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Greenspan Tells Congress Bad Data Hurt Wall Street
CWmike writes "Former Reserve Bank chairman Alan Greenspan has long praised technology as a tool to limit risks in financial markets. In 2005, he said better risk scoring by high-performance computing made it possible for lenders to extend credit to subprime borrowers. But today Greenspan told Congress that the data fed into financial systems was often a case of garbage in, garbage out. Christopher Cox, chairman of the Securities and Exchange Commission, told the committee that bad code led the credit rating agencies to give AAA ratings to mortgage-backed securities that didn't deserve them. Explaining in his testimony what failed, Cox noted a 2004 decision to rely on the computer models for assessing risks — a decision that essentially outsourced regulatory duties to Wall Street firms themselves."
The guy's 82 for fuck sakes! Who gives a shit what some senile old fart thinks?! That's the problem with this world, the people running it are all far too god damned OLD.
If these people did not know what was going on, they are not professionals, they are just a schmuck who is being paid too much. To say that the computer models did not anticipate their stupidity is just denial.
"Christopher Cox, chairman of the Securities and Exchange Commission, told the committee that bad code led the credit rating agencies to give AAA ratings to mortgage-backed securities that didn't deserve them."
What do they expect? Code can only handle preconceived models. If the programmers overlook something it's not like the code will fix itself.
These models are based off of incomplete information and it's up to us to fill in the gaps. We've never had subprime mortgages en-mass before and the model likewise didn't know how to handle them.
Well, back to rejecting software patent applications.
What a way to shoehorn a non-tech/nerd story into slashdot (BTW, why is this in politics??!!)
Bottom line, this had nothing to do with bad data. It was Greenspan's blindness to the consequences of easy monetary policy would have that caused much of the problems today.
Models themselves, and the blind faith in "the market". When the model's wrong, quality of data becomes irrelevant - "not even wrong" (Pauli, I think).
Well, "the market" did sorta work - by eventually bringing down the crash, but gov't softened (and lengthened) it by bailing out the banks. But that's just semantic rubbish, of course.
Fuck systemd. Fuck Redhat. Fuck Soylent, too. Wait, scratch the last one.
Greenspan really is scarily inept... It amazes me that he was taken as seriously as he was for so long. The most amazing thing I found in his autobiographical book was that he believed in the 90s that computer systems were going to efficiency gains that accounted for the share price rises during the .com bubble.
http://www.amazon.com/Age-Turbulence-Adventures-New-World/dp/1594201315
If all else fails, blame your tools.
The data being flawed is very different than the code being flawed. In fact, what Greenspan is talking about has almost no connection to what Cox is talking about, and there's no real reason to put them both in the same article. Starting with bad data will abundantly suffice to explain the meltdown before any problems with the algorithms used have to be assumed.
Most of the bias that did the real damage is political. For example, the most recent figures on the economy show that in the months before the mortgage crash began, 68% of all spending was driven by individual consumers buying retail. If the last tax rebate had been aimed at 68% of the total going back to individual consumers, or the '700 billion bailout' had put 68% of the 200+ Billion actually committed so far into reducing the impact to non-institutional borrowers, those would be appropriately neutral positions - but in the current climate, those would both be classified as terribly liberal.
But that figure wasn't trumpeted about until after the bailout was passed. The same goes for the corrected inflation rates, which are still not accurate but are a bit better, and which again weren't corrected in releases to the general public until after the bailout was final.
Who is John Cabal?
Those bankster knew exactly what will eventually happen. But their modus operandi is to privatize profits and socialize losses. It's as simple as that. So why would they bother?
Bottom line, this had nothing to do with bad data. It was Greenspan's blindness to the consequences of easy monetary policy would have that caused much of the problems today.
Absolutely. Wait, rollercoaster interest rates are a bad idea? Really? And it took a genius to figure this out?
It's so easy to understand. Low credit and the push for home ownership at any cost led to insane price increases and speculation that it wasn't hard to see had to come to a crash stop. I had this figured out as of 2004 when I talked to a realtor who told me I needed to buy NOW with nothing down and use the guaranteed 2%/month price increase to refinance in a year. I can recognize a bubble when I see it.
That's why it pisses me off when Greenspan points the fingers elsewhere. He's the one who set the rates. He's the one who jacked them up, then down, waiting too long and overcorrecting to account for it. And he refuses to take the blame.
