Greenspan Tells Congress Bad Data Hurt Wall Street 496
CWmike writes "Former Reserve Bank chairman Alan Greenspan has long praised technology as a tool to limit risks in financial markets. In 2005, he said better risk scoring by high-performance computing made it possible for lenders to extend credit to subprime borrowers. But today Greenspan told Congress that the data fed into financial systems was often a case of garbage in, garbage out. Christopher Cox, chairman of the Securities and Exchange Commission, told the committee that bad code led the credit rating agencies to give AAA ratings to mortgage-backed securities that didn't deserve them. Explaining in his testimony what failed, Cox noted a 2004 decision to rely on the computer models for assessing risks — a decision that essentially outsourced regulatory duties to Wall Street firms themselves."
Alan Greenspan (Score:0, Insightful)
The guy's 82 for fuck sakes! Who gives a shit what some senile old fart thinks?! That's the problem with this world, the people running it are all far too god damned OLD.
Re:Alan Greenspan (Score:2, Insightful)
The problem is all you youngsters who don't realize how much we know that you don't.
Outsourcing Their Decisions (Score:5, Insightful)
If these people did not know what was going on, they are not professionals, they are just a schmuck who is being paid too much. To say that the computer models did not anticipate their stupidity is just denial.
Of course the code was bad. (Score:3, Insightful)
"Christopher Cox, chairman of the Securities and Exchange Commission, told the committee that bad code led the credit rating agencies to give AAA ratings to mortgage-backed securities that didn't deserve them."
What do they expect? Code can only handle preconceived models. If the programmers overlook something it's not like the code will fix itself.
These models are based off of incomplete information and it's up to us to fill in the gaps. We've never had subprime mortgages en-mass before and the model likewise didn't know how to handle them.
This Is NOT News For Nerds (Score:2, Insightful)
What a way to shoehorn a non-tech/nerd story into slashdot (BTW, why is this in politics??!!)
Bottom line, this had nothing to do with bad data. It was Greenspan's blindness to the consequences of easy monetary policy would have that caused much of the problems today.
More than data (Score:3, Insightful)
Models themselves, and the blind faith in "the market". When the model's wrong, quality of data becomes irrelevant - "not even wrong" (Pauli, I think).
Well, "the market" did sorta work - by eventually bringing down the crash, but gov't softened (and lengthened) it by bailing out the banks. But that's just semantic rubbish, of course.
Greenspan's a muppet. (Score:4, Insightful)
Greenspan really is scarily inept... It amazes me that he was taken as seriously as he was for so long. The most amazing thing I found in his autobiographical book was that he believed in the 90s that computer systems were going to efficiency gains that accounted for the share price rises during the .com bubble.
http://www.amazon.com/Age-Turbulence-Adventures-New-World/dp/1594201315 [amazon.com]
As the saying goes (Score:5, Insightful)
Re:Of course the code was bad. (Score:4, Insightful)
In a Neural Network Design course I took ~ 3 years ago (which consisted of a number of financial type folk), they were using incomplete training datasets to decide whether or not to give mortgages. They didn't have enough data on failed loans - why? because most home loans in the US up until then had not failed. People bought homes to live in, instead of as a risky investment which they intended to flip before their ARM reset. The model changed in the real world - and the computer models the analysts made didn't. But the models are not to blame here in my view. It is the fact that they depended solely on these models. If they had some consistency checks with the real world and actual people looking at the data, perhaps they wouldn't have just been stamped AAA without any real thought.
Two different issues - (Score:5, Insightful)
The data being flawed is very different than the code being flawed. In fact, what Greenspan is talking about has almost no connection to what Cox is talking about, and there's no real reason to put them both in the same article. Starting with bad data will abundantly suffice to explain the meltdown before any problems with the algorithms used have to be assumed.
Most of the bias that did the real damage is political. For example, the most recent figures on the economy show that in the months before the mortgage crash began, 68% of all spending was driven by individual consumers buying retail. If the last tax rebate had been aimed at 68% of the total going back to individual consumers, or the '700 billion bailout' had put 68% of the 200+ Billion actually committed so far into reducing the impact to non-institutional borrowers, those would be appropriately neutral positions - but in the current climate, those would both be classified as terribly liberal.
But that figure wasn't trumpeted about until after the bailout was passed. The same goes for the corrected inflation rates, which are still not accurate but are a bit better, and which again weren't corrected in releases to the general public until after the bailout was final.
The Great Pretenders (Score:5, Insightful)
Greenspan's hubris (Score:5, Insightful)
Bottom line, this had nothing to do with bad data. It was Greenspan's blindness to the consequences of easy monetary policy would have that caused much of the problems today.
Absolutely. Wait, rollercoaster interest rates are a bad idea? Really? And it took a genius to figure this out?
It's so easy to understand. Low credit and the push for home ownership at any cost led to insane price increases and speculation that it wasn't hard to see had to come to a crash stop. I had this figured out as of 2004 when I talked to a realtor who told me I needed to buy NOW with nothing down and use the guaranteed 2%/month price increase to refinance in a year. I can recognize a bubble when I see it.
