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Incompetence played a large role. I knew a couple of people who were interning at investment banks at the start of the financial crisis. The banks had absolutel
by zhdc1 7y ago
Incompetence played a large role. I knew a couple of people who were interning at investment banks at the start of the financial crisis. The banks had absolutely no idea who owned each piece of the synthetic instruments - including the underlying collateral - that were on their books. Keep in mind that the insurance wasn't there to protect themselves - it was there to ensure that the product would receive an AAA credit rating - which made it palpitate to institutional investors who were restricted from purchasing or otherwise stayed away from riskier assets. It turns out that you can't accurately insure (or price) instruments when you don't have some knowledge of the thing that secures the instrument.
- DennisP 7y agoSeems to me if the banks piled up a bunch of junk, didn't track who owned what, took advantage of the lack of bad information to make crap insurance look just good enough to fool the ratings agencies, and sold the resulting AAA-rated instruments for AAA prices, then the banks did a perfectly competent job making money for themselves. The ratings agencies did a bad job, but that doesn't mean they weren't able to do better. They make more money doing a bad job so that's what they did. The real incompetents were the investors, but the whole system was telling them they didn't need to be competent, that's what the ratings agencies were for.
- cosmodisk 7y agoThe behaviour of ratings agencies is very well depicted in 'Big Short', which essentially says that if one company won't do it, other will always agree to issue AAA rates.
- zhdc1 7y agoExcept that a large number of them went bankrupt: https://en.wikipedia.org/wiki/List_of_banks_acquired_or_bankrupted_during_the_Great_Recession https://en.wikipedia.org/wiki/List_of_banks_acquired_or_bank... And took a lot of countries down with them: https://en.wikipedia.org/wiki/2008%E2%80%932014_Spanish_financial_crisis https://en.wikipedia.org/wiki/2008%E2%80%932014_Spanish_fina... https://en.wikipedia.org/wiki/Greek_government-debt_crisis https://en.wikipedia.org/wiki/Greek_government-debt_crisis https://en.wikipedia.org/wiki/2010%E2%80%932014_Portuguese_financial_crisis https://en.wikipedia.org/wiki/2010%E2%80%932014_Portuguese_f... https://en.wikipedia.org/wiki/Post-2008_Irish_economic_downturn https://en.wikipedia.org/wiki/Post-2008_Irish_economic_downt...
- DennisP 7y agoYes, but what happened to the individuals involved? A lot of them went home with giant bonuses.
- TheOtherHobbes 7y agoThe real incompetents are the developers of the system. It's clearly optimised to create the illusion of useful business activity out of bad-faith value manipulation and outright market fraud. Of course they're not considered incompetent if they personally do well out of it. So perhaps the real problem is more systemic.
- rhino369 7y agoThe underlying individual assets didn't really turn out to be poorly rated. The problem was they assumed a low-level of correlation between the risk of individual assets. Basically, they believed default risk for a house in Milwaukee essentially an independent variable compared to default risk in South Carolina. They made that assumption because there had never been a nationwide (or global really) housing crash. That assumption actually drove nationwide demand for mortgages, which lowered rates, thereby creating the correlation they assumed didn't exist.