Current Credit Crunch Harbinger of Worse Things to Come?

Colonel Kenneth Allard (US Army, ret.)

Fannie Mae and Freddie Mac in receivership. Bear Sterns and Lehman Brothers going belly-up while AIG gets a government bailout to avoid even more chaos. And you thought Gordon “Greed-is-good” Gecko was only a fictional movie character? Personally, I’m glad to be living light years away from Wall Street as a transplanted Texan, where we long ago produced two people who had exactly the right idea about banks: Bonnie and Clyde.

I’m not entirely kidding but don’t miss the deadly serious point: things are going to get a lot worse unless we fundamentally change the way American financial firms operate, from Wall Street to Main Street. While former military officers aren’t expected to offer opinions on business issues, much of my writing and research since Enron has focused squarely on business leadership.I teach MBA’s and my2004 book, Business As War, argued that American business should exploit such cutting-edge 21st century techniques as business intelligence.

But it was only during a recent fight over identity theft that the vulnerability of our financial sector became vividly personal. Although I had never had an account with either of them, the fraud involved such prominent banks as Capital One and Bank of America, the latter easily the worst of the lot.

If you have ever wrestled with an inaccurate credit report, you can easily understand how the credit information game is played fast-and-loose by some banks. Capital One simply sent a blank check to a former address. Someone else cashed it by forging my name and introducing me to the world of steadily compounding credit card debt. The Bank of America account was opened using only a name and an address that were never cross-checked. Even worse, their “credit verification” data were entered electronically, without such rudimentary back-ups as a signature or a driver’s license photograph.

I did all the things you are supposed to do: placing innumerable telephone calls to bank voicemail systems (usually outsourced to Third World countries); writing angry letters to indifferent corporate offices and filing complaints with overworked local police departments. But eventually I cleared my name only through an expensive, year-long civil suit in Alabama. Even there, Bank of America stiffed trial subpoenas while an incompetent local judge declined to enforce sanctions.

So you might consider these tentative conclusions about the current state of the American establishment, financial and otherwise:

1. Who’s on first? Banks and credit reporting agencies have failed to verify the customers they are really dealing with, much less their ability to repay subprime mortgages or rising credit card debts. Often confused with data warehousing, better business intelligence systems are part of the answer. But even simpler common-sense practices – like picking up a phone and calling a prospective customer – can go a long way toward reducing fraud and bad debt.

2. The love of money: Really IS the root of all evil, but especially when banks are able to charge 37% interest on credit card balances, usury once available only from the Sopranos. With profits so high, small wonder that customer verification or preventing identity theft are all but ignored. The only thing that really matters is continuing to rake in all that swag so if some loans turn bad, what of it? Enough other schnooks will obediently pay their minimum monthly balances.

3. Bad structure compounds bad business. Wall Street now resembles what Marx gleefully prophesied – capitalists devouring other capitalists. But even he could never have imagined the perverse effects of aggressively decentralizing our financial institutions. Organized around innumerable stand-alone “profit centers,” effective leadership became impossible so what was everybody’s business became no one’s business. With disaster no longer being left to chance.

4. The best government money can buy. All you need to know about where the buck really stops is that two ranking Democrats on the Senate Banking Committee got sweetheart deals from the very same mortgage brokers they were supposedly overseeing. As George Costanza used to say, “Not that there’s anything wrong with it.” Indeed not, nor with those sky-high interest rates that are authorized by law, regulated by various Federal agencies and entirely controlled by the American Banking Association.
   

Free enterprise is a wonderful thing. On the assumption that these excesses might present opportunities, several of us here in San Antonio just launched a new start-up focusing on the competitive exploitation of business intelligence. With all that wreckage on Wall Street, a turn-around management firm seems like an awfully sure bet.

Editor’s note: Col. Allard will now be writing exclusive articles for FSM, using his background and expertise to discuss the military and emerging dimensions of national security – specifically, the economic and informational components of security, including business intelligence and cyber security. We welcome his contributions to a topic that is important to us all.