After being a customer of Radian Group, a Philadelphia-based credit risk management firm, S.A. Ibrahim joined it as CEO in 2005. Soon, the subprime crisis gripped the nation. Through innovative thinking and some seemingly risky decisions, he turned the company around and, when he left in 2016, it was the best year in its history. Ibrahim calls it a journey to the gates of hell and back.
In a conversation with Knowledge at Wharton, Ibrahim says: “I had to convince everybody in my company that we could make it because no company with 6,000 basis points of credit risk ever came back. Everybody else had written our obituary.” One of the most important lessons he learned, says Ibrahim, is to not waste time complaining about how unfair the world is and instead, focus on things that one can change. He calls his magic mantra “C to D: From the current state to the desired state.”
Below is an edited version of the conversation:
Knowledge at Wharton: Before we talk about leadership, I wonder if you could start with your early years growing up in Hyderabad in India. Who were your role models at that stage of your life? What did you learn from them?
S.A. Ibrahim: I had a very interesting childhood in the sense that I came from a business community, part of the communities that originated in Kachchh district of Gujarat in Western India and then spread all the way across India and the world. In fact, the joke about us was, “Your true religion is business.” But interestingly, my mother, while she came from the same community, had a very academic orientation. So I was stretched between business role models and highly intellectual role models.
That included wandering around with people like Albert Einstein and George Gamow [the author of One Two Three… Infinity] in my head. I’m not sure whether I understood any of them, but it was a very impressive thing to walk around with. On the business side, [there were] the business leaders in India, like the Birlas, with whom my family did business, and the Tatas. I think most people didn’t realize at that time the strong entrepreneurial culture in India. It wasn’t just at the upper levels. Today, even the slums in India are humming with entrepreneurial activity.
Knowledge at Wharton: Based on the fact that you already had such a strong entrepreneurial background, what brought you to America? When did you come here?
“I took advantage of the fact that the stock was so low. You look at every challenge as also providing an opportunity in disguise.”
Ibrahim: I came to the U.S. in the bicentennial year. Interestingly, I had been here on vacation once to visit some relatives while I was in college, engineering college. But I came here to go to school at Wharton; that was my first stop. What brought me, more than anything else, was the draw of America. I was from a small business family in India. In those days, business families in India were much maligned by the media. I wanted to come to a country where free enterprise had an opportunity. I was first in direct lineage to go to college. My uncles had been educated, but my mom and dad had never gone to college. I went to undergrad engineering school in India and business school here and I betrayed my family tradition of being an entrepreneur and worked for large companies most of my life.
Knowledge at Wharton: What were your early professional experiences like? And, most importantly, what qualities did you develop that helped you ultimately become a CEO?
Ibrahim: I’m trying to remember who the dean [of Wharton] at that time was…Dean Palmer [Russell Palmer, who was Wharton’s dean from 1983 to 1990]. [I remember] asking him of the choice I had when I graduated. Who should I go work for? Unlike many other students who had focused on finance and consulting out of school, I was attracted — given my Indian background and having heard of those companies in the manufacturing sector — to IBM and GE. In those days, Reginald Jones was the chair of the Wharton Board of Overseers. So, of course, you are going to work for Reginald Jones’s company. So I went to work for GE.
It was an amazing company because I think one of GE’s consistent products has been management leaders. They have a DNA which they embed into you right from the very beginning. Everybody at GE aspires to be a general manager who can deal with all aspects of business and not just focus and excel in one narrow aspect.
Knowledge at Wharton: What was the impetus for you joining Radian? You became CEO in 2005. How did that come about?
Ibrahim: Radian’s board decided to make a change in their CEO. Having worked for large companies, I had moved to a small company. It’s a story in itself. Because I was traveling all over the world and my wife and son wanted me to be in one place, I joined my previous boss from Chemical Bank, at a small thrift in New York called GreenPoint. He asked me to focus on growing the mortgage business. I acquired a mortgage business in California and moved there to run it. We took it from $6 billion to $60 billion in six years, which was an amazing journey.
In that process, I had become one of the most important customers of Radian. And the board wanted to bring in a non-traditional person from a related industry and they were insightful enough to say that bringing somebody from a customer perspective was important. So I went from having been a customer to running the Radian Group, which at that time was a $140 billion-$150 billion credit risk company headquartered in Philadelphia, but with major operations in New York and London.
Knowledge at Wharton: During your tenure, to what extent did that grow?
Ibrahim: I joined the company in the middle of 2005, so I had the luxury of a little over a year before the downturn hit. The company’s market cap when I joined was probably in the mid-$4 billion range. For some unexplainable reason, right after I joined, which one of the leading equity analysts of our industry dubbed the “S.A. effect,” the [market cap] went up to $5.5 billion and it became equal to that of our closest peer.
