Coding Flaws Caused Moody's Debt Rating Errors

An anonymous reader writes "The Financial Times has the story that billions in incorrect AAA ratings given out by Moody's were the result of a coding error in its computer models. 'Internal Moody's documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.'"

Comments

not err

[Anonymous Coward]

Cue the onslaught of economists and generally math-illiterate people saying that computer models just can't be trusted. They can, ya morons, just not when they're implemented by penny-a-day visual basic dolts.

Re:not err

[Anonymous Coward]

The problem is that the credit agencies used past data for new types of asset backed securities. While this works with most asset backed securities, the use of CDOs and MBSs caused a perfect storm. They assets they were backed up with were housing values and the AAA ratings they had made them very popular, inflating the housing values. When the housing values took a nosedive, there were no assets to back up these securities.

This isn't a trivial issue. False AAA ratings are what have caused the global credit crunch and mortgage crisis. For those who aren't familiar with a AAA rating, it is considered as good as a US government bond. It is a very hard rating to get and only 8 US companies are rated AAA by all of the credit agencies.

In my opinion, there is a very strong need for regulation of the credit agencies. If they didn't allow for CDOs and MBSs to get AAA ratings, this credit crunch and likely recession wouldn't have occurred.

re: not err

[ed.han]

while i disagree that even more regulation is needed in the financial services industry (SOX, anyone?), i'm worried about the imminent bloodletting as people try to find even safer investment vehicles--and the inevitable billions in lawsuits that will be filed in the coming weeks.

Re:not err

[jedidiah]

IOW, they are blaming the coders for generating results that should have
failed even the most basic sanity checking. All of their finance geeks
upon seeing these ratings should have been individually and collectively
scratching their heads.

I'm not sure I buy it really. It just seems like corporate blame deflection.

I dunno. I'm no MBA but I would imagine that the rating of any composite
security should be the lowest rating of the most risky component.

Re:not err

[Anonymous Coward]

Well, I think the guys in the brokerages who were passing this crap off on everyone are trying to blame the programmers instead of admitting they were selling economic snake oil.

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[homer_s]

In my opinion, there is a very strong need for regulation of the credit agencies.

And who would regulate the regulators? You think the regulators won't have political pressure to alter the ratings in an election year?

The ratings agencies operate in a market where competition is prevented by the SEC. In 1975, the SEC mandated that debt be rated by a Nationally Recognized Statistical Rating Organization (NRSRO).

Before that, they were paid by those looking to buy bonds or make loans to a company. If a rating company did poorly it lost business. If it did poorly too often it went out of business.

But now, since there are only 5 to 7 such companies, the issuers of debt have to pay to get it rated or they couldn't sell it. So this leads to shopping around to see who would give the debt the highest rating. And no matter how badly Moody's or any member of the cartel screws up, they won't go out of business.

Re:not err

[Anonymous Coward]

False AAA ratings are what have caused the global credit crunch and mortgage crisis.

That is far too strong. The ratings agencies played a part, but you are you a fool if you look at something that will "promise investors very high returns with little risk" and don't think something is fishy. It's not like the ratings agencies duped everybody.

Re:not err

[Hemogoblin]

I dunno. I'm no MBA but I would imagine that the rating of any composite
security should be the lowest rating of the most risky component. That's not correct in general. Many structured products and derivatives have components that cancel each other out. A really silly example is a portfolio that buys a stock and short sells it at the same time, which will net out to nothing (except lost transaction fees). Obviously CDO's and whatever are ridiculously more complicated, but you get the point.

Re:not err

[Anonymous Coward]

It looks like the problem is that these investment vehicles are really hard to understand the intrinsics of, let alone model properly. The FT's awesome finance blog, FT Alphaville goes into a lot more depth on the whole issue - they "explain" the investment thingies themselves, the CPDOs, as well as the failures themselves.

"I'm not sure I buy it really. It just seems like corporate blame deflection."

If anything, the story paints a completely different, much worse picture:
1) Coding bug found to be cause, internally at Moody's
2) Internal docs show adjustment of model factors, ruling out high volatility as part of the model, in order that ratings after the bug fix don't deviate much from those before the bug was found.

That's my understanding of the story, anyway - IANAFinancier. But to me this paints Moody's in a much, much worse light than if they had *just* had a bug in the initial model which they then fixed - after all, that would have resulted in a re-rating...

(Again, I don't quite understand what's going on here, but that was my initial take on the situation)

Re:not err

[dubl-u]

IOW, they are blaming the coders for generating results that should have
failed even the most basic sanity checking. Indeed. This isn't a coding error, it's a testing error. Or perhaps a process design error.

Any professional knows that coding has a certain error rate. So you add practices, like pair programming, unit testing, acceptance testing, external code reviews, parallel implementation, and black-box testing until you get below the error rate you need.

For some part-time e-tailer's web site, you can skip a fair bit of that; if you fuck up badly enough, you might cost them an entire $500. But in the financial world, they know that errors can cost a lot more, like a million times more, and so it's worth spending more on quality-oriented practices.

Blaming this on the coder who happened to make the key error (if indeed their was one) is like blaming the Titanic disaster on some guy who missed a rivet on that side. It's the purest bullshit, designed to deflect responsibility from the people in charge. If they set it up right, a single person would be unable to make a mistake of this magnitude.

Re:not err

[DragonWriter]

I'm no MBA but I would imagine that the rating of any composite
security should be the lowest rating of the most risky component.

To the extent that different investments in a portfolio (which is what a "composite security" is, in essence, a prepackaged portfolio) have independent risks, there is a leveling effect (this is why, e.g., when you roll two dice, the distribution of the results is tighter proportionate to the range than when you roll one, and tighter still when you roll three, etc.)

OTOH, to the extent they tend to vary together, they don't level each other. Assessing the degree to which two different investments are independent in their risks is, AFAIK, still more art than science to start with, and when the people doing the assessment often have financial interests (even if only indirectly) in promoting the sales of the packaged investments, well, the results are likely to represent those interests more than any rational assessment of reality.

Re:not err

[Anonymous Coward]

Yeah, that's what I was saying, but I tried to stay away from complicated stuff like correlation, gamma, vega, etc :)

Re:not err

[tqft]

Coder? More like junior messed up a spreadsheet and higher ups had no way to know if it was right or wrong other than the issuers who pay Moody's & S&P (and others) big time for ratings kept coming back for more.

Now if the users paid for ratings the customers would be whining pretty hard - to some extent the users of ratings do pay in deciding what effective interest rate they will pay to hold a bond.

Re:not err

[Alpha830RulZ]

I'm no MBA but I would imagine that the rating of any composite
security should be the lowest rating of the most risky component.

Nor are you a statistician (which I'm not either, BTW, but I slept in a Holiday Inn Express last night...). Not dissing you, BTW.

The risk of a portfolio is dependent on the individual components' correlation with each other, as well as their individual risk. You can make a fairly safe portfolio out of relatively risky investments, IF the individual investments are not correlated in their behavior. If you have stocks and bonds in your portfolio, for example, this reduces portfolio risk because prices of stocks and bonds tend to not track each other tightly. Something that trashes the stock market overall may not impact the bond market as much, thus the variability in the overall portfolio is reduced.

This assumption of lack of correlation is what is causing the house of cards to tumble. Risk packagers assumed that there would be no fundamental common fall to the subprime housing market, and priced risk accordingly, which caused interest rates to be too low for the associated risk, which caused over-purchase of the loans. Everyone could have been completely honest, and we would still have this problem.

From my limited understanding of the problem, there are several fun things going on in this situation, any one of which are troublesome:

1) the real estate bubble as a whole, where we lost sight of what a piece of property can really be worth. Regardless of how pretty the house is, the price has to be something that can be paid for out of the income stream of the owner. This was enabled by

2) the mispricing of loans by the industry, in part due the flawed risk assessment, and in part by the complete breakdown of law and morality in the mortgage brokering business, well described elsewhere. These two factors made it cheaper for marginal borrowers to get into property that they couldn't afford, and in that deal (this is subtle) the ultimate lendors endangered themselves because they made loans at an interest rate which did not properly compensate them for the risk they took on. This was enabled by

3) the growth of the securitization of the mortgages into portfolio securities. This was and is I think a good idea, as it allows flow of capital into housing loans from sources that wouldn't otherwise easily be able to supply it. However, apparently the risk modeling that was used to price these was flawed, well before the aforementioned bug surfaced. That meant that these loans were mispriced, as I mentioned before. Since the price was too low, people overpurchased the product. Several somebodies, somewhere, didn't factor in the risk of the bubble in the prices mentioned in one, and what a price collapse would do. That fundamental risk, and the resultant mispricing of the loans is what is bringing the house of cards down. That risk makes this bug trivial in comparison. IMCLTHO

Re:not err

[glitch23]

Cue the onslaught of economists and generally math-illiterate people saying that computer models just can't be trusted. They can, ya morons, just not when they're implemented by penny-a-day visual basic dolts.

Anyone can still make a typo in code without it being caught. Or it can be malicious such as the if (uid = 0) statement in the Linux kernel a while back that someone just happen to catch. This just shows that no model is infallible because no human is infallible and that checks should be in place to validate the model.

Re:not err

[Z34107]

That actually is (used to be?) a tax dodge.

Take the money you want sheltered. Spend all of it on buying stock and selling an equivalent amount short. If the stock plummets, write the purchase off on your taxes. If it soars, write the short off on your taxes.

Step 3: Profit. Anyone taking notes should question why we have such a screwed up tax system.

Re:not err

[tomhudson]

after a computer coding error was corrected, their ratings should have been up to four HUNDREDnotches lower.

There. Fixed it for ya.

Seriously, they wilfully looked the other way. There is NO way that hundreds of these "new investment vehicles" could have been expected to receive AAA credit ratings when there are only a handful of corporations that have that rating.

This was a case of "don't ask, don't tell - because then the game is over". Everyone knew it was bogus, but nobody was going to be the first to blow the whistle - not when their continuing to make the big bucks depended on them not rocking the boat.

Re:not err

[lgw]

In my opinion, there is a very strong need for regulation of the credit agencies. If they didn't allow for CDOs and MBSs to get AAA ratings, this credit crunch and likely recession wouldn't have occurred. Yes, giving CDOs and MBSs AAA ratings just because house prices have never before declined sharply enough to affect the reliability of these securites was a problem, but government oversight wouldn't have helped here: securities regulation is good at preventing us from repeating past errors, but that's about it.

Of course the credit agencies used past data: that's how insurance works. You examine the past for hard data on the likelyhood of events, and the cost when those events occur. Stating a couple years ago (as I did) that house prices were in an unsustainable bubble (or as Shiller did much earlier) was just an opinion. Shiller is taken seriously *now*, because his hypothesis made predictions that turned out to be accurate, but before those predictions were validated it was just another hypothesis.

Would a government bureaucracy that ignored the prevailing opinions in a field and ruled based on one guy's untested hypothesis really be a good thing? Does "we need a government bureaucracy so that we can react to change quicker" make any kind of sense whatsoever?

The credit crunch happened because people willingly borrowed more than they could afford to. Asking for a government "department of preventing me from borrowing too much" because you don't have the sense to moderate your spending is a really pathetic abandonment of personal responsibility, right up there with a "department of outlawing unhealthy foods" because you don't have the sense to moderate your eating.

It's not the government's fault if you bought a house you couldn't afford. It's not the seller's fault. It's not the lender's fault. It's not the credit agencies' fault. It's not the evil corporations' fault. It's not George W Bush's fault. (And yes, I've heard every one of these arguments used seriously.)

Re:not err

[columbiatch]

These structured products are broken into what are known as tranches.

Even if you know you're holding a pile of dog crap mortgages, you know that most will be able to make first months payment. Each successive monthly payment pool is likely to have more defaults, and thus uncertainty grows. If you take 1000 loans, and group the payments together, you can theoretically predict the risk of each band of payments. If you buy the first band, aka tranch, you're far more likely to get paid than if you buy the junior tranches that are expecting payments 30 years from now.

Here's where the fun stuff happens. Those earlier tranches that are more likely to get paid will usually be given very high credit ratings, as it's likely that the owner will collect the income from the pooled debtors. Since the security their holdings is so highly rated, perhaps AAA, then other institutions are willing to accept that AAA security as collateral for additional borrowing. This all continues on in a crazy cycle of leveraging until you have hunders of dollars of leverage to cents of actual income. All the while, these leverage products maintain a high credit rating, because it's all based off of AAA securities.

What happens when people start to default on the orignal loans and the person who bought that orignal pools of loans doesn't get paid? They can't pay their interest to a person who in turn can't pay their interest to a person who gets screwed and has to bring this "safe" security onto their balance sheet and write it all off as a loss. TADA! Credit crunch.

Re:not err

[lgw]

It's more complicated than simply reducing correlation. To hugely simplify: let's take 10 mortgages of equal size, and sell 2 securities related to them:

* The "senior" security is the size of 5 mortgages, and pays it's buyer as long as *any* 5 of the 10 mortgages are paid.

* The "junior" security is also the size of 5 mortgages, and assumes all the risk for all 10 unless 6 or more of them go unpaid (but pays a really nice interest rate).

How reliable is the senior security? If you look through all historical American data and see that failure of 60% of mortgages has never happened (assuming here that we're taking the mortgages from different markets in theis simple example) then you have created a security that, based on all available historical data, is quite reliable.

Of course, the reality of thse securities is far more complicated, but this gets the basic idea across: in order for the AAA rated securites to fail, we'd need a fall in house prices unprecedented in American history. A few of have been predicting such a fall for years, but so what? There are always some loonies predicting doom and gloom, and the hard data supported the ratings.

Re:not err

[columbiatch]

Close but not quite. The prices of homes taking a nosedive don't necessarily effect existing MBS. The problem is that when people default on their loans, the "guaranteed income" of AAA securities goes away and the security deleverages. This has scared everyone from the CDO/MBS/ABS market and now liquidity has dried up too. I don't agree with your statement about regulation and the credit crunch. Poor risk pricing didn't help. But proper risk assesment wouldn't have prevented morons in booming housing markets from "keeping up with the Smith's"

Re:not err

[Anonymous Coward]

The debt ratings agencies have been involved in the institutionlized, government sanctioned system of rampant fraud which is now coming home to roost, and we are far from the end of this. This is the "Mousolini Fascist Business Model" (Jim Willie) in full effect!

Re:not err

[electroniceric]

Therein lies the problem: the senior 100000 of 2 million piece of crap mortgages that their holders can't pay still has a high likelihood of some or all of those mortgages defaulting. So if the pool overall is no good, the seniority does nothing to solve that problem. And that's before CDO^2 nonsense is used to claim that the senior of lots of junior tranches of various pools are as good as the senior tranches of a single pool...

So the senior tranches of CDO's have to be based on the risk ratings on the whole mortgage pool, and this is precisely where Moody's and S&P bamboozled the public and are now trying to blame it on a bug. They would bless the claim that the top of nearly any pool was great stuff, no matter what the contents of the pool were. As others have observed, that's no coding bug, it's a policy to willfully ignore reality to facilitate the sale of more securities.

The mortgage market was hardly unserved when the securitizers entered it - rather it was full of banks offering conventional mortgages at rates that properly priced the risk (and the banks took care to do that, since they held on to the risk at that time, and federal insurance laws require them to have sane risk holdings). The introduction of securitized mortgage products flooded the market with much cheaper debt. That meant that the pools kept getting progressively worse and worse as the lenders headed down-market to try to sell mortgages to people who didn't already hold more than enough debt.

And as for the loonies, as asset bubbles go, the runup in housing has only one precedent in American history: the speculation before the Great Depression. Now there are a lot more safety valves in the finance system these days, but to claim that it is or was doom and gloom to be concerned about the size of the bubble is pretty a blinked view of the world.

Re:not err

[damasterwc]

i second that... sounds like a game of hot potato is starting. the truth is some people (various sales people, lenders, brokers, etc.) were making a killing and nobody wanted the party to end.

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[treat]

In my opinion, there is a very strong need for regulation of the credit agencies. If they didn't allow for CDOs and MBSs to get AAA ratings, this credit crunch and likely recession wouldn't have occurred. First of all, we are not in a recession by any documented definition of the word "recession".

However, if this recession was averted, you are saying what - a future of permanent economic growth, or a recession delayed by a few months?

Re:not err

[Anonymous Coward]

That actually is (used to be?) a tax dodge.

Take the money you want sheltered. Spend all of it on buying stock and selling an equivalent amount short. If the stock plummets, write the purchase off on your taxes. If it soars, write the short off on your taxes.

That doesn't work, because you have to pay tax on the capital gains if the stock goes up, or tax on the income from selling the shorts if the stock goes down.

Re:not err

[sjf]

I dunno. I'm no MBA but I would imagine that the rating of any composite
security should be the lowest rating of the most risky component.

Nope. That's precisely the opposite purpose of a composite security. Think about a mutual fund: the risk of one component is mitigated by the risk of all the other components.
You'd have no possibility of retiring if your pension was predicated on the risk of your riskiest investment.

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[Alpha830RulZ]

and the hard data supported the ratings.

Which is the fundamental issue here. The ratings, or rather, the underlying risk models depended on some assumptions about the data, that past trends will continue. In a bubble situation, which I think is how history will view the real estate situation, the trends are not reliable indicators. It's a black swan problem .

