Malcolm Gladwell's latest book, "What the Dog Saw" (a collection of his writings for The New Yorker) includes a piece from 2003 called "Connecting the Dots." Gladwell introduces readers to the concept of "creeping determinism." He defines this as the sense that the ultimate outcome of an uncertain situation seems almost inevitable given the benefit of hindsight.
The most famous example of this phenomenon concerned the attacks of Sept. 11. Given what we know now-notably the spike in cell phone traffic among suspected Al Qaeda members and warnings that Al Qaeda may attempt to send students to civilian aviation schools-it seems easy to say that the nation's intelligence agencies should have sniffed out the plot, but when the FBI's counterterrorism group had 68,000 outstanding leads, connecting the dots would have been nearly impossible.
Anyway, this made me wonder if the credit union industry-myself included-was also guilty of creeping determinism when it came to the corporates. It seems so easy now to say that this was inevitable. WesCorp and U.S. Central bought securities backed by exotic mortgages taken to buy overpriced homes. The final chapter had to include conservatorships and corporate stabilization expenses, right?
Honestly, the answer is no. It would have been nearly impossible to predict that things would end up as poorly as they have. If the housing bubble had stayed inflated for one more year, many of the bad mortgages backing the troubled securities might have prepaid and the problem would have been a lot smaller. Or what if TARP money had been used to buy troubled assets and not used to recapitalize banks? What if ratings agencies had been more rigorous in their analysis? We can play this game all day.
The mistake made by the corporates wasn't failing to account for the long shot scenario that actually played out. The biggest mistake involved overconcentration in a sector that most agreed was fundamentally imbalanced. The actions actually taken by the corporates and NCUA, such as a moratorium on the purchases of private-label mortgage securities, would have proven sufficient most of the time. However, by putting essentially all their eggs in one basket, WesCorp and U.S. Central invited the risk that ultimately ruined them.
Gladwell goes on to discuss best practices in the area of intelligence and argues that competition between agencies (i.e. the FBI and CIA both investigating the same leads) is the best approach since it creates a free market that rewards those who work harder and smarter.
As soon as I read this, I immediately thought of one of the most original and provocative comment letters that NCUA received on the subject of the new corporate regulation. It was from USE Credit Union in San Diego and much of the letter focused on the notion of transparency. The letter asserts that WesCorp communicated to its members than it didn't own subordinated tranches of private-label mortgage securities, but then didn't provide members with a list of securities that it actually owned. USE argues that sharing this information would have effectively turned every interested member into a regulator and would have revealed WesCorp's perilous holdings of mezzanine tranches much sooner.
USE's push for transparency has much in common with Gladwell's free market approach to intelligence. If every active member is policing its corporate, NCUA's monopoly on supervision is broken up. True, the members wouldn't have regulatory authority, but they can certainly take action, like withdrawing their funds or seeking board and management changes. USE's idea is revolutionary and brilliant, and I hope that NCUA requires corporates to provide portfolio-level detail to its members as part of the corporate reforms.