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A CRISIS OF LEADERSHIP
To put it lightly, September was a bad month for Wall Street. Faced with a crisis like the one that ripped through the financial sector last month, one can’t help but ask: how could this have happened? It appears that a number of factors, such as overvaluation of assets, contributed to the shock, but some of the crisis’s roots have more to teach us, as Egyptians and foreigners involved in the local market, than others.
Perhaps the most important lesson from the current turmoil is about leadership. As Wall Street firms and other financial institutions racked up billions in bad debt, making their companies look good on paper while seriously undermining their long-term financial viability, both the government and private sector should have done something about the unsustainable situation.
Since the 1980s, the compensation for many financial executives has been aligned with share price. Thus, fewer managers are willing to make decisions that benefit their company’s long-term health if it means a blow to their stock’s value – and perhaps it’s naive to expect otherwise.
But it shouldn’t be. One of the marks of good leadership is being able to make the right decision, even if the results are tumultuous in the short term. Leaders must have the courage to make unpopular and selfless decisions.
The housing bubble and the accompanying sub-prime mortgage crisis was no secret in Washington. Yet the private sector and US government stood idly by as premier financial institutions accumulated massive amounts of bad debt on their balance sheets, playing with it to turn a paper profit. Strong intervention and regulation by the government was needed, and only now – after matters have come to a head – is this willingness to step in more forthcoming.
While the current crisis reflects a failure of private sector leadership, the US government is also culpable. In addition to strong leadership in the private sector, increased regulation of financial tools would have helped. The necessity of robust regulation in the banking and credit markets is a lesson that Egypt should take to heart as these sectors continue to develop.
Seeing a gathering storm on the horizon, one must have the courage to change course. US regulators and financial services firms lacked this, and unfortunately, now it’s too late. But Egypt, with its financial system still in its infancy, has the opportunity to learn from others’ mistakes and apply their lessons as its markets move towards maturity.
KHALED F. SEWELAM
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