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[alexander_686]

Not exactly, this is not above having a diversified portfolio. This is something different. A typical CDO, Mortgage Back Pool, etc., is sliced into different âoeTranchesâ. For example, a bond may be stuffed with 1,000 sub-prime home loans worth 250K each for a 250M bond. You cut the bond into two slices, a 200M âoeAâ tranch and a 50M âoeBâ tranch. You structure the default so all default loans hit the âoeBâ. If you structure the bond correctly, the chance that the âoeAâ tranch will get hit is low. Most of these bonds that were issued prior to 2004 are working just fine. Itâ(TM)s the bonds that were issued after this point that have gone wonkie. Mainly because everybody (lenders and borrows) were having too much fun drinking the KoolAid. Now we have the hangover.

Re:not err

[Anonymous Coward]

I think you mean the distribution OF THE MEAN of the results.

You know. The average.

I think you mean something like the central limit theorem.

Well, maybe not since these... composite securities... are composed of very connected parts.

Maybe you want another fancy limit theorem. Maybe you want to do some math so your data look like something a system based on limit theorems can work with.

Maybe you don't.

Maybe you build a fucked up model. Your assumption that there is a leveling effect is wrong in your setup. You misjudge risk. You don't find a way to backtest things and a few years later you learn how fucked you are.

Whoopsy Daisy.

Peace.

Re:not err

[thePowerOfGrayskull]

This isn't a trivial issue. False AAA ratings are what have caused the global credit crunch and mortgage crisis. See now, in my ignorance I figured it was caused by a) people stupid enough to invest in someone's debt, without doing research into exactly what they were getting and b) individuals stupid enough to say, "Yeah, $500/mo mortgage, I can totally pay that!"

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[TemporalBeing]

If you look through all historical American data and see that failure of 60% of mortgages has never happened (assuming here that we're taking the mortgages from different markets in theis simple example) then you have created a security that, based on all available historical data, is quite reliable.

You forgot about 1929, didn't you? There is prior precedence for such a fall. And the US housing market really sucked thereafter too until just after WWII at which point it picked up steam and stabilized until the late 1980's where it jumped and started the creation of a big bubble that is only just starting to deflate. There's a study out there of housing data from the late 1800's until pretty recently. (Wish I had the specific link, but you can find it on-line. It was done by Harvard/Standford/ or such.) The study adjusted for inflation and leveled, which set the adjusted housing price at $100k. During the Great Depression it dropped considerably (over 50%), and didn't revive until after WWII, when it came back up to around $100k and stayed there until the late 1980's when it started to go skyward, peaking near $190k or so around 2002 or so, and then starting to decline. I think the most recent number was still above $180k. Guess what? That number still has a long ways to drop before it'll be back in reality.

The problem is larger than simply what you are stating, though it certainly didn't help at all - and problem made things worse.

What you have to look at is the long term trend and also the affordability to the base market. For example, in Northern Virginia buying a house went skyward after 2000. My sister's townhouse went from $93k (1997) to a peak of $330k (2005) - little to no change in the property itself outside of standard maintenance. It's settled down some, but is still well above $200k. The primary causes were (a) zoning laws modified to "keep the way of life the same" (i.e. houses spread apart, country feel), (b) growing increase in population, and (c) the belief that the prices would forever go up b/c the gov't is there and thus makes a stable economy.

The problems ended up being: (a) there existed a $20k gap between what an individual could leave on under subsidized housing ($42k salary max) and what the same person could live on without subsidized housing (roughly $60k salary) due to housing (renting) prices alone, and (b) the base market (people in their mid-20's to early 30's) were being forced out of the market - they simply couldn't afford to buy a house any longer; moreover, it was showing signs of the problems even in 2005 when people that had been in the area for a while wouldn't have been able to buy their own homes.

I still have quite a few friends in that area, and while the market has come down some, it is still quite crazy and unaffordable (the reason my wife & I moved out of that area). Sadly, many are in a very tough position b/c if the housing market keeps going the way it is (and it will until it reaches a full correction) many are going to end up in bankruptcy as a result. But that's the "high demand" side of the story.

On the other hand, out in Columbus, OH - city officials decided they wanted to "clean-up downtown" and get rid of the "poor people", so they worked with lenders to get those people loans and move them out to the suburbs. For example, in my parents development there was a high school student who (a) just graduated high school, and (b) didn't have a job (period!) but had been qualified for a mortgage and allowed to buy a home. She's now in bankruptcy. The "clean-up" simply put the poor people elsewhere, essentially making them someone else's problem while making the politicians look good. In the meantime, that "someone else's problem" has resulted in mass foreclosures in neighborhoods as things caught up to people that weren't have been able to pay the mortgage to start with and ended up in foreclosures quite predictably, which is on

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[ppanon]

Depends. If the capital gains is taxed less than the tax credit for the short loss, it would be a win.

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[Dilaudid]

True - but we are talking about credit ratings. Given that there is no consensus on how to price any kind of exotic derivative (hence the existence of both local vol and stochastic vol models) then why the hell are the ratings agencies trying to rate what are exotic, highly leveraged derivatives - using a ratings system designed to explain one of the simpler forms of investment, corporate and government debt?

Seems like they have a bug in their business model.

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[Anonymous Coward]

If you cashed them out in different years, you might get a benefit. Long term capital gains is taxed separately from income at 15%. Capital losses lessens your adjusted gross income, which lowers your federal tax burden (likely to be taxed at more than 15%) and possibly your state tax burden as well.

The problem with this plan is that the write-offs from capital losses are capped at $3000, so you wouldn't make very much.

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[WaZiX]

This assumption of lack of correlation is what is causing the house of cards to tumble. Risk packagers assumed that there would be no fundamental common fall to the subprime housing market, and priced risk accordingly, which caused interest rates to be too low for the associated risk, which caused over-purchase of the loans. Everyone could have been completely honest, and we would still have this problem. They didn't assume lack of correlation, they assumed low correlation is calculated on historical data, and historically, loans were not given to subprime borrowers. As they gave out more and more loans, the marginal quality of the loans decreases, increasing the risk of the loans, but more importantly, increased the correlation between defaults.

Now, this phenomenon is pretty well known, since it had been observed in other lending markets, but one thing made things very different in this case... they also assumed that house prices couldn't go down!

Note that this scenario should have been stress tested, and dynamic correlations should have been assumed; but then again, who wants to see risk when leveraged positions allow for 25% annual return...

Re:not err

[Anonymous Coward]

Almost, but not quite. Tranches actually refer to the level of defaults, not to individual cash flows. In other words, the first tranche gets taken out by the first group of people to default, regardless of which payment they default on. How do I know this? I worked on CDO pricing code about six months ago...

Re:not err

[Anonymous Coward]

Not really. If you buy an option to buy and short at the same time, it can be profitable so long as the stock moves. This is a popular investment when a company is sitting on the fence about whether or not to M&A another company, as you would assume the acquired company will either go up because they get bought or drop because they dont.

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[Hemogoblin]

You're describing a position where you buy a call and a put at the same strike price. These are different derivatives, so they don't cancel each other out like the portfolio in my example. It's hard to make money buying a long call and put at the same strike price, because you're paying for two option premiums. The stock has to move a LOT in either direction for you to make money. If it doesn't move at all, you lose a ton on the premiums.

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[RobertJon]

Physics degree, actuary by training, investment banker by profession; that is math-literate.

And I confirm that models cannot be trusted nor can they replace sound judgment and experience. Besides the issue of visual basic dolts, and obvious limitations of input quality, there remains the fundamental question of scope of application.

In the late 1980s, S&P rated First Executive as triple-A, even though that life insurer was loaded with junk bonds. S&P bought into the weak argument that diversification of junk bonds would work.

The SUBTLE error here by S&P is that credit risk is highly correlated and requires more individual bonds than were ever available for diversification.

But the more important BLATANT error by S&P was that First Executive was NOT a passive, diversified pool of junk bonds. No, First Executive was an actively managed machine for producing ever-rising reported income. So Fred Carr actively-managed his way to ruin by greedily stretching for returns.

S&P's junk bond models were wrong, but even if they were right, they were applied immodestly, to do things (like anticipate management behavior) for which those models were not qualified.

At Moody's I was unable to persuade the rating committee to rate First Executive below an A3. (That's 6 notches below triple-A.) The limiting factor? Moody's methodology including guys who asked "But how could S&P be THAT wrong?!"

In fact, First Executive failed, spectactularly.

Models exist solely to let us play many rounds of the game, in simulation. Models help us find unanticipated correlations, un-imagined peaks and valleys in the game solution surface. Models are never the final answer.

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[DragonWriter]

I think you mean the distribution OF THE MEAN of the results.

No, I don't. That doesn't even make sense -- the mean has no distribution, its a single value.

What I mean is the is the distribution of the results. Just like I said.

Well, maybe not since these... composite securities... are composed of very connected parts.

I addressed that. Maybe you need to go reread what I wrote, paying particular attention to the two sentences using the phrase "to the extent that...", and the final sentence: "Assessing the degree to which two different investments are independent in their risks is, AFAIK, still more art than science to start with, and when the people doing the assessment often have financial interests (even if only indirectly) in promoting the sales of the packaged investments, well, the results are likely to represent those interests more than any rational assessment of reality."

But those three sentences are the whole post. If you missed them, what exactly are you responding to?

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[TheWizardOfCheese]

They are not blaming the coding error for every wrong rating they have ever issued, just for the CPDO products (a kind of leveraged portfolio strategy involving broad credit indexes.) The instruments in question depended on the credit quality of a broad index of European industrial companies. They have no direct connection to mortgages or to America at all; the link is just through the general decline in liquidity and increase in credit spreads.

It is true, though, that most independent observers were extremely skeptical about CPDOs when they were introduced by ABN: they promised a AAA rating for paper yielding 200 bp over LIBOR! Magic! Gold from dross! The "sanity check" would be that when something is to good to be true ...

Re:not err

[lucifuge31337]

I dunno. I'm no MBA but I would imagine that the rating of any composite security should be the lowest rating of the most risky component. I'm no MBA either, but that's not correct. The point of a composite security is to spread out the risk of the assets. If you had 2% of high risk assets, and 98% of assets considered to be stable, you wouldn't rate the entire composite based on the 2%. That's why these calculations are hard. And depend on so much data. But I agree with you on the first part of your post. Something sounds rather unbelievable in this whole story.

Re:not err

[Aristos Mazer]

The NPR radio show "This American Life" had an excellent story about the credit crisis and went in depth on the use of past data that didn't really apply to the current scenario. Here's the link if you want to listen:
http://www.thislife.org/Radio_Episode.aspx?sched=1242

It's probably the most complete report on the roots of the crisis and how it developed over time that I've heard thus far.

Re:not err

[DavidHumus]

IOW, they are blaming the coders for generating results that should have failed even the most basic sanity checking. Indeed. This isn't a coding error, it's a testing error. Or perhaps a process design error. Any professional knows that coding has a certain error rate. So you add practices, like pair programming, unit testing, acceptance testing, external code reviews, parallel implementation, and black-box testing until you get below the error rate you need. ... None of these software practices will tell you that what you're rating AAA should really be BB. I work on this stuff and it's very complex. The way deals are structured makes them arguably "Turing complete" - the deals themselves are programs but with non-deterministic inputs.

Re:not err

[ahabswhale]

False AAA ratings are what have caused the global credit crunch and mortgage crisis. Actually, there were fuckups at EVERY level of the game but of all the fuckups, I still say that giving $400,000 home loans to people who make $50k a year is what caused it. Lenders were giving out loans to people who had no business having them. They knew damn well that they were bad loans but since they also knew they would be securitized, they didn't give a shit. Somebody else was going to have to eat it. I guess technically you can't call them fuckups since it was all intentional (except for the false AAA ratings) and was motivated purely by greed.

Re:not err

[dubl-u]

None of these software practices will tell you that what you're rating AAA should really be BB. Nope. And they shouldn't. That's a requirements question.

The claim that it was a bug is a claim that the software failed to behave according to requirements due to a developer mistake. I'm just pointing out that them saying it was a bug is equivalent to a claim of professional incompetence on the part of pretty much everybody in their software organization.

Like many others, I think that's unlikely; I don't think they accidentally got the wrong answer. I expect the software did its job correctly. That job was to give happy answers to the people paying for happy answers.

Re:not err

[Aceticon]

I work in IT in investment banking, front office.

The concept of "Software Development Process" is alien to most people here.

In my experience Investment Banks tend to try and save money on the up-front analysis, design and implementation of mission critical systems (by getting cheap people to do it) while paying for it many many times over in support costs and indirect costs to the business.

These guys have some of the biggest, most complex, highly interconnected software systems infrastructures in the planet serving the needs of a business which moves billions of dollars around every year and yet there is no overall Architecture documentation (nobody really knows the whole picture, not even part of it), no standardized means for interconnecting systems, not even software libraries reused across systems.

For a single geographical location, any of these banks has at least 3 implementations of every major sort of system since IT isn't shared across business units (such as equities, cash and fixed income) and any big bank usually serves at least 3 geographical areas (Europe, US and Asia).

Pretty much all software languages and libraries in existence are deployed around here and everybody needs to know a bit of everything (and as a result be a master of nothing).

The place doesn't even have standardized reusable libraries so they are decades away from actually having a process.

Re:not err

[lgw]

The fall in house prices *per year* as a percentage that we're now facing exceeds that which followed 1929. If all we have is a price fall like in the 30s, the senior CDOs will be fine. These securities weren't created by stupid people, or people who avoided due dilligence.

BTW, the study you're refering to was done by Robert Shiller, and while a group of people (myself included) found his hypothesis obvious, that's not how the scientific method works. "Oh, yeah, that sounds right" isn't a basis for any sound decision-making process. Now that the predictions of Shiller's model have been validated, it's taken very seriously, and S&P now has the "Case-Shiller index" to track house prices.

There's other areas in Corporate America that this will happen too, it's a matter of time before the house of cards falls. One big one is the how short sighted companies are - most now only look at a year past and year future earnings outlook, and are lucky to have even a 5 year plan, let alone a 10 year, 15 year, or 20 year plan which is essential for running a business (especially large businesses). Eventually the short sightedness is going to catch up and reek quite the havoc there too. Companies have been run this way for 500 years. It's the normal mode of operation - get used to it. As old companies with no plan fold, new companies with no plan fill the void, and the system while turbulent at the small scale is stable at the large scale. The few companies with a real plan become the GEs and United Technologys of the world - they win, instead of losing, the race for capital and become hugely valuable. Big companies that stop planning, like AT&T, go under with amazing speed.

Oh, and your havoc reeks - that site is your friend.

Re:not err

[Ol Olsoc]

3) the growth of the securitization of the mortgages into portfolio securities. This was and is I think a good idea, as it allows flow of capital into housing loans from sources that wouldn't otherwise easily be able to supply it. And yet, the beginning of this whole mess can be traced to this very thing. When My Parents bought their house, they had a mortgage that was held by one bank, and never sold. That bank made darn sure that they were going to get their money back, so they didn't lend money foolishly. OTOH, the first 5 years of our mortgage , we had something like 7 different companies that we had to deal with. Finally the immoral group took over and just worried about making that first mortgage, then selling it off in a game of Hot Potato.

Re:not err

[triso]

...
But those three sentences are the whole post. If you missed them, what exactly are you responding to? You must be new here.

Re:not err

[Alpha830RulZ]

While that's a pain in the ass, it's a different thing. What you are referring to is probably the servicing of your mortgage, which is the business process of collecting your payment and reducing your balance. The actual owners of the mortgage may well be a completely separate group.

The servicing business, and the pain in the ass to the consumers that it causes, is not tightly related to the recent problems, which are around the creation of the loan in the beginning, when the house is purchased. The servicing business is just data processing, and is a bloodily competitive business, which is good for the consumer. Unfortunately, you and I aren't the consumer, the holders of the mortgage are.

Re: not err

[dintech]

And people will do that by investing in things that are historically safe, not new fangled structured credit products that some company tells you are safe.

Re:not err

[dintech]

Guess what? That number still has a long ays to drop before it'll be back in reality.

I think you're right but it's clear that increased demand is responsible for this. It's not some magic inflation. Of course house prices might seem unrealistic, but why does gold or oil cost so much? It's just supply/demand.

Re:not err

[TemporalBeing]

Guess what? That number still has a long ays to drop before it'll be back in reality.

I think you're right but it's clear that increased demand is responsible for this. It's not some magic inflation. Of course house prices might seem unrealistic, but why does gold or oil cost so much? It's just supply/demand. Not entirely. Sometimes, as was the case in Northern VA, prices go up b/c of supply/demand (ok), but then stay up as people get an unrealistic idea of what the price should be, which leads to the situation they are facing now - declining prices that are going to bankrupt a lot of people.

Now, the prices there got that way because people would go in an offer $10k+ over the asking price just to seal the deal, but also because communities changed zoning laws to protect their way of life too - in the end, developers couldn't buy 20 acres and create quarter acre lots to put houses on - they could only put somewhere between 1 and 4 houses on it instead per zoning. So there are a number of factors.

But in the end, housing prices are ultimately determined by what people can afford. The typical price of a house should be around 3 times your annual salary; in Northern VA it was at something like 5 or 6 times. Now salaries did go up there too (average household is around $90k/anum, thus average sale should be around $270k), but not enough to support everyone buying $500k+ homes, which was the starting point for a house (of any size) just a couple years ago (it has since come down into the $300k range).

