The Model Made Me Do It

The Model Made Me Do It

It’s silly to blame risk-management calculations for sinking financial firms.

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  • Matthew Stewart was a management consultant for ten years. He is the author of The Management Myth, out in August 2009. He does not have an MBA.

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Submitted by mike on Wed, 12/03/2008 - 4:55am.

Human nature

Sure you can blame human nature. Blame us "all". Or you can blame the economic premise of "scarcity of resources".
Or you could blame the monetary system. At the end of the day, though, we have to live through all this. And in this process it is good that we recognize the mistakes we made so as not to repeat them.
(1) it was a disaster that Clinton gave "significant new authorities to the Banks" as he said on nov 12, 1999, at the signing of the Financial Services Modernization act of 1999".In effect, their power was a power of leverage, on average, for every dollar they had they gambled 30.
(2) it was a disaster that Jimmy Carter addressed the deteriorating conditions of low income minority neighborhoods with the "provision of credit" regardless of wealth or poverty. Clinton said that with the act of 1999 the "Community Reinvestment Act" was greatly expanded. It is a disaster that Florida and California, home to 13 million immigrants are the hardest hit when it comes to foreclosures.
(3) It is a disaster that a "bond" was created a group of borrowers called not "the government", or "the corporation", but "homeowners". Salomon Brothers created securitization of mortgages.
(4) It is a disaster that the taxpayer has to carry the burden of the losses.
(5) It is a disaster that the solutions are "bailouts" and "regulatory changes". Bailouts take the money from the competent and give it to the incompetent. They also create a moral hazard since it leads the risk takers to believe that they will not carry the burden of their losses. Regulations can be dodged by the use of "derivatives". Porsche bought VW in the dark with "cash-settled options", avoiding the disclosure law. And Banks side-stepped their capital requirements by buying "insurance" ("credit-default" swaps) from AIG. They turned BBB securities to AAA by paying a premium to AIG which freed capital so that they could do more business which eventually paid Wall Street 33 billion in bonuses in 2007.
After all this, what are we left with? We are left with the evil sorcerers at the Fed and Treasury who have brought to life the dead corpses of the big banks, the insurance giant and the mortgage finance companies. We are left with a Zombie Nation.

Submitted by Steve Van Loon on Mon, 12/01/2008 - 10:30pm.

simple things

I am a simple working man without a college degree, and there is a whole lot I don't know. I hear and read all kinds of explanations as to the cause of the financial crisis. Somehow I suspect the underlying principals of the causes really are simple, but I don't think it is "trust, integrity, and responsibility—or lack thereof." as you are claiming. These things are constant like gravity. Humane nature did not take a sudden turn a decade or so ago.
I suspect the causes of the crisis are: 1) historic low fed funds rates from 2002 -2004. 2) loosening of down payment requirements on mortgages. 3) Strengthening of the community reinvestment act in 1995. 4) Pressure on lenders from H.U.D. to make loans to people of high credit risk. 5) Expansion of Freddie and Fannie by using the assurance that the tax payer has their back. And last, but not least, 6) The Commodity Futures Modernization act of 2000, which gave rise to the shadow banking system.