That's why it pisses me off when Greenspan points the fingers elsewhere. He's the one who set the rates. He's the one who jacked them up, then down, waiting too long and overcorrecting to account for it. And he refuses to take the blame.
The funny thing is, this isn't the first time things have gotten sideways thanks to overspeculation. During the (mercifully) brief meltdown in 1998 due to the currency markets, he basically told the banks to do what they do, the government will help out if things go bad. The overcorrection to that mini-crisis and the post-9/11 slowdown sowed the seeds for what we have now. Gee, thanks Alan.
So now he blames bad data. Really, Alan, you're surprised that people selling certain securities said things about them that was overly rosy? Give me a break. At some point, you have to have some damned sense, and actually look at the securities without the computer models. When things defy common sense to that degree, something's wrong.
The funny thing is, it seems every crisis comes about because risk diversification models fail. Happened in 1929, happened in 1998, happened now. Investing houses have this theory that a lot of big risks can be less risky in totality, because the risks aren't correlated. Problem is, when the shit hits the fan, a lot of things become correlated that didn't use to be. Partly it's because everything's sitting on top of the same increasingly global economy. Part of it is that funds that are overly leveraged have to sell whatever they have to meet margin calls. The people who create the models study the risk correlation and assume things based on it that simply aren't valid in the real world. The book "When Genius Failed" has a good case study on this, where an investment house run by brilliant guys including Nobel Prize winners crashed and burned because they didn't understand that common sense trumps mathematical models.
To disclose, I actually see great value in statistical predictive models - indeed, that's what I do for a living. I design and implement mathematical models. But because of that, I also know what mathematical models can't do. Too much hubris by too many people, and we all suffer.
Re:Alan Greenspan (Score:5, Insightful)
The problem with some old people is that they don't realize how much they don't know.
The problem with most people is that they don't realize how much they don't know.
Computers cannot replace common sense (Score:5, Insightful)
From what I understand, they were giving loans to people who had no collateral and no income. If your computer model says that loan is a safe loan, then you have a bug.
Re:bad code or bad summary? (Score:4, Insightful)
Coders would spot that
Re:Outsourcing Their Decisions (Score:4, Insightful)
bingo! Greenspan did exactly what all the Republicans and Libertarians wanted... lowered the interest rate the Fed charged for money and kept their fingers out of market regulation. Wall Street spent and gambled like drunken sailors.. they deserve to have been shut down, their employees laid off without paychecks like all the manufacturing workers they sold out, but they're so big and tie up so much money it will put the honest people out of business too.
Re:Keep Changing Assumptions Until the Right Answe (Score:5, Insightful)
There are plenty of human-factor reasons why these kinds of models fail: management wants certain results, modellers want to feel they are contributing valuable results, people with big-brother pretensions placing too much faith in fancy computing, geeks lapping up the attention, etc..
But the bottom line is that people were not properly using information about uncertainty: if crap data is all you have, you have to tell the model how crap it is. If you don't do that, then your model is misleading and dishonest. Forecasting the future is tricky business, and you just have to know when it's too hard.
The bottom line is that modellers who don't turn around and say "sorry, boss, the model can't tell you that" and insist on it are largely responsible. Unfortunately, as a rule, it is the person who makes the boldest predictions who gets the most attention, and attention becomes credibility.
Collectively modellers are the /only/ people capable of understanding the output of models. Modellers must have enough influence in an organisation that /their/ interpretation of a model prevails--they don't have to dictate decisions, but the CEO needs to know the modellers' interpreattion of the model, not some intermediate's. If not, then I think negligence or fraud charges should be on the table for someone--maybe the modeller who is oversells their result, maybe someone else.
Yes, I'm a modeller. To the extent that our opinions guide decisions (what is a model if not a collection of opinions?) we need a professional code of ethics, just like engineers, lawyers, doctors, etc..
Ask Alan Greenspan and HAL 9000 (Score:4, Insightful)
Alan Greenspan: "The economy is in the shitter because of computer error.
HAL 9000: "I'm sorry, Alan, this could only be the result of human error."
I'll tend to break ranks, and side with HAL on this one.
Re:Greenspan's a muppet. (Score:3, Insightful)
Flip-flopping? It's worse than that. The Federal Reserve pretty much destroyed our economy by causing the housing bubble, dot com bubble, snl crisis, etc etc. Their actions are more than just a bit criminal if you ask me.
Re:Greenspan's a muppet. (Score:5, Insightful)
Yeah, the last thing you want is someone who changes their mind in the light of new information.
I think the world got dumber the day the term "flip-flopper" began being used in public discourse.
Re:Too big to fail ... (Score:5, Insightful)
Trouble is....if they did all this and were playing within the rules laid forth by the SEC...there is no crime committed. There is nothing to be arrested for...
Re:Greenspan's hubris (Score:5, Insightful)
It's so easy to understand. Low credit and the push for home ownership at any cost led to insane price increases and speculation that it wasn't hard to see had to come to a crash stop.
