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Leadership means confronting reality

The Washington Post’s Steven Pearlstein calls out Wall Street executives for failing to lead in the years when the entire economy shackled itself to the unsustainable rise in housing prices. In this case, leadership means accepting reality and helping other people see and accept that reality as well.

Throughout the expansion of the real estate bubble, there were plenty of people out there who were saying that the bigger the bubble got, the more damaging the collapse was going to be. Unfortunately, none of them were in a position to do much about it.

Here’s Pearlstein:

One thing we know about leadership is that it rarely involves using excuses such as “All the other kids were doing it.” That’s only a slight oversimplification of what we’ve heard from the masters of the financial universe in explaining how things could have gone so wrong. The more elaborate explanation goes something like this:

“Yes, we saw that there was a deterioration in underwriting standards for loans, and yes, we understood we were taking on additional risks to our company and to the system by making lots of those loans and putting them on our books. But you have to remember that this was where the big growth in the industry was coming from. If we had refused to go along, we would have effectively put ourselves out of the game. We would have lost market share. Our profitability would have been significantly lower. Our stock price would have been hammered. We would have been crucified by analysts and the financial press, short-sellers would have begun to circle, and before long some hedge fund masquerading as an ‘activist investor’ would have bought a stake and begun to agitate for a change in management.”

Pearlstein then goes on to describe what real leadership looks like. And what I like is that he makes the most important point — leadership is more than telling the truth. Anyone can explain what’s wrong and hope people listen to them — leadership is about bringing about needed change. None of the many economists, journalists, bloggers, or innocent bystanders who saw this coming were able to prevent the subsequent unraveling. But the CEO of one major investment bank could have. One highly placed cabinet official could have. One committee chair in Congress probably could have. The head of the Federal Reserve could have. The President certainly could have. They all declined because it was easier to try to blend in with the herd.

It’s not as though I, a programmer who blogs about whatever shiny idea captures his interest, is any smarter than the CEO of Lehman Brothers or wiser than the Secretary of the Treasury. I just don’t have any vested interests or any influence over what actually happens. The risks are much greater for people who are in a position of leadership, but they’re the ones who asked to be put in these positions in the first place. The fact that they opted into the shared delusion rather than facing reality is the most damning indictment of their leadership that can be made, and none of the excuses they’re making should be accepted.

4 Comments

  1. I agree with you in your definition of what a good leader is. I also believe that being a leader means building customer loyalty- something I learned in Ken Lizotte’s latest book, “The Expert’s Edge.” With all of the scandal and dishonesty that has gone on over the past couple of months, Wall Street has lost my loyalty and trust- I will be very hesitant to ever invest again.

  2. Leadership is a process that includes a leader, a follower, and a situation. Each element of the leadership process brings something unique to the table. In the case of the financial crisis, the entire leadership process was flawed (as you seem to allude to). There was no vision or values, there was a lack of followership as a result, and, because there was no clear leader, there was no understanding of the situation. A complete and gross disregard of the leadership process. When this happens, there is a clear failure of leadership. When leadership fails, well, I think we all understand the consequences.

  3. I heard a very interesting interview on NPR – what I gleened from that, as well as this post, is that leadership failed because two parts of the human condition got in the way – fear and greed. Fear of being the one who “tells” and greed for people know it is wrong and going along to get theirs. I certainly agree that the people at the top are responsible; but, so are the people who bought houses they knew they couldn’t afford, the people who packaged and sold the mortgages and me – for watching those ads about “no money down” mortgages and thinking it was a “lost leader ad” – because they couldn’t really be doing that.

  4. obligatory note: not everybody who got into too much house did so “knowing that they couldn’t afford” them. for decades, people have trusted banks to look at their finances and tell them how much house they should be shopping for (which is why the mortgage application often precedes the house looking) — the banks totally took advantage of that trust (i.e., ceased to do their job)…

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