1 Is it fine to privatize profits and nationalize losses, is it right for organizational development ? The combined revenues of the big five of Wall Street, i. e. , Freddie Mac, Fannie Mae, AIG, Merrill Lynch and Lehmann Brothers, added to $ 322 Billion in the year 2007. Compare it with the fact that GDP of 185 countries, including those of fairly developed countries such as Denmark and Greece, are less than those figures. These firms were so large that it was widely believed that they are unsusceptible to any kind of collapse. Things started going sour towards the end of 2006.
But it was only during the last quarter of 2007 that the effect was largely felt with almost all these firms except Lehmann brothers posting losses. This can be characterized as “Privatization of Profits and Nationalization of Losses”. American tax-payers were already engaged in a wide debate regarding the misuse of public money to the tune of $ 182 Billion when this issue has arisen where the government is using more than a trillion dollars to bail-out some of America’s largest financial giants. Consider the case of Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation).
Both were offsprings of federal government. Fannie Mae was started in 1938 as a government agency before it became a publically traded company in 1968. Freddie Mac was started in 1970 to provide competition to Fannie Mae. Till recently, they accounted for $ 6 Trillion of mortgage securities. To make the mortgage based securities more attractive, both these firms provided further guarantees that if the home-owner is unable to pay, the firm would pay up. When Fannie was a government agency, this kind of a guarantee was backed by the federal government.
So investors by and large believed that as government had created these entities, and thus, would certainly bail-out in case of a crisis. This implicit backing made these securities appear much safer. 2 Was this a result of failure of leadership of these firms? This down-fall of such huge companies is not just a failure of the financial system, but also a massive leadership failure across the financial services landscape. This type of leadership lapse dates back to 1980s when companies began to align executive compensations with share-holders interests.
Excessive interest in personal financial goals as against the larger interest of the organization is one of the root-cause of this debacle. Another point is that many managers choose not to lead at all. They believe that if they hire smart people, give huge incentives for personal results, the management of the firm would take care of itself. Under such circumstances, taking risks to achieve personal goals even if that puts others or organization in danger seems acceptable. These particular leadership failures have been a major cause of this full-scale meltdown of US financial sector.