The View from Atop a Collapsing Fannie Mae

Of the 11 companies that Jim Collins featured in his best seller Good to Great, just one—Circuit City—no longer exists. But amid a brutal housing crisis, the mortgage finance giant Fannie Mae (FNM), which Collins called "a high-performance machine," now finds itself in government conservatorship. BusinessWeek's Jena McGregor spoke to former CEO Daniel Mudd, who was dismissed when the government took over.

In Collins' new book, he says decline often starts with hubris, when great companies regard success as an entitlement. Fannie Mae's culture has been described as arrogant. How much do you think this was an issue?There was a certain amount of arrogance. For lots of people, that would be the first adjective out of their mouth in talking about Fannie Mae. When I got the CEO job [in 2005] I very explicitly talked about the culture of arrogance, and there was a lot of nodding in the room. Here's how I think about it: Fannie Mae played such a dominant role in the market historically that even if it was a little bit wrong, the customers had no choice but to play ball. We were establishing the standards.

Collins also points to an "undisciplined pursuit of more" as a marker for a fall. Some would see moves like Fannie Mae's guarantee of riskier "Alt-A" mortgages as such overreaching.In retrospect, would you like to have had less Alt-A? Absolutely. But there was an enormous question around our market share in the period of 2005 to 2007, when we went from 55% market share to something like 28%. The notion that we just went and grabbed everything we could get is wrong. There were huge swaths of home equity loans and subprime loans and high loan-to-value loans that came across the desk, and we said no.

What lessons did you learn from the experience about managing during a crisis?The firm had been under pressure for some time with [a major earnings] restatement and regulatory pressure. When you added to that the housing collapse and the finance crisis, we found ourselves spending a greater amount of time just firefighting. If I had a do-over, we might do more of what we did with the restatement. We hired two finance teams—one did the restatement, another managed the ongoing finances of the company. As the mortgage crisis unfolded, that wouldn't have been a bad page from the playbook: to divide out a team that focuses on ongoing operations [and have] one for all of these new and very difficult problems.

The second thing would be that when you get into that kind of environment, it's hard to keep people motivated by a higher purpose of what you're doing for housing or what you're doing to save the company. You need to talk about what's going to happen to them, to their unit, to the people that sit around them—the way that you manage and motivate changes as you go down through these stages. Meanwhile, individual human beings are going through Maslow's hierarchy of needs.

What did you learn about yourself through the process?In every important decision that I made, the most helpful thing I could do as a senior manager was to step back and look at it and discern what the principle was. I regret the couple of cases where we started with the outcome we needed instead of starting with the principle.

As a manager, an ex-GE guy, I had a lot of confidence I could get Fannie on the right track, even though people warned me it wouldn't end well. I thought I could catch a falling knife—and I'd turned things around for GE in Mexico and Asia. Well, the housing market collapsed and the falling knife became a falling chainsaw. Sometimes the downward slide of a company becomes so momentous and complex that whatever talents and effort you pour into it, it doesn't matter. I've learned to be more humble, and to try to distinguish problems that are fixable and within your control from those that are not. I'd rather not be in The Texas Chainsaw Massacre Part 2.

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