...most Wall Street computer models radically underestimated the risk of the complex mortgage securities, they said. That is partly because the level of financial distress is “the equivalent of the 100-year flood,” in the words of Leslie Rahl, the president of Capital Market Risk Advisors, a consulting firm.
...The people who ran the financial firms chose to program their risk-management systems with overly optimistic assumptions and to feed them oversimplified data. This kept them from sounding the alarm early enough.
Top bankers couldn’t simply ignore the computer models, because after the last round of big financial losses, regulators now require them to monitor their risk positions. Indeed, if the models say a firm’s risk has increased, the firm must either reduce its bets or set aside more capital as a cushion in case things go wrong.
In other words, the computer is supposed to monitor the temperature of the party and drain the punch bowl as things get hot. And just as drunken revelers may want to put the thermostat in the freezer, Wall Street executives had lots of incentives to make sure their risk systems didn’t see much risk.
“There was a willful designing of the systems to measure the risks in a certain way that would not necessarily pick up all the right risks,” said Gregg Berman, the co-head of the risk-management group at RiskMetrics, a software company spun out of JPMorgan. “They wanted to keep their capital base as stable as possible so that the limits they imposed on their trading desks and portfolio managers would be stable.”
Well, it's obviously good enough to earn an ex-CEO $17,000 an hour while the geting was good...
If they throw a pot-smoking 18 year old in prison, why doesn't a CEO who reprogrammed the Fed-mandated watchdog hardware see some prison time?
If punishment's proportional to the damage to society, the Masters of the Universe would be exiled to the Netherworld for an eon or so. Or Jotunheim. Or somewhere without a modem.
Meanwhile, be glad you've got that third rail that stopped Bu$hCo and its Wall Street Ba$e a couple of years ago. Jack Cafferty, via Crooks and Liars:
“Luckily we have the safety net of Social Security to fall back on…for now.
You may remember just four years ago President Bush made a big push to partially privatize Social Security… You know so we could individually invest our future with the great minds on Wall Street. It failed back then, but that concept could still become a reality. See John McCain also supports supplementing Social Security with private investment accounts. His opponent Barack Obama does not.”
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