Re:not err

[jedidiah]

This is mathematically absurd.

If you have a negative and that's canceled out by some postitive then you have a positive that's been canceled out.

That positive has been diminished.

You end up with something LESS.

It may not be total junk any more but it's still not AAA.

You end up with nothing while expecting a return on investment.

THIS is exactly what happened with mortage junk bonds.

Re:not err

[jedidiah]

In the end, a sufficiently experienced subject matter expert should be able to "eyeball"
the inputs and the outputs and make a value judgement. They should understand their model
well enough to take a reasonable swag at the result. While the swag doesnt' need to be
precise, it should be able to distinguish between junk and AAA.

These people need to be made to answer why their ratings so completely fly in the face
of naive intuition. They need to explain why they've done worse than small scale
small real estate professionals and hobbyists.

Re:not err

[jedidiah]

There's always corrections in housing prices.

You people are all off your rocker and making lame excuses by attempting to cite "statistics".

There were some unprecedentedly BAD loan practices going on that helped fuel a bubble at the same
time mortage resellers were hiding junk in with the good stuff. The ratings agencies were gladly
covering it all up.

Anyone with half a brain could have seen this mess brewing years ago.

HELL, some of the first lenders to fail went out of their way to make sure you
were upside-down on your mortage payments.

Do you people all live in your mother's basements?

Ok, so mebbe you only knock an A or two off the rating.

Damned lies...

prime+prime != prime+subprime no matter how much you cook the numbers.

This situation just goes to prove that deluding yourself with unecessarily
complicated mathematics won't save you from the real world when it comes
knocking at your door.

Re:not err

[dubl-u]

These people need to be made to answer why their ratings so completely fly in the face
of naive intuition. They need to explain why they've done worse than small scale
small real estate professionals and hobbyists. Oh, I'm sure they'll have explanations a-plenty. It's a financial industry mantra that past performance is no guarantee of future results. And these guys will say that they based all their ratings on historical data, so they did what they could. And that ratings are just opinions, and they never promised anything more than that.

They will blame somebody else. Everybody involved will blame somebody else. When really, I think there's enough blame here to go around.

Personally, I think the ratings agencies were fools for taking business like this. And that people buying the products were fools for trusting the opinions of somebody with a conflict of interest.

When Congress gave the ratings agencies a special place in the system, they should have mandated that they not be funded by people getting rated. And one reform I'd love to see is forcing the ratings companies to have some skin in the game. Perhaps guaranteeing their ratings in the aggregate, so that if more than a certain percentage of AAAs fail, it costs them.

Re:not err

[allcar]

Indeed. This isn't a coding error, it's a testing error. Or perhaps a process design error. Excellent point. I work for a financial institution that I'd better not name. The business are constantly complaining about the cost and lead time involved in new IT development. In particular, we have been pressed on whether all the testing we do is really necessary. No doubt, if/when we cut corners and problems occur, those same people will be looking to blame the coders.

A Moody Bug?

[SIR_Taco]

Great... sounds like my girlfriend

Re:A Moody Bug?

[eln]

I can see how your Real Doll would get bugs, but I don't understand how it would get moody.

Likely a feature

[bartle]

This doesn't explain how Standard and Poor's arrived at the same ratings. One possible explanation is that Moody's code was initially correct but they introduced the "bug" to make sure they were providing the same valuations as S&P.

In any case, it sounds like they found a new scapegoat and they're going to take it for a test ride.

Re:Likely a feature

[Bryansix]

Exactly because they need a reason why they rated securities backed by sub-prime negative amortizing loans at AAA. This in turn caused serious miscalculations of risk which led partially to the current economic downturn we are now facing.

The other part was that companies were all too willing to offer these risky products and buyers were all too willing to lie on their loan applications to get approved for them.

Re:Likely a feature

[Thelasko]

One possible explanation is that Moody's code was initially correct but they introduced the "bug" to make sure they were providing the same valuations as S&P. I wouldn't be surprised if S&P also introduced a "bug" to make their ratings match Moody's. The whole thing reeks of the method the RIAA uses to pick the top 40 songs, Payola.

I think the parent is correct, in its allusion. The creator of said "bug" could stand to make quite a bit of money doing so intentionally.

Re:Likely a feature

[dal20402]

I worked in a predatory lending clinic for the last few months (as part of my last semester of law school).

In many of our cases, the buyers didn't lie at all. Instead, the broker modified income and employment information on the application forms it sent to the lender, sometimes forging applications entirely

Lenders, for their part, turned a blind eye to obviously suspicious information (like a security guard making $80,000/year).

This worked for both lenders and brokers in the short term because the broker was only interested in getting more business written and the lender would quickly sell the obviously flawed mortgage to someone else.

Of course, all of this resulted in a lot of borrowers getting approved for products they couldn't afford. Why did they apply for such products? Because brokers often flatly misrepresented the terms of the products.

The incentive to get business done at any cost was a major cause of the outright fraud that underlies the current housing crisis. Borrowers are not totally blameless, but lenders and brokers were the really evil parties here.

Re:Likely a feature

[ztransform]

Very possible.. banking coders tend to be rather cowboy-ish in my limited experience of Investment Banking companies in the UK and Australia.

In a short 5 week stint in an investment bank in Australia I was shocked at the way my manager at the time would order the DBA to "just authorise" some SQL query he'd written on the production database.

The idea of having a DBA authorise a query on the production databases was to prevent stupid things from happening.. but all too often I saw these safety systems bypassed at a human level.

If you want reliable safe systems, I'd bet on telecommunications companies rather than banks.

Re:Likely a feature

[Zeinfeld]

Looks like the corporate equivalent of 'the dog ate my homework'.

So perhaps they could explain why municipal bonds have much lower default rates than equivalently rated commercial paper and this has been the case for several decades? Is this also a computer bug? I suspect not, I think they rate the commercial paper higher because they pay for the ratings.

So where is the accountability here? Do people who relied on these faulty (or fraudulent) ratings get to sue? If not, why did they ever trust a rating that nobody can be held accountable for?

Re:Likely a feature

[Belial6]

No, the buyers were evil too. It was common for the buys to be fully aware that incorrect information was going on their applications, and while I have no doubt a lie was told here and there to the buyers, I cannot count the number of people who were openly bragging that it didn't matter that they couldn't afford their loans because they wouldn't own their house long enough for the higher rate to kick in.

That being said, the lenders were definitely committing crimes. Both of the lenders my wife worked for before the crash were committing crimes on an hourly basis. The funders were expected to keep a stock of different pens at their desks to modify documents and signatures. It was common for my wife to come home worried that they were going to fire her because she wouldn't forge documents. "When the police come in to make arrests, the management is NOT going to protect you." and "It is more expensive to spend time in jail than it is to get fired." became mantras in our house.

Re:Likely a feature

[nguy]

all of this resulted in a lot of borrowers getting approved for products they couldn't afford

The borrower signed on the dotted line for their monthly obligations; they don't need the lender to tell them whether they can afford that.

Borrowers are not totally blameless, but lenders and brokers were the really evil parties here.

The borrowers are 100% responsible for the obligations they signed for. The lenders and brokers are not responsible for protecting the borrower's interests.

Re:Likely a feature

[blackmonday]

This worked for both lenders and brokers in the short term because the broker was only interested in getting more business written and the lender would quickly sell the obviously flawed mortgage to someone else.

I don't understand how the lenders tanked so quickly, since they were selling the loans as securities immediately after closing the deal. Can anyone shine a light on this for me? For instance, why is Countrywide up a creek, if they weren't left holding the bag? It would seem to me that Pension funds are where the real sh*tstorm would be, but that doesn't seem to be the case.

Re:Likely a feature

[ejecta]

I'm one of those people who got fired for not forging documents.

Apparently I was meant to be okay with plugging someone earning $2,000 a month into a mortgage that would cost him $4,000 month. He had $6,000 savings. Simple maths indicates he'd be against the wall in 3 or less months - but they simpled fired me, and then submitted the loan application in my name.

Thankfully I was smart enough to email myself all the emails on such topics before I was escorted out of the office - so should I ever get a visit from the boys in blue I can simply pass on the evidence and they can go sweat someone else.

Re:Likely a feature

[Aardpig]

Except that all lenders are required to provide a Truth in Lending statement, and comply with it. If they misled the borrower, then they have broken the law; there's no two ways about it.

Re:Likely a feature

[bvvr]

Spot on I would say. All of the market player rode on the big credit wave. Moody is indeed trying to cover its arse by trying to downplay their inflated margins as a bug.

Re:Likely a feature

[Anonymous Coward]

Countrywide is having trouble because it is hard to get people to buy houses right now. It's also possible that they got stuck with some loans which they made with the intention of selling immediately but which quickly became unsaleable.

The reason why banks are having trouble is more interesting. Basically banks loaned money to the financial organizations that were buying the mortgages. The mortgages went south, taking the financial organizations that owned them into risk, leaving the banks at risk. Bear Sterns was an example of a financial organization that owned mortgages.

Pension funds should not invest in real estate. Why? Because most people with pensions already own real estate (i.e. their houses). Further, pension funds have limitations on the risk level of securities they own. Finally, unlike banks, pension funds don't loan money. The pension funds chief vulnerability here is to owning a financial organization that goes bankrupt. One example is http://www.nypost.com/seven/03152007/business/mortgage_disaster_in_the_classroom_business_roddy_boyd.htm

Even there, a half way competent management of the fund would have avoided the issue. Why did the pension fund own two million shares? That looks to be about a quarter of the outstanding shares: http://finance.yahoo.com/q?s=NCBC

Re:Likely a feature

[scheme]

I don't understand how the lenders tanked so quickly, since they were selling the loans as securities immediately after closing the deal. Can anyone shine a light on this for me? For instance, why is Countrywide up a creek, if they weren't left holding the bag? It would seem to me that Pension funds are where the real sh*tstorm would be, but that doesn't seem to be the case.

A lot of the lenders didn't have the money needed to make the loans. They would make loans, package them and sell them and the money that they made from selling the loans would finance the next batch of loans that they were packaging.

Without a steady cash flow from selling mortgages, they can't make any new loans. So when companies stopped buying mortgage securities, their cash flow dried up and they couldn't make any more loans. Game over.

Re:Likely a feature

[klenwell]

For an excellent end-to-end journalistic account of the subprime bubble, I highly recommend the recent This American Life episode:

http://www.thisamericanlife.org/Radio_Episode.aspx?episode=355

(Unfortunately, link does not contain a podcast, though it does link to a shorter All Things Considered version of the story.)

An hour-long insightful and comprehensive examination from many different angles.

Re:Likely a feature

[Belial6]

The only thing that saved my wife was that she was incredibly productive. When she would run across something they wanted forged, she would send them an email to the effect of "I am unsure of the legality of doing this, so if you can just send me back an email letting me know it is legal, I will complete the task. Thanks." This would result in a request to have the documents delivered to the managers office, and that would be the last she heard of them. If she wasn't out producing most of the other funders 2 to 1, she would not have lasted a month. In the end though, she did get fired for it at the first job. The second job ended because of the crash. They actually seemed to be OK with her refusals. They just let her crank out her work, and handed anything shady to someone who might be slower, but could prove their worth by handling such "problems".

The best part is that when we counted up the costs of daycare, gas, clothes, taxes, etc..., we only lost $400 a month when she wasn't working. It never made sense for her to go back to work.

Re:Likely a feature

[m.ducharme]

Where I am, brokers owe a fiduciary duty to the buyer, not the lender. ymmv

Re:Likely a feature

[lgw]

The only way the buyer is not at fault is if, as you have suggested, the actual summary of the contract was false. Of course, the buyer should still have read the fine print, but these summaries are legally required to be accurate for a reason. In fact, the buyer can argue that the "false" summary is binding on the lender (and would have a pretty good chance in court, in my limited understanding).

But, really, this is a small percentage of the problem. The common case was people who wanted a house to flip (or maybe even to live in) and just didn't care about the fact that in 3 years their payments would change to something they couldn't possibly afford. Sure, the person selling the loan may have lied to the person backing the loan, but the buyer knew full well the situation was unsustainable, and was just counting on perpetually rising house prices.

We learned nothing from the dot-com stock bubble, and moved immediately to the next unsustainable bubble without a care in the world. And we're going to to it *again* on the coming gold bubble! (Or at least I'm betting heavily that way.) People just never seem to learn that prices can't go up forever.

Re:Likely a feature

[Dachannien]

banking coders tend to be rather cowboy-ish That's because they're always programming in COWBOL.

*rimshot*

Thanks, I'll be here all week.

Re:Likely a feature

[ejecta]

I did the ole "You're telling me to say he's earning X yet we can only demonstrate Y, can you please send on the documentation regarding Z".

They forwarded my termination papers inside. Which is bizarre in itself seeing as I was the only person accredited by the lenders to sign off on loan applications - but I guess that's no hinderence when they are happy to put my sign off on things I've never approved when I'm no longer there.

I'm not that worried though, whilst it sucks supporting a family of four on no income (wifes a stay at home mum) I'd prefer to be looking for work than constantly having to cover my ass and wondering if the next day is the day the feds are coming to come through the door.

Also helped I hadn't taken a holiday the entire time I worked there and they had to pay out 8 weeks leave + 4 weeks termination pay.

Re:Likely a feature

[Anonymous Coward]

What new scapegoat, themselves?

Re:Likely a feature

[blincoln]

The borrower signed on the dotted line for their monthly obligations; they don't need the lender to tell them whether they can afford that.

Maybe you didn't catch any of the "seminars" that real estate and mortgage companies had going back in the early part of this decade. A friend of mine convinced me to go to one and this is what they tried to hammer into the audience for a couple of hours:

1 - Personal income always increases over time.
2 - The value of real estate always increases over time.
3 - ARMs are to the buyer's advantage (not the bank's), because no one lives in a house for more than five years anymore.

Therefore, everyone should spend as much money as possible on a mortgage, because they are guaranteed to come out ahead.

There were certainly some weasel words used that would probably get them out of any legal trouble for what they said, but that was the point they were trying to convey. And this was before the *really* dangerous types of loan came into play, like the ones where the monthly payment didn't even cover the interest.

I still believe that the buyers should be held accountable for the contracts they signed, but the real estate industry has only itself to thank for its shortsighted cannibalization of an entire market.

Re:Likely a feature

[Anonymous Coward]

So perhaps they could explain why municipal bonds have much lower default rates than equivalently rated commercial paper and this has been the case for several decades?

No, it's because government has the power to levy taxes, and can force you to pay.

That didn't stop Orange County from going bankrupt though.

So where is the accountability here? Do people who relied on these faulty (or fraudulent) ratings get to sue? If not, why did they ever trust a rating that nobody can be held accountable for?

I'm sure they can sue, and they will.

Re:Likely a feature

[chez69]

I work in a large bank. believe me, things are controlled more then you can know.

There's so much red tape and CYA crap it takes forever to get changes in. Maybe some stupid little web application that has the rent a coder type working on it is lax, I assure you the real systems at my employer that handle the money are tightly controlled.

Re:Likely a feature

[alexander_686]

AAA Muni bonds have a lower coupon rate not because they are safer than AAA Corporate bonds, but because in the USA they are mostly tax free. [Your milliage may very depending on bond and the state that you live in]. You donâ(TM)t have to pay intrest on most muni bonds. So, if you are in the 50% tax bracket [because you are living in NYC and are paying Federal, State and City Income tax] a corporate bond yielding 4% and a muni bond yielding 2% put exactly the same amount of money in your pocket. So you donâ(TM)t care. Itâ(TM)s nothing about safty.

Re:Likely a feature

[gambolt]

The lenders weren't selling securities. They were selling lots of mortgages to Wall Street firms which were packaging them into securities. To make the initial mortgages they were leveraged, sometimes at rates of 10:1 or higher. They were borrowing all the money they were lending out and then selling the mortgages to pay off the loans. When stuff started to take a nosedive, the people high on the foodchain stopped buying the high-risk mortgages, leaving the the little guys stuck with bad mortgages and no way to pay off their debt.

Re:Likely a feature

[Anonymous Coward]

Did either of you report these crimes? Your posts seem to indicate not. If not, why not?

Re:Likely a feature

[Builder]

I'm sorry to say, but your company might be an exception rather than the norm. I'm at my third investment bank now, and I see exactly the same things as the parent was talking about here.

The more SOX regs, the more audits, the harder it becomes to get things done legitimately, so people start to sneak them through back channels. This soon becomes a standard solution in some parts of the business.

Re:Likely a feature

[ThaReetLad]

I have only one thing to say to you and your wife. I hope you do go to jail. I know technically you did nothing wrong, but you failed to blow the whistle on illegal practices which have helped to propel the world into financial chaos.

People losing their homes is as much on your heads as if your wife HAD forged those applications.

Re:Likely a feature

[locofungus]

It's not just brokers.

Whenever I have an interview for a job I always take a copy of my CV to give to the person interviewing me. The CV that the interviewer is holding varies from close to what I sent to the agency to bearing absolutely no resemblance to what I wrote. New skills, missing skills, sometimes I think agencies must cut and paste from several different peoples CVs.