Then, we decided to combine the two companies just before the downturn. We announced the merger and the stock hit an all-time high of $60 in February of 2007. A week later, HSBC issued an earnings warning related to the subprime business. And from then onwards, it was one piece of bad news after the other externally until it started affecting our businesses, taking it right down to unwinding the merger. Our market cap shrank to just a little over $100 million.
Knowledge at Wharton: I know that in previous conversations you have described your experience as a “journey to the gates of hell and back.” I wonder if you would explain this. And how did you come up with the strategy to deal with it?
Ibrahim: Radian had two major businesses: the Philadelphia-based flagship business took a layer of mortgage credit risk for certain borrowers who put down less than 20% and stood ahead of Fannie Mae and Freddie Mac. So in the event of a default or a foreclosure, Radian would take the hit for a portion of the loss before Fannie and Freddie. And Radian had about $30 billion odd of exposure to that, and another $10 billion in European residential mortgage risk in Germany and Denmark. Then, we had a New York-based business with about $115 billion to $120 billion of risk exposure, half of it in guaranteeing principal and interest to investors in municipal bonds and half of it in working with hedge funds and Wall Street firms in creating synthetic or exotic structured financial instruments, that were used as investment vehicles or hedging vehicles around the world. Our exposure was very broad, ranging from railroads in Australia to toll roads in Turkey, to exotic forms of structure, debt for traders, to Puerto Rico, the infamous Puerto Rico, to some of the counties in California that went through trouble during the downturn. And nobody — we all thought that there would be an economic correction at some point — got the depth or the prolonged duration of the downturn correct.
One of the things we prided ourselves on is we had so many different exposures that were not at all correlated to each other. So we were stronger. One of the fundamental principles of managing credit risk is diversification and avoiding concentration risk. And for a period of time, all these risks became totally correlated and everything went bad at the same time. We were in a more challenging position than any of our peers, because not only did we have a challenge in the mortgage insurance business where we competed with other mortgage insurance peers, but we also had a challenge in terms of our financial guarantee. So we were dealing with two mega challenges at that time in businesses where there were a lot of people in either of those businesses that didn’t survive.
Knowledge at Wharton: What did you do to survive?
Ibrahim: You know, as I look back at it, I can put it in the following categories — when I got into Radian, I had to deal with an immediate challenge. Radian’s insurance business was double-A rated, which is remarkable as today that’s the rating of the U.S. Because, essentially, our business was all about lending our rating to what we guaranteed. One of the rating agencies had put us on a negative outlook for our financial guarantee business because they had some concerns. So within a month of getting there, we decided to change the leadership in that business. We brought in a new chief risk officer for the whole company who had previously been the chief risk officer for all of JP Morgan.
“Don’t mourn about the world being unfair; don’t focus on things you can’t change. Concentrate on the handful of things that you can do and believe in yourself.”
As a result of that, we avoided getting into what was then called the CDOs of RMBS (collateralized debt obligations of residential mortgage-backed securities) business that many of our peers did. That decision filtered up to me. I went for the recommendation of the chief risk officer of forgoing risk, because we already had that exposure. So some of the things that we had done just before the downturn helped. Then, I turned my attention to the mortgage insurance business, where we were very concentrated in a handful of customers. Now that the merger had unwound, I took advantage of the fact that the stock was so low. You look at every challenge as also providing an opportunity in disguise. The challenge we had was that our stock was so low; we were going to be losing so much money. So I went to the mortgage insurance business, having come from that industry, I said, “Credit has overnight become completely tight and very different from what it was yesterday.” I told my sales people, “Go out and spend money and hire a lot of sales people, expand.” And even my CFO wondered and said, “Why are we spending $20 million, $30 million more on expansion when we are going to be losing money?” I said, “Precisely because of that. When we are going to be losing $300 million, $400 million a year, who is going to notice the $20 million, $30 million?” And by writing a good new book of business, we will offset the bad book.
Some of those things played out. They largely played out because we had an amazing group of people. At that time, we couldn’t access capital, so we decided to stop writing business – the New York financial guarantee business — because that business was broken once we got downgraded along with everybody else in the industry. We cannibalized that business as a source of capital. We used the fact that our credit spreads had widened to 6,000 basis points and nobody thought we would survive as a means of getting the exposure and that business commuted. We were so successful commuting that exposure that every time we got rid of risk, the amount of capital we got to access by not having that risk was greater than the cost of getting rid of the risk. So we kept growing capital.
