Sticking with Your Strategy

Excerpted from Harvard Business Online, “Why the Mortgage Meltdown Hasn’t Burned These ‘Square’ Lenders”, by Bill Taylor, September 11, 2008

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How do you keep your head when all those around you are losing theirs? This has become a defining challenge for leaders in an age of technology bubbles, private-equity overreach, and, most recently, the mania (and meltdown) in the mortgage market.

What can we learn from this heartache and misery? The most valuable insights come from those few leaders who refused to be seduced by the promises of fast growth and easy profits.

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One case in point is Hudson City Bancorp, a 140-year-old company based in Paramus, New Jersey that has managed to avoid the mortgage meltdown and continues to post tremendous results. Business journalists have discovered this quiet little outfit and marveled at its strategic insights. Its shares are up 50 percent since last August, when the credit crisis really kicked in. (A leading index of bank stocks is down 40 percent over the same period).

“Hudson City banks the old-fashioned way,” Newsweek marveled. “It takes deposits and makes mortgages to people who buy homes in which they plan to live. And then it hangs on to” the mortgages, rather than sell them in the secondary market.

Imagine the brilliance! Take deposits. Make sensible loans. Repeat over and over again, until your market cap approaches $10 billion.

The New York Times tried to unpack the secrets of Hudson’s success and offered this analysis: “The bank carefully screened loan applicants to ensure they would be able both to afford a new house and reside there, rather than flip it. And the bank demanded hefty down payments…as a cushion against any sharp drop in home prices, because it planned to hang on to the loans.”

What a formula! Make sure borrowers can afford their loans. Insist that they make a big down payment. Favor owners over speculators.

Hudson City’s mindful approach to banking only looks remarkable because so many established banks lost their minds. ING Direct, a cutting-edge banking innovator, also managed to avoid the march of folly in its industry. The bank avoided the subprime meltdown because it stuck to simple, plain-vanilla mortgages rather than exotic instruments that sounded too good to be true (and were). The bank has written 100,000 mortgages worth $26 billion and has a grand total of 15 foreclosures. Not 15 percent, just 15 mortgages out of 100,000.

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These successes speak to one of the unappreciated elements of strategy and creativity:

Sometimes, the most important form of leadership is resisting an innovation that takes hold in your field when that innovation, no matter how popular with your rivals, is at odds with your long-term point of view. The most determined innovators are as conservative as they are unique. They make big strategic bets for the long term and don’t hedge their bets when strategic fashions change.

Edit by DAF

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