That seems to be an oversimplification. The most reasonable thing I've seen is that we deregulated the credit derivatives market, and told the crooks to "regulate themselves." When the government advocates more people to have homes, and ties that to a banks ability to expand, that's not necessarily a bad thing, unless the originating lender can hand off hot potatoes, rake in cash, and not face consequences. If full disclosure was part of that market by law, then we simply wouldn't be where we are today. Originating lenders would be unable to sell bad loans, and when they started suffering the consequences, the game would have ended early and not been nearly as bad.
Exacerbating the situation is the removal of important firewalls between investment houses, banks, and insurance companies that happened at the same time. Companies that had been only banks or only insurance providers are now in deep trouble, though their original departments weren't involved. So, I agree with you about "diversification models." One of the downsides of free markets is the inevitability of boom and bust cycles, which is why every successful economy has a powerful governing authority to regulate a relatively open market. It helps calm the highs and the lows, which restricts growth but also prevents everyone from losing their shirt at the same time.
Accountability is what's missing from capitalism. In my opinion, everyone who was aware of the risks they were handing off to others should be stripped of every penny they made off of those transactions, and if found breaking any laws, should be serving as much time as petty thieves who steal thousands instead of millions. Similarly, any company that intentionally and illegally pollutes should have to pay clean up costs and matching punitive damages that fund land trusts.
The difference in treatment of those two types of criminals is indicative of another problem at the foundations of modern western capitalism: privatized profit and socialized risk.
Re:Of course the code was bad. (Score:1, Insightful)
The trouble is selling mortgages in those worst areas to begin with!!!
If we hadn't had things like CRA [wikipedia.org] and community activist groups painting banks that didn't paint lots of bad loans into 'underserved' areas as racists, then we might not have had quite so many bad loans.
This wasn't the only cause, but definitely a big factor.
Not making stupid loans to poor risks in the first place would have avoided most all of this mess.
But hey...this might not be all bad. House values that were way overvalued are coming down to more reasonable costs, and fiscally responsible people will buy them. We will hopefully go back to the time where you had to be a good credit risk, AND had to save to buy expensive things like a home or car. I'm sorry, not everyone deserves nice expensive cars and homes or luxury items. You gotta work, save and earn them.
Bullshit. total televised shitting (Score:5, Insightful)
this senile old bastard is trying to drop the blame ball on someone else than himself. he was the person who ushered the 'let everyone run around lawless' era in finance. he was praising it and saying that 'free market' was this and that. now he comes up saying he is 'shocked' to see the market not regulating ITSELF.
i have news for you, bastard, what you call market is comprised of PEOPLE, and its a social activity. just like life doesnt 'regulate' itself so that you still need laws and justice system, the social activity you call 'market' also is comprised of people and full of opportunists, schemers, bastards, exploiters, criminals and crooks. if you just let everything be, IT BREAKS. and IT DID.
any person with only a few decade of life experience under his/her belt would be able to realize this.
but you and your fellows in the church of holistic economists were SO zealots in your belief that, you were unable to realize this simple fact of social existence despite your 5-6 decades on the face of this world.
shame on you old man. shame on you for preparing the grounds for breakdown of ENTIRE global economy with your zealotry and foolishness, and your attempt to blame others for it.
blame the data !! after all, noone can do anything against it right ?! its not live, its nobody, and even if you hate its guts, you wont be able to remove it from business, so problem solved.
Re:Of course the code was bad. (Score:5, Insightful)
Blaming computers and code? In this case, don't blame the game, blame the players. If they are truly the smartest guys in the rules, they would have known the practices (not tech) put in place were just plain wrong, or at least high risk involved. They saw tech as something to apply their new theories, without acknowledging the risk. Just because I bent the nail doesn't mean it was the hammer's fault!
If they are not the smartest guys in the room, then the emperor is without his clothes and these guys, along with all of Wall Street, do not deserve the rich payouts they're going to get in the next year, seriously...they are going to ask for more cash to put in their pockets.
Re:Greenspan's hubris (Score:4, Insightful)
Low rates do not, themselves, motivate banks to write bad paper on behalf of the risky blokes who suddenly think they can afford a house. Banks were pushed. Banks were even sued [mediacircus.com] to extend home ownership to those who, frankly, can't handle it.
Low rates accellerated the process, but cannot indepedently cause this problem. You almost said it yourself in your first sentence, before tripping over your own politics and blaming Greenspan.
Greenspan did oppose CDO regulation [gata.org], an error which he has since admitted. But the unregulated state of CDOs also could not cause the crisis. CDOs arose to collect the bad mortgages, and the ratings agencies performed whatever evil was necessary to keep the music playing. Whether they too were strongarmed, or simply cashing in on banks' willingness to pay annual "maintenance fees" for AAA ratings, is not yet known.
Re:700B mistake (Score:4, Insightful)
I believe the parent wasn't trolling as much as he was making an observation about how faulty code and outsourcing to india ultimately have the same root: that software development isn't given the resources that it so often deserves. When you're running a multi-billion dollar business and you need a program to help you with that business that's going to make decisions that have repercussions reaching towards trillions of dollars, there are methods to make sure that you get correct code. These methods almost certainly were not used, and they're certainly not used in over 90% of the programs released. In other words, software quality is sacrificed for short term profits almost all of the time, which is certainly pertinent to the issue at hand.
