The Countrywide Conundrum

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Obviously Risky

Yet as the subprime contagion continues to spread—and the ousters of Stan O'Neal at Merrill Lynch (MER) and Charles Prince at Citigroup (C) indicate it's going to for some time—the pressure will only increase to tighten mortgage lending to where it was 20 years ago.

Indeed, many commentators "have suggested that we throw out the whole market and go back to the constricted situation of the early 1990s," Edward Gramlich, a senior fellow at the Urban Institute and the author of Subprime Mortgages: America's Latest Boom and Bust, told those gathered at a Federal Reserve conference last summer. "[But] that seems exactly the wrong message to take from the experience," Gramlich said. "The subprime mortgage market was a valid innovation, and it did enable 12 million households to become homeowners."

Lending large sums to people with scant or shaky credit histories is, obviously, risky. Then again, Drucker noted in his 1985 book Innovation and Entrepreneurship, "All economic activity is by definition 'high risk.'"

Simple Greed

The problem with subprime lending was not the nature of the innovation itself. It was the way it was carried out. Correctly executed, "Innovation is both conceptual and perceptual," Drucker wrote. "Successful innovators use both the right side and the left side of their brains. They look at figures and they look at people. They work out analytically what the innovation has to be to satisfy an opportunity. And then they go out and look at the customers, the users, to see what their expectations, their values, their needs are. Otherwise one runs the risk of having the right innovation in the wrong form."

In a way, that's just what happened here. Because of simple greed, all sorts of subprime loans were sold with reckless disregard for whether these particular products were appropriate for the consumers snapping them up.

The end result, as Drucker might say, is that the crisis has put all the focus on what shops such as Countrywide have done to society. Largely forgotten is what they've done for it.

Rick Wartzman is the director of the Drucker Institute at Claremont Graduate University and an Irvine senior fellow at the New America Foundation. He writes The Drucker Difference every other week for businessweek.com/managing/.