Very, very occasionally (happened to me just once) I got a call from the agency - "Is it alright if we change this to say this instead. This client is looking for a particular skill and it's not immediately obvious to a non technical person from what you've written that you've been doing this for the last three years"

CVs can often be dramatically improved without lying. If you know a good salesman then it's worth asking them to help with the writing of your CV. Once you get to the technical people it probably doesn't matter too much but you've probably got to get your CV through HR screening first. I'd have no problems with agencies reworking my CV if they came back to me first to make sure it was accurate.

Tim.

Re:Likely a feature

[Tim C]

If you want reliable safe systems, I'd bet on telecommunications companies rather than banks.

I worked for a company owned by one for a few years. I wouldn't take that bet if I were you.

Re:Likely a feature

[Anonymous Coward]

"The best part is that when we counted up the costs of daycare, gas, clothes, taxes, etc..., we only lost $400 a month when she wasn't working. It never made sense for her to go back to work."

More people should do that calculation. My wife has stayed home to be a full-time Mom for many years now. A long time ago, we determined that if she worked the money would barely cover the expenses and taxes. I'm on the brink of paying AMT (the wrong side of the brink in some years); a job for my wife could easily produce negative household net income.

Re:Likely a feature

[BBandCMKRNL]

The banks also shot themselves in the foot by getting the bankruptcy laws changed. One of the bedrock assumptions made when assessing risk was, "People will pay their mortgage before their other debts." Historically, this was true. When the fit hits the shan, people would pay their debts in the following order:

1) House.
2) Car.
3) Other secured debt.
4) Credit card.

The banks didn't like the fact that people would stop paying their credit card debt, with its associated 10%+ return, when they had financial trouble. So they pressured Congress to make it almost impossible for people to get out of paying credit card debt. When this happened, did the banks lower the interest rate on the credit card debt that was still unsecured, but effectively guaranteed by the federal government to reflect the reduced risk of that debt? Nope. Of course not. They still wanted their 10%+ return.

This effectively reordered the debt payment order into:

1) Credit card.
2) House
3) Car.
4) Other secured debt.

So, when someone's ARM adjusts and their house payment goes from $500/month to $900/month and they don't have enough income to make the payment, they look to see what they can stop paying or pay late. Now they have to make the credit card payment, and they realize that even if they stop paying all their other debt, they can't make the house payment, they decide to sell the house. Oops. They owe more on the house than it's worth. The end result is that they let the bank foreclose on the house, move into an apartment, and pay their other bills.

Now the banks find themselves owning a whole lot of real estate that is worth less than the mortgage. Since banks don't want to own the real estate, especially in a declining real estate market, they dump it as quickly as they can, taking a loss on the mortgage loan, and further depressing housing prices.

Re:Likely a feature

[BBandCMKRNL]

People just never seem to learn that prices can't go up forever. Actually, with small exceptions, they do. In the U.S., these exceptions include the Great Depression and various recessions.

Re:Likely a feature

[Anonymous Coward]

Being in IT in Investment Banking in UK at the moment and coming from a Retail Banking, Software Products and Software Services background I can vouch for this.

These guys are frigging amateurs, and sloppy amateurs at that.

The only reason why IT in Investment Banking stays the way it is is that it's a close community where people just go from one bank to the next doing the same kind of things in the same kind of way. No mater how good you are and how large your experience is, if your CV doesn't say X years in investment banking you'll find it hard to even get an interview. The end result is that the some bunch of people which only know "the Investment Banking way" of doing IT go from one place to the next and eventually some of them get promoted to management, thus making sure that the whole structure from top to bottom is filled-in with people that never got any experience with any IT industry standard Software Development Process.

Re:Likely a feature

[dubl-u]

They just let her crank out her work, and handed anything shady to someone who might be slower, but could prove their worth by handling such "problems". [...] The best part is that when we counted up the costs of daycare, gas, clothes, taxes, etc..., we only lost $400 a month when she wasn't working. It never made sense for her to go back to work. If that's the best part, it may yet get better.

Figure the feds spend $300 bn on bailouts and lose another $300 bn on "stimulus" and $300 bn on lost tax revenues due to the downturn. That's $3k per citizen, or $9k for your fam, assuming you're an average taxpayer and have just one kid.

Not counting interest costs (because we'll borrow it all), that's 22 months of your net gain, so depending on how long she worked there, her turning a blind eye and participating in a criminal enterprise may have actually cost you money.

And people say there's no such thing as karma.

Re:Likely a feature

[dubl-u]

There were certainly some weasel words used that would probably get them out of any legal trouble for what they said, but that was the point they were trying to convey. And that's the part that enrages me.

Yes, everybody is legally responsible for their own actions, including signing contracts. But the sales techniques used to manipulate people can be proven in the lab to make a percentage of your audience do obviously retarded things. They are just as judgment-impairing as giving them two neat shots of tequila.

Why is that the mortgage-holders are solely responsible for the contracts, when it can be proven that most of them never would have signed without the high-pressure sales techniques? Why can the dirtbags leave a roomful of people with a materially false understanding of things and escape with a few weasel words?

If people had really of their own accord walked up to a mortgage broker and demanded to sign something obviously retarded, I'd say fine, they deserved it. But when they have been carefully manipulated into it by professional salesmen, I begin to have a different view.

Re:Likely a feature

[Nightbender]

A lot of the lenders didn't have the money needed to make the loans. They would make loans, package them and sell them and the money that they made from selling the loans would finance the next batch of loans that they were packaging.

Without a steady cash flow from selling mortgages, they can't make any new loans. So when companies stopped buying mortgage securities, their cash flow dried up and they couldn't make any more loans. Game over.

This actually happened to someone I know. They were purchasing a house and the bank who was financing their mortgage ran out of money.

They couldn't close that day and ended up having to find a new bank at the last minute to close a couple of days later. Everything ended up ok for them but I'm sure it was a more than a little stressful at the closing.

Re:Likely a feature

[kraut]

You forget that the risk / reward ratio in investment banks is completely different than in telecoms. Time to market is often more valuable than complete reliability. So in sensible investment banks, you adjust the development and balance the development speed against the reliability. E.g. if you have a stock trading system that deals with a million transactions a day, you make sure it's rock solid, even if that means only quarterly releases. If you have an exotics system which needs daily changes, you do that and accept that every now and then it has problems.

Re:Likely a feature

[nguy]

First of all, we are talking moral responsibility ("evil"), not legal responsibility here.

Second, TLA requires a clear disclosure of all costs and obligations; it doesn't impose a legal responsibility on the lender to keep the borrower from doing something stupid.

Re:Likely a feature

[lgw]

Not inflation-adjusted, they don't, with the exception of commons stocks because the market as a whole grows with GDP.

Robert Shiller worked out inflation adjusted house prices back to the late 19th century for his book Irrational Exuberance, you can download the raw data here - the chart is a real eye opener on just how bad (and withouth American historical precedent) the housing bubble is. Even if you're not in denial over falling house prices, you might find this amazing.

Re:Likely a feature

[Anonymous Coward]

I work in a large bank. believe me, things are controlled more then you can know.

Bank or investment bank? The others are talking about investment banks which aren't really banks.

Re:Likely a feature

[nguy]

That may be, and maybe you can even construct some legal theory out of that under which the borrower is the aggrieved party.

But the GP was holding the lenders and brokers morally responsible. I'm sorry, but you are an adult and have the legal right to vote and enter into contracts. If you got full disclosure of the APR and your monthly costs, it is your responsibility alone to figure out whether you can afford it.

Re:Likely a feature

[m.ducharme]

That may be, and maybe you can even construct some legal theory out of that under which the borrower is the aggrieved party. It's not a matter of "constructing some legal theory", I work in a law office, and we defend brokers against their customers all the time, and believe me, there's a lot of case law on point regarding the duty of care owed to a person by their broker (in my field, it's insurance and not banking, but the concepts should be the same. They may not be, and it may vary by jurisdiction and nation).

The "some legal theory" behind it is that the independent broker (this doesn't apply to employees of the Insurer or Finance company) works for you, not for the corporation. They have a duty to look out for your best interest, and if they don't, you can sue them.

But the GP was holding the lenders and brokers morally responsible. I'm sorry, but you are an adult and have the legal right to vote and enter into contracts. If you got full disclosure of the APR and your monthly costs, it is your responsibility alone to figure out whether you can afford it. For what it's worth, I agree with you, but the law doesn't always work out that way. The key lies in the term "full disclosure". If a broker can prove they gave it, they probably will get off if it goes to Trial (more likely, the broker's E and OE insurer will settle before Trial). If the Broker didn't bend over backward to make sure the buyer knew what was going on, then they can expect to bend over forward for a little judicial schooling.

Re:Likely a feature

[Belial6]

Yeah, maybe you and I can share a cell. After all, you are personally responsible for thousands of deaths a year. You see people breaking the law by speeding every day, and don't report them. I'm sure that you call the police every time you see someone with a copied CD also, right? Don't forget those jay walkers. You report them every time you see them don't you?

So, when you stop being a murderer, then you can start judging others.

Re:Likely a feature

[Belial6]

So, are you going to take responsibility for turning a blind eye to these criminal enterprises, or are you going to claim that you were to stupid to understand the wide spread reports of bad loans, as well as the bragging of people who were openly and publicly announcing that they were getting bad loans?

You are truly stupid if you think that one or two funders complaining about a practice that was well known by the authorities, and common practice in the industry was going do anything other than get them fired. Everybody knew what was happening, including you. Nobody cared until it blew up. Then everybody did exactly like you are doing and started to look for scape goats. Really. You are going to blame the people that refused commit the crimes? I assume that you also blame poor folk who live in ghettos for the drug trade because they know it happens in their neighborhood, and they don't publicly announce to the police who has dope and illegal guns?

I guess you also report every jay walker, speeder, dog off the leash, and copied music CD you ever see right?

Re:Likely a feature

[dintech]

I work at an investment bank and I do what the insensitive clod is talking about. :)

Re:Likely a feature

[Anonymous Coward]

This doesn't explain how Standard and Poor's arrived at the same ratings. One possible explanation is that Moody's code was initially correct but they introduced the "bug" to make sure they were providing the same valuations as S&P.

In any case, it sounds like they found a new scapegoat and they're going to take it for a test ride.

Can someone explain to me about Triple A Municipal Bond Ratings work? I'm just a simple property, overtaxed homeowner, who's been baffled at our municipal Triple A Bond Ratings from none other than Moody's and S&P- while our town continues to borrow beyond their means and the only generation of revenue is on an over assessment of homes - while the bankruptcy rate grows dramatically and we are now mandated to fully fund pension liability funds under Federal GASBE laws.

Did someone say Revolution?

Re:Likely a feature

[BBandCMKRNL]

My point was that inflation causes the price of everything to go up, the exceptions being the Great Depression and other recessions.

Re:Likely a feature

[dubl-u]

So, are you going to take responsibility for turning a blind eye to these criminal enterprises I wasn't the one with evidence of criminal activity. I wasn't the one getting paid by people setting up a financial time bomb for somebody else to deal with.

When I learned what was going on, I wrote my elected officials. I have since written more, applauding the FBI investigations and discouraging mortgage relief for idiots. I certainly have spent a fair bit of time educating pals and people on the Internet about the topic, and hopefully dissuaded a few pals from getting caught up in the housing bubble.

You are truly stupid if you think that one or two funders complaining about a practice that was well known by the authorities, and common practice in the industry was going do anything other than get them fired. I don't think one or two is enough. But how many people quietly took their paychecks while fucking the rest of us? I am thinking it was more than one or two. As I mentioned elsewhere in this thread, "All that is required for evil to prevail is for good men to do nothing."

Regardless, claiming that it must have been ok for you and your wife because everybody else was ruining the country's financial system is a kind of moral logic that most people grow out of in their teens. Maybe you could work on that.

You are going to blame the people that refused commit the crimes? I will not blame them as much as the people who chose to commit the crimes. But yes, they share some of the blame. Forget blame, really; what I care about is that they understand that they are also morally culpable.

I guess you also report every jay walker, speeder, dog off the leash, and copied music CD you ever see right? Are you suggesting that the kind of fraud that was rampant in the mortgage industry is some sort of victimless non-crime like jaywalking? Get real. Had the fed not intervened, we would have been looking at something between the Asian financial crisis of the late 90s and the Great Depression.

When I see real crimes or dangerous behavior, I report it or stop it myself. In my life, that's generally limited to the occasional erratic driver or the sort of dolt who parks in front of a hydrant.

Even when it's not a crime, when it's pathologically anti-social, I'm happy to work against it. When some Herbalife sucker spams my neighborhood telephone poles, I take the flyers down. And I've been fighting email spam since before TBL invented the web.

So yeah, I try to walk the talk. But even if I didn't, that wouldn't excuse your moral lapses, would it?

Re:Likely a feature

[Belial6]

You say all this and you knew that criminal activity was happening, and what the results would be, yet you didn't quit your job and go work for a lender so you could turn them in. Blaming others because you chose not to do anything about it is "kind of moral logic that most people grow out of in their teens." As YOU say "All that is required for evil to prevail is for good men to do nothing." And what did you do? Nothing. You may not have received your paycheck from the specific institutions that had fraud going on in them, but you did gain financially, as a large part of the economy that you happily suckled from was running off of this fraud. You knew it was happening, yet did nothing to stop it. Maybe someday you will accept your responsibility for destroying the US economy.

Re:Likely a feature

[dubl-u]

You say all this and you knew that criminal activity was happening I found it out eventually in the newspapers. At which point, it was a little too late for me to go effectively expose it by working for anybody. Plenty of other people had more specific knowledge, and they had it sooner. You and your wife may have dodged legal responsibility, but not moral responsibility. Which is why you're squirming so much here.

I'm not even saying you had a particularly big share, but it was definitely larger than the average citizen.

you didn't quit your job and go work for a lender so you could turn them in Clearly, you are upset, and not thinking straight. That's an absurd statement.

I pay people to do this exact thing. I call them police. They are handy. Unlike me, they have guns and subpoenas.

you did gain financially, as a large part of the economy that you happily suckled from was running off of this fraud. Probably not. I turned down mortgage-related work and housing-bubble work the same way I turn down advertising work and anything else that I think is morally dubious.

Thanks to the housing bubble, I also couldn't buy in my area; idiots with idiot loans bid us out of the market. We've continued to rent long past when we normally would have bought. So the housing bubble ended up costing us money net. And that's not even counting what the recession will cost me.

Blaming others because you chose not to do anything about [blah blah blah] Only one of us had detailed advance knowledge that crime was being committed. Only one of us got a paycheck from it. But when I heard, I did choose to do things about it: I wrote my government reps, I warned friends, I wrote publicly on the topic. And believe me, I will vote based on this.

Maybe someday you will accept your responsibility All of us as citizens are responsible for this. I accept that, and will be paying plenty taxes because of it for years to come.

I'm just saying that everybody who had detailed advance knowledge of this bears a greater share of the moral responsibility, and in direct proportion to their involvement. Especially those, like yourselves, who continued to consciously take money from criminal enterprises.

Sure, there are other people who knew a lot more and did a lot worse. I look forward to seeing them in federal prison. But that doesn't absolve the you and yours, either.

Re:Likely a feature

[chez69]

it's a mega corp that has both.

the red tape here could of choked andre the giant.

Re:Likely a feature

[Belial6]

I found it out eventually in the newspapers. At which point, it was a little too late for me to go effectively expose it by working for anybody. So, now you are claiming you are stupid? Because only the truly stupid didn't know this was going on long before the news started scape goating. If you are claiming you are that stupid, then you are not smart enough to have a valid opinion on the subject. If you are not too stupid to have a valid opinion, then you obviously knew about this in plenty of time to have done something about it, and by your own standards, are personally responsible for all of the current financial problems that people are facing.

I'm not even saying you had a particularly big share, but it was definitely larger than the average citizen. No, the average citizen was fully aware of what was going on. The vast majority of people who bough and sold during that time wanted it that way.

Clearly, you are upset, and not thinking straight. That's an absurd statement. I pay people to do this exact thing. I call them police. They are handy. Unlike me, they have guns and subpoenas. Ohhhhh.... So when other people don't quit their jobs as some kind of martyr they are bad, but when you are asked to do the same thing, the requester is not thinking straight, and it's not your job, that's what the police are for. Your comments ooze with hypocrisy.

Probably not. I turned down mortgage-related work and housing-bubble work the same way I turn down advertising work and anything else that I think is morally dubious. You have already set the standard that one does not have to be directly involved with the fraud to be responsible. While you might not have worked directly worked for a lender, you certainly worked for businesses that collected money from people that had profited from the fraud. Heck, the very roads you drive on were being maintained with money that was earned with the fraud. Those police you commented about earlier... They were hired and payed with the fraud money. You were suckling from the fraud tit right along with the rest of the country.

Only one of us had detailed advance knowledge that crime was being committed. Again, trying to play dumb.

Only one of us got a paycheck from it. You gained financially.

But when I heard, I did choose to do things about it: I wrote my government reps, I warned friends, I wrote publicly on the topic. And believe me, I will vote based on this. Sure, you'll do all sorts of things, as long as it in no way threatens your income.

All of us as citizens are responsible for this. I accept that, and will be paying plenty taxes because of it for years to come. Yet you keep trying to explain why your inaction isn't so bad.

I'm just saying that everybody who had detailed advance knowledge of this bears a greater share of the moral responsibility, and in direct proportion to their involvement. Since you fully knew what was happening, you are just as responsible as anyone else. Since you claim to have a higher moral understanding than the rest of the population, yet still did nothing, you are MORE responsible.

