It is a well known fact that most if not all asset bubbles are characterized by significant speculative investment activity (and by this I mean investors with very short investment timeframes and expectations). And this was certainly true of the US housing market (and other overinflated housing markets globally) over the last few years. It’s impossible to know exactly how much of the housing market was driven by speculation, as no agency tracks this issue…and even if they tried, it’s impossible to verify someone’s intent. But I sit back and wonder if our society has gotten too lax on “personal accountability”.

I remember a top Los Angeles real estate agent telling me earlier this year about taking a client to go see a home about to go into foreclosure (the home had been an investment property) and being surprised when the owner’s assistant drove up in an expensive Mercedes with the home keys.

I wondered: if the loan is secured only by the home, it sounds like the owner may be “getting away with something wrong”. He handed his keys to the Bank since the home didn’t make investment sense anymore…but it sounds like he has more than enough money (likely profits from earlier more successful investments) put away for himself…so he will be fine even if his credit gets hit for a while.

And then today, a successful female executive told me what she had viewed as a ‘sign’ of the bubble: a few years ago her maid had purchased a 2nd home for investment purposes!

I’m not an expert on foreclosure law. But it does seem like a lot of people including many walking down Main Street, were unrealistic/foolish with their investments. And I’m not sure our laws and regulations have kept up….so that there is fairness and accountability in the system.

2 women walk into a hospital with acute stomach pain. One is a highly paid lawyer at a top law firm who is covered by her company’s health insurance plan and the other is a working class American without health insurance. Both women get the exact same diagnostic tests and medical care, and both stay in the hospital for the exact same number of nights. Do the two women pay the same amount for the health care they consume (in total, including payments made by the insurance company on behalf of the lawyer who has health insurance)? Likely not, if the above happens in the USA.




Does this make any sense? I believe the answer is clearly no….and yet this unfair practice has been allowed to go on for decades….and is still going on today. The reason for this is that insurance companies in America directly negotiate “bulk pricing” directly with hospitals and other healthcare providers. This pricing is usually significantly lower than the “list price” of a product or service. However, when an individual (e.g., uninsured worker, foreign national, etc.) who is paying for their health care expenses out of pocket walks into a health care provider, they pay the “list price”. It’s ironic that this leads to price discrimination against the same (generally poorer) individuals who couldn’t afford health insurance in the first place.

So here’s a simple solution for ending health care price discrimination in America: Mandate that every hospital or health service provider can only charge uninsured individuals the average of the pricing they have negotiated with their health insurance companies. This would eliminate much pain and suffering….and right a basic wrong in our health care system today.

November 1, 2008 Update:

Today, I received an "Explanation of Benefits" Statement from my health insurance provider which I think proves my point above:

Service Date: October 16, 2008
Type of Service: Outpatient Services (a generic term to say this is for a minor outpatient procedure performed about 2 weeks ago)
Total Billed (to health insurance company): $5,665
Patient Savings: $4,767
Coinsurance Copayment Amount: $89.80
Claims Payment: $808.20

In other words, the total cost to the insured party (in this case me) and the insurance company was $898...or 16% of the amount billed. So we saved $4,767 for only one reason: we had the insurance company negotiating with the provider, auditing the bill etc.

One of the fatal flaws of the Bush approach/policy framework that I would love to see Barack Obama change…is this idea that it is America’s job to spread Democracy around the world. As a student of Democracy and child of the largest Democracy in the world (India), I do believe in and love Democracy. However, just like Capitalism….Democracy, too, is a flawed, chaotic, and imperfect system and I just don’t think it’s America’s job to tell other countries what political system is best for them.

In fact from a purely theoretical standpoint, I believe a ‘benevolent autocracy’ is likely the best political system to help efficiently/quickly advance a society economically and socially. The only issue is, those benevolent/enlightened autocrats are really difficult (virtually impossible) to come by….and power corrupts, so this too is a slippery slope.

In any event, to get back to the original point of this blog….I believe America needs to officially change this stated policy of spreading Democracy….and focus primarily on spreading/ensuring basic human rights for every human being. Even if you disagree with my point on Democracy….I think most should agree safety comes before politics…and the problems the people of the world face in so many countries (including the Middle East) are still about safety.

Let’s work on the basics, and get to politics later.

I worked at Indymac Bank for a little over 4 years till July 2008 when - after the FDIC took management control of the Bank after a “run on the Bank” was (unfortunately) triggered by Senator Schumer’s leaked WSJ letter (discussed in a prior blog) - I resigned from my position as Chief Administrative Officer. My role had put me in charge of the “People” and “Expense/Cost” functions of the Company…but thankfully (I guess – given the massive blame game going on against anyone involved in the lending industry) I was not involved in any way with making loans.

