Integral for the Masses: The Credit Crisis Through an Integral Lens — and When is the Most Appropriate Time to Evaluate a Leader’s Achievements?

Keith Bellamy

Keith BellamyNew York: The most fascinating show in town this summer has, in my opinion, played out not on Broadway but down at the tip of Manhattan on Wall Street. From the same people who brought you such previous delights as “The 1929 Crash,” “Melt Down in South America,” and “Bursting the dot-com bubble,” amongst many others; this year we were treated to “The Sub-Prime Credit Crisis.” Featuring a cast of millions, yet again the Financial Services Industry has taken the developed (and much of the undeveloped) world to the brink of yet another meltdown of the systems that underpin life as we know it.

Having spent 30 years of my life in or around this industry, I found myself viewing the unfolding developments with the same fascination as one has for road-kill. I didn’t really want to look but just couldn’t look away. The plot line was no different from that which has played out so many times before. Initially, the leaders of the Financial Industry are unanimous in their denial that there is a problem. Seemingly overnight this turns into utter surprise that such a situation could ever have arisen, followed by the seeking out and exposing of some prime players (in this case Bear Stearns in the US and Northern Rock in the UK) effectively hanging them out to dry. Finally, the crisis is declared past allowing the moguls of the industry to move on and seek out a new area to effectively play with, whilst around the globe the true victims of the mismanagement that led to the crisis try to pick up the pieces of their lives.

Don’t get me wrong I am not some born again tree-hugging Vermont-living reformed capitalist who can see nothing but evil in the world financial systems. Whilst not perfect, the evolution of these systems has been an essential part of the development of society, culture and mankind bringing us to the brink of Integral awareness that so fascinates many of us today. The collapse of these systems will indubitably lead to an unraveling of so many of the facets of life that we take for granted today. Unlike the New Age Movement I do not subscribe to “back to the future” as a philosophy for mankind’s development

As I followed these developments over the summer, two questions kept running through the back of my mind:

  1. How would an Integral perspective potentially avoid these ever-frequent threats to our fundamental systems? And
  2. Considering that the seeds of these crises are often laid many years before they eventually arise as the result of actions taken by leaders who are not responsible for recovering the situation, when is the most appropriate time to assess a leaders impact on society?

From an Integral Perspective the current crisis was to be expected; however, it wasn’t necessarily inevitable. Actions taken by different leaders over time (including Alan Greenspan as Chairman of the Federal Reserve Bank in the US and Gordon Brown as Chancellor of the Exchequer in the UK) appeared rational at the time. They were, however, actually creating the environment that finally exploded in the summer of 2007. Because these individuals were ignoring the internal perspectives of individuals and collectives, and the stages of development at play, they effectively chose to steer the world economy with the dexterity of an oil tanker skipper with one arm tied behind his back and only the ship’s wake to inform his decisions.

As Alan Greenspan mentions several times in his autobiography, The Age of Turbulence, all that he could do was survey the data and draw rational conclusions as to the actions that he took. He couldn’t be held responsible for the irrational behaviors exhibited by individuals and organizations. Yet these behaviors were not irrational if one takes into account stages of development. Not allowing his decisions to be integrally informed was possibly the least rationale thing that he could have done.

I’d like to delve a little into the history of what is being called the Sub-Prime Crisis, which you will see really has little to do with Sub-Prime Mortgages, and highlight where Integral insights might have influenced decisions differently. At the very core of the issue is a desire for security. The American Dream of home ownership and Margaret Thatcher’s liberating of buying your own property in the UK both play to this fundamental desire. However, few have the resources to buy their home with outright cash, so the financial services industry devised the Mortgage.

Traditionally, the banks that lent you the money to purchase your own home were fully accountable for ensuring that you paid back your loan over an agreed timeframe. Because there was a risk that some people might fail to meet their obligations, the banks charged a risk premium in the interest rate associated with the mortgage. Here was a system that was mutually beneficial and in the main self-regulating, and had been refined over the years. The system was exclusive, requiring an individual to meet some pretty high criteria before a bank would enter into a relationship, which could last for 30 years.

However, there was a small problem, once the bank had lent you the money for your mortgage it was effectively dead money and couldn’t be used for anything else until it was repaid. This inability to leverage this tied up money restricted the banks and in turn restricted the number of people who could purchase properties. So in the 1970s some very bright people in the Investment Banking sector devised an approach whereby they would buy the mortgages held by the banks, package them together into a security and sell that on to other investors.

These derivative products as they were known seemed like manna from heaven. For the originating banks, they could release some of their tied-up capital and re-lend to new buyers of homes. On the other hand those people with spare cash could invest in these new securities because they were “as safe as houses.” This turnaround or velocity of capital fuelled the growth in home ownership across the world. Of course there were risks, but originally, the bank making the loan continued to manage it and the relationship with the borrower.

