It could be argued that one of the root causes of the current problem was "faulty" risk analysis.

Whether the risk analysis was faulty by design or intent is left as an exercise for the reader.

The following post from comp.risks is posted verbatim as it seems to be so on topic - and apolitical.

*****

A lot of the comments in RISKS-25.34 seem to imply that the people running

the financial firms were stupid and/or careless in not doing a correct risk

analysis.

These people are not stupid or careless, merely greedy, unscrupulous and

irresponsible. They did a careful risk analysis all right, and then made the

decision to deliberately feed false information into the computer models and

deliberately create massively complex financial instruments.

Their risk analysis looked like this:

Success: My company hands off the package before it blows up. My company

makes a massive profit and I end up fabulously wealthy. (Other companies

make massive losses and have to be bailed out by the government, but that is

incidental).

Failure: My company ends up holding the package when it blows up. My

company makes a massive loss and ends up having to be bailed out by the

government. I end up extremely wealthy.

After careful consideration of all the risks and benefits, I decide to go

ahead!

In an ideal world, the risk analysis would look like this:

Success: My company hands off the package before it blows up. My company

makes a massive profit and I become fabulously wealthy. Other companies

make massive losses and have to be bailed out by the government. My company,

and all the others, gets investigated and I end up bankrupt and jailed for

many years.

Failure: My company ends up holding the package when it blows up. My

company makes a massive loss and ends up having to be bailed out by the

government. I become extremely wealthy. My company, and all the others, gets

investigated and I end up bankrupt and jailed for many years.

Quote: "There was a willful designing of the systems to measure the risks in

a certain way that would not necessarily pick up all the right risks" If an

engineer, for personal gain, willfully designed (say) a sewage monitoring

system so that it did not pick up the right risks, and as a result thousands

of homes were flooded with sewage and destroyed, that engineer would (I

hope) end up in jail. But in the financial world, people can get away with

doing much more damage, for personal gain, with no personal risk to

themselves.

*****

Thoughts?

There's plenty of blame to go around for this issue. You can start out with people living and spending way beyond their means. Then you could go back to Clinton and his push for getting more people into houses (which led to lower standards for getting mortgages and increased risk). Or you can go back even further to Reagan who could be credited with turning us into a debtor nation. If you wanted to stay more in the moment you can of course also blame Bush for the out of control spending.

I have to say there was what seems to be criminal negligence in the decision making process on who to loan to. I'm just not sure who committed the crime, or if it was actually a crime...

So when people make decisions, and they are de-coupled from the consequences of their decisions they have less incentive to care?

In economics, this is known as an externality: the cost of a decision that is borne by people other than those taking the decision.

For example - politicians who only care about being re-elected. The long term problems they create, are a problem, not for them, but for their successors.

Fund managers - driven by quarterly results, and their bonus assessment based on quarterly results. Then jumping ship after getting that fat bonus.

It is short term thinking divorced from long term consequences. Buy Now!, pay later.

But as John Maynard Keynes said

"Long run is a misleading guide to current affairs. In the long run we are all dead."

Given that there was a(n internal) definition for Ninja Loans, (No Income, No Job, And no assets) I think we can say that some people were well aware they were engaging in predatory (mortgage) lending, yet still carried on. Commission driven sales tend to motivate the salesperson, not necessarily with the buyers best interests at heart.

The whole thing just makes me sick. And that many, myself included, saw this coming for many years, is just the capper. It all comes down to greed. Greedy families living beyond their means, raising greedy little brats who grow up to be greedy asshole investment bankers, who grease the hands of greedy asshole politicians on both sides of the imaginary aisle. And no matter the rules or regulations, it will happen again. It always does. It is simply human nature.

Greedy families living beyond their means, raising greedy little brats who grow up to be greedy asshole investment bankers, who grease the hands of greedy asshole politicians on both sides of the imaginary aisle.

Is this not often simply abbreviated to "The American Dream"?

