BBB-minus

I’m only half way through it, but so far this is the best account I’ve read yet of the roots of the credit crunch: The End of Wall Street’s Boom, by Michael Lewis.

One sentence captures the mixture of insanity and gross negligence – to put it at its most charitable – that led to dodgy BBB-rated loans being repackaged into AAA-rated bonds (“turning … garbage into gold”, as Steve Eisman, one of the few on Wall Street to have bet on the collapse long before it happened, puts it):

[Eisman] called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number.

So there you go. A huge financial bubble was created – and then the entire financial system brought to the brink of utter ruin – using models that “had no ability to accept a negative number”.

There is a point at which stupidity tips over into insanity. And there is another point at which insanity tips over into a demonic frenzy.

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3 Responses to BBB-minus

  1. Theresa K. says:

    A lawyer I know pointed me to this helpful explanation (don’t view in front of the kids- a few bad words commensurate with market failure).

    (MOD: link fixed. Thanks for the reminder – I’ve seen that one before, and I agree it is a richly enjoyable summary. 🙂 )

  2. Theresa K. says:

    My link doesn’t appear to be working:http://bigpicture.typepad.com/comments/2008/02/how-subprime-re.html. I’m bad at remembering html!

  3. Josh S says:

    So there you go. A huge financial bubble was created – and then the entire financial system brought to the brink of utter ruin – using models that “had no ability to accept a negative number”.

    I think the similar things when people insist we need to bet the farm based on results produced by climate models that have no ability to account for…well, lots of things.

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