The Coder Behind the Mortgage Meltdown

axjms writes "New York Magazine has a confessional/abdication from the man who wrote the software that turns mortgages into bonds and those nasty little things called CMOs. An interesting first-person account from a coder whose work reached far beyond what he or anyone could have anticipated."

Comments

Here's one reason the financial system failed.

[Anonymous Coward]

Two words: Information asymmetry.

CMO vs. CDO vs. CDS

[Fantom42]

The end of the article starts to get to the heart of the problem, which really happened after he was involved. It was when they started doing this with all debt that it got really bad. And even then its only half the picture without looking at the other piece of this the Credit Default Swap. Another thing he alluded to when he talked about default models. The problem was much more complicated than this one guy.

Re:Oh, jeez, not more CRA-blaming

[dkleinsc]

Some citations for those interested:
http://www.ccc.unc.edu/news/news.021809.php
http://www.clevelandfed.org/research/Commentary/2000/1100.htm
http://www.treas.gov/press/releases/ls564.htm

All are very clear that the CRA had little to nothing to do with the subprime mortgage foreclosures.

Re:This topic is too hot to handle.

[CFTM]

Wow.

That's all I have to say about that one.

Wow.

Hyperbole, Check!
Misogyny, Check!
Confusing Causation and Correlation, Check!

Re:This topic is too hot to handle.

[Estanislao Mart�nez]

If it is obvious that the debtor will never be able to pay back, you would have trouble selling the loan, right? Unless the buyer is unaware of the risk involved, of course.

Exactly. Securitization packages up pools of loans into bonds that get given a credit rating by an agency. A lot of bond buyers just go by the bonds' ratings. These bond buyers are the ones who ultimately provide the easy money that ends up being used for the junk mortgages.

Who are these bond buyers? All sorts of banks, and, more worrisome, retirement pensions and bond mutual funds in people's 401k plans. Look, for example, at what happened to Fidelity Ultra-Short Bond Fund. This is a fund that was supposed to be extra-low risk; it lists "preservation of capital" as a goal, and it's supposed to compete with money-market funds and bank accounts. It lost 20% because of exposure to highly-rated subprime securities.