The Subprime Mortgage Scandal:Regaining the Public Trust

The subprime mortgage fiasco has caused a great deal of pain … to mortgage lenders that retained the credit risk … borrowers who are losing their homes … retail and institutional investors who hold mortgage-backed securities … and the rating agencies that seriously overvalued the risky instruments.

This is certainly not the first time that a financial bubble has burst, but one has to look hard to find a time when so many financial firms lost as much as they did last year (as of January 25, 2008, an estimated $130 billion). It wasn’t just “loose lending” that was the problem. Because of the complexity of the securities themselves — each representing thousands of loans, with varying degrees of risk — even sophisticated institutions, like Morgan Stanley, had problems valuing their holdings.

According to a really incisive piece by Gretchen Morgenson in Sunday’s New York Times, the Federal Reserve is doing all it can to calm the financial markets but, as Morgenson writes, “For all its power, the Fed cannot change this troubling fact: trust in much of the financial system — banks, brokerage houses, ratings agencies, bond insurers, regulators — has been severely damaged by the subprime mortgage crisis. And that damage cannot be reversed with a quick cut in interest rates.”

“The Fed cannot turn a bad mortgage loan into a good one,” says Morgenson. “And it may not be able to convince investors that their money is safe in institutions whose risk management was so lax that their shareholders have absorbed billions in losses.”

Is there any way for financial institutions to restore the trust they’ve lost?

Economist Henry Kaufman thinks so. He recommends that the Federal Reserve and other supervisory authorities do something about “removing the opaqueness and setting new ground rules for financial disclosure.” He wants to hear “a call from Congress for an investigation where it will ask the Federal Reserve, the Securities and Exchange Commission and federal and state banking regulators, ‘What did you miss and why did you miss it?’”

Morgenson adds, “Greater disclosure of the risks in these complex securities and the institutions that hold them is in order. And investors must be confident that the values assigned to these holdings reflect market reality.”

I’d go one step further.

I’d say that transparency is also a key responsibility of the chief executives of all of those institutions that failed their stakeholders. They need to identify and disclose the vulnerabilities of their processes and systems, expose them to the light of day and clearly communicate how they are being fixed.


Technorati Tags: trust, subprime mortgage crisis, Federal Reserve, Gretchen Morgenson, Henry Kaufman, financial institutions, securities, business, communications, public relations

American Trust

As a new year unfolds, with elections in the air, trust continues to stand out as the virtue we all crave the most. Indeed, it is at the foundation of every communications program we execute, because every corporate client wants to increase the level of trust between itself and its constituents.

Several years ago, I heard a presentation on trust by a Wall Street Journal reporter (whose name, unfortunately, I can no longer recall). Many of the things he said about the importance of trust in our society I found enlightening — particularly because the PR business is based on building it. What follows is a combination of my thoughts and his.

“America’s capitalistic society is often portrayed as a dog-eat-dog world where everyone is out for numero uno. While there is a certain truth to that, there is more to it than that. It is probably a more peaceful, friendly and trusting place than most of the alternatives. In fact, trust is so ubiquitous here, we don’t even think about it.”

Very true! In fact, most people seem unaware of the pervasiveness of trust. Sometimes people take advantage of that, as did the 9/11 hijackers and other terrorists and their sympathizers who live among us.

“The analogy is traffic. In the United States tens of millions of drivers make their way to and fro each day in their personal automobiles, in traffic that is regulated by red lights, speed limits, rules for passing and so forth. These rules, to be sure, are backed up by the threat of state force: the police issue tickets for relatively minor offenses and will arrest drivers for more serious ones, such as drunk driving. But if obedience to the rules of the game depended solely on the certainty of police action, the system would break down. Anyone who has been in a cab in a Third World city knows exactly what I mean. These are places where people use horns instead of brakes.

“Our daily lives are built on this trust. For one thing, in a society based on free exchange, people have to please us to get our business. We thus expect to be treated better at Federal Express than the local Post Office. And many of us throughout the U.S. (maybe not in New York City) leave our car doors unlocked. We order things from stores and trust they will be delivered to our homes. We put our money in the bank and leave it there. We invest it in mutual funds. We order something via the internet and know we will receive it. The more we feel we can trust, the less hassle we have.

“In his book, Trust: The Social Virtues and the Creation of Prosperity, Francis Fukuyama points out that high-trust societies like the U.S. sometime make markets more cost effective than they do in low-trust societies because transactional costs are lower.”

As public relations professionals, we understand more readily than many others the price companies pay when lack of trust suddenly becomes a public issue.

As we have watched executives being led off in handcuffs, we know that the market is not value free. “To the contrary, we believe that the market, at least in the long run, elevates the straight and narrow over the quick and easy. Life here is conclusive on that point.”