Because of this risk, the Investment Banks argued that the need for regulation should be negligible. “Trust us! We are Investment Bankers!” they said. And the blinkered regulators took them at their word even though this promise rates somewhere between “of course I will love you in the morning” and “the cheque is in the post” on the list of the top ten biggest lies in history. This failure to appreciate the inner nature of Investment Banks that an Integral perspective could have given is where the initial seeds of the crisis originated.

Again don’t get me wrong; some of my best friends are Investment Bankers and they are wonderful people. Yet anybody who has spent some time in an Investment Bank will be the first to tell you that the collective values of the bank rarely matches their own. Most Investment Banks are strongly tribal in nature (you either fit or you are out the door) and highly aggressive (make the next deal at the expense of “fill in the blank” or you are out the door and I’ll make sure you never get to work on Wall Street or the City again). Perhaps Investment Banks provide a place where unresolved shadows of individuals are allowed to dominate, but methinks that is a subject for another column. The critical point is that Investment Banks are cauldrons of potential excesses that Regulators are established to contain and channel; give them an inch and they’ll take a light-year.

So back to our story, with little or no regulation in place the Investment Banks started to encroach further and further into the Mortgage marketplace. First they offered to provide custodial services for the loans made by the originating banks. This allowed the originating banks to drastically reduce their costs of managing the loans over their lifetimes. Sure it meant that somebody else was building a relationship with your customer, but what the heck you didn’t need all those back office systems and nerds around the place.

As a consequence of this move, the Investment Banks could start creating even more esoteric instruments that arose out of its flexibility and latitude in Mortgage processing. These sophisticated securities would, of course, only be traded amongst individuals who understood the complexity and risks of these instruments (wink, wink); and the underlying securities were sound (suppressed belly laugh).

The final act to set up the crisis of this summer was when the Investment Banks effectively cut the Originating Banks out of having any long-term responsibility for the loans that they sold. The Originating Bank was paid a fee for selling the Mortgage, which like a surrogate baby was taken at closing by the Investment Bank and securitized. For the originator there was a lump sum payment and absolutely no risk; as a consequence the criterion for selling mortgages lessened considerably.

The important thing to note is that this didn’t happen recently, the restructuring of the Mortgage Industry was probably completed a decade ago. There was just one thing that was stopping the explosion of unscrupulous selling that led to summer of misery for many this year – high interest rates. From the Regulators’ point of view there was no need to intervene based upon the basic data (the rear mirror perspective.) Yet if the internal perspectives of the key players were taken into account, which an Integrally informed perspective would call for, it would have been blindingly obvious that should interest rates fall, then the finger would have been removed from the dyke, and the potential for catastrophe would have been heightened.

As with most things in life the final element in this pending crises came from a completely unexpected quarter. When the dot-com bubble burst, regulators around the globe were fixated on achieving a soft landing for the global economy. They were concerned about the lack of liquidity and rapidly reduced interest rates to near record lows. As a consequence the one remaining barrier to a flood of new mortgages, monthly repayment costs, dissolved almost over night. The smart money moved into property; home prices started to rise rapidly; developers started building new homes; existing homeowners could take out equity and spend it on whatever they liked. The economy was saved, and the leaders who achieved this result felt rather smug.

However, the hurdle for getting into the housing market was removed and many pursuing their dream of home ownership could now step onto the steroid propelled escalator of home prices that had always seemed out of reach. From an Integral perspective this was an inevitability; the rampant explosion of exploitative selling of loans demanded the mediation of regulation sooner rather than later. But when you are an Alan Greenspan or Gordon Brown just watching the data, and not understanding the dynamics at play, expecting everybody to act rationally then you are in dereliction of your leadership responsibility.

At the time of writing a lull appears to have settled on the markets of the world. However, I believe that we have not felt the final aftershocks from this summer’s crisis nor are we likely to do so for some considerable time to come. I am strongly of the belief that had the leaders of the global economy been Integrally informed they could have made minor interventions to prevent the current crisis whilst saving the world following the dot-com crash.

As for my second question that is a little harder to answer. I have to admit to having a lot of admiration for Alan Greenspan and believe that he did a lot of things right whilst at the helm of the Fed. However, he retired with a reputation of walking on water, which is probably somewhat exaggerated. It is clear from his autobiography that he struggled throughout his career with what we have come to know as the interiors of both individuals and the collective that manifests in both local and global economies. Yet his fixation on and expectation that reason would prevail had him deeply rooted in the values and action-logics of first tier.

His inability to gain perspectives of the global economy from higher levels of consciousness left him with limitations that will, over time, lead to a questioning of his overall leadership of economic affairs. Perhaps it is one of the great paradoxes of leadership that we continue to assess the actions of leaders in order to propagate our desire for mythical heroes; at the same time as we become more aware of the circumstances in which these leaders made their decisions, we strip down the myth to reveal the underlying human being warts and all.

If we didn’t do this then the pedestal on which we continually insist that we place our leaders on would become extremely crowded and the consequences for leadership in general would be extremely dire. So I raise a glass to all of the leaders basking in the glory of their elevated positions with a toast that they enjoy their hour in the limelight for it will not last forever.