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von clavichord (DE), Last modified: 2008-11-02, 22:09   Spam?  

Greed

Oh yes, they are saying it again. This mess on Wall Street will lead to a more stable system, because the bad entrepreneurs are weeded out, and everybody will become more risk-averse, and thus the system after the event will be safer than before. Survival of the fittest and leanest and all that.

Only that we have had it before, and no they didn't learn anything, they stumbled into the same greed biorhythm trap, and of course they will do it again. Does anybody here remember 1990, Michael Milken and the junk bond excess that led to the demise of Drexel Burnham Lambert? No? You are not to blame, because Wall Street doesn't remember either.

What he had done was based on statistical analysis, that if you bundle together a portfolio of bad bonds of which some will default, nevertheless the surviving portfolio will yield you a higher return, and a lower volatility of return (that is the statistical definition of "risk") than any other bond portfolio. And thus, bad loans became sought after, and it was even easy to issue them because there was a greedy market out there that had discovered that if you held a variety of them, they were lower risk. And as the amount of bad loans increased, nobody bothered to adjust the statistics to this new sample universe. And of course, in the end the bubble imploded.

And exactly the same mode of thinking has over the last years led to the bundling of risky mortgage loans into packages and portfolios that were marketed around the globe, because the packages were perceived as low risk and high return. And borrowers who lacked equity and collateral were encouraged to borrow, because investment banks were eager to bundle those loans into sexy products, and then even pile derivatives on them.

They don't learn. Never will. Shame on them.

Michael

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von Proteus, 2008-11-02, 22:21   Spam?  194.166.196...

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von Proteus, 2008-11-02, 22:38   Spam?  194.166.196...

The plot centers on Sherman McCoy, a young, cocky, married multi-millionaire, WASP, bond trader on Wall Street. ... Sherman's life as a self-assumed "Master of The Universe" on Wall Street
Wikipedia(EN): The_Bonfire_of_the_Vanities  
Wikipedia(EN): Michael_Milken
Wikipedia(EN): Ivan_Boesky
Wikipedia(EN): James_Goldsmith
Wikipedia(EN): Nick_Leeson
Wikipedia(EN): Barings_Bank

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von Proteus, 2008-11-02, 22:57   Spam?  194.166.196...

Wikipedia(EN): J%C3%A9r%C3%B4me_Kerviel
Google Images: "Jérôme Kerviel"