Tags: business


Strategic Defaults

Thanks to netmouse for the link to a recent NYT article on the simple justification for homeowner foreclosure.

This issue is of course very timely because of the recent real estate collapse which has left huge numbers of people burdened by hopelessly undervalued mortgages. It is made much more poignant, however, by the fact that the collapse was largely triggered by the same lenders who knowingly sold those mortgages, and who not only reaped the gains of underhandedly dumping the risks off on other parties, but dodged much of the fallout entirely by successfully lobbying to stick future generations of Americans with the bill.

The article makes some very good points about the simple fact that -- just as when big companies lay off recently-hired workers -- lenders treat their own defaults as a simple business decision. On the contrary -- just as many people feel guilty for ditching out on a job after six or twelve months -- individual borrowers feel a personal responsibility to make good on their promises.

A few highlights:

"Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. ... Nobody has said Morgan Stanley is immoral ... But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry ..."

"Once, perhaps, when bankers held onto mortgages for 30 years, they occupied a moral high ground. These days, lenders typically unload mortgages within days (or minutes). ... [and in] our transaction-obsessed society, the message is that enduring relationships count for less than the value put on assets for sale."

"[Borrowers' strategic defaults] would correct a prevailing imbalance: homeowners operate under a “powerful moral constraint” while lenders are busily trying to maximize profits. More important, it might get the system unstuck. If lenders feared an avalanche of strategic defaults, [it] could produce a wave of loan modifications — the very goal the Treasury has been pursuing to end the crisis."

I have many mixed reactions to the article which i'll spare you, but for me it reinforces two trends i observe:
  1. Our contemporary political-economic system has been increasingly protecting the organizations with superior resources and position, and decreasingly prioritizing the welfare of its people, who often have little recourse.

  2. Most people are inherently superior entities than the organizations that they comprise.
Some would call these observations self-evident, but we noneless allow the perpetuation of the first despite the second.


The New Shape Of Success In America

America, self-proclaimed leader of the free world (or at least the free market, which is anything but free), has a new theme boldly re-shaping how it does business. Knowing this theme will not only bring your business in step with the industry leaders, but may likely boost your revenues in time for that critical quarterly report. That magical theme: incompetence.

I'm not talking about the kind of self-serving loss-of-big-picture lack-of-foresight kind of incompetence. That's the kind that brings about things like a trillion-dollar taxpayer-funded lending industry pseudo-bailout. (I say "pseudo" because actual bailouts fix the problem.) That's the kind of incompetence we come to expect of small-minded, short-sighted, Wall-Street-driven big business. That kind is neither new nor bold. It's old hat. Some might go so far as to call it best practice.

I'm talking about a simpler, more fundamental kind of incompetence. I'm talking about the kind of incompetence that becomes apparent when a company doesn't actually know anything about their product or service, except how to sell it.

My first realization of the prevalence of this new kind of business practice came a few years ago. I tried to take advantage of a fantastic offer that Discover Card was selling. The resultant unauthorized balance transfer they performed on my behalf was amusing, but the real amazement came when i tried to have them fix the problem. Several departments provided me with a wildly colorful collection of unique stories about who could help me and how. In the end, none of them could.

More antics with credit card companies followed. The time that Bank Of America lost my phone payment was a fun one. One month, a live person is giving me a confirmation number for receipt -- the next, another handful of departments is telling me they had no record of my call. Were it not for the rule-bending compassion of one amazing soul within the huge bureaucratic machine (think Mr. Incredible at InsureCare), i'd still be living with the usurous interest rates they tried to slap on me for lack of payment. (Well, actually, i'd be happily paying that interest to American Express, who i can honestly say has done nothing but impress me with their unequalled commitment to customer service. Maybe they're European?)

The stories go on. Pioneer sold me a dual-layer DVD burner that couldn't burn dual-layer DVDs. (Well, it could in theory, which is all you need to sell it.) Verizon sold me DSL that they couldn't install (though they at least sorta tried). Bank Of America (currently leading my personal race in selling something they don't provide) had their agent inform me that i was misinformed by their agent (did you catch that?), and that i'd need to pay the resultant penalties (as if their inability to train their people is somehow acceptable grounds for my liability).

The latest (and inspiration for this post): Sprint's online tech support didn't know that their mobile broadband hardware wasn't supported on my machine. I don't mean my specific machine, i mean my whole brand of machine. When i was buying the product, it was "plug and play" on both PC and Macintosh. When i was trying the product, it was PC-only and required software installation. I have the chat sessions to prove it.

So what gives? What's the business model here? How can you get in on the action?

I propose that this new wave in profitability is driven by a simple paradigm:
  1. Boost your sales by X% by selling exactly what people want.

  2. Provide something that is close to what they want, but costs you $Y less to provide.

  3. Make it a time-consuming hassle for them to return your product once they've bought it.

  4. If they don't notice, you make $Y some fraction of X% more often.

  5. If they do notice but don't care, you make $Y another fraction of X% more often.

  6. If they do notice but don't care enough to go through the time-consuming hassle, you make $Y another fraction of X% more often.

  7. If they do notice and care enough to go through the time-consuming hassle, either:

    1. use your bureaucracy as an excuse for incompetence and apologetically provide what they want, in which case you sustain no real loss,

    2. use your bureaucracy as an excuse for incompetence and apologetically re-sell them the something that's close to what they want, in which case you still make $Y some other fraction of X% more often, or

    3. use your bureaucracy as an excuse for incompetence and apologetically accept a return, in which case you sustain no real loss.

  8. Avoid legal liability for false advertising by:

    1. making it an even bigger time-consuming hassle for anyone to bring suit against you, and

    2. using your bureaucracy as an excuse for incompetence if they do.

While bureaucratic complexity and hassle are important parts of this new flavor of success, it is incompetence that is the key. Incompetence is incentivized, because it is incompetence that creates that profitable gap between what you're selling and what you're providing. It's the buffer between you and the customer during their buying and their trying.

This is, after all, America: land of opportunity for the enterprising, hard-working soul. It's this kind of outside-of-the-box innovative business creativity that obviously embodies that ideal.

However, in case anyone out there -- Discover, Bank Of America, Sprint, Verizon, or whoever -- decides they'd like to try something even newer, i have an even more innovative solution. Really. After years of experience as both a customer and a manager, i have engineered a groundbreaking paradigm that leverages the low-cost of compartmentalized functionality and specialized outsourcing into an unprecedented level of efficient and reliable customer service excellence that will rocket you head-and-shoulders above the competition, all with minimal capital investment and almost no retooling.

If you're interested in this solution, please do contact me. I'd be happy to sell it to you.

Do you have any similar experiences to share? Post your story in a comment. Feel welcome to link to the providers involved.