The whole thing just makes me sick. And that many, myself included, saw this coming for many years, is just the capper. It all comes down to greed. Greedy families living beyond their means, raising greedy little brats who grow up to be greedy asshole investment bankers, who grease the hands of greedy asshole politicians on both sides of the imaginary aisle. And no matter the rules or regulations, it will happen again. It always does. It is simply human nature.

Couldn't have said it any better myself

Couldn't have said it any better myself

Gotta have somewhere to vent!

How will this apply to high-end audio? I suspect eBay will get flooded with tubes as people look for things to unload and prices will come down significantly

I see this whole situation as a complete failure of the entire capitalist system. After so many examples of failure in socialism/communism, capitalism was about due for a loss.

I can't help but think that there's still (at least) one big shoe to drop in all of this, Credit Card debt. Depending on what data you believe the average American household carries somewhere between $8,000 - $10,000 in revolving debt. My wife and I have always made it a priority to carry $0 revolving debt. We don't put anything on a credit card we can't pay for immediately. I get the distinct impression that we are in a very small minority.

And once again a fair portion of the blame lies with what is essentially predatory lending practices. I carry only two credit cards (Discover and Visa) and between the two of them I probably have ~$50,000 in "credit". That seems outrageous to me. My wife and I both make a decent living and probably fall just a bit above the middle of the middle class but it's absolutely inconceivable that we could afford that kind of debt. Granted, there has to be some level of personal responsibility that kicks in and keeps you from being an idiot but giving someone that much rope doesn't sit well with me.

Ugh, I hate thinking about this shit.

Personal responsibility in this country has been gone for a very long time. It's always someone else's fault.

Sad that things have come to this but it is very true.

Personal responsibility in this country has been gone for a very long time. It's always someone else's fault.

Can't say that I disagree with you there but it's swung badly in both directions with both the consumer and lender ignoring everything.

Yep I agree completely it's been a huge problem that pretty much everyone ignored and now it's going to bite us in the ass.

Nate, I have friends in consumer finance and used to follow the industry in my previous job. And you're right, it's a cesspool.

Of interest, the big issuers are thinking of swinging the pendulum all the way back now that the party's over. We'll likely soon see them starting to unilaterally close the accounts of customers under a certain credit score threshold in the name of cleaning up their loan portfolios. This will be a very nasty surprise for lots of people who have been living on credit, or counting on it as their cushion to get through the coming tough period, and an absolute kick in the nuts for consumer spending and the broader economy.

So if you think CC companies are unpopular now, just wait a while!

I'm just waiting to find out that in addition to bailing out mortgage companies that I get to bailout some dumbass who decided that what he needed was 5 flat panel TV's even though he couldn't afford groceries.

I actually don't think they'll start to close down accounts, etc. But they will drastically increase interest rates and lower spending limits.

I did hear something on the news last night that surprised me a bit. Something like 20-30% of all companies have to take out loans to make payroll. With the current freeze on lending how long before we start to see massive layoffs and closings?

Did you know most farmers also have to take out loans to get the harvest in?

The Biggest Loser: National Edition.

I heard alot of CC companies already drastically cut people with low credit scores limits.

I did hear something on the news last night that surprised me a bit. Something like 20-30% of all companies have to take out loans to make payroll. With the current freeze on lending how long before we start to see massive layoffs and closings?

Shit, THAT is scary.

I heard alot of CC companies already drastically cut people with low credit scores limits.

They have. Lots of people have had their cards frozen already, same thing with HELOCs.

It gets even more fun. In the last week the yield curve on Treasuries has inverted. This means the banks' business model of borrowing short to lend long is now toast. If you thought the lending cutbacks to date were bad, what's coming up next will make it look like a picnic. We are entering the acceleration phase of the credit crunch.

This means the banks' business model of borrowing short to lend long is now toast.

Not to mention that LIBOR is now almost 7%! Can't borrow much shorter than overnight. Actually, scratch that, can't borrow -- period.

Yup, ECB overnight rate has blown out to 11%. You could probably get better rates from the mafia, except they break your kneecaps when you don't pay them back.