The funny thing is, this isn't the first time things have gotten sideways thanks to overspeculation. During the (mercifully) brief meltdown in 1998 due to the currency markets, he basically told the banks to do what they do, the government will help out if things go bad. The overcorrection to that mini-crisis and the post-9/11 slowdown sowed the seeds for what we have now. Gee, thanks Alan.
So now he blames bad data. Really, Alan, you're surprised that people selling certain securities said things about them that was overly rosy? Give me a break. At some point, you have to have some damned sense, and actually look at the securities without the computer models. When things defy common sense to that degree, something's wrong.
The funny thing is, it seems every crisis comes about because risk diversification models fail. Happened in 1929, happened in 1998, happened now. Investing houses have this theory that a lot of big risks can be less risky in totality, because the risks aren't correlated. Problem is, when the shit hits the fan, a lot of things become correlated that didn't use to be. Partly it's because everything's sitting on top of the same increasingly global economy. Part of it is that funds that are overly leveraged have to sell whatever they have to meet margin calls. The people who create the models study the risk correlation and assume things based on it that simply aren't valid in the real world. The book "When Genius Failed" has a good case study on this, where an investment house run by brilliant guys including Nobel Prize winners crashed and burned because they didn't understand that common sense trumps mathematical models.
To disclose, I actually see great value in statistical predictive models - indeed, that's what I do for a living. I design and implement mathematical models. But because of that, I also know what mathematical models can't do. Too much hubris by too many people, and we all suffer.
From what I understand, they were giving loans to people who had no collateral and no income. If your computer model says that loan is a safe loan, then you have a bug.
Yes, I checked for this too. Even followed a link about Christopher Cox and risk models. At no point was a bug mentioned. The word "code" wasn't used. ;-)
Coders would spot that
There are plenty of human-factor reasons why these kinds of models fail: management wants certain results, modellers want to feel they are contributing valuable results, people with big-brother pretensions placing too much faith in fancy computing, geeks lapping up the attention, etc..
But the bottom line is that people were not properly using information about uncertainty: if crap data is all you have, you have to tell the model how crap it is. If you don't do that, then your model is misleading and dishonest. Forecasting the future is tricky business, and you just have to know when it's too hard.
The bottom line is that modellers who don't turn around and say "sorry, boss, the model can't tell you that" and insist on it are largely responsible. Unfortunately, as a rule, it is the person who makes the boldest predictions who gets the most attention, and attention becomes credibility.
Collectively modellers are the /only/ people capable of understanding the output of models. Modellers must have enough influence in an organisation that /their/ interpretation of a model prevails--they don't have to dictate decisions, but the CEO needs to know the modellers' interpreattion of the model, not some intermediate's. If not, then I think negligence or fraud charges should be on the table for someone--maybe the modeller who is oversells their result, maybe someone else.
Yes, I'm a modeller. To the extent that our opinions guide decisions (what is a model if not a collection of opinions?) we need a professional code of ethics, just like engineers, lawyers, doctors, etc..
Alan Greenspan: "The economy is in the shitter because of computer error.
HAL 9000: "I'm sorry, Alan, this could only be the result of human error."
I'll tend to break ranks, and side with HAL on this one.
Schroedinger's Brexit: The UK is both in and out of the EU at the same time!
Trouble is....if they did all this and were playing within the rules laid forth by the SEC...there is no crime committed. There is nothing to be arrested for...
Light travels faster than sound. This is why some people appear bright until you hear them speak.........
Computers and programs do what they are built to do, exactly like they are programmed by programmers. and programmers code what they are TOLD to program.
this senile old bastard is trying to drop the blame ball on someone else than himself. he was the person who ushered the 'let everyone run around lawless' era in finance. he was praising it and saying that 'free market' was this and that. now he comes up saying he is 'shocked' to see the market not regulating ITSELF.
i have news for you, bastard, what you call market is comprised of PEOPLE, and its a social activity. just like life doesnt 'regulate' itself so that you still need laws and justice system, the social activity you call 'market' also is comprised of people and full of opportunists, schemers, bastards, exploiters, criminals and crooks. if you just let everything be, IT BREAKS. and IT DID.
any person with only a few decade of life experience under his/her belt would be able to realize this.
but you and your fellows in the church of holistic economists were SO zealots in your belief that, you were unable to realize this simple fact of social existence despite your 5-6 decades on the face of this world.
shame on you old man. shame on you for preparing the grounds for breakdown of ENTIRE global economy with your zealotry and foolishness, and your attempt to blame others for it.
blame the data !! after all, noone can do anything against it right ?! its not live, its nobody, and even if you hate its guts, you wont be able to remove it from business, so problem solved.
