR departments. Now they have many specific HR sub-processes, which can be outsourced, which in turn requires standardization. Big things broken into little; little things reconfigured into big. Now companies can configure their own HR departments.

Take music. The record business used to record artists on vinyl and sell the product through physical stores. Now artists, recording, and marketing are going off in dozens of directions. A big business broken into little parts; little parts reconfiguring into dozens of designs.

Take software, movies, travel, training, banking. All used to be made of monolithic structures. All can now be configured in myriad ways.

But here’s the catch. The main way we reconfigure modules in the world is by contract, in some kind of market.

That means transactions. That means costs, complexity, and lawyers. It means every little module has to be priced, defined, tracked, and contracted.

The trend has hit absurd levels in many places by now.

• How many levels of automated phone answering software can you stand before exploding?
• Sampling of a half-second of music is subject to copyright law so we can write royalty checks to dozens of people from thousands of users;
• And now scientists don’t share because we need to prospectively track the rights to thinks that might be invented in the future.

This is what happens when a new technical/organizational reality meets an outmoded ideology.

The new reality is the ability to connect everything and everyone to everything and everyone else.

The outmoded ideology is the idea that everything is property—and is therefore definable, trackable, assignable and salable.

Put those two together, and something’s got to give. Eventually, it will be the outmoded ideology that gives. The question is, how long will the forces of resistance hold it back?

How long can we live with outmoded laws governing intellectual property, water rights and patents?

How long can we put up with outmoded business models that define relationships by boundaries rather than by bonds?

How long can we live with corporate and social governance models that can’t figure out how to make individuals accountable to the public good, and present generations accountable to their heirs?

Chief Seattle, in 1854, supposedly said, “The earth does not belong to us; we belong to the earth.”

With a little updating, that’s exactly the thinking we need. The more complicated and topheavy the contract/ownership model gets, the more economically superior becomes a model based on trust and mutual interests.

Flaky? Not at all. Read, for example, a Nobel Prize economist’s lecture here, or read a Harvard Business Review article here.

Trust is not flaky, it is commonsense. It’s just not common. Yet.