Headquartered in Pasadena, my Indymac was a performance focused/driven but family friendly place which was discrimination free at the highest levels (certainly, no “discriminating” CEO would have ever hired me, given all the minority categories I fall into). All that mattered at work was “output” (i.e., what you got done) not politics. In fact, my Indymac experience included more “head” and “heart” than I’d personally expected to find in Corporate America (where I’ve been walking Executive hallways at “Fortune 1000” companies for about 12 years since I graduated from college).

I do believe fraud was a key contributing factor to the housing bubble that we have realized too late was both national and huge, and also believe we must find and punish those that perpetrated it because personal accountability is critical to the stable/smooth go forward functioning of the market. However based on my own personal experience at Indymac I have a strong instinct that the government is focusing its limited fraud resources in the wrong places, and working in bureaucratic and inefficient ways. In particular, I believe the government has an excessive focus and has over-allocated resources to search for fraud by senior management, but is not pursuing the most efficient ways (e.g., interviewing managers/employees of the firms they're investigating) to quickly find/punish any such “bad managers”. On the other side, the effort to investigate/prosecute perpetrators of individual fraud (i.e., at the transaction level) is woefully under-resourced (See this article on mortgage fraud and note the FBI was only able to investigate 2.6% of the over 46,000 suspicious activity reports submitted in 2007: http://www.consumeraffairs.com/news04/2008/05/mortgage_fraud_fbi.html).

What makes me think this? Well, I can tell you I didn’t see anything that looked or felt like fraud around me at Indymac (except where expected, in individual situations which were addressed appropriately consistent with company policy and existing laws/regulations). I say this as a member of Indymac’s Executive Committee (comprised of roughly the top 25 managers at the company) since late 2006, prior to which I was the CEO’s Chief of Staff (in which role I attended most of his meetings and reviewed most of his emails and other communications).

You’d think as a key member of management, I would have been interviewed after the FDIC took control of Indymac. It certainly looks like they are investing significant resources in investigating Indymac. For example, during the 48 hours after the FDIC takeover of Indymac, millions of pieces of paper were taken from Indymac’s Corporate Offices for review/investigation. I walked into my office on July 12th, the day after the FDIC took over Indymac, to find my office (and my Assistant’s filing cabinets) stripped of every piece of paper I had accumulated over the course of my 4 years at Indymac (and I can tell you I am highly organized…so there was lots of it).

No-one really explained what was being investigated or why…just that conducting a detailed investigation was “standard protocol”. Given I had a lot of exposure to top management’s activities in the years preceding the companies’ failure I thought I would try to help, so mentioned to one of the top FDIC managers that they were welcome to interview me as I had spent a lot of time with the CEO (who was no longer at the Bank as part of the government takeover) and had read a lot (perhaps even most) of his communications for roughly a 2 year period (from fall 2004 to fall 2006). He nodded, but nothing happened.

To cut a long story short, I decided shortly thereafter to resign from the company...as the "head" and "heart" of the company was gone and I just couldn’t sit and watch the FDIC create a massive loss by fire-selling the company’s assets into the worst market for mortgage assets in 80 years. Before departing the company about a week later (with no ‘golden parachute’ or severance, I should note), I repeated my offer one more time. To this day, no one from the FDIC or any other governmental organization has called me to take me up on my offer.

So my hypothesis – based on my own personal experience – is that people’s ire and the government’s dollars are misdirected in the fraud category. I believe it is unlikely there was widespread fraud at the top levels of the (recently or currently distressed) financial institutions…and that in fact mortgage fraud was largely perpetrated at lower levels within companies and by individuals outside the financial institutions who were independent. As a result, I believe the government should speed up/resolve the management blame game by interviewing all the executives (remaining and departed) at the various distressed financial institutions. This process would take weeks, not years….and would be more effective at identifying management fraud than reviewing millions if not billions of pieces of paper. Then shift the resources currently deployed to read/review the millions of pages collected from these companies largely over to investigating and prosecuting individual fraud.

I was trying last night to have a mellow evening at home after a full day of work. The full day of work was quite an experience after spending 3 blissful months ‘Exploring my Zen’ (as I like to call it) following the collapse of Indymac during the Summer. So here I was…cuddling with my 2 freshly bathed (and good smelling) Great Dane’s Lara and Tank…watching TV. But what I saw on CNN shocked me.

It looked (from the multiple clips they showed) like many people (definitely way more than a handful) at Palin/McCain rallies were screaming rascist comments and the crowd was supporting them. This included statements like “Obama bin Ladin”, “Mohammed Husein Obama”, “Them Commies”…etc.

Could this really be going on in America, without bipartisan public denunciation? As I recall, McCain actually defended the people attending their rallies during the final presidential debate. Is this new, or do these conversations go on in this rough tone more regularly? I sure hope I see McCain or Palin step up and call this nastiness what it is – unacceptable in America.

