Mike Baker: Subprime Crisis Explained

At last, in one simple phrase, one of the key players in the subprime crisis has explained how it all ended up in the toilet.

Regular readers of the PWB will know that we visit this issue from time to time in an effort to bury the myth that the crisis is a result of really difficult and complex problems that only financial big brains can understand. Here at the PWB, we hold to the theory that the crisis resulted from greedy and lazy individuals up and down the food chain who failed to do their damn jobs.

Reading through the New York Times earlier today, I stumbled upon a story with the following headline:

UBS Says Excess of Ambition Led to Its Miscues on Subprime Loans

And there you go. You can stop wondering now how everything got so screwed up. It was, simply, an Excess of Ambition. How we didn’t figure that out before is beyond me.

If you’re not up on your UBS trivia allow me to elaborate.

UBS is Switzerland’s largest bank. Since the relative beginning of the subprime crisis last summer, the bank has been forced to write off a bit more than $37 billion. This vaults them to the top of the list, meaning they’ve written off more debt than any other bank on the planet as a result of the subprime goat rope.

Now, if you’re like me, when you lose over $30 billion, you get a severe hankerin’ to investigate what happened. UBS did just that, with the help of government officials…they nosed about the corridors, poked in the bottom drawers and eventually issued a 50-page report announcing their findings.

For what it’s worth, let me point out that a 50-page report covering the writeoff of $37 billion comes to about $740 million per page. Frankly, I would have at least increased the font size, double spaced and pushed the margins in a bit to try to get in the range of $600 million a page. The shareholders like to see a little value now and then.

Speaking of which, an interesting note in the Times article pointed out that the $37 billion writeoff effectively erased all profits that the bank had made since 2004. Luckily, profits made by the senior executives of UBS since 2004 are safe and sound.

The bank’s report, entitled “Comment Nous Avons Rincé de l'argent en Bas la Toilette” (in English that is roughly translated into “UBS Findings on the Subprime Crisis”) provided the key findings, and I am not making this up:

1. Poor Risk Controls.

2. Overly aggressive growth of the bank’s investment banking activities.

3. A lack of clear management structures.

4. Too much emphasis on revenue growth.

5. What a load of crap.

These are the findings of the Swiss organization known as EBK, which is the banking watchdog in Switzerland. Let’s not spend too much time wondering what the watchdog was doing over the past few years while UBS was engaged in items number 1 through 4 above.

According to the report, other problems were that “… senior management apparently did not sufficiently challenge each other” and “… the oversight of investment banking lacked effectiveness.”

Well, you can see how that could lead to trouble when operating a really big bank.

And so, it turns out that they simply had too much ambition. In their rush to be ambitious and achieve ambitious growth, they took all the rules of sound banking and shoved them in the shredder. They weren’t being greedy, they were just ambitious. I had them pegged all wrong. I apologize for rushing to judgment.

Now mind you, I don’t want to be seen as picking on UBS alone. I have nothing against the Swiss and have always admired the strong stance they take in any world conflict. In reality, all the institutions around the globe caught up in the crisis were just a tad ambitious. And not just the banking institutions. I’m talking individual homeowners, mortgage brokers, lenders, ratings companies and a host of others that make up the symbiotic environment of the housing industry.

We’ve talked about this before…we all get screwed because people in positions of responsibility up and down the chain couldn’t be bothered to do their jobs properly. But it’s okay… as we know now, it wasn’t greed, it was ambition. Ambition is a redeeming quality. Greed, well… greed just sucks.

Not to beat a dead horse, which would do nothing to improve the housing market, but simple due diligence and a sense of responsibility could have prevented the crap we’re now experiencing.

Imagine these scenarios (wavy lines as we signal a flashback)…

… A would be homeowner honestly evaluates their finances and only buys what they can reasonably afford…

… A realtor doesn’t try to sell up to a buyer that they know is already stretched…

…A mortgage broker carries out proper due diligence and doesn’t write a loan for someone who can’t afford it…

… A ratings agency properly investigates the loans and doesn’t inflate the standing of crap paper…

… An investment bank examines the ratings and what’s behind the numbers and doesn’t invest in a house of cards…

… Institutions take the time to analyze and understand what they’re buying in their portfolios…

None of this is rocket science. But apparently it’s all too much to ask in the face of blind ambition. Don’t get me wrong… I’m a big fan of capitalism, opportunity, income, competition and the rewards that come from working hard and doing well. There’s not a single hackeysack or patchouli stick in the PWB headquarters. One of the interns brought in a Frisbee the other day but we made her take it home.

So where does that leave us? Unlike some, I don’t look at the subprime crisis and immediately think how the “systems” have failed. I look at it as a failure of individuals.

Which leaves us with personal responsibility. It’s as simple as that. Do the right thing. Be responsible for you and your own. Saddle your own bronc and treat others fairly. However you want to put it.

We don’t need to legislate the crap out of society or regulate industries until they grind to a halt from lack of drive, creativity and free market forces. But we do need to do a better job of reinforcing the basic notions of personal responsibility, self discipline, fairness and respect for others. Strengthening these ideals throughout the community… in the family, schools, workplace and government, will do more to prevent future crisis of ambition than anything else.

Till next week, stay safe.

Respond to the Writer.

Mike Baker served for more than 15 years as a covert field operations officer for the Central Intelligence Agency, specializing in counterterrorism, counternarcotics and counterinsurgency operations around the globe. Since leaving government service, he has been a principal in building and running several companies in the private intelligence, security and risk management sector, including most recently Prescience LLC, a global intelligence and strategy firm. He appears frequently in the media as an expert on such issues. Baker is also a partner in Classified Trash, a film and television production company. Baker serves as a script consultant and technical adviser within the entertainment industry, lending his expertise to such programs as the BBC's popular spy series "Spooks" as well as major motion pictures. In addition, Baker is a writer for a BBC drama to begin production in July 2007.

Mike Baker is the Co-Founder of Diligence LLC, a leading global intelligence, security and risk management firm. Prior to starting Diligence, Mike spent over a decade and half with the CIA as a covert field operations officer. He is a regular contributor in the national and international media on intelligence, security, counterterrorism and political issues. He appears regularly on Fox News, as well as other major media outlets.