As a non-economist, the way I understand this crisis, it corresponds to gross incompetence on the part of many in the financial industry.
An analogy is as if some engineers built several nuclear power plants using some complex “innovative brick instruments”: “We don’t know the specific composition of these bricks, but they are cheap and will reduce our costs, and thus increase our profits, so we’ll use them to build the nuclear power plants. Based on some simplistic assumptions, these bricks will work fine and not disintegrate.”
Then, something happens that violates the simplistic assumptions, and all the nuclear power plants in the US are in danger of blowing up and damaging the entire country, unless the government steps in and spends $700 billion to repair the damages.
If something like that happened, there is no way the engineers and supervisors who built those plants would escape without being charged with gross incompetence, gross negligence, etc.
In the current financial crisis, won’t anyone be held accountable for the massive amount of stupidity and incompetence in the financial and banking industry that brought us to the point we are today?
(Held accountable as in: losing their job, paying a huge fine, going to jail, etc)
It was not incompetence. They were making a fortune by buying up the mortgage packages. For 5 years they have made huge bonuses ,salaries and severance packages. It has worked well.
They also leveraged the companies to an average of 30 to 1. That means they kept back about 3 percent in case something went wrong. Something went wrong. They had no financial backing. It was done by economists and money managers. It was not done by some desk jockey but by the most respected ,highly educated, financial money managers in the world. We did not regulate. We allowed them to go nuts.
Paulson was at Goldman forever. He is worth about 700 million dollars. Lets start with him.
This financial crisis was engineered many years ago to coincide with the end that is near. Don’t listen to me though, I’m a crazy conspiracy theorist.
At any rate, I really like this guy’s take on the economy. He has been following this for the past four years. Funny how he saw it coming but nobody else on TV seems to have…
There was certainly greed at every level of the system and poor judgement, but there are other forces at play. Nasem Taleb wrote a wonderful book, “Fooled by Randomness” that was primarily about hedge funds and why they tend to produce regular gains with little apparent risk and then collapse. Actually it was about a whole lot more than that, but that was a part of the phenomenon he was examining.
All of the instruments that are now crashing our economy were created for a reason. In another thread Scylla gave a very good explanation as to why, but they were created to allow risk to be spread around and to increase liquidity in the markets. Part of the problem is that when you are inventing new securities you typically measure risk by what has happened in the past and building models to show how your security would perform under different circumstances. The problem is that under normal conditions the various credit swaps and CMOs behaved as expected.
The way I picture it is like a group of settlers on the Great Plains. They decide to head west, but don’t know what kind of terrain is out there. So they send out a scout to head out a couple of hundred miles and report back. He reports back that there a few hills, but things are basically flat for as far as the high can see. Everyone packs up and heads out and things are indeed exactly as expected until they run into the Rocky Mountains.
These securities were built swapped and sold in either willful or just blind ignorance of what would happen if everything went wrong. As the housing market unraveled the flaws started to develop like cracks in a foundation. I doubt that AIG went and insured these securities thinking that they would make a ton of money and then collapse. They probably felt that, given their modeling, these things were safe. It was only over time that the best laid plans began to unravel and these companies were already in too deep to get out from under.
Here is an insurance company with an ostensibly clear idea of how insurance works, and they chose to pursue this new financial innovation which violates all the basic tenets of insurance.
They certainly have all the actuarial experience, data and models to tell them some premiums need to be set aside to cover ‘events’.
They also would not normally allow 10 or 15 policies to be written on each underlying asset. You just don’t let everyone in the neighborhood insure one house. And the first rule of insurance is do not let an arsonist insure some random house.
And if they had a good understanding of credit default swaps, equity default swaps, and total return swaps, why didn’t they buy swaps insuring against their own demise? They could have bailed on their obligations and gotten paid for it.
There is another possibility. This is the last step in the Nordquist idea of making the government small enough to flush down the toilet. When Jan.rolls around how do we finance education, welfare, Social Security ,Medicare or anything else. To start an expensive war and cut taxes was not an accident. It has never been done before because it is stupid and dangerous. Then he kept cutting taxes to the wealthy.
Deregulation was to allow the financial institutions to enrichen the top managers and loot the system. It worked fine. We have split the economy into the haves and have nots. The next couple months will demonstrate the power over us they actually have. To get a trillion dollar going away present is more than they could wish for. They used fear one more time and we almost caved. Paulson was to have complete control of all the money. He was to give it to any financial institution he chose. He was to be above the court system and not have to answer to any government agency. He almost got away with it.
What laws did they break? They packed the corporate boards to approve every theft. They made greed legal and sold it to America. They changed the laws and were legally allowed to keep their books hidden. They made it possible to overleverage their companies. It was dangerous for the viability of the company. It was stupid. It was not illegal.
Well, how about 40,000 or so Bear Stern and Lehman Brothers employees for a start?
How do you pin this on just a handfull of people? It’s pretty much everyone’s fault. From the homeowners who thought they deserve $500,000 houses on a $45,000 salary to the lenders who just handed out loans to anyone to the banks and rating agencies that failed to adequately analyze the risk involved.
Many heads should roll. The problem is that the heads that roll won’t be from the top.
I understand the anger, I’m angry as well and was seriously thinking about telling my mortgage company to fuck off. But it just doesn’t work that way. Even though I see three houses for sale on my street and nobody even coming to look as far as I can tell I know that the company that holds my mortgage has me by the balls.