Voices: Human Capital

lead tom moriartyHuman Capital is a monthly column for plant managers, department managers, supervisors and aspiring leaders. This column provides a blend of leadership and organizational development concepts with practical applications and insight. Look for Plant Services Contributing Editor Tom Moriarty for leadership topics to expand your leadership toolkit.

What causes a system meltdown?

Tom Moriarty says that RCA tells us no failure is due to one particular event.

By Tom Moriarty

Curious about the root causes of the 2008 housing and financial system meltdown, I recently read a book called Bailout Nation by Barry Ritzholtz, published in 2009. Just as any practitioner of root cause analysis can tell you, no failure is ever due to one particular event or circumstance. Failures always have multiple causes and could have been avoided or at least postponed if any one of the contributing events or circumstances could have been disrupted.

The main culprits in the housing and financial system meltdown story range from politicians (from both political parties), unscrupulous mortgage originators and banks, and individuals who signed inappropriate mortgages to the Federal Reserve, the securities rating agencies, and risk managers of many investment and non-profit bond portfolio managers and board members.

Politicians passed policies that generated advantages for the largest of financial corporations because of lobbying and a lack of integrity by politicians. The Federal Reserve kept interest rates at historically low levels for an extended period of time to support stock market prices. This made home mortgages more affordable but also had the unintended consequence of suppressing yields for large bond portfolios (pension funds and charitable organizations, representing 20 times the scale of the total stock market). The large bond portfolio managers were unable to make required distributions to investors without dipping into the principal due to the low interest rates. Portfolio managers needed yields greater than 5% but were getting less than 2%.

Mortgage originators got paid to process applications, so they processed a lot of them. Banks approved mortgages and creatively bundled mortgages into collateralized debt obligations (CDOs) and other products, which could be sold on a secondary market at higher yields. When sold, the CDOs came off the bank’s books, and liability transferred to the purchasers of the CDOs. Securities rating agencies, such as Standard & Poor’s, Fitch, and Moody’s, were complicit; CDOs were given AAA ratings, which were normally reserved for low-risk U.S. government securities. Portfolio managers snapped up CDOs, with inflated ratings, to increase their portfolio yields.

Home buyers obscured or lied on their mortgage applications, with originators and banks purposefully not enforcing standards. In one California example, a seasonal agricultural worker making $14,000 per year was provided a mortgage for a $472,000 home. As long as the home purchaser could make the first 90 days of mortgage payments, the mortgage originators and the banks were happy to sign the mortgage. Why? Ninety days provided enough time to get the mortgages bundled into CDOs and off the bank’s books.

Tom Moriarty, PE, CMRP, is a former Coast Guardsman having served for 24 years; an enlisted Machinery Technician for nine years, then earning a commission through Officer Candidate School, retired as a Lt. CommanderTom Moriarty, P.E., CMRP is president of Alidade MER. He is a former Coast Guardsman, having served for 24 years; an enlisted Machinery Technician for nine years; earned a commission through Officer Candidate School; and retired as a Lt. Commander. During his final year of service, 2003, Tom was selected as the U.S. Coast Guard’s Federal Engineer of the Year; an award sponsored by the National Society of Professional Engineers (NSPE). He is a member of the Society of Maintenance and Reliability professionals, the past Chair of the American Society of Mechanical Engineers (ASME), Canaveral Florida Section, and a member of the ASME Plant Engineering and Maintenance (PEM) Division. He has a B.S. in Mechanical Engineering from Western New England College, and an MBA from Florida Institute of Technology; Professional Engineer (PE) licensed in Florida and Virginia, Certified Maintenance and Reliability Professional, various credentials in management and reliability fields. He can be reached at tjmpe@alidade-mer.com.

So, why am I reliving this depressing scenario in a magazine column that is dedicated to plant operations and maintenance? There is benefit in studying historic events to learn how things can get out of hand. Longevity and complexity in any system will lead to deterioration of focus and weakening of standards, leading to self-interest dominating individual and group actions.

Think about a plant or business unit that is having difficulty competing. Sales drop, executives issue edicts that major improvement must be demonstrated in short order or drastic measures will be taken. Plant leaders may look the other way when shortcuts are taken to maintain unit production. Every hour that goes by without an incident provides a payoff for taking the risk, so it happens more and more. Eventually there is going to be a major event that proves not worth the accumulated risk.

As with the housing and financial system meltdown, no one party is ever to blame. If you are at the shop floor level, a quote from Mark Twain may sum up what you feel: “Sometimes I wonder whether the world is being run by smart people who are putting us on, or by imbeciles who really meant it.”

All manufacturing, power generation, and other facilities are complex organizations. Every organization needs to have rules and regulations that provide boundaries. And every organization needs to have people who are alert and who hold others accountable. Without leaders at all levels paying attention and taking action, any system will degrade. The size the system and the scope to which it’s allowed to decay determine the magnitude of the consequences.

When things are not right, individuals, supervisors, and managers must speak up, take action, and hold others accountable. If you are in an influential position (executive, plant manager, or board member) remember that your actions, or inactions, affect everyone that is affected by your system. Doing otherwise only means you are contributing to the meltdown.

Read Tom Moriarty's monthly column, Human Capital.

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