Especially those, like yourselves, who continued to consciously take money from criminal enterprises. Money is only an accounting system for goods and services. You continued to consciously take goods and service from criminal enterprises. Thus, you are especially responsible for the housing crash.

Sure, there are other people who knew a lot more and did a lot worse. I look forward to seeing them in federal prison. But that doesn't absolve the you and yours, either. Sure, there are other people who knew a lot more and did a lot worse. I look forward to seeing them in federal prison. But that doesn't absolve the YOU and YOURS, either.

Yeah right, that's what it was...

[Colin Smith]

A coding error.

Re:Yeah right, that's what it was...

[kcelery]

An opulent coding error.

Re:Yeah right, that's what it was...

[omnipresentbob]

Yes! All those heretical programmers should burn! Burn them, burn them alive! It's THEIR fault I defaulted on my loan!

It's suddenly getting warmer in here...

Re:Yeah right, that's what it was...

[PotatoFarmer]

while (true) {
if (isSECWatching = false) {
commitEgregiousFraud();
}}


Assignment vs. equality check strikes again!

Re:Yeah right, that's what it was...

[Anonymous Coward]

This is B.S. They were double dipping because they provided ratings and at the same time consulted about how to get better ratings... and getting paid for both. They are simply crooks looking for excuses.

Re:Yeah right, that's what it was...

[cleatsupkeep]

while (true) {

if (isSECWatching = false) {

    commitEgregiousFraud();

}}

Assignment vs. equality check strikes again! Does that mean you can get the SEC to stop watching by doing assignment instead of equivalence? Because that would pretty cool.

if (isAboutToCommitFraud == true) {
        isSECWatching = false;
}

I like this system. :-).

unlikely

[blackcoot]

this is probably more a feature than a bug --- those instruments are rated by multiple agencies, each of which use their own risk evaluation methodologies and software. i find it highly unlikely that s&p would make mistakes, independently, that would cause it to give the same junk paper the same AAA rating that moody's gave.

Re:unlikely

[trybywrench]

this is probably more a feature than a bug --- those instruments are rated by multiple agencies, each of which use their own risk evaluation methodologies and software. i find it highly unlikely that s&p would make mistakes, independently, that would cause it to give the same junk paper the same AAA rating that moody's gave. i bet a million dollars they're all using the same, industry standard, software.

Re:unlikely

[Otter]

i find it highly unlikely that s&p would make mistakes, independently, that would cause it to give the same junk paper the same AAA rating that moody's gave.

I don't think anyone is claiming that. The question is why their supposedly "correct" ratings were as hare-brained as Moody's erroneous ones.

Re:unlikely

[powerlord]

You failed to capitalize the beginning of a sentence, as well as a proper noun, and improperly placed a comma. Your post is invalid.

He plans on correcting that bug in the next release of his post.~

Re:unlikely

[Anonymous Coward]

You failed to suck my balls. Your life is invalid.

Re:unlikely

[Spatial]

I don't know about being invalid, but it's, got a, few, too many, commas. William, Shatner, has a, Slashdot, account!

Re:unlikely

[Anonymous Coward]

You are an obnoxious asswipe. Your post is invalid.

Re:unlikely

[ejecta]

Fitch, S&P and Moodys often have very similiar ratings. It's as if one goes first and the others follow so they don't have to answer questions about having a largely different rating.

Plus, if you rate someone poorly they may not pay you to rate them again. One of the lenders I worked for had the option to use S&P or Fitch, they got a poor rating from Fitch one year and used S&P ever since - that's a heck of a lot of cash not going to Fitch anymore.

Re:unlikely

[Anonymous Coward]

I was not aware of this startling aspect of English syntax. Where should this be placed and what's the ASCII code for it?

Re:unlikely

[DigitAl56K]

i bet a million dollars they're all using the same, industry standard, software. Hey guys, take him seriously! Our Moody software indicates that he's good for this.

Re:unlikely

[Anonymous Coward]

I'll take that bet.

I work for one of these agencies and I see a lot of the software - it's all custom-built. How could there even be an off-the-shelf market when there are only three major agencies?

Re:unlikely

[dintech]

QuantLib?

code writing Brother ...

[joeyspqr]

can you spare a stock tip?

Re:code writing Brother ...

[Bieeanda]

"Plastics."

Can't read the article...

[avronius]

Think maybe Moody's would like to finance my FT subscription?

Good economy news go unchecked

[Denial93]

This is another example of how good news in the economic field can easily go unchecked because it is beneficial for everyone involved (in the short term) for the world to believe them.

My favorite, and perhaps the most drastic, example is how the US government grossly misrepresents employment stats, the consumer price index, and the GDP. This creates another bubble; not for the New Economy or for the housing market, but for the US as a nation. As long as people keep believing in the "world's strongest economy", investments pay off much as they do in a pyramid scheme - but the point where they won't becomes ever more dangerous the longer the scheme holds.

I for one prefer investments in Europe if only for the seemingly more reliable numbers they have there. Investing in the US is a way too dangerous gamble right now.

Re:Good economy news go unchecked

[Jeff DeMaagd]

Regarding the shadow stats site, I'm wary of the type of conspiracy proponent that tries to push a product, book or service. Especially for this, non-subscribers wouldn't be able to pick apart the results. In the same way, this is why I don't like the articles based on what financial analysts say, because you have to buy the original report in order to make sure they aren't pulling any shenanigans.

Re:Good economy news go unchecked

[Gat0r30y]

It would appear they caught the error and then proceeded to do jack about it:

after a computer coding error was corrected, their ratings should have been up to four notches lower. Now why exactly didn't they immediately act to correct the error? So even if everyone else was just hopping on the good news bandwagon, there was serious fraud here on the part of moody's

Re:Good economy news go unchecked

[powerlord]

So even if everyone else was just hopping on the good news bandwagon, there was serious fraud here on the part of moody's

I say we downgrade their rating.

Re:Good economy news go unchecked

[nido]

This is how the author makes his living - everyone has to support themselves somehow, you know. If he gave his insights away for free, he wouldn't have nearly as much time to devote to his specialty as he does.

I wrote a diary on k5 a few years back which referenced Shadow Stats, which linked to an interview that links to a fuller interview of John Williams, the guy behind the Shadow Stats site.

My impression is that while Mr. Williams is quite right about the government mangling the statistics, he's wrong about the long-term implications (inflation forevermore). I like Mish of the Global Economic Analysis blog's take: he's been saying for some time that the end-game of current economic developments is massive deflation, as all the loans in the economy go bad one at a time, in a sort of cascading system failure. We're now seeing the deflation prediction come to pass - while Gas & food are skyrocketing, other assets (housing, etc) and prices are dropping fast, as homeowners and businesses struggle to find buyers at any price. This is what you'd expect if the amount of money available in the economy (read: available for the everyday working Joe to spend - the trust fund manager who made $1billion last year doesn't count) was decreasing.

For the record, I don't subscribe to Mr. Williams' newsletter - much too poor for that right now.

Re:Good economy news go unchecked

[lgw]

I sure hope the government if underestimating inflation! Most of the federal budget these days is tied to the rate of inflation as estimated by the CBO, and cheating on the estimate is seemingly the only way to reduce spending.

Re:Good economy news go unchecked

[Tycho]

Here is a link from the shadowstats site to their well hidden free report, or rather some of their free FUD:
http://www.shadowstats.com/article/292

A summary of this FUD might be that it is about what American residents can do to prepare for a depression coming RSN. It gets even more absurd the FUD paper mentions how the US dollar will undergo seven to ten digit percentage hyperinflation RSN. It also gives questionable suggestions like buying "financial hedges" like gold, and using the gold and other items in barter transactions after the coming "calamity" when the US dollar loses its value.

The author backs up his statements with misleading graphs, no explanation of the methodology used to generate the figures for the graphs. There is a source given for the original data in the graphs, however the author has given no links back to in order to find the original figures so that one could to duplicate the results from the graphs. The first graph in the report has continuous inflation numbers for the US going back to 1665 and no explanation of the relevance of these figures to today's situation, 333 years later. Additionally, for this first graph, the author also prominently inserts some of his own unsourced data. The line for his data starts at a similar position as the line for the other data on the graph and the values increase geometrically which badly distorts the vertical scale. The author also chooses colors for the lines that allow his data to obscure the more continuous figures. The extraneous figures on the graph from before 1946 and the author's added data makes the graph nearly impossible to analyze at all. Even worse, all of the graphs are extremely misleading like the first graph. The entire piece is egregiously bad FUD. I would assume the rest of the site contains more too.

In any case, if a situation occurred which caused a total breakdown in order and social structure, Gold and other precious metals would be of the same value as a small chunk of basalt, optionally painted with acrylic paint with suspended crushed pyrite used as a pigment. In this case Gold have no value. In such a situation where Gold was worthless, the one of the ways Gold could regain value is due to its scarcity, it could be used as currency in a small regional market. However, the value of Gold would come from being scarce which would make it a "fiat" currency. Also, Gold would not necessarily regain much value because it has few applications in many manufactured items. Additionally, other metals and alloys could be used instead if Gold was scarce.

Re:Good economy news go unchecked

[KKlaus]

Total Bullshit. The fall in housing prices has nothing to do with a contraction of the money supply, and we are not experiencing general deflation. We don't even include food and fuel when we calculate inflation for the very reason we're seeing right now - their price fluctuations often have little to do with the valuation of money. But a little research shows me that the CPI nevertheless increased .6% annualized last month, and it's been positive all year (I don't think it has ever been negative, at least not over the course of a year - the fed prevents that). Housing prices are falling because houses were overvalued (go look at the ratio of house values / rents on those houses - you will notice that they are relatively constant for a long time then shoot up... the housing bubble). I notice that housing was the entirety of your list of assets that were experiencing price drops. In any case, here's a link to a graph of the money supply: http://research.stlouisfed.org/publications/usfd/page6.pdf. You can see we are not seeing any type of collapse.

One of the few things the fed has near total control over is the money supply, and that allow them essentially to prevent deflation under any circumstances. Worry about something else.

Re:Good economy news go unchecked

[Anonymous Coward]

The website you cite is pretty off the wall. Just regarding CPI stats it claims that Alan Greenspan and others conspired, under Clinton, to fool the American public with artificially low inflation numbers. This, by itself, is crazy. Also the math doesn't add up.

Th reason for switching from arithmetic to geometric CPI calculation is a good one. A constant utility level basket of goods does change as prices fluctuate. Don't tell me if apples were $50 a lb you'd keep buying the same amount. Arithmetic CPI says you would.

A better website (for once):
http://en.wikipedia.org/wiki/United_States_Consumer_Price_Index#Perceived_overestimation_of_inflation

Re:Good economy news go unchecked

[yahyamf]

Response to Mish's deflation case

Bullshit

[Anonymous Coward]

Total B.S. The ratings were wrong because various companies needed these AAA rating to stay in business. (And if you need a AAA rating to stay in business, you don't deserve a AAA rating.)

A bug management knew about for 2 years..

[WarwickRyan]

..isn't a bug, it's a feature. Of fraudlent behaviour from management.

Re:A bug management knew about for 2 years..

[Anonymous Coward]

Send them to the Martha Stewart jail!

Re:A bug management knew about for 2 years..

[kcelery]

The question remains, does the 'CDO coding error' ends there? How faulty are the bonds and commodities ratings?

After the OpenSSL bug

[Ckwop]

... and this bug.. is it not time we started acting like engineers and started building software in a way where we can show it is correct.

As an industry, we really need to start growing up and using the tools the mathematicians have provided us, just as other engineers do in other disciplines, to show our programs actually work as advertised.

The competent have nothing to fear from formal verification and anyone who is not capable of doing such verification should not be writing software anyway.

Simon

Re:After the OpenSSL bug

[Anonymous Coward]

To be fair the OpenSSL problem wasn't caused by the OpenSSL developers. It was an idiot (or two) that hacked up shit when they obviously had no skill.

Re:After the OpenSSL bug

[nomadic]

The competent have nothing to fear from formal verification and anyone who is not capable of doing such verification should not be writing software anyway.

This is Slashdot, where everyone just blames management. Because you know, there are no incompetent programmers in existence.

Re:After the OpenSSL bug

[vux984]

... and this bug.. is it not time we started acting like engineers and started building software in a way where we can show it is correct.

As an industry, we really need to start growing up and using the tools the mathematicians have provided us, just as other engineers do in other disciplines, to show our programs actually work as advertised.

The competent have nothing to fear from formal verification and anyone who is not capable of doing such verification should not be writing software anyway.

Lock it all up tight, and make sure every line of code being executed is signed and certified.

And given how difficult it is to right correct code, I'm not sure a 'formal verification' would be worth that much. I mean, you think Windows is expensive NOW?

Not sure OSS could even exist in a world like that. After all, 'formal verification' isn't free. And you wouldn't be allowed to modify your own source... the liability issues alone!

Be careful what you wish for.

Re:After the OpenSSL bug

[Rakishi]

... and this bug.. is it not time we started acting like engineers and started building software in a way where we can show it is correct. Well enjoy paying $200k per copy of MS Office, personally I'll take some bugs instead.

As an industry, we really need to start growing up and using the tools the mathematicians have provided us, just as other engineers do in other disciplines, to show our programs actually work as advertised. Last I checked mathematicians can't even say if my program will finish running much less if it will work as advertised.

Re:After the OpenSSL bug

[SquirrelCrack]

Who would enforce this?

Re:After the OpenSSL bug

[blahplusplus]

"we really need to start growing up and using the tools the mathematicians have provided us"

Mathematicians are only part of the answer unfortunately, there needs to be standardization in functions and code, so coders do not have to rewrite the wheel.

I've been thinking a bout making a completely visual compiler where you should not have to code in abstract numerics and other function statements beyond construction, all mathematical statemetns and programming statements can be virtiualized and rendered into a virtual 3D environment, and represented in a flowchart like format but much more like a diagram of an electric circuit and with things like what the size of X is and it's computational *load* on the cpu and whatnot.

Software engineering tools are really really bad, what really needs to be done is taking the math and expressing it as geometry in standardized ways IMHO so that you can actually *engineer* stuff, virtual structures and visual shapes and understand and visualize what the hell you are actually coding so that you can see the mistakes in the structure visually, since visualization is very very powerful and highly underutilized in software engineering,

I may have not described my ideas very well but hopefully those reading my posts get the idea, that software engineering has a lot in common with circuit design and should borrow and modify principles and concepts from hardware side in terms of expressing their programming and math in a format akin to electricity flowing through a circuit, etc.

Re:After the OpenSSL bug

[maxume]

Please send me $100,000,000, I would like to purchase a formally verified version of solitaire.

Re:After the OpenSSL bug

[Gospodin]

And given how difficult it is to right correct code...

No kidding! Look how difficult it is to "right" correct English!

Re:After the OpenSSL bug

[Rich0]

software engineering has a lot in common with circuit design and should borrow and modify principles and concepts from hardware side in terms of expressing their programming and math in a format akin to electricity flowing through a circuit

Ironically the hardware side has been going in the opposite direction. How many transistors in a modern dual-core processor do you think were actually put there by hand with manual checking of voltage/resistance/heat/etc? Somebody writes up some code essentially and a program creates millions of gates to do what the algorithm dictates.

The problem with this visual rendering of software you suggest is that any non-trivial program is going to turn into a monstrosity of flow charts that would probably require tens of thousands of pages to print on paper. A single line of code could potentially be a few different boxes in a language like C.

The reason software engineering isn't like civil engineering is that while a bridge has maybe a few tens of thousands of parts, a computer program has the equivalent of hundreds of millions of parts (if you were to express the software as the equivalent machine). The best you can do is at least develop libraries that can have some level of specifications and testing around them so that you minimize the amount of code that is unique to a particular application. Software is just a different kettle of fish...

Re:After the OpenSSL bug

[jareds]

Last I checked mathematicians can't even say if my program will finish running much less if it will work as advertised. Misconception. It is of course the case that some programs can neither be proven to halt nor be proven not to halt. That doesn't mean you should be writing such programs. It should generally not be conceptually difficult to prove that your program halts (or, perhaps everything but one or more deliberate event loops and whatnot halts). It might be extremely time-consuming and expensive, but possible. It's also possible to write code that should halt but really can't be proven to halt, but it's probably very bad code.

Re:After the OpenSSL bug

[Cal Paterson]

Posting to undo moderation. Silly web 2.0 moderation.

Re:After the OpenSSL bug

[LordLucless]

Hey, as soon as I can get a client to provide me (or hell, even sign off on) a mathematically correct specification that covers every aspect of a system, you got a deal.

The last "specification" (and I use that term loosely) I got was something along the lines of "hey, can you add a members section to this website?". Good luck demonstrating the resulting functionality to be mathematically correct.

Re:After the OpenSSL bug

[Maestro485]

You actually bring up a very good point. However, as others in this thread have noted, designing flawless software can be quite expensive. This article shed's some light into the programmers responsible for the NASA shuttle program. As stated in the article, they are among the most expensive programmers in the US.

Of course, prominent financial institutions should be required to implement a system comparable to the NASA technique given the obvious importance of the data, but like most truly important things I doubt it will happen (especially considering the $35 million budget this group has).

