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A Perfect Storm? No, a Failure of Leadership

By Steven Pearlstein
Wednesday, December 10, 2008

A bit of unsolicited advice to business executives trying to explain why their company or their industry is suddenly in the soup:

Please spare us the "perfect storm" metaphor.

It's hackneyed, for starters. It doesn't square with the facts. And for people who fancy themselves leaders, it's downright unbecoming.

The reason the perfect storm is such an appealing metaphor for these shipwrecked captains of industry is that it appears to let them off the hook. After all, who can blame you if the ship goes down in one of those freak, once-in-a-century storms that result when three weather systems collide? It's an act of nature that nobody could have predicted -- or so the story goes.

The latest victim to offer the "perfect storm" defense is Sam Zell, the real estate tycoon who was smart enough to sell out at the top of the commercial real estate cycle, only to dive into the newspaper and broadcast business of the Tribune Co. just as circulation and advertising revenue were about to collapse.

Three weeks ago, it was the auto executives on their first visit to Washington who tried to convince us that the only reason they were running out of cash was a sharp drop in vehicle sales brought on by sky-high gas prices, a credit crunch and rising unemployment.

And in several recent interviews, Robert Rubin, the Treasury secretary turned boardroom consigliere, conjured up the perfect storm to explain how Citigroup and the rest of Wall Street nearly brought the global financial system to a grinding halt, vaporizing trillions of dollars in wealth and putting large swaths of the economy on government life support.

The first thing to understand about the perfect-storm defense is that these guys actually buy into this nonsense. The rest of us want desperately to believe that what brought us this economic crisis was some combination of greed, fraud and negligence -- and, no doubt, there was quite a bit of that. What the populist critique ignores, however, is that at the heart of any economic or financial mania is an epidemic of self-delusion that infects not only large numbers of unsophisticated investors but also many of the smartest, most experienced and sophisticated executives and bankers.

It's not that they don't see the excesses and dangers in front of them -- how could they not? But somehow they convince themselves that the world has changed, that the old rules no longer apply or that, because of competitive pressure, they had no choice but to run with the herd.

In recent months, I've had a chance to talk with half a dozen top business leaders whose companies have fallen into the soup and read published interviews with many more. And almost to a person, they say that they've been replaying the tape over and over in their minds and, even now, they still can't figure out what they might have done differently, given what they knew at the time and the various pressures they were under. Or put another way, they continue to think of themselves as victims of a perfect storm.

The second thing to understand is that, fundamentally, they're wrong.

It is useful to remember that in Sebastian Junger's gripping account of a shipwreck that popularized the notion of the perfect storm, Billy Tyne, the skipper of the Andrea Gail, received urgent and repeated warnings that he was heading into what could be a monster storm off the Grand Banks -- warnings that Tyne and his crew chose to ignore. After all, the weather immediately around them had been relatively calm, and the swordfish had been tantalizingly plentiful. And there were always worrywarts warning not to do this and not to do that. If Tyne had listened to them, the Andrea Gail would never have left port, let alone become one of the most successful sword boats in Gloucester, Mass.

It was no different for Sam Zell. By last year, when he was negotiating for Tribune, was there anyone in America who didn't know that the Internet was stealing readers and advertisers from the mainstream media, eating away at profit margins and calling into question the business model on which the entire industry was based? Did he wonder why nobody else in the industry seemed anxious to bid for some of the country's best newspapers and broadcast stations? Had he not seen the flurry of articles in the financial press warning of ridiculously loose lending and over-leveraged deals?

The only perfect storm to hit the Tribune was the one that resulted from the collision of Zell's ego, his arrogance and his utter ineptitude in running a media empire, along with a total disregard for the financial well-being of thousands of employees whose retirement assets he commandeered for a financing scheme that gave him control of the company while putting in very little of his own money.

I suppose we can have a bit more sympathy for the car guys, who might not have understood that the reason Americans were buying record numbers of foreign vehicles in recent years had nothing to do with cheap credit or mortgage cash-outs and everything to do with the superior styling and quality of the products. But are we really supposed to believe that when giant century-old companies hit a sudden downturn in sales, the reason they run out of cash in a matter of months has nothing to do with the billions upon billions of dollars they spend on reckless promises of job security and lavish health benefits for workers and retirees?

When it comes to self-delusion, however, Wall Street's top bankers and financiers take the prize.

The most common rationalization is that because housing prices had not fallen nationwide since the Great Depression, nobody could have anticipated the current meltdown in the housing and mortgage markets. Oh, really? Had they somehow missed all those discussions back in 2005 about whether there was a housing bubble? Or had they considered that something unusual might be in the works when housing prices nationally were rising two and three times the rate of inflation, year after year, which was also without recent precedent?

In fact, as we were reminded again yesterday at the congressional hearings on Fannie Mae and Freddie Mac, everyone understood that housing prices and mortgage lending were out of control. What they didn't know was what to do about it. Any company that dared pull back on lending and sell off mortgage-backed securities would almost surely have lost market share and seen its profitability and share price fall behind the competition. Before long, analysts, investors and the press would agitate for a management shake-up. So they convinced themselves that the safer strategy was to keep running with the herd.

What capsized the economy was not a perfect storm but a widespread failure of business leadership -- a failure that is only compounded when executives refuse to take responsibility for their misjudgments and apologize. General Motors took an important step this week with a full-page mea culpa in an industry publication. But until many bankers and dealmakers come clean, my guess is that the growing anger and resentment of ordinary Americans is likely to hamper any government effort to deal with the crisis.

Steven Pearlstein will host a discussion today at 11 a.m. at http://washingtonpost.com. He also moderates a new Web site, On Leadership, at http://washingtonpost.com/leadership. He can be contacted at pearlsteins@washpost.com.

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