Oh My!

One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit ratings that made them look so good.

One answer is that Wall Street was given access to the formulas behind those magic ratings — and hired away some of the very people who had devised them.

In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested, according to former agency employees.

Tsk.

You mean that banks did with the ratings agencies what Congress does with the CBO?

Tsk, tsk.

2 thoughts on “Oh My!”

  1. Banks buying in ratings agency ‘talent’ combined with regulators buying in banking ‘talent’ created a consensus of opinion that everything was swell.

    Not enough input from outside the financial services? Not enough input from contrarian views within the financial services? There must have been some.

    What did they think about house prices going up; ‘They’ll never go down and people can afford to borrow loads more’?

  2. I sometimes wonder (perhaps with a soupçon of sour grapes) whether most of the quants are worth a damn. Is much mathematical ability beyond the ability to read a balance sheet really necessary in finance? Sure, you can make a case for needing schoolboy algebra like calculating the beta of a stock, finding the NPV of an annuity, etc., but a lot of the more exotic stuff seems to be a house of cards when it comes to the underlying soundness of the mathematical justification.

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