Re:Greenspan's hubris (Score:2, Insightful)
Re:I blame ACORN! (Score:5, Insightful)
It didn't. It punished everyone who made bad decisions - the people who loaned money, the people who borrowed money to buy a home they could never afford and the people who invested in companies that loaned the money.
Of course, it is not the free-market that is giving 700-billion to the people who made reckless loans. Maybe you can figure who that is...
Re:Greenspan's a muppet. (Score:4, Insightful)
He's not inept, he's actually a pretty bright fella. The thing is: nobody can see _all_ the consequences of, say, arbitrarily changing the interest rates.
The reason the Fed fails is the same reason the U.R.S.S. failed; Central planning _does not work_, socialism _does not work_, price fixing ( including the price of money, i.e. interest rates ) _does not work_.
To paraphrase Mises, if a God would descend from the heavens and take the economy's leash to guide us, then socialism would work under such an omniscient leadership, but since that's not likely to happen anytime soon, the free market is the only rational mechanism we have to direct economic activity.
Accountability? (Score:4, Insightful)
So, your definition of accountability is that hundreds of people make off with millions of dollars and serve no jail time? Everyone who "indulged in that binge" is on a beach somewhere in the Caribbean, trying to figure out where they can spend the hundreds of millions of dollars they just swindled. If that's your definition of justice, you can keep it.
If the government allowed those companies to fail, you'd just have more people out of work. The criminals are free in either of your scenarios. You may stop one generation of people from investing in the stock market again, but that's the only lesson that would be learned.
Re:More than data (Score:2, Insightful)
Any reasonable person (and even most libertarians like myself) would agree that for "the market" to take care of everything, the government has 3 important roles to fill:
This stupid banking crises cannot be blamed on "too much" or "too little" regulation, so much as the government falling down on it's core responsibilty to the market.
There was a *lot* of fraud in the subprime market. After the fact, a lot of people will be going to jail, but nothing was done to prevent liar loans a ninja loans until after the crises, and even then it's a market reaciton, not new regulation, that's put a stop to that BS.
Also, tolerating these bogus AAA ratings was a big mistake. Fine, we don't want the government to determine on a company-by-company basis who gets a loan and who doesn;t: credit ratings belong in the private sector. But the *system* of assessing risk falls into the real that the government has a legitimate interst: standardizing measures used nationwide (and worldwide) which are critical to the functioning of an industry.
Using bank regulation a an instrument of social policy *really* didn't help things here, but neither was it the cause of the crises.
[Citation needed] (Score:5, Insightful)
Citation needed.
I don't think models were anywhere near that simple. The closest you could get to that is if you fed home appreciation data from a time period where house prices mostly went up, and had no examples of periods when they went significantly down. That's a plausible failure mode for many of these models (and it happens all the time with financial models, ugh, and the financiers don't seem to learn), but the models would have made different predictions with different data sets.
There's another assumption that people made that led to the problems with the ratings: the assumption that housing and mortgages from different parts of the country would have uncorrelated performance, so that packaging them all together would diversify risk away. The short catchy phrase for that was "all real estate is local": the assumption was that house prices can go down in some parts of the country at any given time, but that it was unlikely that they would go down in all of the country all at once. You can see how that one turned out, of course.
That one, again, turns out to be a recurring problem with financial modeling:
The financial model failures we're seeing now are remarkably similar to the crisis that led to the failure of LTCM [wikipedia.org] 10 years ago. The industry doesn't seem to learn, which is a big problem.
More generally, there's a bigger problem here (and I'm paraphrasing Buffett in the following): it's not that the mathematical models of risk aren't valuable, it's that, by putting very precise-looking numbers to aggregates of thousands of highly uncertain estimates of future risks, they make it look like risk has been tamed. If you have a model that tells you that the current risk of your portfolio is, say, 15.72%, and you mechanically decide how to allocate your capital using a formula that doesn't build in a generous margin of safety against mistakes in that number, you're going to get burned by problems like this.
Re:Of course the code was bad. (Score:5, Insightful)
If we hadn't had things like CRA and community activist groups painting banks that didn't paint lots of bad loans into 'underserved' areas as racists, then we might not have had quite so many bad loans.
This wasn't the only cause, but definitely a big factor.
No, it was a relatively small factor. 50-80% of subprime loans were made by companies to which CRA didn't apply. [lohud.com] In fact, CRA only applied to 1 of the top 25 subprime lenders. [mcclatchydc.com] Furthermore, less than a third of CRA loans are in the category of subprime - most of them have fixed interest rates better than subprime and consequently default rates are below average too.
Re:I blame ACORN! (Score:5, Insightful)
Bull. The majority of those executives who made the horrible decisions were riding high on ridiculously, fraudulently inflated stock prices, and got their huge bonuses and golden parachutes, leaving before the crash.
Re:Libertarians say Federal Reserve is Theft. (Score:5, Insightful)
What commodity should money be backed by, then?
