If you watch the news at all, you saw today the collapse of two more financial institutions amidst the mortgage meltdown. Both Lehman Brothers and MerrillLynch went under today. Lehman Brothers to bankruptcy and Merrill Lynch in a forced sale of the company to Bank of America. These two join countless other victims of the mortgage industry collapse. You may have heard of the other big-name institutions but rest assured that many many other small/medium financial and mortgage companies are going under due to their exposure to the subprime market. I can’t give the whole story of what happened in the mortgage industry here – I just don’t know enough about it – but I would like to share a story that is very closely linked to the financial disasters we’ve been seeing lately.
In late 2005 while living in Miami, I began working in the IT department of one of the nation’s largest homebuilding companies. This company did business and built communities in 13 states around the country, and at their peak had almost 12,000 employees. Early on things were great. Homes were selling, the real estate market was hot in almost every metropolitan area around the country, investors started to dive headlong into properties in need of a little work in hopes of turning them around for a quick profit. Even television producers got into the act and throughout 2006 the top-rated shows of HGTV, TLC, and other similar networks were about “flipping” real estate. But something was very wrong with the economics of this latest real estate buzz. It simply wasn’t sustainable.
Throughout 2005 and the first three quarters of 2006 things were great at this company. Revenues were up, profits were up and morale was high. But then something started to happen. As part of the IT team I presided as the on-site tech for many of the management meetings that brought together regional managers from territories around the country to Miami to meet and discuss the state of the company. At one of these meetings in the Fall of 2006, managers began to stand up and describe slowing sales in their area and concern that prices were inflated.
These meetings were generally run by the company’s CEO and CFO, and as the conversation went around the room, the regional managers would give a short description of themselves, their sales area, and the state of business there. Many managers got up and spoke to slowing sales at which the CEO simply scoffed at their lack of salesmanship and continued to repeat the idea of more creative ”incentives” - which would later become the craze of homebuilders nationwide as a hail-mary idea to bring in buyers. What struck me was the level of sarcastic arrogance by the executives to the national market conditions and where they seemed to be heading. In their minds, it wasn’t the market’s fault that sales were slowing it was the fault of sales managers for not being able to create a convincing arguement to buy.
The one manager that I specifically remember was the regional vice president from Las Vegas. When it was his turn to speak he stated how Las Vegas real estate has undergone explosive growth (much of it through investors and speculators) not much different from what Miami real estate seemed to be experiencing. His question was whether the company executives were concerned about the level of growth as a possible “real estate bubble”. The CEO snapped back at the manager, “I keep hearing this talk about a ‘bubble’. I don’t want to hear it.” He pointed to the CFO and called to him, “..what do we say about the ‘bubble’”? The CFO shot back almost laughing and he said, “Bubble Schmubble!” The CEO echoed him, “That’s right! Bubble Schmubble!” It sounds corny, and it was, but what you have to also know is that the phrase was a part of the company’s propaganda hung in and around the headquarters on posters. It was designed to ingrain in employees that despite all common sense, the idea of a real estate bubble was actually nonsense.
I left the company in early 2007 when I moved to Seattle. As I left the markets were beginning to see that very earliest signs of mortgage troubles. In the months immediately following my departure the company’s stock price dropped nearly 40% as the fallout began, massive strings of layoffs occurred, and morale nose-dived. Looking back on that meeting it still blows my mind how dismissive the top executives of the company were to the concerns of managers who were right there, in the very markets being hit, and raising real concerns. It was a scary level of detachment from the everyday business of the company that does nothing but reinforce to me the commonly held belief that executive compensation is egregiously high. These executives rode a waveof market-indifference straight into the ground. The company’s stock now sits below $14/share and has taken billions of dollars in write-downs and losses since that prophetic meeting. It’s number of employees has fallen to below 4000 and sadly the Las Vegas market that inspired the CEO’s phrase has experienced arguably the largest collapse of real estate in the nation.
Update: In light of a report issued on February 19, 2009 I’m not holding back the details of this story any more. You can read the report here. The company I worked for was Lennar Corp. whose shares are now trading below $6. Wall Street executives have been the target of investor ire for both their excessive compensation packages and reckless abandon towards running their companies. The leadership team of Lennar was no different then these Wal Street firms’. The above story is just one of many examples that have convinced me that the current state of our economy is the result of blatent greed and indifference of those in the financial and real estate industries. In many ways I regret my former association with these people. I have since returned to working in the non-profit sector and could not be happier with my work.