Read radical news here
Hmm, I fail to see how that constitutes a troll. True, it's almost certainly untrue that the code was actually outsourced to India. At the same time, we know that the code was outputting the wrong rating from a previous story, and we also know that code from India is often subpar.
I believe the parent wasn't trolling as much as he was making an observation about how faulty code and outsourcing to india ultimately have the same root: that software development isn't given the resources that it so often deserves. When you're running a multi-billion dollar business and you need a program to help you with that business that's going to make decisions that have repercussions reaching towards trillions of dollars, there are methods to make sure that you get correct code. These methods almost certainly were not used, and they're certainly not used in over 90% of the programs released. In other words, software quality is sacrificed for short term profits almost all of the time, which is certainly pertinent to the issue at hand.
The invisible hand of the market would not let us down like that.
It didn't. It punished everyone who made bad decisions - the people who loaned money, the people who borrowed money to buy a home they could never afford and the people who invested in companies that loaned the money.
Of course, it is not the free-market that is giving 700-billion to the people who made reckless loans. Maybe you can figure who that is...
So, your definition of accountability is that hundreds of people make off with millions of dollars and serve no jail time? Everyone who "indulged in that binge" is on a beach somewhere in the Caribbean, trying to figure out where they can spend the hundreds of millions of dollars they just swindled. If that's your definition of justice, you can keep it.
If the government allowed those companies to fail, you'd just have more people out of work. The criminals are free in either of your scenarios. You may stop one generation of people from investing in the stock market again, but that's the only lesson that would be learned.
Citation needed.
I don't think models were anywhere near that simple. The closest you could get to that is if you fed home appreciation data from a time period where house prices mostly went up, and had no examples of periods when they went significantly down. That's a plausible failure mode for many of these models (and it happens all the time with financial models, ugh, and the financiers don't seem to learn), but the models would have made different predictions with different data sets.
There's another assumption that people made that led to the problems with the ratings: the assumption that housing and mortgages from different parts of the country would have uncorrelated performance, so that packaging them all together would diversify risk away. The short catchy phrase for that was "all real estate is local": the assumption was that house prices can go down in some parts of the country at any given time, but that it was unlikely that they would go down in all of the country all at once. You can see how that one turned out, of course.
That one, again, turns out to be a recurring problem with financial modeling:
The financial model failures we're seeing now are remarkably similar to the crisis that led to the failure of LTCM 10 years ago. The industry doesn't seem to learn, which is a big problem.
More generally, there's a bigger problem here (and I'm paraphrasing Buffett in the following): it's not that the mathematical models of risk aren't valuable, it's that, by putting very precise-looking numbers to aggregates of thousands of highly uncertain estimates of future risks, they make it look like risk has been tamed. If you have a model that tells you that the current risk of your portfolio is, say, 15.72%, and you mechanically decide how to allocate your capital using a formula that doesn't build in a generous margin of safety against mistakes in that number, you're going to get burned by problems like this.
Are you adequate?
Bull. The majority of those executives who made the horrible decisions were riding high on ridiculously, fraudulently inflated stock prices, and got their huge bonuses and golden parachutes, leaving before the crash.
Slashdot gets worse every day... Pipedot: News for nerds, without the corporate slant
What commodity should money be backed by, then?
The answer all the libertarians seem to give is "gold". But this is nonsensical. Gold is not particularly valuable. It has some worth in certain industrial processes and such, but mostly its value comes because people are collectively nuts. In this way, the value of gold is not much different from the value of the un-backed $20 bills in my wallet.
If you mod me Overrated, you are admitting that you have no penis.
The problem is that there is not enough of any commodity to support the actual amount of productivity in the US, much less the world. I agree the Fed reserve printing money at will is a crock, but money doesn't have to be backed by anything as long as everyone agrees that it can be used as an exchange of goods and services.
And yes, printing money right now is a horrible mistake. 1 trillion there another trillion here. I hope everyone is ready for the upcoming hyper inflation and 15%+ interest rates!
I listened to part of the congressional hearings on C-SPAN. I got the impression that they were actually blaming the top management at the ratings companies. The upper management applied pressure so what would have been a low rating became a high rating. This was because they regarded the companies selling bad financial instruments as being a customer (kickbacks?). Naturally the underlings, interested in keeping their jobs, either altered the programs or put in bad data. At the root of the ratings mess was top management.