The answer all the libertarians seem to give is "gold". But this is nonsensical. Gold is not particularly valuable. It has some worth in certain industrial processes and such, but mostly its value comes because people are collectively nuts. In this way, the value of gold is not much different from the value of the un-backed $20 bills in my wallet.
Re:Alan Greenspan (Score:1, Insightful)
Yea, but when everyone with power is old, then no one has any incentive to look out to the future. Most of them will be dead and gone by the time most of their decisions will start to have consequences.
Re:Libertarians say Federal Reserve is Theft. (Score:5, Insightful)
The problem is that there is not enough of any commodity to support the actual amount of productivity in the US, much less the world. I agree the Fed reserve printing money at will is a crock, but money doesn't have to be backed by anything as long as everyone agrees that it can be used as an exchange of goods and services.
And yes, printing money right now is a horrible mistake. 1 trillion there another trillion here. I hope everyone is ready for the upcoming hyper inflation and 15%+ interest rates!
My impression after watching C-SPAN. (Score:3, Insightful)
I listened to part of the congressional hearings on C-SPAN. I got the impression that they were actually blaming the top management at the ratings companies. The upper management applied pressure so what would have been a low rating became a high rating. This was because they regarded the companies selling bad financial instruments as being a customer (kickbacks?). Naturally the underlings, interested in keeping their jobs, either altered the programs or put in bad data. At the root of the ratings mess was top management.
Re:Outsourcing Their Decisions (Score:5, Insightful)
Libertarians don't want the Fed to exist at all. The market can set interest rates just fine on its own. In fact, that's what it's been doing for the past several weeks. Had that been allowed to continue, you would have gotten your wish: most companies on Wall Street would have failed, because no one can afford to pay a paltry 4% any longer. They're too highly leveraged and every asset on the market yields too little. That's the legacy of two decades worth of artificially low interest rates, courtesy of the central banking cartel. Had the market been allowed to set its own interest rates along the way, we would never have gotten here. For that matter, without the Fed and its paper money we'd still have circulating gold and silver, and the "dollar" would simply be another name for 1/20.67 ounce of gold. You could buy a house with a small purse full of coins, and the money in your savings account would never lose value. That's the libertarian way. Any claim to the contrary is a damned lie.
You can blame the Republicans if you want (I do!) but don't forget to blame the Democrats as well. FNM and FDE are well-known homes for aged Democrats and their lobbyist friends seeking sinecures, and they like anyone else benefited from the easy profits to be had when money was free to all comers. And while we're there, don't forget the political imperative to push home ownership rates as high as possible and then much higher still: that was a Democrat-led, Republican-approved move. Again, artificially low interest rates made that possible.
Blame all the politicians in office, blame the career bureaucrats, and blame the greedy bankers. But never forget, either, that every transaction has two sides. So blame the borrowers, too, and the shareholders who collected their dividends - several times what bank deposits paid, by the way - without asking questions about the assets that provided them. And blame yourself, if you're anything like the typical American: indebted up to his eyeballs, with a comfy McMansion in the 'burbs, a brace of SUVs in the garage, and a plasma TV in every room. You can't afford that crap, but you bought it anyway - maybe you believed you could pay back all that debt, maybe you believed the boom would never end, maybe you just wanted to keep up with the Joneses or feel special. But you had to know you couldn't afford it, yet you borrowed and spent anyway. Now I hope you die in the fire you set while trying to collect an insurance payout. It's people like you - and all the others I just mentioned - who make this world a shitty place to live. So please, FOADIAF already. And in the meantime, take some goddamned responsibility for yourself.
Re:Libertarians say Federal Reserve is Theft. (Score:5, Insightful)
Value is related to scarcity and utility. People are always forgetting about that second part.
For example, if I sculpt my shit into a likeness of Jimmy Carter and call it "art", we have something that is extremely scarce. It is quite literally a one-of-a-kind item. Total value? Essentially zero. It may be worth something as fertilizer, but it's probably not worth transporting it to where it could be useful.
On the other hand, air is quite valuable. (If you don't believe that because you don't pay for it, just try doing without it for a while.) It is also about as far from scarce as you can get.
Gold has very little utility. Before the modern age it had basically zero utility. This is, quite simply, because people are irrational and assigned a value to it which is beyond its inherent worth. Exactly what the gold-standard crowd says people do to $20 bills.
Re:Greenspan's hubris (Score:3, Insightful)
So the multiple bank panics and recessions in the United States between 1837 and 1913, when there was no central bank, did not happen? Interesting....
Re:Alan Greenspan (Score:5, Insightful)
"Fox guarding the hen house"... Like Anarchy? Or Government regulation? Both are remarkable for their efficiency infringing people's freedoms and rights.
The point of government regulation is to play corporations, who are equally rapacious to people's freedoms and rights, against the government.
Corporations don't benefit from government getting too big and taking over their markets. Government recognizes that risky and anti-consumer behavior by corporations may destroy the economy or incite revolution.
A balance of power between the two using smart regulations (as opposed to the often presented "more" or "none") is the way to go.
Re:Alan Greenspan (Score:4, Insightful)
Government centralizes power so that it can be more efficiently corrupted.
