Courion Corporation

Governance - Applied Wisdom Nugget #2

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With 34 successful books and decades as a regular contributor to rags like WSJ, HBR and The Economist, many regard the late Peter Drucker as the most influential thinker on management and leadership in modern times.

As a slick communicator, Drucker was very fond of saying that "If you can't measure it, you can't manage it."

Think about that for a second, "If you can't measure it, you can't manage it".  Should we have been thinking this way about mortgage backed securities?

• With traditional mortgages, originators make and service their own loans. The service provider knows the borrower and takes care to ensure that the borrower has the ability to repay because if the don't, they take the loss. It's also worth noting that there's not much leverage. The originator is limited in how much they can loan by their own deposits.
• With the mortgage backed securities (MBS) era that began in the late 1970s, providers pool individual loans by the thousands and convert them into bond like instruments that are floated to investors as claims to principal and interest. Selling these assets means that the originator has more cash to make more loans. The resulting leverage and liquidity is very seductive to the original provider but the new provider and the real customer can no longer see each other so you can't manage it. To complicate things, these new providers also want leverage and liquidity so they abstract their securities yet again into even bigger pools and sell them to even bigger investors (like the Chinese government ;). No one can see anything but we have lots of leverage and liquidity so everyone is happy until....
• Until some of those individual mortgages fail. With all those layers of abstraction it is impossible to separate toxic assets from good ones so investors stopped buying, which seizes capital markets, so no individual or business can get a loan... and you find yourself in the worst economic down turn in 80 years.

Drucker would have said that this leverage & liquidity was the opiate that led everyone to abandon transparency and reason and, ultimately, to our collective doom. He would have said that a system like this where the service providers deliberately abstract the actual services in a series of layers, each of which might be repackaged and resourced to a different provider until the customer and the provider have no traceable connection to each other is a disaster in waiting. He would have said that... Wait.. Am I thinking about MBSs or cloud computing - I honestly can't tell.

I can tell that the insightful and pragmatic Drucker would have made a great CISO. He would have worked tirelessly to put in place an effective framework for information governance, provisioning and access compliance before moving aggressively into the cloud so that, when his company did, they could maintain transparency and control and still get liquidity and leverage.. And he would still have his job next year ;)

Did you know?

• In April 2009, the FBI raided 5 data centers in an attempt to gather evidence related to an ongoing fraud investigation. As part of these raids, they physically seized computers and storage for dozens of companies because they were co-hosted - The action effectively shut them all down until the evidence was processed.
• "Computers have enabled people to make more mistakes faster than almost any invention in history.... with the possible exception of tequila and hand guns" - Mitch Ratcliffe