So while everybody, many companies’ financial guarantee business went to zero, I was able to get $500 million of dividends from it to write MI business. Then, two years ago, we sold the financial guarantee business for $810 million with all its remaining risk. And in the meantime, we wrote almost — by being the early players, $200 billion of new mortgage insurance business. And I just created this chart on the back of an envelope saying, “To convince everybody.” I had to convince everybody in my company that we could make it because no company with 6,000 basis points of credit risk spread ever came back and everybody else had written our obituary. I said, “Look, the way the mortgage insurance business works is you write business today. In the first year, you only make a little bit of money because you spend more money getting the business. But in the next five, six years, that business continues to produce money.” So you create a step-ladder function, and I actually drew the step-ladder chart and said, “Look at how much money we are going to make in a few years, we are going to be profitable.”
People looked at me like I was crazy. But then, it came right. I left the company having had the best year ever in its history; 2016 was very profitable, getting in a core business, getting our great investment ratings back, going from virtually running out of capital to having excess capital. But it all came down to focusing on our customers and our people and having the guts to do things that were different or before anybody else did.
Knowledge at Wharton: Would you say this journey from the gates of hell to the gates of heaven was the biggest leadership challenge in your career?
Ibrahim: Absolutely, because prior to that, I had grown a company, and it’s a different challenge. We went from 500 employees to 5,000 employees. We went from $60 million pre-tax income to $650 million pre-tax income. We went from having no technology to speak of to winning a global award for global transformation. So it was a different challenge. I was not prepared for a turnaround challenge in the crisis that happened, but some of the lessons worked out.
For example, hitting the gas pedal right after things broke turned out to be a leadership challenge, but I had some experience of that. The reason is when I first started building GreenPoint Mortgage, I was bold enough to propose that in five years I would double from $12 billion to $24 billion. My parent company’s board said, “Oh, that’s too ambitious; you’ve got to scale it down.” In 2000, there was a downturn in the mortgage industry and instead of cutting expenses, I doubled the number of my branches. I said, “Downturn is the time to expand.” So in 2001, our goal was to be $24 billion by 2005. In 2001, when the wave came back and the industry came back, we beat our goal by doing $26.5 billion in the very first year after our plan.
I applied the same method at Radian by writing new business. Early on, when I went to work for GE, I worked for a wise, senior person and he told me, “You have a choice, you can either continue to build your models and be a very bright, analytical person, or you can start to learn about people.” I focused on the people side. I’ve always wanted to develop the ability to turn people on. I’ve always said, “Everybody’s capable of doing a lot more than they even think they are, and how can I find a way to remove the barriers that get in the way?” And that’s what happened in GreenPoint in making them grow and that’s what happened at Radian in making it overcome the downturn. But I just did a little bit. It was the people there who did all the heavy lifting and I was blessed in both cases to have wonderful people.
Knowledge at Wharton: What are the biggest lessons that this experience taught you?
Ibrahim: The lessons are the simple things that we sometimes forget. Don’t waste your time complaining about how unfair the world is. I went from GreenPoint to Radian, I exchanged all my options and stock at GreenPoint for Radian stock. It all got wiped out. I could have sat and mourned about how unfair things were. We had no capital, we had no ability to raise capital. We could have said, “Let’s give up.”
But instead we focused on things we could change. And I came up with this thing called C to D: From the current state to the desired state. And we’d get together and say, “Let’s imagine,” and then, we’d make it realistic. But stretch. You know, what was it going to take to get our stock from $2 to $4? Well, we have to demonstrate that we are on our way to profitability. We have got to reduce our risk exposure. And we have to create a list of 20 of those things, and then everybody in the company would contribute small and big ideas to make it happen. And, behold, we got to $4 and we said, “How do we get from $4 to $8?” And that is how, ultimately, we got through that journey. By the time we left, we almost hit $20.
I exited the company at a $4.5 billion market cap, which it was when I [joined it]. So the lesson really learned is don’t mourn about the world being unfair, don’t focus on things you can’t change. Concentrate on the handful of things that you can do and believe in yourself. Don’t believe in the external people who say you can’t make it.
If you believe you’re creating a path to success, it’s going to happen and then you’ve got to do two things. You’ve got to keep your customers with you and you’ve got to keep your employees motivated and with you. I used to tell my people, “Nobody’s giving us money today.” But I said, “If we keep our customers and our employees, in a few years they will be lining up at our door, knocking on our door to do it.” And sure enough, that happened. One of our investors came to me and said, “I want to invest in your company because I am now ready to. I have made a lot of money betting the housing industry is going down and I’m now ready to bet the other away. I want to start by investing in your company.”
Knowledge at Wharton: On May 17 last year Radian announced that you would be stepping down as CEO. Often this act of letting go is a difficult decision for CEOs, especially those who have been through such a harrowing experience as you have. Can you tell us about how that process worked in your case? And what can other CEOs learn from your experience?