Re:bad code or bad summary? (Score:3, Insightful)
Is Open Source the Answer for Risk Models?
By agreeing to rely on Wall Street's computer models to gauge investment risks, the SEC essentially outsourced that part of its regulatory duties to the systems of financial services firms, says Erik Gerding, an assistant professor of law at the University of New Mexico who does research on securities law.
Gerding's proposed fix: Make the software code that underlies the risk models open source -- a step that he claims would boost the transparency of risk calculations and potentially improve their accuracy.
"Just as with open-source software, other users would be able to copy and modify these models for their own use," Gerding said. And by looking at the code, business partners as well as credit-rating agencies could get a better picture of how financial services firms assess the transaction risks, he said.
Many Wall Street firms are already major users of open-source software. But Lisa Cash, executive vice president of sales and marketing at DFA Capital Management Inc., a vendor of risk management tools, said she thinks it would be difficult to get high-quality risk models into the market on an open-source basis.
Cash said that a better option for increasing transparency as well as confidence in risk models would be for U.S. regulators to emulate their counterparts in Europe, where watchdog agencies audit financial firms' risk models.
Peter Teuten, president of Keane Business Risk Management Solutions LLC, also questioned the wisdom of using open-source approaches in risk modeling. But he said that he does expect some modeling standards to emerge from the crisis.
Who is the fox, and what is the henhouse? (Score:5, Insightful)
Whomever thinks self-regulation will ever work for the benefit of the public needs their head examined.
Does the phrase "Fox guarding the hen house" ring a bell to anyone?
Tell me, being that the root of this whole mess are subprime loans, were you this concerned when some Congressmen tried to enact new regulations on Fannie and Freddie, and others blocked it, citing such economic justifications as "racism" and "fairness"? Because it's in the Constitution that everyone gets a house, you know.
Re:Outsourcing Their Decisions (Score:5, Insightful)
Don't confuse the libertarian. They always seem to think all those regulations that controlled the excesses of capitalism mysteriously appeared on their own by accident. All those laws that were removed in the deregulation gold rush, were put in place as the direct result of failures resulting from unbridled capitalism, each failure and corrupt exploitation resulted in new laws to prevent their recurrence, of course those laws, as yet, could not ultimately prevent their removal.
The out of control lending was all about creating the illusion of profits and hence inflate the bonuses of grossly overpaid executives. It was all about a total disregard of the consequences, of people cashing in on other peoples savings, of management making millions while costing everyone else billions. It did not happen accidentally, it was inevitable and planned and executed by people who had no regard for the damage they caused, their sole interest was in how much in bonuses they could squeeze out before it all collapsed.
Re:Alan Greenspan (Score:2, Insightful)
Why do you think we can watch movies like "Erin Brockovich" and 'connect' with the notion of Big Corporation fucking with Small Town, and Small Town not even realising what is happening? [until the heroÃne with the impressive cleavage shows up, anyway]
There are so many basic assumptions in the Libertarian "belief collective" that are wrong that I think even the Amish are less naive.
Against money-creation, against government [regulation], against the corporations that fuck with them as soon as there is no regulation [which is a given, but it is somehow not seen as a basic fact, but as a 'special case' of corporation behavior], and if they don't believe in corporations in the first place they leave open what should take its place [I see amazingly few Libertarians espousing Hunter/Gatherer societies, and commie/feudal/communitarian setups are probably not what they're looking for either.
But yes, let's be "Against government". "the market [which in an earlier post here is equated with 'the community']" will regulate itself, create money [they just tried that, it didn't work out], and presumably now stone the culprits.
It isn't deregulation, but "Fannie and Freddie" caused the fact that it was legal for mortgage salesmen to give everyone loans without doing credit histories.
If you'd have had the (European) system where mortgage debt is personal debt, and you can't just give up on a house if you can't pay for the mortgage anymore, this shit would never have happened in the first place, because at least then you people would've been afraid of making a "bad choice".
But i guess that would've hampered "Consumer choice" as well, and thus the exploitation of the common man. Which would've been "unjust" because "everyone has to have the right to choose what he or she wants" and whatnot. Except children (aren't assumed to be able to deal with that)/don't have that right, and especially not when it comes to their sex life, because you have to protect Them, but not the average Joe with what, K-9 'education'? And if they're really dumb, (ie. mentally retarded) you chemically castrate them (well, until the '60s), but that wasn't even called regulation, or taking away the rights of people.
Dear Lord, what I would give to live in such a place.
Re:Outsourcing Their Decisions (Score:1, Insightful)
I'm afraid you 'libertarians' are underestimating the importance the Fed's lowering of interest rates has been in the history of the country. It has allowed the investment and growth that has made us an economic superpower, and has allowed us to push down inflation to manageable levels. In times of crisis, it has given the nation confidence in our financial institutions. The Federal Reserve is an institution that should be respected and given credit for creating a much more stable economic environment for the regular American. Without the Fed, this crisis could have been much, much, much worse. Remember, through all the political bickering of the past few decades, it is the Fed that has remained independent. I must also remind you that the greed and shortchanging of humanity is much, much more without regulation. Ha! You imagine a world where government has no interference? Read your history buddy... things are bad, I'm not saying otherwise, but things could be much, much worse. Count your blessings.
