by Tony Golobic on Thursday, March 10, 2011
As we look back on the financial crisis of 2008 and 2009, it all seems so distant and in a way, unreal. It was barely 30 months ago when Lehman Brothers declared bankruptcy and triggered those cataclysmic events when even the most seasoned financial professionals panicked. Yes, panicked is the right word; even the largest financial institutions stopped lending to one another. So unreal, so unbelievable, so impossible, yet it happened. Can it happen again? My answer a few years ago would have been different; but now I say, I hope it doesn’t, but, of course, it can.
The crisis affected each of us to a different extent, in different ways, so each of us learned our own lessons. Our company, GreatAmerica Leasing Corporation, was very lucky indeed. Although the financial crisis and the Great Recession caused our cost of funds and our credit losses to increase, thereby lowering our net income, our profitability was still respectable, our cash flows remained strong and we continued to enjoy the uninterrupted trust of our financial partners. But it wasn’t without some worrying and knowing that although we had done a lot of things right, we could have done an even better job preparing for what we knew would never happen, yet it happened.
By the way, preparing for the most unlikely events is what we do at GreatAmerica as a matter of stewardship to our customers, employees and owners. Just barely four months before the onset of the most unlikely financial crisis, another extremely unlikely event happened at GreatAmerica – a historic flood, the likes of which Cedar Rapids has never experienced before and we hope, never again. We found our office building, which was situated on a 500 year floodplain (0.2% chance of a flood), in 8 ½ feet of water and we had to evacuate our building with literally four hours’ notice. We evacuated at 2:30 pm that June 12th and we could not get back into our building for over three months. However by 7:00 the next morning, we were back in business some 55 miles north of Cedar Rapids and some 80% of our 3,000 or so equipment dealers didn’t even know anything happened to us. From some of the other 20% of our equipment dealers, we received e-mails and phone calls of support we will forever treasure.
Just barely a week after we moved back into our building, Lehman Brothers declared bankruptcy and we found ourselves again in the midst of another extremely unlikely crisis. One lesson learned: although we at GreatAmerica are eternal optimists, we make allowances that seemingly the most improbable events might happen. Preparing for improbable events can be costly, but it is a cost of building an organization that will last.
While quite a few commercial finance and leasing companies’ funding and therefore new business originations were interrupted, GreatAmerica continued, not only to serve our customers without interruption, but to actually continue with our record of 18 years of steady growth in our originations. We believe this was due to several factors.
One, we at GreatAmerica tend to the conservative in our credit, accounting and statistical reporting. We like to think we are not smart enough to take a liberal approach to these important quality and credibility building areas. We are also disciplined. No matter the competitive pressures, we stay our course. This is also of benefit to our equipment dealer customers; during economic downturns, we don’t have to overcorrect our credit policies. While most of our competitors “red-circled” certain industries to the point where they wouldn’t even consider certain hard-pressed ones, GreatAmerica customers were able to continue serving their credit-worthy customers in all industries. Of course, we were more cautious in our evaluation of exposures to certain hard hit industries.
Two, we have built long lasting relationships with our financial providers at different levels of their organizations. Our financial providers know they can trust the numbers we report and they know we have a portfolio of high credit quality in good times or bad. At the depths of the Great Recession, our delinquency compared well to the levels our industry averages even during a strong economy. The only area where GreatAmerica is aggressive is in our passion for our employees and our customers. We also always ask to meet and get to know the most senior level executives. This way, as turnover happens, our relationships continue uninterrupted. Although we maintained sufficient credit facilities before the crisis, we have now added new relationships and have increased our cushion of committed facilities.
Three, we measure and analyze just about everything. This not only keeps us efficient, but it also alerts us to the beginnings of any unfavorable trends in our portfolio so we can correct them while they are still minor.
Four, we are very serious about risk management, which at GreatAmerica means concentration management with respect to virtually every aspect of our portfolio in addition to normal business risk management areas. This point is worthy of emphasis. At GreatAmerica, we like to think of ourselves as operationally focused as opposed to the vast majority of our competitors who are volume focused - volume at almost any cost.
Five, and perhaps most important of all, we truly believe our employees are the most valuable GreatAmerica asset and we are devoted to them. In turn, our GreatAmericans are passionate about their company. I have never in my life seen such hard work and so much devotion as I have seen from our GreatAmericans during the two extremely unlikely calamities that happened to us in a row during these past three years. Believe me; our employees made us look like geniuses and we are not. We have also benefited, not only because we didn’t lay off anyone, but we kept on hiring. As job markets tightened substantially during the downturn, particularly for new graduates interested in the financial services areas, we continued recruiting on campuses. As a result, we were able to add a number of very talented people who would likely have gone to choice jobs in large metropolitan areas upon graduation. These young professionals are already strong players at GreatAmerica and will play ever increasing roles as we continue to grow.
Has our industry learned any lessons in the past three years? I hope so, but unfortunately recent evidence does not point in this direction. Barely two years past one of the greatest financial disasters ever, we are again observing old habits are hard to break. There are growing signs that “volume at any cost” is again becoming a more common mindset. It feels almost as though the financial nightmare never really happened. Our industry would do well by remembering that famous phrase of Spanish poet and philosopher George Santayana: “Those who cannot remember the past are condemned to repeat it.”