“I left the company having had the best year ever in its history; 2016 was very profitable…”
Ibrahim: I think it has to be a very individualized decision. People have different priorities and things that were achieved in life. I loved what I was doing at GreenPoint. I loved what I was doing at Radian. But I didn’t want to do it forever. Besides, for my wife and I — even though we are from South Asia – the part of the country that we really love in the U.S. is the West Coast. And it was taking a toll on my family to commute back and forth every week from the West Coast. So I was waiting for the right time to leave.
I toyed briefly with the idea of leaving at the end of 2014, when my contract expired, and was persuaded by the board to extend it. And more than anything else, I said, “Even though my projection showed the company climbing back to the top of the hill and then being able to scale new heights, not everybody is buying into it. I want to wait until it becomes completely crystal clear that we’ve done it.” And sure enough, as we were starting to approach 2017, I said, “This is going to be true; 2016 is likely to be a very solid year for us. I’ve got to leave when I have brought the company to the top.” And I’m still enthusiastic, I still want to do other things in life and I still have the energy and health to be able to do some of those things.
Knowledge at Wharton: You mentioned a little while ago that one of the factors in your decision was that you wanted to leave at a time when you still had the excitement and energy to do other things. What are some of those other things that you are working on now?
Ibrahim: What has fuelled me throughout my career is passion. For the most part, I am getting involved with new startup companies. And I might be involved with companies where they genuinely engage in activities and products that make a positive difference in the life of people, companies that actually do good for society.
I want to take passion to the companies [I am linked with]. One of the first companies I am now involved with is called Meritize out of Frisco, Texas. It is going to help revitalize the middle-class in this country in a small way, by enabling students to get loans to go to highly-skilled programs, like learning how to operate heart monitors and heart defibrillators and be in the operating room with the heart surgeon monitoring the heart and those kinds of specialized skills. These people’s lives will become much better as a result. They will be able to borrow at a lot less than borrowing on credit cards.
Knowledge at Wharton: Based on your experience, what advice would you offer young leaders who are at the beginning of their leadership journey? Would you give the same advice to young men as you would to young women?
Ibrahim: I’m very passionate about women’s education. I think women have as much the right and the opportunity and the skillsets to be successful as men.
There are many paths to success. Decide whether you want to be the best violinist [ensemble] in the business and master that equipment or if you want to be the maestro. Both are very different areas. In the past, when I went to Wharton, it was more the violin players that came out of the school. But my son is pursuing a path very different from mine. As a young kid in his 20s, he learned to deal with contracts, assembling teams, dealing with different classes of investors, even litigation, marketing strategy and sales contracts. I said, “I only knew a lot about a narrow area. This kid knows everything — and a lot about everything.” He’s not unique; there are a lot of young people like that, which is why I keep a foot in the door in San Francisco and, now, the Seattle/Bellevue area. There are a lot of young people who are so impressive at that age. I feel blessed I don’t have to compete with them at the age I am now. So they’ll be in a class by themselves. And my advice to them is create your own path, but choose wisely and then be good at what you do.
“We had no capital, we had no ability to raise capital. We could have said, ‘Let’s give up.’ But instead we focused on things we could change.”
And No. 1, no matter what you do, master the ability to deal with people. Because ultimately, as customers, as investors, as employees, your ability to deal with people is going to be the biggest way you can succeed as a CEO. CEOs don’t accomplish anything by themselves. They only accomplish things if they can get the others to produce success for them. I used to make the comment you can either be a leader or a loner. You can be a loner by being the brightest person. You try and sell those ideas to your team and you leave them behind and you increase the distance between them and you. And you take pride and say, “Oh, boy, I’m so intelligent, they don’t even follow me.” But that’s not what a CEO is. A CEO has got to be ahead of them, but you’ve got to keep them coming. My most pleasing, defining moments both at GreenPoint and Radian were when those people following me became so good that at times I thought they were ahead of me.
Knowledge at Wharton: Since you mentioned there are many paths to success, let me ask one final question — how do you define success?
Ibrahim: I define success as, in my way, making a difference, making a positive difference. So the most thrilling thing is not measured in terms of the money you make, but how many people [can benefit from you]. We all know something or have something that others can benefit from. Not everybody is the same. If we learn from those things, where they are better than us, but pass along the things where we are better than them, and, in that process, improve the lives of others, it would be fantastic. The same thing comes whether it’s knowledge or money. I believe that that’s not ours. We’ve been given temporary custodianship of our fortune and we have to use that wisely to benefit as many people as possible.
Creating a better world is what my parents did for me and I am grateful to them. That’s what not only my parents, but what everybody around me did when I was growing up in India. That’s what faculty members and all the business leaders that came to speak at Wharton did for me. That’s what my mentors did for me. I feel so fortunate that they are the ones who made me. It’s my job to make [better people] not in the business world, but also in the world of helping people who are less fortunate or in parts of the world where there’s conflict. If we focus on how we can take the best from one another and create a person of tomorrow and a community of tomorrow, we’ll have a better world.