Re:Who is the fox, and what is the henhouse? (Score:5, Insightful)
That's the whole point of TFA - that the repackaged debt was given AAA ratings despite being obviously toxic.
Of course the decision to force institutions to make these loans was stupid, but it's the subsequent repackaging and reselling of the debt, disguising its lack of real value, that was the cause of this crisis, and the methods used to create that false valuation that are the subject of Greenspan's criticism.
Re:Not to mention Freddie Mac and Fannie Mae (Score:5, Insightful)
There's an alternate conclusion: Corporations don't want a free "laissez-faire" market, because they want to be able to use government to block competitors. For example, Comcast uses government to grant it a guaranteed monopoly in various counties across the continent. Comcast certainly does *not* want a free market. Neither does Microsoft, or GE, or numerous other companies.
Oh one other thing:
It's a mistake to think corporations don't like Democrats. The TV corporations donated 74% of their funds to support Democrats, and just 26% to Republicans. Why? Well your guess is as good as mine, but I suspect it's because the TV media knows Democrats love to regulate, and the TV media is hoping the democrats will *protect* TV's business against internet competitors (like video-streaming Ipods).
Corporations don't want a free market. They want a socialized, closed market that protects their current standing. They want competition to be blocked.
Re:Not to mention Freddie Mac and Fannie Mae (Score:4, Insightful)
What really pisses me off about this issue, is that there has been no substantive debate about what actually needs to be done to change financial regulations.
This episode has illustrated that our financial system is too delicate, with too many large firms that can take down the entire global economy if they fail.
The important thing to note, is that this systemic risk will not be minimized by the actions of the actions of self-interested agents, because they do not care about the welfare of other banks, only their own(And there is nothing wrong with that). So a perfectly free market will fail.
So the question is, what do we do about it? Do we place stricter leverage limits so that these firms are not allowed to take on risk? Do we forcibly break up the companies to create more redundancy?
Until your party drops it's tiresome and simplistic ideology( "Capital gains taxes! That will magically eliminate systemic risk!" ) in favor of realistic and sober policy proposals, it will continue to be relegated to the political wilderness.
Re:Outsourcing Their Decisions (Score:2, Insightful)
and the money in your savings account would never lose value.
Don't equate money with currency. Money is a way to measure value, and value is set by the market. (Or in its most simple form, the value of something is simply what two parties to a transaction agree it is.)
If you want to fix the value of money by tying it to gold, then yes your savings account would never lose value, but your purchasing power would be affected by drastic inflation or deflation.
Moreover, without an efficient mechanism for inflation, economic growth would be stifled. If I start a new business/create new value, where does the aggregate money come from to represent that new value? By inflation.
Your understanding of economics is flawed, or else you would not hold these views about what the gold standard does.
Re:Who is the fox, and what is the henhouse? (Score:3, Insightful)
These two statements aren't at odds with each other. Fannie Mae and Freddie Mac did increase their already significant lobbying efforts in response to administration calls for increased regulation after their accounting scandals in 2003. But that didn't stop the debate dead in it's tracks of course, it's in the ensuing debate that issues of racism and fairness were a factor. Counterintuitively it was Republicans urging more regulation and Democrats urging less. A big part of the argument in defense of Fannie and Freddie was their role in promoting affordable housing for the lower classes and they painted the reforms as a threat to that role... inevitably given the parties involved and the nature of the proposed regulations (for instance moving regulation of the GSEs from HUD to Treasury) "racism and fairness" were the subtext of the defense even though they weren't explicitly invoked. Witness Rep. Meeks angry outburst with federal regulators for even reporting on the accounting irregularities... it's obvious that he saw Fannie Mae only in it's role as a benefactor of the lower classes and even when they were caught red-handed cooking the books that no criticism could be made because it would empower the GSE's (and the lower-classe?) nefarious opponents. For the record I don't think that Meeks took that position because he was bought by GSE lobbying money... I think he really saw the whole issue in those Manichean good vs. evil class warfare terms.
Re:Not to mention Freddie Mac and Fannie Mae (Score:4, Insightful)
That's a nice strawman argument. Blame the democrats for wanting to give mortgages to minorities and poor people. The numbers tell a different story. There are only $150 billion in total mortgages that are at risk of defaulting or going into forclosure. Out of those $150 billion, the land and homes still back the mortgage, so you can't expect a complete loss.
Then, take a look at the $62 trillion in credit default swaps. Compare $150 billion in bad mortgages (not all of them made to poor people or minorities) to $62 trillion in credit default swaps due to lax regulation.
It's not hard to see who is really at fault here, but go ahead, keep blaming the poor and minorities, like all of the conservatives do. You're just digging yourself into a bigger hole.
Who Cares? (Score:1, Insightful)
I've read most all the posts to this thread and have yet to find anyone positing that this entire fiasco was
allowed to happen because, in the end, those in the know were fully aware of what would happen and either
didn't care, or worse, wanted it to happen knowing they would side-step the fallout.
