Spring Break
Outsourcing deserves some blame for financial crisis
Dan Cunningham
Issue date: 10/6/08 Section: Commentary
A salesperson has one job: Get the loan. The firms invested in selling loans are not directly paying for it. After they acquire the loan, they outsource it to a bank. A bank will pay them a lump sum for the loan, and the salesperson continues business. The bank buys loans in large, billion dollar packages. These packages had an estimated yield, which the salesperson was responsible for calculating. The packages hold so many loans that it was perceived to be too costly for the bank to accurately verify that they would actually be paid off. The detectives were only responsible for credit history, so their analysis was irrelevant in determining if the borrowers would pay off the future interest rates. This leads to an inevitable cost of outsourcing.
Outsourcing any function means you sacrifice the information that comes with that process. Salespeople were not held responsible, and therefore did not research the future ability of a borrower to pay the loan. Worse, they were incentivized to withhold any information from banks that would alert them that the borrowers might foreclose. This lack of transparency has corrupted the system and had perverse effects on almost every financial-related industry in the country.
The conflict of interests that caused this to happen was never corrected. The industry, after feeling the crash, has nearly stopped lending for fear of imperfect information. The $700 billion question arises, where do we go now? Congress is trying to take on the burdens of the industry in order to maintain business as usual. They have proposed several measures intended to reduce the fear of failure to lenders. This should raise concerns from us both as voters and prospective future homeowners. We should all be asking: Is Congress addressing the causes of the failure? Are their bills, which are intended to free up credit, improving or harming the economy? Is their stimulus plan counterproductive to establishing a stable financial environment?
We might not have definitive answers to those questions for years, so it is critical to ensure that they make the right decision the first time, before it comes back to bite us.
Outsourcing any function means you sacrifice the information that comes with that process. Salespeople were not held responsible, and therefore did not research the future ability of a borrower to pay the loan. Worse, they were incentivized to withhold any information from banks that would alert them that the borrowers might foreclose. This lack of transparency has corrupted the system and had perverse effects on almost every financial-related industry in the country.
The conflict of interests that caused this to happen was never corrected. The industry, after feeling the crash, has nearly stopped lending for fear of imperfect information. The $700 billion question arises, where do we go now? Congress is trying to take on the burdens of the industry in order to maintain business as usual. They have proposed several measures intended to reduce the fear of failure to lenders. This should raise concerns from us both as voters and prospective future homeowners. We should all be asking: Is Congress addressing the causes of the failure? Are their bills, which are intended to free up credit, improving or harming the economy? Is their stimulus plan counterproductive to establishing a stable financial environment?
We might not have definitive answers to those questions for years, so it is critical to ensure that they make the right decision the first time, before it comes back to bite us.
Viewing Comments 1 - 1 of 1
uconn mfg grad
posted 10/07/08 @ 12:57 PM EST
This article is pretty sad. Very weak arguments combined with a poor understanding of supplier networks.
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