Value is related to scarcity and utility. People are always forgetting about that second part.
For example, if I sculpt my shit into a likeness of Jimmy Carter and call it "art", we have something that is extremely scarce. It is quite literally a one-of-a-kind item. Total value? Essentially zero. It may be worth something as fertilizer, but it's probably not worth transporting it to where it could be useful.
On the other hand, air is quite valuable. (If you don't believe that because you don't pay for it, just try doing without it for a while.) It is also about as far from scarce as you can get.
Gold has very little utility. Before the modern age it had basically zero utility. This is, quite simply, because people are irrational and assigned a value to it which is beyond its inherent worth. Exactly what the gold-standard crowd says people do to $20 bills.
If you mod me Overrated, you are admitting that you have no penis.
Is Open Source the Answer for Risk Models?
By agreeing to rely on Wall Street's computer models to gauge investment risks, the SEC essentially outsourced that part of its regulatory duties to the systems of financial services firms, says Erik Gerding, an assistant professor of law at the University of New Mexico who does research on securities law.
Gerding's proposed fix: Make the software code that underlies the risk models open source -- a step that he claims would boost the transparency of risk calculations and potentially improve their accuracy.
"Just as with open-source software, other users would be able to copy and modify these models for their own use," Gerding said. And by looking at the code, business partners as well as credit-rating agencies could get a better picture of how financial services firms assess the transaction risks, he said.
Many Wall Street firms are already major users of open-source software. But Lisa Cash, executive vice president of sales and marketing at DFA Capital Management Inc., a vendor of risk management tools, said she thinks it would be difficult to get high-quality risk models into the market on an open-source basis.
Cash said that a better option for increasing transparency as well as confidence in risk models would be for U.S. regulators to emulate their counterparts in Europe, where watchdog agencies audit financial firms' risk models.
Peter Teuten, president of Keane Business Risk Management Solutions LLC, also questioned the wisdom of using open-source approaches in risk modeling. But he said that he does expect some modeling standards to emerge from the crisis.
Whomever thinks self-regulation will ever work for the benefit of the public needs their head examined.
Does the phrase "Fox guarding the hen house" ring a bell to anyone?
Tell me, being that the root of this whole mess are subprime loans, were you this concerned when some Congressmen tried to enact new regulations on Fannie and Freddie, and others blocked it, citing such economic justifications as "racism" and "fairness"? Because it's in the Constitution that everyone gets a house, you know.
Life is hard, and the world is cruel
There's an alternate conclusion: Corporations don't want a free "laissez-faire" market, because they want to be able to use government to block competitors. For example, Comcast uses government to grant it a guaranteed monopoly in various counties across the continent. Comcast certainly does *not* want a free market. Neither does Microsoft, or GE, or numerous other companies.
Oh one other thing:
It's a mistake to think corporations don't like Democrats. The TV corporations donated 74% of their funds to support Democrats, and just 26% to Republicans. Why? Well your guess is as good as mine, but I suspect it's because the TV media knows Democrats love to regulate, and the TV media is hoping the democrats will *protect* TV's business against internet competitors (like video-streaming Ipods).
Corporations don't want a free market. They want a socialized, closed market that protects their current standing. They want competition to be blocked.
FOX NEWS.com should be BANNED from television and internet. Have the Congress take it over and give us Truespeak.
What really pisses me off about this issue, is that there has been no substantive debate about what actually needs to be done to change financial regulations.
This episode has illustrated that our financial system is too delicate, with too many large firms that can take down the entire global economy if they fail.
The important thing to note, is that this systemic risk will not be minimized by the actions of the actions of self-interested agents, because they do not care about the welfare of other banks, only their own(And there is nothing wrong with that). So a perfectly free market will fail.
So the question is, what do we do about it? Do we place stricter leverage limits so that these firms are not allowed to take on risk? Do we forcibly break up the companies to create more redundancy?
Until your party drops it's tiresome and simplistic ideology( "Capital gains taxes! That will magically eliminate systemic risk!" ) in favor of realistic and sober policy proposals, it will continue to be relegated to the political wilderness.
That's a nice strawman argument. Blame the democrats for wanting to give mortgages to minorities and poor people. The numbers tell a different story. There are only $150 billion in total mortgages that are at risk of defaulting or going into forclosure. Out of those $150 billion, the land and homes still back the mortgage, so you can't expect a complete loss.