Like the S-n-L crimes, there will be some scape-goats, but most of those who plundered will emerge
unscathed. We're talking about the 1%'ers here. Hell, even the 5%'ers won't be leaping from their offices
any time soon. They and their wealth are safely ensconced.
Considering that the contributions to both political parties from financial sector account for 30% (roughly
100 million to obama and mccain each) can we really expect anything more than a dog-n-pony show instead of putting
these criminals in the dock?
And how is what's happening to us 'joe the plumber'(s) any different from what was foisted on S. American countries
or worse, S. Asian countries in the 80s and 90s?
As cited repeatedly in Naiomi Klein's book, this is just another instance of "Disaster Capitalism" that
the elites will profit from while the pundits scratch their heads and the likes of Jeffery Sachs back-steps over.
(Tip of the hat to Chalmers Johnson)
Re:What the hell are you talking about? (Score:2, Insightful)
I'm sorry, but Fannie and Freddie bought the least amount of the subprime and alt-a loans as a percentage of total assets of all the major players in the mortgage security business.
Yes, the GSEs(Govt Sponsered Enterprise) were making 'easy' money and it was only because they had government backing. This enticed non GSE to try and get into the game and it turned out it wasn't easy money after all.
The problem is without GSEs there would be no real market for fixed rate home mortgages. I think the majority of people would agree fixed rate mortgages are a real benefit to your average home buyer on many different levels. Fixed rate mortgages are a real drag on a Bank however. The reason for this is how Banks had traditionally acquired the money to lend for mortgages.
Say you want to loan out $1B to home buyers for 30 years you used to either have to have $1B on you or got someone else to loan you $1B. The majority of the time you get a $1B loan. Only You never really got a 30 year term. You got much more short term loans.
Here is the first flaw in non GSE mortgage lending. You can't borrow short and lend long, you will end up with nothing eventually as the return on your mortgages will be under the cost of your borrowing.
They had thought they had figured a way around this problem in the MBS, mortgage backed security. In this model you only need short term financing while you find a 3rd party to buy your securities. The MBS is a complicated device but everyone viewed it as a fixed income stream. An investor would give Firm $1B and then the Firm would give you, over the life of the MBS, $1B plus 'income' back.
Here is the 2nd flaw of non GSE companies. If you have $1B to spend, why would you spend it on a non-liquid long term non-GSE security when you could get the same return from a nice stable GSE security? So the non-GSE's had to make their MBS more attractive. They did this through financial trickery that was obfuscated on purpose I believe. If you make it very complicated its less likely your investors will ask tough questions as they don't understand it enough to ask tough questions. Not to disparage the investor's, but the people managing the investors money were much less savvy and much less skilled then the people at the securities firms.
I assume you know that it turns out the assumptions they used to make the models that they used to value and asses the risk of the MBS turned out to be flawed in a rather obvious and fatal manner.
Would we have had a bubble and the following contraction of the real estate market with out the MBS debacle? Yes, of course. There was to much demand for investment vehicles in the early part of this decade for no bubble to have occurred.
However, It should have stopped several years ago, probably around 2004-2005 time frame when all the 'prime' borrowers had bought homes and the pool of 'non-prime' borrowers who had loans was much smaller.
If you want to assign blame, then blame the middle class for wanting fixed rate mortgages or your over educated wall street types who mistake their privilege for merit. It is not some GSE's fault for trying facilitate the social policy of affordable non-discriminatory mortgage lending.
Re:Outsourcing Their Decisions (Score:1, Insightful)
For the most part, I do agree with what you have to say, but you do make one claim that I don't believe to be completely true.
First, you claim that the value of money would never decrease, which isn't quite true. Due to gold being fairly limited it's unlikely that its value ever drops significantly, but if I unearthed a large quantity of it, the value of gold in general would fall simply because there is now more of it available for circulation.
What's more likely to happen is that since we can't easily ensure that we'll get more gold if we need a greater money supply, we'll basically have a currency that is always deflating. There are problems inherent with this situation just as there are with a currency that is always inflating.
You can limit this problem somewhat by adding other materials that could be used as money. Silver is another popular one, but that too is limited. In order to keep a currency from deflating or inflating too rapidly, you have to select which commodities it will be backed by and then ensure that you can keep finding enough of them to increase your money supply without the risk of finding too damn much of it and causing inflation.
I don't think that a gold or silver standard alone is enough to solve the monetary woes that this country faces, especially as we as a society continue to find new ways to increase productivity.
Why not just create a fiat currency where printing is controlled by the government and only print or destroy enough money to keep its value from either inflating or deflating. I wouldn't mind allowing a gold or silver backed currency to exist along side of it either, but the values of those will always be based on how much gold or silver is available for trade.
Re:I blame ACORN! (Score:3, Insightful)
Do you have any numbers to back that statement up?
Lehman Brothers was handing out billions in bonuses even as the company was going under. Sure, the shares held by these executives might be worthless - but they still got paid millions and walk away with millions more via golden parachutes.
And btw, for those who blame the crash on deregulation, the regulations in the financial sector only grew in the last 20 years.
And what color is the sky on your planet?