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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."
Joe Public: What happen ?
Coder: Somebody set up us the bomb.
Operator: We get signal.
Joe Public: What !
Operator: Main screen turn on.
Joe Public: It's you !!
Wall Street Fat Cat: How are you gentlemen !!
Wall Street Fat Cat: All your base are belong to us.
Wasn't it John Kenneth Gailbraith (an economist) who stated that "If all else fails, immortality can always be assured by spectacular error"?
We've been Osinski'd....
Faster! Faster! Faster would be better!
Yep, you can pretty much say that the financial crises was caused by just about anyone, and you'd probably be right to some extant or another. Homeowners, loan officers, big banks, small banks, the FHA, AIG and companies like them, investors, the media, the non-journalistic media, republicans, democrats, and government regulators just to name a few and I'm sure you can come up with more if you try.
There's plenty of blame to go around, anyone who claims one group is responsible is pushing an agenda or very short sighted.
Two words: Information asymmetry.
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.
Can you say scapegoat?
Of course, it's a geek who is to blame for it all with his immoral software witchery. It couldn't possibly be the result of a large number of greedy, thieving scum, who were regulated by greedy, corrupt scum, and they in turn were regulated by a greedy, corrupt government.
The writing was on the Wall(street) for the subprime meltdown for a very long time before this software was written. It was obvious to anyone with Economics 101, a long time ago.
I've argued the issue of the CRA on many occasions, but I guess I have to do it one more time. For starters, I refer you to an earlier Slashdot discussion on exactly why the CRA had very little if not nothing to do with it.
The short version: The vast majority of bad loans originated from brokers (e.g. DiTech, Countrywide, Ameriquest) who weren't covered by the CRA. Banks who were under the CRA actually did considerably better than other financial companies. Furthermore, CRA borrowers had to meet identical loan standards as anyone else.
The reasons that various groups have blamed the CRA has a lot to do with hating that regulation since at least 1990 or so, and very little to do with reality.
I am officially gone from
The guy coded it. Who created his requirements?
Sig ?
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.
I am officially gone from
I was contracting at a mortgage company from Summer 2006 to Summer 2007, working on a model to predict mortgage behavior (and watching the office getting emptier and emptier). A few observations.
Why, in the name of the FSM, did my data have "stated income" as a yes-or-no field? Nobody sane would make a major loan to somebody who couldn't even verify his or her income, unless they had absolutely no concern about whether it would be paid. Nobody sane would purchase such a loan from a broker. There was no federal regulation saying "You have to make loans to indigent liars" that I know of.
We had several projections of housing prices. The number of them that showed any sort of decline? A bit less than one. It wasn't that nobody was talking about a bubble, either.
What I saw was idiotic, short-sighted, greed, laid out in 1s and 0s. This had nothing to do with any sort of pressure, other than for the quick buck right now.
"When you have eliminated the unacceptable, whatever is left, however improbable, must be the truthiness" - Holmes
When it's not your money your lending out.
Say, I'm a loan officer. I see someone being high-risk. Do I loan out to that person? Well, if I'm at risk, I might not, but since the home prices are going up, I give the loan, and then sell the loan to someone else. I'm not stuck with the loan, and I make money on loaning out money. See where my incentive is to loan out money whether the person can pay back or not?
Je ne parle pas francais.
> the financial crises was caused by just about anyone
Except for folks who bought within their means and paid their mortgages on time. Sadly, they will now end up paying for everything else.
The Army reading list
Wow.
That's all I have to say about that one.
Wow.
Hyperbole, Check!
Misogyny, Check!
Confusing Causation and Correlation, Check!
the galactic insanity of the CRA
Whether the CRA was a good idea or not might be up for debate, but if "galactic insanity" implies that it was operating at a scale necessary to be a real driver of the crisis, there are significant indications you're wrong.
Consider, for starters, these statistics:
"Federal Reserve Board data show that:
* More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions...
* Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics."
There are a number of other relevant resources (such as those posted elsewhere in this discussion and in my comment history) which also examine the idea that the CRA was a significant cause of the current problems. The data seems to indicate that not only were CRA loans not any significant portion of problematic loans, they're actually turning out better than comparable private loans.
Tweet, tweet.
In fact, renting is even more expensive than owning when you consider that you don't get to keep any of the equity, and the landlord needs to make a profit.
Actually, no. The whole point of the psychological aspect of the bubble was/is that "housing only goes up". Therefore landlords didn't care that the typical rental cost was a fraction of their mortgage payment.
For example, say the cost was $500K. That would imply, at a reasonable rent to cost ratio of 100, a rental cost of $5000 per month. But the going rental rate for a SFR is only $1800. Thus each month a landlord loses $3200 in cashflow.
However the whole point of the bubble is to mix up cash flow and balance sheets. So, if that $500K house cost $250K two years ago, it's gonna double in two years, right? Because housing only goes up, right? So, if you expect to gain $500K on the balance sheet in two years, that is simplistically a monthly gain of $20833. A new car each and every month....
So, the bubblehead thinks he gains $1800 a month from rent, lost $3200 a month in expenses, and gains $20833 per month in bubble prices. Sounds highly profitable. Now what happens when real estate no longer goes up? What if it drops by half, thus a balance sheet loss of 10K per month, every month? Ooops. Mail the keys back to the bank and tell the bank, tough luck. Don't worry about the bank, taxpayers will bail them out.
Another way renting can be cheaper is looking at opportunity costs. If the "savings" of ownership are less than the money lost thru peasant work of maintaining the house, then you're better off outsourcing property management to the landlord. People whom get alot of money by working crazy hours are far better off outsourcing toilet plunging and lawnmowing to a landlord. Also some people are willing to pay alot for someone else to handle the hassles for them.
The final way renting can be cheaper, is if you know anything about economics, and see whats going on in the inflation adjusted prices over the long term over the last century, in the ratio of house prices to rent over the last century, in the ratio of median income to median home price, in the ratio of median home price to... heck just about any commodity, in the historical graph of interest rate vs house price with attention given to the current temporarily multi-generationally low interest rate implying a very temporarily multi-generationally high house price, in the trends of median middle class income over the years, in the demographics of baby boomers flaming out with not enough younger folks to move in/up, in the graphs of house construction vs population change (supply vs demand), it's not too hard to see whats going to happen to prices. On one side you've got all the math and graphs that are worth considering, and on the other side, you've got slogans like "real estate only goes up", pretty easy to evaluate what will happen soon. So, pay a small rent to the landlord whom will take a staggering huge capital loss. Some homes in CA have been/are dropping in the high five figures per month, an order of magnitude larger than their rent...
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
Well really what happened is the bank gave Joe Foreclosure a loan.. They knew Joe is a bad risk so they bought insurance for that loan from AIG.
Now that loan is 100% guaranteed to pay off so the debt of off my books (balanced by the Insurance policy) repeat over and over again.... Ohh since these loans are fully insured they run out and package bundles of them up as AAA bonds and sell em off to market investors.
This is all fine and dandy, AIG wrote policys out for trillions in mortgages. To bad and they only had the cash to pay on a handful. No big deal they thought.. Home values have only gone up for 30 years..
The the bubble burst.. record numbers of homeowners were defaulting on mortgages. The Banks turned to AIG for the insurance. AIG didn't have the cash..
Now the banks are over leveraged and all those bad loans are wrapped up out there as AAA bonds they are liable for.
Thats why the feds have to keep pumping billions into AIG.. If they fail the policies fail. then the banks fail and the bond market fails..
You know the rest..
If you think it's expensive to hire a professional to do the job, wait until you hire an amateur. --Red Adair
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.
Are you adequate?