I find it interesting you don't have any response to the S-O angle. The details of that stuff are way out of my area of expertise, so I can't really assess the details, but assuming their interpretation of S-O is right, everything else hangs together.
I don't think that Sarbox is really relevant. That is, while it's entirely possible that people who are fundamentally far from culpability could be nailed on Sarbox issues, the problem really wasn't the kind of thing that Sarbox was written to solve. Sarbox mandates that you actually write down the reasons for decisions, and that they have some basis, and that you expose the reasons to the parts of your organization that perform oversight. The thing is, these deals were not being done without internal organizational visibility. Moody's was giving ratings that were higher than they should have been, but they were exposing that possibility to their customers, who were then acting on the rating just like everyone else on the market. And it's really hard to argue, as required for a Sarbox violation, that someone was taking an inappropriate risk when a) everyone in the industry is doing it, and b) it's been making rafts of money for much of the prior decade. Banks and retirement funds that bought products that were pitched to them inappropriately have a cause of action, but those people are really way at the periphery of the system, and they're already suing the majors. Where we got into trouble was AIG promising to insure against a slowing of the US economy, which looks stupid on its face when looked at from that macro perspective, but each decision leading up to it looks reasonable. Until you have a whole string of decisions in a row that amplify risk, run out of room on the very first one, and the whole thing comes crashing down.
The bundles were created on false pretenses. They looked good on the outside, but they were rotten on the inside.
Some bundles looked good on the outside and were rotten on the inside. You're conflating the ones that collapsed with the ones that didn't. The ones that collapsed are a large number, but your statement seems roughly analogous to 'Some people bounce overdraw checking accounts. To protect the financial system, we shouldn't have them.'
just because the flaws don't show, doesn't mean they aren't there, or that criminal intent/incompetence was not present.
You bet. So, how do you tell if a practice is risky or not? No one had seen an economy-wide drop in housing prices in close to a hundred years. That looks like a pretty good track record. Most of the structured securities that have collapsed collapsed because they were designed to perform even if the mortgage default rate was double the rate that had been observed for the prior forty years. That looked like a really solid bet, at the time. I'm not even sure that it was a bad bet, really - the pain we've gone through in the last three years was the result of suppressing the economic realignment we needed to go through in 2001, which we suppressed by dropping interest rates to the floor. Which made housing look like a better investment than it is. And staved off realigning the economy for nearly a decade. Now we're going through not just that realignment, but having to shift everyone who built careers and lives around the bubble out into profitable parts of the economy instead. And since we're now a lot more in debt than we were at the beginning of that decade, that's going to be even more unpleasant than it would have been a decade ago.
no subject
I don't think that Sarbox is really relevant. That is, while it's entirely possible that people who are fundamentally far from culpability could be nailed on Sarbox issues, the problem really wasn't the kind of thing that Sarbox was written to solve. Sarbox mandates that you actually write down the reasons for decisions, and that they have some basis, and that you expose the reasons to the parts of your organization that perform oversight. The thing is, these deals were not being done without internal organizational visibility. Moody's was giving ratings that were higher than they should have been, but they were exposing that possibility to their customers, who were then acting on the rating just like everyone else on the market. And it's really hard to argue, as required for a Sarbox violation, that someone was taking an inappropriate risk when a) everyone in the industry is doing it, and b) it's been making rafts of money for much of the prior decade. Banks and retirement funds that bought products that were pitched to them inappropriately have a cause of action, but those people are really way at the periphery of the system, and they're already suing the majors. Where we got into trouble was AIG promising to insure against a slowing of the US economy, which looks stupid on its face when looked at from that macro perspective, but each decision leading up to it looks reasonable. Until you have a whole string of decisions in a row that amplify risk, run out of room on the very first one, and the whole thing comes crashing down.
The bundles were created on false pretenses. They looked good on the outside, but they were rotten on the inside.
Some bundles looked good on the outside and were rotten on the inside. You're conflating the ones that collapsed with the ones that didn't. The ones that collapsed are a large number, but your statement seems roughly analogous to 'Some people bounce overdraw checking accounts. To protect the financial system, we shouldn't have them.'
just because the flaws don't show, doesn't mean they aren't there, or that criminal intent/incompetence was not present.
You bet. So, how do you tell if a practice is risky or not?
No one had seen an economy-wide drop in housing prices in close to a hundred years.
That looks like a pretty good track record.
Most of the structured securities that have collapsed collapsed because they were designed to perform even if the mortgage default rate was double the rate that had been observed for the prior forty years. That looked like a really solid bet, at the time.
I'm not even sure that it was a bad bet, really - the pain we've gone through in the last three years was the result of suppressing the economic realignment we needed to go through in 2001, which we suppressed by dropping interest rates to the floor. Which made housing look like a better investment than it is. And staved off realigning the economy for nearly a decade. Now we're going through not just that realignment, but having to shift everyone who built careers and lives around the bubble out into profitable parts of the economy instead. And since we're now a lot more in debt than we were at the beginning of that decade, that's going to be even more unpleasant than it would have been a decade ago.