Re:After the OpenSSL bug

[Anonymous Coward]

Really? I'm pretty sure I don't want my operating system to halt except under abnormal conditions...

You talk about 'generally'--but generally does not exist at 100k lines. Pointers happen, malloc happens, people forgetting to check what it returns occurs along with other badness.

The entire point of programming is really the act of abstraction--of simplifying the hard to generalize cases away and out of sight. I don't think dealing 'generally' with things that are specific and mathematically defined is nearly as easy as you seem to pretend it is...

Re:After the OpenSSL bug

[Hotawa Hawk-eye]

There are some programs that are very easy to write or describe, that involve very basic operations, but for which the question of whether or not it terminates is very, very hard. One such program is the Collatz conjecture:

Step 1: Start with an integer n.
Step 2: If n is 1, stop.
Step 3: If n is odd, replace n by 3*n+1.
Step 4: If n is even, replace n by n/2.
Step 5: Goto Step 2.

Re:After the OpenSSL bug

[mOdQuArK!]

Many people might find that kind of programming environment valuable, but there are times when being able to define your program as a set of abstract symbols is MUCH more powerful than anything you can visualize (and/or it's really difficult to come up with a good visualization that fits the type of operation that you want to perform).

Re:After the OpenSSL bug

[Knara]

This, in all likelihood, was not a "bug". It was in Moody's (and others') interest to rate these bonds this way, and so it was done. Blaming it on a computer "bug" is a very transparent attempt to avoid getting charged with some very serious fraud. If they're resorting to this method, they must be in very deep shit, indeed.

Re:After the OpenSSL bug

[Repton]

Not sure OSS could even exist in a world like that. After all, 'formal verification' isn't free. And you wouldn't be allowed to modify your own source... the liability issues alone!

I'm not sure you've got the right end of the stick, here. "formal verification" doesn't mean "code review by some officially-sanctioned third party". It means "verification using formal methods".

As such, the only cost is time. People already volunteer their time to work on open source projects; there's no particular reason [other than mind-numbing tedium] why they wouldn't volunteer time for this too.

Re:After the OpenSSL bug

[Chris Burke]

How many transistors in a modern dual-core processor do you think were actually put there by hand with manual checking of voltage/resistance/heat/etc?

The majority. The most critical components, the caches, the ALUs, branch predictors, the reorder buffers and schedulers are all made by hand and tuned as much as possible to the needs of the product. Of course for most of it that just means they create one SRAM cell and a sense amp macro, or a full adder, and plop down a whole bunch of them (with manual place and route too) which ends up comprising the majority of transistors on a chip. The control logic, which is what actually constitutes the majority of the complexity of the chip, is in fact done with synthesis software from a hardware design language.

I agree completely with your point (including that hardware is headed towards more automation), I was just geeking out there. :)

Re:After the OpenSSL bug

[ColdWetDog]

This is Slashdot, where everyone just blames management. Because you know, there are no incompetent programmers in existence.

Really? We've let everyone at Microsoft off the hook? Must of missed that article.

Re:After the OpenSSL bug

[Anonymous Coward]

Yeah, ask anyone who has to suffer through programming in LabVIEW (which uses the circuit paradigm). LabVIEW makes a particular kind of data-flow driven programming very, very easy to write, and any other kind of program mind-bendingly hard.

Debugging a LabVIEW program of moderate complexity is horrible.

Re:After the OpenSSL bug

[lgw]

Formal verification is a total crock of shit. Here's program A0, and I know it has no bugs because program A1 says it doesn't, and I know *that* has no bugs because ...

All you can do is move the need to prove correctness around. Any serious software should run programs like Coverity and Prefast to catch the "provable bugs" which are the low-hanging fruit here, but claiming you can prove that a piece of software has no bugs is just BS, and a waste of time besides.

How could you prove that a program in a formal language precisely meets the requirements written in ambiguous English to begin with? The best that these proving engines do is prove that your code meets a set of requirements also specified in code, which even if you ignore the need for recursive proof of correctness, you *still* can't prove that the formal requirements fithfully represented the designers' understanding of the requirements.

And heck, even if you overcame both of these impossibilities, you'd still get some package maintainer introcducing new bugs in order to make a valgrind warning go away.

Re:After the OpenSSL bug

[lgw]

there's no particular reason [other than mind-numbing tedium] why they wouldn't volunteer time for this too So you agree this is impossible for open source, then? The most basic rule of (unpaid) open source is that only the fun parts get done (or only the most painful bugs get fixed). You cannot get due dilligence without paying for it, and paying a lot because it's so damn boring, yet requires very skilled labor.

Re:After the OpenSSL bug

[smellotron]

If I ever encounter software that looks like that in a business outside of compiler/language design or mathematics, my immediate reaction would be svn blame followed by an angry conversation with the guilty party. Just because it's possible to write software that's formally hard to prove things about doesn't mean it's good to do so.

Re:After the OpenSSL bug

[vux984]

I'm not sure you've got the right end of the stick, here. "formal verification" doesn't mean "code review by some officially-sanctioned third party". It means "verification using formal methods".

As such, the only cost is time. People already volunteer their time to work on open source projects; there's no particular reason [other than mind-numbing tedium] why they wouldn't volunteer time for this too.

Well the mind-numbing tedium for one thing. :)
But the real issue isn't lack of volunteers, its that volunteers are just as likely to turn in bad proofs as they are to turn in bad code.

If you wanted to build a bridge and some volunteer on the internet submitted a design, along with some structural analysis by other volunteers from the internet declaring that it was a sound design, would you just accept it and build the bridge? Or would you want some "officially sanctioned engineers" to review it first?

The issue with requiring that code be provably correct is the same; the proofs have to be done by people that are demonstrably competent at formal methods, and the proofs themselves must be reviewed by people who are demonstrably competent at formal methods. So even if the internet volunteers perform verification using formal methods -- no one will have any confidence that it was done right.

And of course, the number of volunteers capable of proving code (who understand the mathematics and what not behind the methods) and who interested in doing so is VASTLY outstripped by the number of volunteers capable and interested in writing code.

So even if the volunteers COULD satisfy the formal verification requirement -- OSS would be utterly hamstrung due to the back log getting new code volunteer verified.

Re:After the OpenSSL bug

[gnuman99]

Because real engineers design cars that are "reliable".

Enough said.

Re:After the OpenSSL bug

[Repton]

Fair enough. I just thought you might have misunderstood the term "formal verification" (which would be easy enough to do, if you haven't met the word "formal" in the mathematics or abstract CS sense).

Re:After the OpenSSL bug

[Anonymous Coward]

OSS could exist in a world with formal verification -- producing *any* software, even unverified software, takes time and effort. Sure, formally proving a program correct might take *more* time and effort, but there's no reason why the proof itself (and the tools used to verify the correctness of the proof) couldn't also be open source. Check out some of the cool work (e.g. verified compilers) being done with proof assistants like Coq and Isabelle/HOL.

Re:After the OpenSSL bug

[jareds]

Really? I'm pretty sure I don't want my operating system to halt except under abnormal conditions...

I clearly indicated parenthetically that in practice there will be deliberate exceptions to halting. Saying you don't want your operating system to halt is ignorant or disingenuous. From the point of entry to an interrupt/exception/syscall, you want the operating system to halt deterministically and quickly by returning to user space. The fact that it informally "doesn't halt" because it keeps getting timer interrupts is completely irrelevant.

You talk about 'generally'--but generally does not exist at 100k lines. Pointers happen, malloc happens, people forgetting to check what it returns occurs along with other badness.

The entire point of programming is really the act of abstraction--of simplifying the hard to generalize cases away and out of sight. I don't think dealing 'generally' with things that are specific and mathematically defined is nearly as easy as you seem to pretend it is...

I clearly said it would be difficult, time-consuming, and expensive. That's the reason it's rarely done. It's not rarely done because people want to write programs where it's impossible to figure out what they do. The fact that such programs exist has nothing to do with this.

Re:After the OpenSSL bug

[YodaYid]

Max/MSP is a (2D) graphical language for sound synthesis. PureData (PD) is the FOSS equivalent. I find graphical programming can be tedious and often counter-intuitive, but it's worth a look.

Anyway, I disagree that software engineering tools are particularly bad. With a modern IDE, you can see all the class and instance methods of any public API class very easily (you even get some documentation in a tooltip). And a well-designed OO library should need fairly little documentation - most of the functions should be self-explanatory. Refactoring tools have become very powerful. And thorough testing should catch the most serious errors. Last but not least, languages themselves are higher level and easier to understand. Where's the bad?

Re:After the OpenSSL bug

[Garse Janacek]

But the real issue isn't lack of volunteers, its that volunteers are just as likely to turn in bad proofs as they are to turn in bad code.

Not if you're using the right formal methods... the whole point behind most code verification approaches is that it can be verified automatically. If a human had to review the proof, then sure, this will never work, but if you're using proof-carrying code in a relatively formal language, the verification can be an automatic part of the process.

The point about having programmers who are capable of writing those kinds of code is still valid -- there are lots of them, but it's definitely a smaller set than the people who can usefully contribute to an OSS project today -- but verification is more a question of building good technical infrastructure rather than finding infallible coders...

Re:After the OpenSSL bug

[Free the Cowards]

What bullshit. As if engineers never screw up. Tacoma Narrows. Hyatt Regency. Challenger. Pinto. Their provable mathematical models don't seem to get the job done 100% either.

Re:After the OpenSSL bug

[nomadic]

Really? We've let everyone at Microsoft off the hook? Must of missed that article.

Nah, everyone blames Gates and Ballmer, not the programmers.

Re:After the OpenSSL bug

[story645]

there needs to be standardization in functions and code, so coders do not have to rewrite the wheel Those standard functions also need to follow good coding practices. There's a library that's used pretty often in the robotics community, but I've got coders who want to write the functions from scratch 'cause the documentation is almost non-existent. (It's a collection of wiki to:do pages, an active mailing list, and uncommented/badly commented code.)Hell I'm tempted to switch to a different architecture for the same reason, and I fangirl using stuff that's already there.

virtual structures and visual shapes and understand and visualize what the hell you are actually coding so that you can see the mistakes in the structure visually I can't get electrical engineers to abstract their code enough to think of it as a whole, and they're taught to make visual models-getting decision trees and flow charts was like pulling teeth, ended up a total waste of time. The computer engineers I know fall mostly into the "hate software engineering with a passion and think it's worthless" category-one of 'em likes vb, but he's not gonna code a vision system for a robot that way. (Which is a different point-not all code is equal, and a visual ide may very well be useless for a lot of projects.)

represented in a flowchart like format but much more like a diagram of an electric circuit and with things like what the size of X is and it's computational *load* on the cpu and whatnot But isn't that sort of throwing optimization right with design right with implementation-something that should never be done for a wide variety of reasons?

Re:After the OpenSSL bug

[yada21]

the whole point behind most code verification approaches is that it can be verified automatically.

Im assuming here that the automatic verification is doen by somee form of software so how can we be sure that the 'verfication engine' is correct? Sorry if its a stupid question but its not my area and it reminds me of 'who made god' kind of arguements.

Re:After the OpenSSL bug

[blahplusplus]

"The problem with this visual rendering of software you suggest is that any non-trivial program is going to turn into a monstrosity of flow charts that would probably require tens of thousands of pages to print on paper. A single line of code could potentially be a few different boxes in a language like C."

That's only if you designed what I'm talking about like a moron. Technically a bridge has as many parts as their are atoms (and even more if you down deep enough), but we CONGLOMERATE those parts into those 13 thousand (i.e. they are generalized to bigger structures), the bridge is EXACTLY like the software program with millions and millions of subunits that don't have to be taken into account in engineering a bridge, you can do the SAME with software, you have a terrible lack of imagination. Many of those millions of lines can be generalized into bigger pieces, and can be ignored. Just like our bridge, you forget that's just what we do.

For instance: We have chemists (engineers) and structural engineers, many products require both even though their jobs don't usually overlap. The same goes for computer science.

"The reason software engineering isn't like civil engineering is that while a bridge has maybe a few tens of thousands of parts, a computer program has the equivalent of hundreds of millions of parts"

Which I've already answered above.

Re:After the OpenSSL bug

[Just Some Guy]

As an industry, we really need to start growing up and using the tools the mathematicians have provided us, just as other engineers do in other disciplines, to show our programs actually work as advertised.

The problem is that programming is nothing like any other discipline. I read a comparison between coding and building a bridge once: imagine that the bridge had to be optimized for a a Prius and a convoy of Abrams tanks; that there was no (practical) way to examine the materials you built it from; that the same design had to be extensible from the culvert under your driveway to the Royal Gorge; that random attackers spent their days trying to blow it up. Add to this that there just aren't as many ways to combine concrete and steel as their are to arrange clauses in a complex application.

The competent have nothing to fear from formal verification and anyone who is not capable of doing such verification should not be writing software anyway.

I don't fear formal verification, but blanch at the thought of having to do it for every single package I wrote had to go through it. It makes sense in places where you don't mind productivity being quartered, but not so much for most businesses.

Re:After the OpenSSL bug

[Anonymous Coward]

Sir, I work in the financial industry, and I assure you this is the biggest bunch of BS I have ever heard, and to hear it from a ratings agency, who is supposed to be the most honest and free of conflicts of interest of all the agencies, this is a ballsy move on their part.

This is not over, I expect the SEC to bitchslap and impose some heavy regulations if not overhaul how the payments work to these firms.

Bug my ass.

Re:After the OpenSSL bug

[vux984]

If a human had to review the proof, then sure, this will never work, but if you're using proof-carrying code in a relatively formal language, the verification can be an automatic part of the process.

Suppose I were to write a traffic light decision program, and my program logic were flawed -- it returns go for red, slow for yellow, and stop for green. There is nothing preventing a stupid or malicious or overtired verifier to write a formal spec based on reading the source code that essentially says it behave as it behaves. The automated verifier will declare it provably correct, and horrible car accidents will ensue.

There is just no way around it. You can only trust code as much as you trust the people that wrote it and verified it. The automated verifier only tells you that someone managed to get the program and the specification to match... but that doesn't tell you that either is actually correct.

Re:After the OpenSSL bug

[npsimons]

First and foremost, the OpenSSL bug would have happened no matter what level of "engineering" you threw at it. Debian is already leagues ahead of most software houses because they have processes in place to track changes, not to mention a fairly thorough vetting of developers and maintainers. The bug was due to human error, and you're never going to get rid of that. Some would even argue that the bug wouldn't have happened if they hadn't been scrutinizing the software so closely. After all, the bug was introduced as a "fix" to a "memory leak"!

Secondly, I don't believe for one minute that this financial miscalculation was a bug, at least not one introduced by sloppy programming. More likely, some management puke said "These numbers don't look right. Change the software until they do." In other words, we're looking at the number one reason software has problems: mis-management, not a failure of software engineering. Fixing that first would solve probably 90% of software failures, and at a much cheaper price than requiring all code monkeys to be engineers. Of course, even fixing that would not solve what is probably another factor in this debacle: greed. I'm willing to bet that someone thought I would be a good idea to tweak the numbers just long enough to make out like a bandit. As with human error, you're not going to fix that one anytime soon.

Re:After the OpenSSL bug

[Anonymous Coward]

I have been thinking the same

34

Re:After the OpenSSL bug

[Anonymous Coward]

And promptly punished with the mod-hammer. Teehee. :)

Need for more stringent coding practices

[Neuroelectronic]

How about that, a coding error that makes lots of money. These are so rare so I think we can say this was a simple mistake.

Lying Through Their Teeth

[littlewink]

The corrupt bastards are going to "shoot the programmer" on this one?

I want a federal investigation.

something like?

[nih]

10 Print "Hello World!" 20 GOTO 10

Scapegoat

[Anonymous Coward]

Someone tag the article with scapegoat.

Some poor IT guy's head's currently careening down the halls in Moody's.

Bullshit

[Anonymous Coward]

Yeah right, a coding error. Made by someone no longer with the company I'm sure...

Or more likely the model was completely incorrect because they assumed low levels of defaults based on the default rates from when lenders actually required some money down (skin in the game from the borrower), didn't just just trust you when you said "yes I earn $200,000 a year, no I don't have any tax returns or pay stubs or bank statements", and occassionaly actually said "no" to a request fort $600,000 to buy a one bedroom apartment in the middle of the desert.

But let's go with typo.

Offending code exposed

[Anonymous Coward]

if ($debt_owner_paid_off_moodys == 1) {
        $rating = "AAA";
}
else {
        $rating = "Junk";
}

monetary incentive to inflate ratings

[nickhart]

Suuuuure... a coding bug is to blame! Nevermind that the agencies selling this financial toxic waste *paid* Moody's, S&P and others to provide good ratings. Software bug or no, there is fraud all around within the US economy--and no one was complaining as long as people at the top were raking in billions of dollars in profits.

Re:monetary incentive to inflate ratings

[spun]

Damn it, it can be so hard to count your money with one hand while covering your ass with the other. Sort of like talking out of both sides of your mouth, it takes practice.

Re:monetary incentive to inflate ratings

[Anonymous Coward]

I think the "software bug" was that Moody's system gave too many people permissions to go in and modify any rating they wanted. Remove some people from that group and - bug fixed!

Every time something like this happens it's like a mini-great-depression scenario. A market becomes lucrative so all the checks and balances fall by the wayside in a mad dash to get in. In the Great Depression, banks were lending huge amounts of cash to stock market investors and considering the stocks themselves to be collateral. Then you knock down the first domino...

