Friday, April 09, 2010

None Too Prescient.

There have been two uber-narratives from key financial executives and senior government officials regarding the Great Cascading Collapse of 2007 - 20??. Uber-narrative #1: the perfect storm! It was like the forces of nature conspired! The result was a financial tsunami. Uber-narrative #2: we had the wrong models!

Uber-narrative #1 basically blames God for decisions made by people on Wall Street. Uber narrative #2 basically asserts, with deep regret, that "mistakes were made" by people who made "models" on Wall Street. They shall nevertheless remain blameless.

Here's former Citi CEO Chuck Prince's testimony from yesterday: "I can only say that I am deeply sorry that our management – starting with me – was not more prescient and that we did not foresee what lay before us.” (emphasis added)

The reason for these uber-narratives is largely legal; people like Chuck Prince are deathly afraid of saying anything that might put them in the cross-hairs of a Federal or state prosecutor. Ditto Robert Rubin. Ditto Lloyd Blankfein. Ditto Stan O'Neill. Ditto Richard Fuld. Given the choice between possible criminal investigation or an outright assertion of "model-worshiping" stupidity, all of these exceptionally intelligent men opt for "model-worshiping" stupidity

Sorry we weren't more prescient!

Eventually, I am going to write a long review of all the books I've read about the financial collapse and what they tell us about what really happened. One thing that is clear from having read about 15 of these tomes, is that the sub-prime mortgage machine was something Wall Street (a) fully understood (including the risks), (b) fully enabled and (3) jacked up on steroids in an out-of-control fee feeding frenzy from 2004-2006. Management did nothing to stop this. Indeed, it encouraged it at every turn; buying up sub-prime mortgage companies, churning out more and more CDOs, synthetic CDOs, CDS, etc, etc.

The question is why these very smart people chose to ignore what was obvious: the machine could not possibly be sustained and would crash. The collateral damage would be immense. Their reputations would be ruined. And so on.

I'll write that review before the month is out.