The Road to Ruin

How the banking industry got into its present crisis, and how financial and banking meetings can recover from it.

HOW THEY GOT INTO TROUBLE

1. U.S. government embarks on an aggressive home ownership policy empowering Fannie Mae and Freddie Mac to offer loans to potential buyers without regular credit analysis, at "teaser" rates, for excessively high principal amounts.

2. Mortgage brokers and property developers jump on the bandwagon, encouraging new home owners to purchase houses they can't afford and existing home owners to take out risky additional mortgages.

3. Result: A river of bad loans with a high probability of default on both interest payments and repayment of principal.

THE DANGER GOES UNDETECTED

4. The initial loans held by mortgage banks, regional banks, and money center banks are quickly sold to investment banks that repackage them into securities traded on the stock market, called Collateralized Debt Obligations (CDOs).

5. The mortgage, regional and money center banks retain no residual risk for the loans they make while collecting substantial fees from the investment banks for issuing the loans. This leads to a degradation of underwriting standards.

6. Credit rating agencies fail to take the collapse of underwriting standards into account when valuing these investment products. Financial institutions buying CDOs rely on the ratings agencies to give them an accurate assessment of credit performance and expected cash flows, which they do not receive.

CRISIS HITS

7. Original borrowers begin to default on their loans in record numbers.

8. CDOs are revealed to be wildly overvalued, resulting in bank assets plummeting in every banking category (mortgage, regional, money center, investment).

9. A major loss of confidence in the validity of the ratings agencies occurs.

10. Interbank lending stops.

11. Original borrowers are unable to qualify for loans to refinance.

12. Interest rates rise.

13. Property values decrease.

14. Credit of all kinds dries up (both personal and business).

15. Unemployment rises.

16. Consumer spending plunges.

Where do banking and financial meetings go from here ...

CHALLENGES

Walking the Plank
Massive industry-wide layoffs, high-profile corporate failures like Lehman Bros., and the worsening financial situation of giants like Citigroup are causing management to consider cutting program budgets.

Drowning Options
Meanwhile, traditional cash incentives—bonuses and stock options—are nonexistent or far underwater.

The AIG Effect
Large banks and financial institutions have taken hundreds of billions of taxpayer dollars and are afraid incentive travel will lead to the perception among lawmakers and the public that they are wasting taxpayer dollars on luxurious junkets

SOLUTIONS

1. "Maintain, rather than change or eliminate, top-performer programs," says Mike Spellecy, corporate vice president and managing consultant for St. Louis-based Maritz. "[Those employees] are self-motivated, but they crave recognition and will get it elsewhere." For instance, from your competition.

2. Understand that the challenges that caused you to create your incentive programs in the first place still exist—if anything, they have become more serious. Mel Van Dyke, employee engagement practice consultant for Maritz, notes that the company has clients that canceled programs six months ago coming back now saying, "We still have those needs."

3. If you've accepted public money, lower the overt luxury quotient—switch from beach resorts to city properties, move to individual incentive travel for a year, or run a points-based merchandise or gift card program. The beauty of points-based or gift card alternatives is that they make it easier to tier programs so salespeople who won't make their numbers have something to aim for.

4. Add business meetings. "We always encourage clients to have business meetings every day," says Harith Wickrema, president of Willow Grove, PA-based Harith Productions. Aside from tax benefits, "you get to gather information from the best salespeople in your company," he adds.

5. Before you start cutting, "Ask what is it you need to get done this year," says Fay Beauchine, executive vice president of global engagement and events for Minneapolis-based Carlson Marketing. "Are you still trying to engage loyal customers? Do you need engaged, knowledgeable, and motivated employees? These [needs] are not going away."

Originally published May 1, 2009

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