Calculated Risk

[ewhac]

Disclaimer: I am nothing more than a happy reader of the site.

This entry at Calculated Risk openly wonders if Moody's jiggered its model expressly so that it would line up with whatever the Standard&Poors ratings were.

Personally, I'm concerned this revelation will result in a concerted effort to blame the whole mess on a computer error, rather than the profoundly bad judgment exhibited by fund managers and investment banks. Expect some hapless programmer to be located and pilloried.

Schwab

Re:Calculated Risk

[KwKSilver]

Just read the comments at the blog you linked to. Many of the finance wonks (or wankers, I can't tell which), made it clear they thought that there was something more than a "coding error" in the ratings, most likely fraud involved. No one made an open accusation, though. Meanwhile, Moody's stock has taken it's biggest loss in 9 years since this came out.

blame the black box

[Anonymous Coward]

honest guv, it was the magic black box with a screen that made the error

wouldn't someone notice?

[belmolis]

If the errors are as large as it seems they were, wouldn't one or more human analysts notice? When your software says "Buy SCO" you should know that something is wrong.

Re:wouldn't someone notice?

[Maestro485]

Not if your boss doesn't care ;)

Re:wouldn't someone notice?

[ejecta]

But it's that the highly reputable company that owns unix? ;)

I hear they might be planning to sell us air soon too!

Fool Me Once, Shame on ?.

[wa2flq]

To err is human, to really screw things up takes a Spreadsheet.

Greasemonkey FT script

[Anonymous Coward]

If you read the FT a lot, or want to, here is a good greasemonkey script

trickle down

[solweil]

IT folks should realize that they've been bureaucratically set up to take the fall for these sorts of things. CYA, obviously.

Blame it on the programmers

[Whuffo]

Moody's were a part of the substandard financing disaster that's led to the current (arguable) recession. Rather than face the music for their (maybe fraudulent) misrepresentations they decided to blame it on "a coding error".

They're depending on us believing their media stories to escape responsibility; anyone who thinks about this situation would quickly realize that for a company full of financial analysts to not realize that an error of this magnitude was happening - well, it beggars the imagination.

What almost certainly happened is that they played the same game that so many other financial institutions did during the real estate bubble. But when the bills came due, they chose to deny responsibility and pass the blame on to someone else. The real crime here is that they'll be allowed to get away with this...

Re:Blame it on the programmers

[mpapet]

The debt situation and the recession aren't related as much as you may want to believe.

No one is going to jail. Mere mortals are already paying for their mistakes through paying more for everything.

Re:Blame it on the programmers

[Knara]

Not necessarily. Moodys has cost other "big players" a lot of money at this point. Those big players aren't happy.

I'd agree with you if it was only us "little people" that got screwed.

Re:Blame it on the programmers

[Anonymous Coward]

Recession doesn't sound like such a huge deal to me. You can't keep expanding forever. Also, it seems people want a company to always be getting bigger, the moment they stay the same, or have a slight dip, they should go out of business because they are through. Sounds like this thinking is fraught with instability and has caused many of the major problems today.

Better cite/site

[conlaw]

If you want to read the whole FA without paying for it, there's a good writeup at Bloomberg: http://www.bloomberg.com/apps/news?pid=20601087&sid=aA57lFH5Exj4&refer=home In it the Moody's folks explained that they "adjusted their analytical models" so that they didn't have to downgrade these instruments. But we're not to worry that they did anything wrong. In their words, they:

adjusted [their] analytical models on the infrequent occasions that errors have been detected,'' the[ir] statement said. ``It would be inconsistent with Moody's analytical standards and company policies to change methodologies in an effort to mask errors.,.

BS

[zogger]

And I am not referring to Briggs & Stratton either.

Them boys at moodys need to open a farm, they sure got a lot of fertilizer on hand!

coding error..hehehehehehe...I think this story comes from the Jon Lovitz school of excuses...."ya...that's the ticket! It was a coding error!" uh huh

I don't think their story is going to fly with investors and lawyers around the world who are the proud recipients of all the creative "write downs" and other sorts of negative profits this year from all those wall street loons trying to push worthless junk paper on each other and actually *believing* their own fantasies that they can just keep coming up with different names for IOUs and keep reselling them back and forth to each other. You can't printing press your way to wealth creation, whether what you are printing up is called "money" or a "collaterlized debt obligation" or whatever other fancy crap term they think up. Not for very long anyway.

You Gotta Be Joking

[HangingChad]

The Financial Times has the story that billions in incorrect AAA ratings given out by Moody's were the result of a coding error in its computer models.

So one of the top financial services companies in the world, staffed with MBA's and finance professionals, and none of them noticed a coding error that changed debt ratings by that big of a margin? That strains credibility to the breaking point. And on the other side of the table, none of the financial institutions buying collateralized debt instruments ever looked at those ratings and thought they were a little optimistic? Come on. The entire sub-prime mortgage mess was a computer glitch.

Guess that means cocaine use is alive and well on Wall Street. Because you have to be really, really high to field a whopper like that.

Re:You Gotta Be Joking

[maxume]

Drug use is alive and well in the US, and aging well:

http://www.sciam.com/article.cfm?id=when-im-sixty-four

Re:You Gotta Be Joking

[Anonymous Coward]

And on the other side of the table, none of the financial institutions buying collateralized debt instruments ever looked at those ratings and thought they were a little optimistic? Come on.

Well, yes. Many of those institutions (like pension funds) are prohibited from investing in anything below AAA.

Put yourself in the shoes of a pension fund manager with billions of assets to worry about. Would you invest some of your cash in securites rated AAA by both major rating agencies? Most would say yes.

Re:You Gotta Be Joking

[Anonymous Coward]

See, I don't believe in coding errors. I believe that statistics performed with ridiculously small sample sets is just impossible to validate for correctness.

Those AAA deals never saw a case of bad performance before, so, statistically, there's no data to support a bad valuation.

I believe that the models are essentially unfalsifiable before the modelled event happens due to the absolute lack of data.

But this line of argument attacks the heart of the ratings idea and rating agencies will defend their statistical procedures to the grave.

Re:You Gotta Be Joking

[freedom_india]

How about the time when a 'mistake' lets me withdraw 1 million from an account which the banker thought was mine, even though i objected it was not?
Can i claim the same defense and escape the noose?
NO!!
The FBI will prosecute me for Mail Fraud and 37 other charges even though it was the banks' fault in forcing me to withdraw money from someone's account.
Moody's explanation is like a child giving an explanation for spilt orange juice on the carpet: The bottle was heavy.
Moody's execs should be prosecuted for mail fraud and sentenced, plus the judge should throw this fraud explanation back to their faces and seize their Social Security amounts.

Not the whole story

[analog_line]

According to one of the Financial Times reporters on the story, interviewed on my local NPR station, the rating was unchanged AFTER Moody's supposedly found and corrected the error, because they "changed their methodology" between the original flawed rating, and the discovery of the flaw.

This guy didn't sound especially convinced, and no one's mentioned any kind of due diligence requirement on the rating agency to actually make sure that their ratings are correct. Apparently whatever gets spit out of the formula is accepted as official, and in this case, they had a lot of incentive to fail to get around to any due dilligence.

Re:Likely a feature - also the cat ate my homework

[waveman]

You're right. They all got paid big money to come up with these bogus ratings. They got paid the same money and came up with the same ratings. "Programming error" is the new "cat ate my homework". The fact that the ratings business is a cosy oligopoly doesn't help either.

Yes, but

[MichaelSmith]

As an industry, we really need to start growing up and using the tools the mathematicians have provided us, just as other engineers do in other disciplines, to show our programs actually work as advertised.

The competent have nothing to fear from formal verification and anyone who is not capable of doing such verification should not be writing software anyway.

How can I keep unvalidatable requirements out of my system? In my field, validation is used to show that the software satisfies requirements, not that the requirements are in any way correct.

Yep

[Sycraft-fu]

You can already buy systems like this. You can buy systems that absolutely have to work all the time, no downtime, no crashes, etc. However, there are some major stipulations:

1) It isn't cheap. There is going to me some major engineering to design it, and it will require some major redundancy in hardware to protect against faults. As such, you are going to pay a lot for it.

2) It isn't fast. No you can't have it today, you can't have it this month, you can't have it this year even. The development and testing will take a long time. This can't be rushed, it simply takes lots of time and lots of testing to make sure there are no faults.

3) You can't add features to it. Once the system is in place, it can run only what it was designed for. You can't go and install new software or anything. If you want any changes made, those will have to go through a full set of testing. No unverified code can be running.

4) It must be accessed only in approved ways. You can't just hook it up to the Internet and go wild, input will need to be properly regulated to make sure it doesn't cause an unforeseen problem.

5) You can't mess with it. Your people will not be screwing around trying things with it. It'll be maintained under a support contract only by certified personnel.

If that's not ok with you, well then some bugs are something you have to accept. This idea that programmers should be able to easily engineer perfect, bug free software quickly and cheaply is just amazingly ignorant. Especially when people come up with false analogies "Oh well people would sue if cars were made as badly as computers!" No, you'd get arrested (or killed) if you tried to use a car like people use computers. If people treated cars like computers they'd expect to be able to run in to a wall at 80 miles an hour and suffer no injuries to themselves or the car.

Cars work well if an ONLY if they are operated properly (and even then not always). You have to do things like obey proper driving regulations, maintain the engine, and so on. If you don't, well shit is going to go wrong, maybe catastrophically wrong. Yet people do just that with their computers all the time. They install random shit, never perform any maintenance, and expect that the computer will magically protect them from all problems.

Moreover...

[mpapet]

They won't go after some low-profile wonk. The French bank with billions of losses from a couple of months ago is trying the same thing. It's not plausible.

This is very quickly how the scam works:
The way bond agencies survive is by acquiring new business. Let's say a utility issues a bond for a new water project. They shop the issuance around. Highest rating gets the business. The higher rating means (roughly) less "insurance" they have to carry and the more they can use free cash to do other things.

The bond agencies are as "financialized" as a low-end broker sweat shop. No one seemed to care when the money was flowing. It's easy to take shots after the fact.

Few people follow the Fed's TAF's and its junk-filled balance sheet. It's worse than the credit agencies situation. Who knows if that will ever blow up like the credit markets.

Re:Moreover...

[Blackhalo]

"It's not plausible." That is because you are someone who understands both finance and technology. To the unwashed masses they might just fall for it and if they do, the legislators\regulators who should know better, might just let them get away with it as they were to some extent complicit in the whole scam. "There's a sucker born every minute" -Barnum "You may fool all the people some of the time, you can even fool some of the people all of the time, but you cannot fool all of the people all the time." -Lincoln You might be able to fool most of the people most of the time. I mean W. got elected somehow... twice.

It can't be Coders complaining

[cps42]

Any dev worth his salt would be blaming, in order:
1) The Firewall
2) The Load Balancer
3) The Firewall
4) The Network Routers
5) The Firewall
6) The Network Cables
7) The Firewall
8) The Network Engineering Team
long before they figured out it was a Layer 8 issue in the code.

Re:It can't be Coders complaining

[DavidRawling]

You forgot:

9) The systems architect
10) The dev team leader
11) The design
12) The functional specification
13) The test plan
14) The test team leader
15) The testers
16) The client

Re:It can't be Coders complaining

[Metorical]

Flip this round and you're closer to reality. Everyone assumes it's a coding error until they realise someone in the infrastructure team decided to update the firmware on a router/firewall and it's failed. Three out of Six major failures I've seen have been router/firewall firmware related. The other three have been failing UPS systems.

Fortunately we work with primary/standby servers.

Re:It can't be Coders complaining

[dintech]

Interested in swapping codebases with me? :)

Try this one

[tqft]

http://www.bloomberg.com/apps/news?pid=20601203&sid=aDGkiET1_Y7w&refer=insurance

Likely S&P cheating

[Scareduck]

Calculated Risk believes this is a case where S&P decided not to believe their own models and tweaked them to match the results derived by Moody's, which spit out the wrong results in the first place. Call it bug-compatibility, but it's also clear that there were plenty of financial incentives at the time for the rating agencies to deliver results in step with their peers lest they lose out on lucrative "second opinion" business.

Billions of...

[dave562]

The wording of the summary is confusing. Were there literally billions of bonds given incorrect AAA ratings, or were the incorrectly rated bonds worth billions of dollars because of the flawed rating?

Confusing summary aside, this is the biggest load of crap I've read in a long time. The financial world made a really bad guess on just how much "money" was really in the US economy and now they are paying for it. They can't actually be held accountable because then people might catch a glimpse of the fact that the financial wizards who run our lives are really full of shit. So instead of taking responsibility for their mistakes they are blaming it on a computer bug. How effin convienent for them.

"Hey everybody, we aren't fucking idiots. You see, it was the computer! I just told you what it told me on my screen. Hold on... my third trophy wife is on the phone... she's telling me that her and the Lamborghini are stuck in traffic somewhere between my multi-multi million dollar home and the club house where I spend multiple tens of thousands of dollars a year. I'll get back to you right after I blow a few more rails of coke!"

How the hell did these people get to be in charge of society?

Re:Billions of...

[Magada]

Well, for one thing, the _rest_ of society is made up of simpletons whose mantra is "I want to believe."
Everyone in the US (and a few other places such as France and the UK) wanted to believe that they could buy expensive houses and flip them in a month or three, that the price of housing outside of big towns will continue to grow indefinitely (which is idiotic, in a world where there is a finite amount of oil), that everyone will keep paying their loans...
All this, because the alternative is believing in a resource-limited world which gets poorer in real terms (available energy, available raw materials, arable land) by the minute - a world not conducive to peace of mind.

Re:Billions of...

[QuantumPete]

Bonds are actually fairly easy to rate, whereas CDOs aren't, because they are far more complex. It sounds to me like either: Programmers created code that rates simple CDOs and then assumed it works for the more complex ones as well. Or Upper Management are lying their asses off, because it's alway easier to blame the developers.

Re:Billions of...

[magus_melchior]

I seem to remember that someone commented how we somehow respect and admire sociopaths who learn to hide their true colors from the world (if someone can find the comment and link it, please do). The peons know their bosses are jerks, but no one listens to mere peons, the outside world can only see the boss making their company billions of dollars. Those who wrench productivity from their subordinates like the last drops of water from a sponge also are seen as the most capable leaders on balance sheets.

That, by the way, is how bullies and jerks become execs. When they say "Nice guys finish last," what they really mean is "You don't get into first place without smashing the feet of your foes."

What would really relieve whatever anger I have at this pathetic attempt at a cover-up is if the OSS community comes up with a superior rating software system and puts the credit agencies out of business. Sadly, to mangle yet another quote, "Rallying the OSS developers to a single cause is like herding all of New York's feral cats."

Re:Billions of...

[dave562]

Well, for one thing, the _rest_ of society is made up of simpletons whose mantra is "I want to believe."

I completely agree with this. People don't want to be bothered with the reality of things. They don't want to take responsibility for themselves. They want to follow the herd and believe that everything will be okay because they are going along with what everyone else is doing.

I almost caved in. I almost bought some property at the peak but I realized that things were screwed up. I realized that real estate values were inflated. The thing that boggled my mind and messed me up is that I thought I was poor. I thought I was some how out of sync. "Everyone" around me seemed to be able to come up with some money for some property. The questions I was asking myself were, "Is there really so much money in the economy?" "What kind of jobs are these people doing that they can afford these housing prices?" "Where are all of the jobs that are letting people buy these houses?" In the end it looks like I dodged the bullet... kind of. The hidden tax of inflation is already here and it's only going to get worse. The Federal Reserve and the government are going to bail out all of the assholes. They have to keep "the economy" going. We don't produce anything in America anymore and we're running out of shit to sell each other. All we have is debt. I heard a rumor that they're going to collaterialize car debt. That's what it is coming down to... the wealth of our nation is based on our ability to reliably pay off our automobiles?!??

Coding Error Corrected, Financial Error Not Yet

[Anonymous Coward]

Sure, a coding error may have resulted in some incorrect ratings, but I suspect that a good chunk of the ratings mis-hits on mortgage deals was also due to their not fully understanding the risks involved, in a very material way.

I call BS.

[benhattman]

This entire story is bullocks, and your analysis is accurate. We aren't talking about a trivial error here. The models were spitting out obviously false results, and Moody's (and everyone else) gladly accepted those bad results. For at least 3+ years now, several analysts have pointed out ratings were too high and that they didn't pass the "smell test". If Moody's is not responsible for their models, then why shouldn't I write some half-assed model of my own, demonstrate to lenders how in the short term it will make them money, and then when I get caught, just point out that I never claimed my models were accurate.

Actually, that's not a bad idea.

To put it in a language slashdotters will understand.
1. Invent model.
2. Lie about model's accuracy.
3. (Sell model)???
4. Profit.

Re:I call BS.

[KKlaus]

The ratings weren't too high if housing prices didn't fall nation wide. Any of you with experience in statistics know that if I have group of 10,000 mortgages with even a 10% default rate, it's overwhelmingly, overwhelmingly likely that at least 3000 of them will be good (consider that 3000 to be the upper AAA rated tranche of the SIV). Unless of course, that 10% default rate turns out to be totally bogus because housing prices fall across the country and people start to walk away from their mortgages en masse. That's how you get a AAA rated asset that turns out be trash. That's how you get a believable AAA, because people thought overall housing prices were reasonable. The math wasn't totally crazy.

