THE WORD "values" has been thrown
around a lot in business circles over the past few years. Everyone
talks about them. Everyone has them written down. I was beginning to
think they were just words in a corporate annual report. But values
have meaning, and the recent subprime mortgage crisis has taught us
Many have heard of the subprime crisis by now, but just let me give
you a little primer. First of all, the word "subprime" does not
actually refer to the mortgage itself or the interest rate on that
mortgage, but rather refers to the borrower. These are real people. A
"subprime" borrower is a person of below-average income, often with
past credit problems such as missed payments or a low credit rating. In
other words, in a financial sense, these are among our most vulnerable
So a subprime mortgage is really just a mortgage that was provided
to a subprime borrower. Except is wasnâ€™t just a simple mortgage; it was
a modified mortgage that included exotic terms and conditions such as
"teaser interest rates" or "rate reset triggers" or "negative
amortizations" in which the monthly payment was set so artificially low
that the principal balance actually went up each month.
Interestingly, although the subprime mortgage crisis was a problem
across the United States, it was localized in eight American cities,
where 50 per cent of the subprime mortgages were created. And do you
know what those eight cities had in common? They had well-defined
neighbourhoods of low-income households, often in immigrant communities
or low-income minority communities, which were clearly among the most
vulnerable, financially, in the U.S.
The other significant factor in this crisis is the unprecedented
degree to which these subprime mortgages were packaged up into groups
of hundreds or thousands of similar mortgages and sold off to Wall
Street investment banks. However, default rates have been soaring, well
beyond the expected level. As it turns out, when the person selling the
mortgage, on commission, knows that his company will not actually own
it, he cares very little about its collectability.
We have all read about the multibillion-dollar writeoffs, but the
real story â€” the human story â€” is the financial devastation that has
been inflicted on thousands of families and entire neighbourhoods. Who
was looking after their interests? The answer is: No one. This was a
complete failure of values.
The conclusion to me is clear. The only sustainable business is one
that is serving the best interests of its customers. You may sell them
products that make their life easier or better. You may lend them money
to help them send their kids to school, buy a home, build wealth; you
may provide them with the right advice to get ahead, protect their
property or save for retirement. These are sound, sustainable business
practices, but enticing people to take on more debt than they can
afford, and taking advantage of their financial vulnerability, is not.
Luckily for us, the subprime mortgage crisis never really got going
in Canada. But the fact remains that it could have, as there is no law
to prevent these kinds of predatory lending practices from occurring.
So I think it is important that the federal and provincial governments
learn from the U.S. experience and enact laws to protect our own
financially vulnerable citizens from these terrible practices.
The topic is one of great interest to credit unions. Although we
provide a wide range of financial products and services to all members
of the public, we are also known for the extra work we do with people
who are financially vulnerable. In many ways, the people that were so
abused by the subprime crisis are our customers.
And yet there is no subprime mortgage crisis with credit unions. And I believe the reason is twofold.
First, we have our unique ownership model; our customers are also
our owners. They are our shareholders who enjoy all the rights and
privileges, and respect, that ownership implies. The second reason is
our time-tested credit union values, as articulated by Moses Coady.
If we take this same concept and expand it to our province, we can
build a modern economy while holding true to the values that we hold so
dear. As it turns out, Coady had it all figured out 70 years ago: A
good education, self-help, local decision-making and investment in your
own community are the keys to building a sustainable economy.
This brings me to the question of public policy.
John Kenneth Galbraith said: "Most economists believe the answer to
economic underdevelopment is massive infusions of capital. They are
wrong. The answer is massive infusions of education." We have a good
system, but we need to make the system more accountable, with more
testing and reporting of results.
We also need more investment in our local infrastructure. Perhaps
rather than arguing about whether we should have private investment,
let’s look at what public assets are most appropriately held in
government hands and which no longer need to be.
Of course, we also need to stay focused on paying down our
provincial debt, which is still too high and restricts the ability of
government to do good things.
I have learned that government is capable of great things, such as
making daily life a little better for many people, particularly those
who need help the most. But it is also true that society can only reach
its true potential when all its resources, both public and private, are