The simple precept definitely motivates me — and I hope others in the communications business — to continue building upon our foundation of trust … for our clients and everyone else.

Technorati Tags: trust, foundation of trust, virtue, Wall Street Journal, Francis+Fukuyama, high trust societies, business, communications, public relations

Predictions: Looking Ahead … and Looking Back

Last week, Brian Pittman of Bulldog Reporter asked me for a list of the top trends that I believed would have a major impact on the public relations industry in 2008. You can find my list of “Eight for '08” by clicking this link.

Now, everybody who knows me knows that I am in favor of full disclosure, so I thought it would be appropriate to look back at the predictions I made in the same venue last year and tally up my hits and misses. So, in the interests of complete transparency, here’s how I scored at predicting the future in 2007.

1. Further convergence of the media. By this, I meant not just the blurring of distinctions between the mainstream and consumer-generated media, but also the ways in which our digital devices are becoming complex new channels of communications. With the launch of the iPhone in 2007 and the massive growth in the social media , this prediction was a HIT.


2. More corporate scandals. Just last month, class-action lawsuits were filed just last month on behalf of shareholders against Merrill Lynch, officers, and directors in the wake of the company’s $8 billion write-down in the subprime mortgage fiasco. Tainted dog food. Dangerous toys. The Blackwater hearings. The bribery scandal at Samsung. And let’s not forget the Mitchell Report. It’s been another red letter year for scandals. HIT

3. Pinpoint marketing will reign. I said that a sophisticated understanding of market segmentation would be essential for crafting an effective public relations program. It’s still true; but I think, as an industry, we need to enhance the skills and the resources necessary to match those of our brethren in advertising and online marketing. QUALIFIED HIT

4. New client opportunities in India and Asia. Both China and India are expected to deliver growth rates of 10.5% and 9.0%, respectively, by the end of the year (compare this to growth of 2.4% among the more mature economies of the E.U. and U.S.). My sense is that, while the creativity of U.S. firms is a potential boon to Asian companies interested in reaching American customers, we in the public relations industry haven’t come close to realizing the full potential of these growing economies. QUALIFIED HIT

5. The talent gap will continue. Sad to say, I was right on target with this prediction. Finding and refining human resources continues to be a critical issue in our knowledge-based profession. HIT

6. Employee burnout is a problem. The gap between expectation and reward can be a problem for any worker, but it’s certainly exacerbated by the stress inherent in our profession. Too true. We’ve each of us got to remember that life is a marathon, not a sprint. HIT

Not too shabby for a guy who doesn’t even own his own crystal ball!


Technorati Tags: predictions, Bulldog Reporter, social media, corporate scandal, marketing, growth rate, talent gap, employee burnout, business, communications, public relations

Eight Ways the Internet Has Changed the Electoral Process

Some interesting observations on how the internet has changed political campaigns were presented recently by a panel at the Newhouse School of Communications Breakfast Series, “The Impact of the Internet on the Presidential Race.” Makovsky is a sponsor of the Newhouse program.

The panel included: Peter Dow, Hillary Clinton’s campaign internet advisor; Arianna Huffington, co-founder and editor-in-chief, The Huffington Post; and Mark McKinnon, vice chairman, Public Strategies, and president, Maverick Media, media advisor to John McCain.

Without attribution, here are some of the panelists’ most interesting comments:

1. The biggest thing the internet has done is end the news cycle. Candidates now must be prepared to update their sites at least every hour.

2. The internet has changed fundraising by opening the door to small donors.

3. It has had a major impact on bringing out volunteers.

4. Despite the perception that the majority of bloggers are 18+ years old, the vast majority of political bloggers are 40+ years old, white, affluent males.

5. Notwithstanding, the Internet has this amazing silo feature: it can go deeper into any sector or minority than ever before.

6. The election is in the U.S., but the internet is global. Do we see more outside forces from other parts of the world attempting to influence the election than pre-internet? There is definitely more interest.

7. Will transparency brought about by the internet lead to the death of democracy because it overexposes candidates’ warts (causing the public to reject them all)? Actually, people have emerged in the “Age of Transparency” who want to elect people with flaws; scripted spots are out, and unscripted spots and unguarded moments that can be used are more credible.

8. The candidate who can take full advantage of the internet has not yet arrived … largely because none has grown up in the Internet Age. In the future, it’s likely that candidates will find even more novel ways of exploiting its potential.


Technorati Tags: Newhouse School of Communications, Breakfast Series, The Internet and the Presidential Race, Makovsky, Peter Dow, Arianna Huffington, Mark McKinnon, US Election, business, communications, public relations