On a broader note: We take things like equal protection under the law and non-discrimination so much for granted at least all the places I’ve lived in America which includes Universities (New Jersey), Cities (Los Angeles, Chicago), Companies (McKinsey, Indymac, and many Fortune 1000 clients served while at McKinsey), or just plain walking around (anywhere….from San Francisco to Michigan to Oregon to Dallas to Seattle to Arizona…the list goes on).

But none of these “now so obvious” modern principles of equality so clearly embodied in the US constitution came naturally to Americans, or really to most societies around the world. They (for the most part) had to be inflicted on the majority by the righteous/enlightened minority or the founders of the modern day states.

In late June this summer, about 2 weeks before the “failure” (i.e., inability to continue to be in business without third party support) of my ethical and well run employer Indymac Bank, I – then a Senior Executive at the Company - read in horror a letter that New York Senator Charles Schumer had sent to two key regulatory bodies - the Office of Thrift Supervision (Indymac’s primary regulator) and the FDIC - and that his office had “leaked” to the Wall Street Journal. We had been fighting hard to adapt/save our business and as many jobs as possible for 12 hard months since the capital markets froze up in the summer of 2007....and this Schumer letter looked like a possible death warrant for our business. "When it rains, it really pours", I thought.

Within hours the letter was all over other media outlets. It (the letter) essentially made public this New York Senator’s concerns about the financial condition of Indymac (a California Thrift), and triggered a “run on the Bank” which ultimately (2 tough and painful weeks later) led to the company’s takeover by the government.

The truth is that financial services companies survive and operate based on “confidence”, and no Bank in the country (or really the world) can survive a run on the Bank. In fact, Runs on Banks were virtually unheard of in modern times until….recently they have become quite widespread (more on why in a future post), and have been the “triggering mechanism” for most if not all of the financial institution failures you have read about in the media (in the US and abroad).

At the time it happened, me and those around me wondered what a US Senator who was also a longtime member of the Senate Banking Committee was doing taking such a public action which he knew (or should have known) could (and probably would) result in the failure of a (regulated) US Bank. Not to mention the question of why a New York Senator was so focused on a (relatively small) California Thrift….when there was plenty to worry about right in his own backyard i.e., on Wall Street.

But too many lives and jobs were at stake…and we got totally consumed first trying to fight this huge “fire” (to try to save the company)….and when the "fire" consumed the company, trying to deal with the aftermath of this disaster on our jobs and lives, and the jobs and lives of those around us.

Then, today, I saw the below article in the news…and it brought the events of the summer right back.

Wasn’t it irresponsible of Senator Schumer to basically trigger Indymac's failure? Why raise a public concern about any financial institution, knowing the possible consequences of such an action? And why Indymac instead of Washington Mutual or Wachovia or some Wall Street firm....all of whom really ultimately faced very similar problems?

Here are some articles on this issue:

Article 1:
Schumer Ripped IndyMac as Democratic Donors Probed Books
New York Sen. Charles Schumer's public criticism of IndyMac Bancorp last summer, which critics say helped spark a run on deposits that took under the troubled thrift, came while IndyMac's assets were being eyed by investors who are major donors to the Democratic Senate campaign committee the senator chairs.

http://online.wsj.com/article/SB122428567636046459.html?mod=rss_Politics_And_Policy

Article 2:
The OTS press release on Indymac...the day it was taken over by the government:

http://www.ots.treas.gov/index.cfm?p=PressReleases&ContentRecord_id=37f10b00-1e0b-8562-ebdd-d5d38f67934c&ContentType_id=4c12f337-b5b6-4c87-b45c-838958422bf3&MonthDisplay=7&YearDisplay=2008

And here is an excerpt from the release: “The OTS has determined that the current institution, IndyMac Bank, is unlikely to be able to meet continued depositors’ demands in the normal course of business and is therefore in an unsafe and unsound condition. The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMac’s viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.

One of the fundamental reforms that is nowhere to be seen on the horizon…that I believe is absolutely critical to addressing one of the key root causes of the current crisis of confidence in the global financial markets is the lack of any significant education on the topic of personal finances and money management in middle/high school and college curriculums worldwide, including in the US.

So here’s my idea Mr. Paulson and (hopefully future) President Obama: add a mandatory requirement that every middle school, high school, and college student in America get a basic education in how to think about personal finances (budgeting, money management, borrowing, net worth, financial ethics etc.). The long term benefits of such an addition to educational standards in the US and other countries would be invaluable.

I am regularly amazed by how little formal or informal education any of us receive (unless we have very diligent and focused parents with good personal financial habits…a rarity) on the topic of money. Yet, understanding money and making/managing it (in whatever quantities “work” for each individual) is critical for the achievement of personal success and happiness.