Then, take a look at the $62 trillion in credit default swaps. Compare $150 billion in bad mortgages (not all of them made to poor people or minorities) to $62 trillion in credit default swaps due to lax regulation.
It's not hard to see who is really at fault here, but go ahead, keep blaming the poor and minorities, like all of the conservatives do. You're just digging yourself into a bigger hole.
"When the president does it, that means it's not illegal." - Richard M. Nixon
I've read most all the posts to this thread and have yet to find anyone positing that this entire fiasco was
allowed to happen because, in the end, those in the know were fully aware of what would happen and either
didn't care, or worse, wanted it to happen knowing they would side-step the fallout.
Like the S-n-L crimes, there will be some scape-goats, but most of those who plundered will emerge
unscathed. We're talking about the 1%'ers here. Hell, even the 5%'ers won't be leaping from their offices
any time soon. They and their wealth are safely ensconced.
Considering that the contributions to both political parties from financial sector account for 30% (roughly
100 million to obama and mccain each) can we really expect anything more than a dog-n-pony show instead of putting
these criminals in the dock?
And how is what's happening to us 'joe the plumber'(s) any different from what was foisted on S. American countries
or worse, S. Asian countries in the 80s and 90s?
As cited repeatedly in Naiomi Klein's book, this is just another instance of "Disaster Capitalism" that
the elites will profit from while the pundits scratch their heads and the likes of Jeffery Sachs back-steps over.
(Tip of the hat to Chalmers Johnson)
resist propaganda
I'm sorry, but Fannie and Freddie bought the least amount of the subprime and alt-a loans as a percentage of total assets of all the major players in the mortgage security business.
Yes, the GSEs(Govt Sponsered Enterprise) were making 'easy' money and it was only because they had government backing. This enticed non GSE to try and get into the game and it turned out it wasn't easy money after all.
The problem is without GSEs there would be no real market for fixed rate home mortgages. I think the majority of people would agree fixed rate mortgages are a real benefit to your average home buyer on many different levels. Fixed rate mortgages are a real drag on a Bank however. The reason for this is how Banks had traditionally acquired the money to lend for mortgages.
Say you want to loan out $1B to home buyers for 30 years you used to either have to have $1B on you or got someone else to loan you $1B. The majority of the time you get a $1B loan. Only You never really got a 30 year term. You got much more short term loans.
Here is the first flaw in non GSE mortgage lending. You can't borrow short and lend long, you will end up with nothing eventually as the return on your mortgages will be under the cost of your borrowing.
They had thought they had figured a way around this problem in the MBS, mortgage backed security. In this model you only need short term financing while you find a 3rd party to buy your securities. The MBS is a complicated device but everyone viewed it as a fixed income stream. An investor would give Firm $1B and then the Firm would give you, over the life of the MBS, $1B plus 'income' back.
Here is the 2nd flaw of non GSE companies. If you have $1B to spend, why would you spend it on a non-liquid long term non-GSE security when you could get the same return from a nice stable GSE security? So the non-GSE's had to make their MBS more attractive. They did this through financial trickery that was obfuscated on purpose I believe. If you make it very complicated its less likely your investors will ask tough questions as they don't understand it enough to ask tough questions. Not to disparage the investor's, but the people managing the investors money were much less savvy and much less skilled then the people at the securities firms.
I assume you know that it turns out the assumptions they used to make the models that they used to value and asses the risk of the MBS turned out to be flawed in a rather obvious and fatal manner.
Would we have had a bubble and the following contraction of the real estate market with out the MBS debacle? Yes, of course. There was to much demand for investment vehicles in the early part of this decade for no bubble to have occurred.
However, It should have stopped several years ago, probably around 2004-2005 time frame when all the 'prime' borrowers had bought homes and the pool of 'non-prime' borrowers who had loans was much smaller.
If you want to assign blame, then blame the middle class for wanting fixed rate mortgages or your over educated wall street types who mistake their privilege for merit. It is not some GSE's fault for trying facilitate the social policy of affordable non-discriminatory mortgage lending.
Do you have any numbers to back that statement up?
Lehman Brothers was handing out billions in bonuses even as the company was going under. Sure, the shares held by these executives might be worthless - but they still got paid millions and walk away with millions more via golden parachutes.
And btw, for those who blame the crash on deregulation, the regulations in the financial sector only grew in the last 20 years.
And what color is the sky on your planet?