Sub-Prime mortgage crisis

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Sub-Prime mortgage crisis

Post by silmcoach »

- result of an emergent culture within financial institutions?

It would appear that financial experts from many of the top institutions did not perceive the inherent risks of the sub-prime model.

From a business psychology perspective it could be asked whether the ensuing crisis reflects the psychology and decisions of a relatively few individuals or rather, a cultural shift within financial institutions?

Gareth Morgan (1998) suggests that we can view organizations from different perspectives. We can think of organizations like brains, as interconnected systems, including an information processing brain, where implementation teams and departments "think" for an organization and control overall activities. He continues, intelligent systems require a sense of the vision, norms, values, limits, or "reference points" that are a guide to self-regulating behaviour. If managers develop new innovative ways to meet customers' needs an open system can use these local ideas to actually influence the wider operating rules of the system. Thus the principles and values of the organization can evolve. (p. 88)

Viewing organizations from a cultural perspective Morgan explains that 'Once we understand culture's influence on workplace behaviours, we realize organizational change is cultural change and that all aspects of corporate transformation can be approached with this perspective in mind.' (p.111) Just as individuals in a culture might share much in common, their personalities can be very different; so too can groups within organizations. It is this phenomenon that is described as "corporate culture."

Thus we might consider different and competing cultures within the same organization. Those with an eye for the market potential and pesonal reward against those immersed in a more traditional banking culture favouring prudence and due diligence.

Citing Weick (1979), the process of enactment is described, whereby we must understand culture as an ongoing, proactive process of reality construction. Organizationally, shared meanings provide alternatives to control through external procedures and roles.

Perhaps the "cultural revolution" in banking was perceived as a brave new world that couldn't go wrong.

The sub-prime model, following Morgan’s line, began this time around as a "new" innovative way to free up capital and increase the customer base. Significant short-term profits and personal gain may have contributed to the proactive process of reality construction described by Weick. Thus the shared meanings, in this case an under assessment, or even "denial" (psychodynamic) of risk associated with the sub-prime model, may have over-ridden the usual financial controls. Based upon nothing more than conviction and belief [see Tri-une brain] the sub-prime model and the process of securitization proved to be seriously flawed. The fundamental assumption that the number of defaults within a portfolio of mortgages would be limited was a serious misjudgement, in particular if mortgage approval was in the hand of external third parties.

It may well be prudent in the future to develop an organizational awareness to monitor cultural shifts that appear to be moving away from sound established practice and controls. Cameron and Quinn (2006) have developed the Organizational Culture Assessment Instrument (OCAI)
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