Re:I call BS.

[Anonymous Coward]

This entire story is bullocks,

Cheap-ass language flame here -- a bullock is a bull without bollocks, which is likely what you meant.

The shuttle's software

[the_raptor]

Go have a look at how expensive it was for NASA to verify the Shuttle's software. Mathematical verification of software is not trivial, standard "software engineering" testing is not anywhere close to mathematical verification.

Also most Engineers in other disciplines don't use mathematical verification to prove their over all design. They prove the critical bits and stuff in enough of a safety factor that full verification shouldn't be needed.

Plenty of "Engineered" systems end up with bugs and flaws as a result. Formal verification is only normally done for the most critical of systems.

Re:not err -- Interesting Fed Paper

[Anonymous Coward]

Read the last two paragraphs of this paper (p26). It states that the credit ratings shouldn't have been relied on for certain types of CDO's because they had hidden risk that wasn't obvious.
The interesting part... the paper was written in 2004.
http://www.federalreserve.gov/Pubs/feds/2004/200436/200436pap.pdf

The Subprime Crisis Explained

[Rastan_B2]

http://www.businesspundit.com/sub-prime/

agreed

[gambolt]

That was really good.

Another me-too post (please don't mod down)

[sydbarrett74]

I hate me-too posts, but I'm going to cast my vote in agreement that the explanation is too simple. This stinks of scapegoating.

Re:Another me-too post (please don't mod down)

[Kevin Stevens]

I agree, perhaps I can make a convincing argument as to why though.

They have changed their story. Their first story was a lot better. The fact that they are now changing their story makes me and I am sure the SEC call their bluff.

Anyway, their first explanation (revealed in a multi-page NYTimes article) was that the data supplied by the mortgage lenders was wrong. And this makes some sense- For years the model worked like this: Loan officers went and made loans, verified income, assets, their credit rating, etc. and made sure that the borrower could afford the loan. The interest charged depended on which tier of credit healthiness they were put into, and these loans were later resold to banks. The banks would package these up in a group and ship them off to Moody's and Fitch, who would then give them a credit score to say how likely each package was to default. A higher default rate would mean that a buyer would demand a higher interest rate return. What Moody's essentially did at this point was take the Loan Officer data and rate the tier of loans based on macro conditions in the market (general direction of the real estate market, rate of defaults by the tiers of borrowers, etc.) Their story is that they took the Loan Officers' word that these mortgages were affordable to the people they made the loans to, and this was not true. I can *kind of* understand this to a point, for years this is how the system worked, and it worked well, so I can understand that a slip in their standards would go unnoticed for awhile. However, there was signs all over the F'ing place that things were seriously wrong. "Option Arms" aka negative amortization loans (you owe *more* money after each month, not less) were used all over the place, incomes didn't even begin to match up with what these people owed each month.

To use the car analogy, imagine you were getting cars from Honda for years, and they worked as expected. If Honda started to cut corners here and there, you might not notice for awhile. But the drop in quality in the mortgage borrowers would be akin to Honda dropping off cars that were billowing out white smoke as you drove them off the lot. You would have to have your head in the sand and screaming lalala I can't hear you to not notice that something was wrong. At what point these companies switched from being duped to negligent is subjective, and that is what will be hotly contested in the months to come.

As an aside, lets talk about who these brokers are that were making these loans. I graduated in 2002, in more or less the trough of the downturn, at least from a hiring perspective. Yet a lot of the lets say, "not so academic" people I knew, the comm and psych majors were all getting hired at mortgage companies, which astounded me because many of them had no idea what an interest rate even was, let alone knew how to calculate a payment from one. But they went through a week long training course, put on a suit and tie or some stilettos and a skirt, and started calling people, pushing products they didn't understand, using the pitch script they were handed in training. And it worked, I was insanely jealous that some of these, pardon my french, dumbass jocks, were making 90k a year out of school while I was making less than half that putting in crazy hours at an entry level programming job. Some of them figured out what was going on, but they were so drunk on the money that they didn't care anymore.

As a final point, lets talk about the "coding errors." I have no inside knowledge, but I work in the industry, and I am pretty sure what they mean is that the models they use to predict the expected returns (which are all written in code these days) had a problem, and the code was probably entirely to spec but the spec was wrong. Of course it is much easier to spin it as a "bug" that some "programmer" made, rather than admit that the very core of their business was based on flawed assumptions. These models are tested extensively in any halfway decently run group, and usually run through a vigorous set of what-if scenarios to see how likely it is they would lose value.

Classic Prisoner's Dilemma at work... twice

[Anonymous Coward]

This looks as a Prisoner's Dilemma problem, and happened twice:

S&P first publishes the ratings and (maybe?) senior staff at Moody's don't stick to their guns when their own models didn't agree with S&P. Given that institutions are pushing hard for those credit derivative products, Moody's yields to pressure. The only game outcome that makes everyone look good is to give AAA's away together, despite common sense, otherwise they risk breeding a credibility crisis throughout the ratings industry.

Then the market comes down. Both S&P and Moody's are pressured to defend their credibility, but they do so in different ways: Moody's acknowledges the error, but it causes them to look bad, as S&P still insists their models are good (despite all the evidence to the contrary). The only outcome that makes everyone look good is either to acknowledge the error or defend it together.

And now, because no one defends their own position, the public will demand regulation of the industry, but the topic itself is so abstract (after all, all you're selling is an expectation of a certain outcome - i.e. "default" vs. "not default" - which one cannot truly guarantee if their life depended on it) that any regulation, by default, cannot be effective here. It's like demanding regulation of weather forecasts. There are quality parameters but, ultimately, how should the government punish a forecaster if he said it would rain but actually it was a sunny day?

Maybe the only fact is that the structure and governing logic behind commercially-sold ratings is just broke. There are so many vested interests that it's nearly impossible to be impartial.

Re:Classic Prisoner's Dilemma at work... twice

[justinlee37]

There are quality parameters but, ultimately, how should the government punish a forecaster if he said it would rain but actually it was a sunny day?

By standardizing the conditions that different predictions are made under. If the gov't were to regulate bond-rating, they would have to create and publish their own set of guidelines for giving different ratings based on analysis of the various company's financial statements.

Hopefully that's exactly what happens! I'm studying economics and I'd love a big new gov't dept. to work in.

Follow the money...

[morkk]

... from the lenders to the credit-ratings agencies.

Yes folks, it was the purveyors of the toxic-waste that *purchased* the ratings rather than the consumers - so naturally the ratings were good, bug or no bug.

There were other lesser known agencies at the time rating the same shite at 4 points lower, but then they were rating it for buyers, not sellers.

See here for more.

AAAA

[krischik]

Is there a AAAA and AAAAA rating as well? - after all I would not consider "as good as a US government bond" all that good.

Martin

One thing I don't understand

[johannesg]

All of you guys that are now boasting here that you actually knew what was going wrong, but not one of you decided to open your mouth before it became a major disaster. Apparently the fact that the world economy has gone to shit over this means nothing to you, or the fact that thousands upon thousands are now homeless.

What I read here are admissions of guilt: you knew of a very serious crime with very serious consequences (and helped commit those crimes sa well) and chose to remain silent. It is both stupid (to admit to it now) and pathetic.

Re:One thing I don't understand

[ejecta]

Oh please! It's pathetic to want to earn an income to keep a roof over the head of my wife & two children who depend on me? Uh okay.

You may wish to note I stated that I did not participate, period. I don't agree with fraud hence I don't participate in it.

I'd like to know how you would have liked me to handle the issue? I was the loan writer in the company of four people, two people were receptionists, the other person was the Managing Director who was wanting fraud to take place and did defraud the banks. Take the issue to the lenders? at the end of the day the lenders don't care because they want the client - the loan isn't the real product either, it's just what they sell - so they need lots of loans to group together and then securitise, that securisation process is where the money is.

Another thing, the economy didn't go to shit because of people applying for these dodgy loans, they are a small proportion of the issue, you know the largest problem?

NINJA Loans.

No, it's not some funky cool slang, it means: NO INCOME, NO JOB, ASSETS that is, dirt poor, companies en masse lent to clients identified as such.

The economy went to shit due to the multinational corporations who;

A) Widened credit critea to include unemployed people with little to no asset base
B) Misrepresented the risk of the securitised products
C) Borrowed excessive funds to plough into securitisation programmes
D) Drank their own knoolaid believing the misrepresented risk ratings
E) Invested heavily in securitised products

Then low and behold these NINJA loans flicked off the honeymoon interest rate and the USA's lending institutions had doomed credit markets world wide thanks to greed. Homeowners couldn't make the repayments with interest now ticking up. They did the only thing they could and tried to sell the house, but when everyone else is in the same boat you can no longer sell the house for what you bought it for, and so the cycle begins.

I suggest you allocate you blame where it belongs: The banks & lending instituions.

Re:One thing I don't understand

[johannesg]

It still comes down to this: you SAW everything go to shit and all you thought to do was cover your own ass.

I don't expect a bean counter to sacrifice himself for the good of humanity, but there must have been thousands like you - and not a single one of them thought to maybe raise an alarm.

And yes, that's pathetic. "all that is necessary for evil to prevail, is for good men to do nothing"...

Re:One thing I don't understand

[ejecta]

Again, what exactly is "raise the alarm"?

Secondly, as I already said, things going to shit had VERY LITTLE to do with this type of fraudulent loan. Especially considering our (Australia) economy is still rock solid & growing rapidly despite such issues.

So again, what options existed to raise the alarm? You think a newspaper honestly would run a story about someone no one cares about?

At the end of the day regulation failed as all parties were interested in gaming the system - compliance & auditing works on the basis that Party 1 and Party 2 have different interests, when Party 1 & Party 2 have the same goal compliance & audit measures fail.

And seeing as you didn't catch it the first few times, I didn't stand by and do nothing - I put down barriers as well as protecting myself - I didn't just accept orders and sign off on junk loans.

Re:One thing I don't understand

[Anonymous Coward]

You knew about crimes being committed and failed to do anything about it. Pretty sure that makes you an accessory.

Re:One thing I don't understand

[dubl-u]

I suggest you allocate you blame where it belongs: The banks & lending instituions. In a situation like this, I believe there is sufficient blame for everybody, from the people advertising the fraudulent mortgages to the people writing them to the people selling them to the people bundling them to the people buying them. There was idiocy and fraud and willful blindness at every level of this, which is the only way we could get a fuckup of global proportions.

Yeah, you didn't participate. But as Edmund Burke said, "All that is required for evil to prevail is for good men to do nothing." So you may not be legally culpable, but don't expect anybody to be sending you cookie platters, either.

Re:One thing I don't understand

[ejecta]

Trying to stop something from happening and using all avenues available to you, even if this only slows the process down is not doing nothing.

When the system is set up to allow rampant corruption and audit & compliance processes of multi-billion dollar, multi-national companies have failed and there is the inertia of millions of dollars of profit at stake they have an incentive to continue the same actions, the managers need profits and they won't be there when it blows up and the share price declines - that will be another managers issue.

I took the matter as far up the ladder as I could - to the National Lending Manager that is, the guy who manages all lending in the COUNTRY and you know what I got back? I was in effect simply told me not to worry because everyone's doing the same.

That's not doing nothing - it's trying to stop the actions and having no avenues of action available due to a complete failure of compliance & audit processes.

Doing nothing would have been rubber stamping the dodgy loans and signing them off as a-ok.

4 Billion CDPOs says Bloomberg

[egghat]

A Bloomberg article says: "Banks created at least $4 billion of CPDOs".

"Created" not rated. So noone knows for sure how many of these 4 billion have been rated by Moody's, but I guess a big chunk.

But this relativly small sum (compared to the amount of mess the credit crisis has produced) is not the heart of the problem. The big question now is "can we trust the rating agencies at all". Because this story has the smell of fraud. And that's (of course) much worse than overpaid MBAs that make some errors ... (which shouldn't happen, but can happen).

Tranche is just the french word for "slice"

[Viol8]

But it sounds so much cooler saying "tranche" because then people arn't 100% sure what it really means. Its designed to obfuscate to people not in the know like a lot of the financial system.

Re:Tranche is just the french word for "slice"

[Abcd1234]

Meh, that's typical of every specialized industry I know of. Law, medicine, computing, engineering, you name it. They all develop a specialized lingo that identifies the players from the outsiders. Pretty standard human behaviour, really... kinda reminds me of the old days of the guild.

Re:Tranche is just the french word for "slice"

[Anonymous Coward]

Yeah kind of like those computer guys, why can't they just call it a brain instead of a CPU. And whats this motherboard talk about, sounds like they are just trying to keep lay people out of their club....

Re:Tranche is just the french word for "slice"

[Anonymous Coward]

I have a brain you insensitive clod.

Not just housing

[phorm]

It seems to happen in a lot of markets. I remember about a year ago, my friend went to buy a new truck. She didn't think would be approved, but surprisingly was. However, when she checked over the paperwork, the dealer was definitely fudging the details (stating she had "vehicle X" to trade in when there was none, etc) to get the credit approval. In the end she ended up walking out on the whole thing because she had sense enough to put together that "a dealer who is willing to cheat and lie to his credit agency is likely more than willing to do the same to me."

same problem with global warming "hockey stick"

[peter303]

The so-called hockey stick - a temperature "spike" of a half degree at the end of the 20th dentury happened to be a statistical error in the data analysis program. The program de-averaged (found baseline) of different temperature datasets incorrectly, magnifying the effect of a new 1990s dataset. The warmest years in the 20th century were the 1930s, not the 1990s.

P.S. Other data probably points to global warming, but this most-touted example is incorrect.

Real issue

[Anonymous Coward]

Why is the only reporting of this issue through FT and NPR.
Try finding this info on the CNBC site...
This goes deep.

Regulators didn't care or have the power

[Bryansix]

One thing to understand here is that there were very obvious cases of blanket fraud going on sometimes with management knowing and sometimes not. The point though is the Loan Officer is the person communicating with the client and SHOULD be ultimately responsible. If someone in a company caught wind of a problem and told the DOC (Department of Corporations in California) or the DRE (Department of Real Estate in California) then the company would be fined but the Loan Officer would be under no direct liability. Sometimes the LO would be fired. Guess what they did next. They went to the next company, got hired and did the same damned thing.

Re:Regulators didn't care or have the power

[Belial6]

"If someone in a company caught wind of a problem and told the DOC (Department of Corporations in California) or the DRE (Department of Real Estate in California) then the company would be fined"

Absolute BS. The DOC and DRE knew full well that these problems were happening in virtually EVERY lending office of any size. Have you ever tried to report something to the DRE? They don't want to talk to you and they don't care if fraud is happening. If they were at all interested in stopping the wide spread fraud that was happening, they could have walked into any lender and found it. Hell, the Home and Garden Channel had at least a couple of TV shows that ran regularly where they would show people who had bad loans. It was on nation TV almost daily.

Re:Regulators didn't care or have the power

[Bryansix]

Granted this is true but it IS possible to push a complaint through and get a fine imposed. You just have to use the right forms and follow up at the right times. I know because I worked for a company that was fined repeatedly.

Re:Regulators didn't care or have the power

[Belial6]

Your example doesn't show that persistence get a fine through. It shows that someone in with authority to fine them had a personal grudge against the company you worked for. Given that your company was "fined repeatedly", and almost every other company out there were never fined, bias is the only believable answer. If it was just persistence, then you could be sure that once the first fine happened, that employee would be fired. So, your company would have had to have many employees that were entirely different than all of the employees in all of the other lending institutions.

Which seems more plausable:

1) Every one of the moral people who worked in funding just happened to get hired at your company; an immoral company. This, and none got hired at any other company in the country.

or

2) Someone at the regulatory agency didn't like someone in the upper management of the lending company. Whether that is because he got annoyed with him at convention, his sister got screwed on a loan, or whatever...

The first would be enough to start a religion over. The second would just be business as usual.

Re:Regulators didn't care or have the power

[Bryansix]

Where do you come up with this stuff? I tend to think you just make it up. Many companies were fined many times. Shoot, the massive mortgage company Ameriquest was fined repeatedly and then sued out of existence. The point is it can be done. But guess what? All the employees there are allowed to go work somewhere else and that's my point (which you seemed to miss completely). The individual people tied with the fraud should be fined and stripped of their ability to work in the mortgage business ever again.

More importantly our the company I worked for didn't even HAVE a funding department. They closed their banking operations a long time ago and funded very few loans through it when it was operating. The bulk of loans were brokered out. The liars were Loan Officers who worked for Branches of the company. These would come and go like most people change their underwear. They were impossible even for us to keep track of. Sometimes management was complicit in the fraud but other times it was simply a lack of knowledge about what was going on or an attempt to do business in a state it had no idea it was not allowed to do business in.

The Fed is impotent

[nido]

One of the few things the fed has near total control over is the money supply, and that allow them essentially to prevent deflation under any circumstances. Mish has pointed out that the Fed is a paper tiger. Bernake has promised to print dollars and drop them from helicopters, but he can't do that legally. All the fed can do is lend money out, and there's no longer any more "greater fools" who are interested in taking out speculative loans.

Now Presenting: Deflation!
other deflation articles from Mish.

HAND.