Tech Innovation Blog

When I started this week’s column, it had a very different feel. It possessed a decidedly different intent. You see the gloom of the economic chaos coupled with what I am certain to be a protracted global rebalancing has left my market faith and industry leadership severely traumatized.

My deliverance from these doldrums occurred when I visited with a 102 year old man who is still vigorous, intelligent, and who lived through what many of us only chatter about – long ago written within the pages of dusty old history books. This brief interaction reignited within me one truism that we all must come to accept. United together we can innovate and succeed even when we don’t think it is possible or practical.

Some would say over the last several months I have become a “Gloomy Gus.” With the latest figures showing a U.S. national debt to annual GDP running at greater than 71% (the ratio in 2000 was under 25%), private mortgage securitization at near zero, and recently announced government “programs” at $3.5 trillion, I must admit my faith in our industry to reinvent itself outside of stringent government oversight is not high. However, while the numbers continue to be poor and the job losses high, the seeds of pervasive, innovative transformations are now germinating.

So what can be done? What should be done? How likely is it to transpire? Whereas there are many iconic and significant issues we should cover (e.g., TARP, credit markets, consumer behavior, global recession, nearly 2,000 banks vying for government “injections,” et al), let’s quickly address a few that are not typical or even politically correct.

• Beyond Origination and Distribution: Down from its peak of nearly 65% just two years ago with an origination market of nearly $3 trillion, private securitization has fundamentally stopped. Lacking a risk tie to the originations while putting servicers into a new series of responsibilities and accountability, the old financial instruments engineered to increase market participation are the biggest obstacle to changing the consumer payment equation. However, several months ago the Treasury/FDIC delivered updated guidance on an arcane investment instrument that accounted for under $50 billion in asset issuance. On Halloween (perhaps fitting), Chairman Bernanke made the markets buzz with an implication that these risk-assessed instruments, covered bonds, may be useful in the dismantling of the old GSE frameworks. For those individuals who have dedicated nearly a decade in pushing standards, this “use case” or practical investment instrument demand may have created the real innovation – widespread and unequivocal adoption of industry and enterprise data interoperability – aka end-to-end STP of data supporting both forward and reverse supply chains.

• Changing FSI National Agenda: It’s all around us. After a two year political debate, a referendum has emerged and a new national agenda is being formed. Regardless of the party in power, a core realization has been internalized by those seeking productivity gains and ethical corporate leadership. Many industry leaders once believed that labor was the cornerstone of productivity. The national agenda has placed domestic jobs and national independence ahead of a quick “buck.” Education and reinvention using domestic entrepreneurs and 21st century business models are surfacing in an effort to increase accountability and responsibility to community and the workforces.

• Investor Driven Consumer Consumption: Unlike the past, investors will have a greater deal of reserve supply chain impacts on the end consumer. As witnessed at the recent national industry conference, there were many, many individuals and groups seeking out funding for new ideas. Some were just there for survival. However, all failed to appreciate the pervasive shift in sentiment and funds available for “new ideas” and the “innovation” these business plans supposedly addressed. Moreover, investors in securitized financial instruments will demand a fully automated and auditable supply chain that lead to the creation of the instrument they are purchasing. The implications demand compliance, fast response (i.e., covered bond defaults and cover pools), practical use of flexible standards, and an ability to support and deliver varied products to an increasingly strained consumer.

• Domestic Arbitrage: Jobs, jobs, and more jobs. I’m amused at the outsourcing projections – activity does not signify booked and profitable structured arrangements. Just look at the external analysis appearing in highly regarded independent sources including the Wall Street Journal and The Financial Times. Domestic sourcing is not nationalism or protectionism just as outsourcing is not innovation. A new balance is emerging as part of Globalization 5.0 and the equation is no longer zero sum or net negative. The last time this occurred was nearly three decades ago when the country renovated itself for the ensuing 25 years. We are at the cusp of a new set of discussions and corporate accountability.

As we know, the mortgage industry is an eclectic, some would say “pioneering,” group of loosely interrelated professionals. There are a few individuals and groups with historic awards. There are more with educational credentials. There are many with varied experience. But none are fully prepared for the trillions being “invested” in the name of financial entities semi-nationalization that may last a decade – not to mention the forthcoming unwinding of the GSE’s as Chairman Bernanke recently implied.

As we continue to fight off the lending orgy after effects of rampant risky behavior, we are witnessing a positive and dramatic rebirth of an industry in need of widespread integrity, new processes, and domestic jobs. The page is turning onto new chapters. They are new leaders and provokers that are not part of the “conference” elite and unlikely to be “invited in.”

I should note that it this 102 year old man was no stranger – he is my Great Uncle Charles. After witnessing a century of innovation, market changes, wars, the Great Depression, and lost loved ones, he still retains the spark of hope and rebirth as part of his daily life. For an industry that must create new financial models which are applicable for a 21st century consumer and investor, we can only innovatively move forward as individuals, as organizations, and as a multifaceted profession together. Like my uncle, there is a great deal of our future that has yet to be written, and we must openly and ethically accept our trials if we are to positively move forward.

Much can be learned from history and few individuals who lived through prior severe downturns. Today some pundits suggest that the only thing missing 80 years later are the gangsters and the locust. While I firmly believe there is much pain ahead for the next three years, a fundamental lesson learned is that the innovative prism of the past will not be the prism of the future no matter how much we think it will or should be.

Innovation is neither linear nor neat – it is frequently born in the fire of despair. We have the latter; now let’s make sure we innovate together for not only our success, but our customer’s future. Are we prepared, committed, and passionate about doing the “right things?”