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Put in Rules That Allow You to Adapt to Powerful Trends

Mar 16, 2008
Optimistic visions of solving problems cause many to choose to cover up problems. When this happens, the result can be to make things worse if conditions are to change permanently.

Banks are not immune from problems with their loans similar to those experienced by the S&Ls in the 1980s. A changed economic environment can mean that asset values drop, cash flow dries up, and the bank is holding a note from a borrower who cannot pay and whose collateral isn't worth very much. Some analysts say that this sort of situation is a major cause of the poor economic performance in Japan during the 1990s, as banks there scrambled to hide the extent of the losses that they have already taken in economic terms, but had not yet charged to their balance sheets. Such a scenario could easily be in China's future.

Banks that have looked into how to recover on such troubled loans noticed something very interesting, however. The loan officer who originally authorized the loan tended to be very sympathetic to the borrower, often taking the step of loaning the borrower even more money, in hopes of being eventually repaid. If the adverse irresistible force turned around very quickly, this approach could work out all right in some circumstances.

However, if the adverse irresistible force of a poor economy or weak demand in an industry continued for many years, this policy could be a disaster, as some argue has happened in Japan. In fact, the banking examiners and those who supervise them in Japan are often those who formerly worked as loan officers, and had lost their previous jobs when the loans they had made were not repaid. Naturally, such examiners are like to be sympathetic to the banks and bank officers they examine.

In this kind of clubby environment, executives and loan officers draw a lot of comfort from knowing that everyone else both in and out of their lending organization is taking the same approach to not being very active in calling bad loans. In the process, billions can disappear, with the rate of disappearance compounded by more bad loans being granted to the same people.

In the case of Japan, the government rules abet this cover-up problem by making it easy for banks to argue that these are good loans. That, too, sends a message that the institution should not seek to aggressively protect its depositors. As a result, an insolvent institution may keep losing and wasting money long after its own capital has disappeared.

Put in rules that give you a fresh look at the situation as soon as possible. Then take action.
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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