[thechat] people who work weekends: a rant

[Judah McAuley]

On Mon, Nov 3, 2008 at 6:18 PM, Matt Warden <mwarden at gmail.com> wrote:
> On Mon, Nov 3, 2008 at 8:49 PM, Erika <ekm at seastorm.com> wrote:
>> CEO's may not generally be dumb but they may be negligent (what happened
>> to our banks again?)
>
> I don't think you can really say the bank CEO's were negligent. They
> engaged in loaning to risky borrowers (either due to interpretations
> of regulations like the CRA or some other reason) because it was high
> profit and low risk. Low risk? Yes. Either they held the risk for just
> long enough to sell it to the government (GSE's) or if the worst
> happened they would be bailed out by the government. (There is also
> the fraud issue, but that is separate and the government already has
> full power to prosecute that.)

Correction: the CDS (and other derivatives) were not low risk, they
were of unknown risk. And that's the problem.

Low risk/low reward, high risk/high reward are both acceptable. You
can look at them on a balance sheet, make judgements and invest
accordingly. These exotic financial instruments were created as a type
of insurance but were not called insurance because then actual
regulation would be in effect. And they were never according a real
analysis of risk because they were pseudo-insurance.

So yes, I'd say there were smart ceo's, dumb ceo's and negligent
ceo's.  The smart ones said it was too risky to dump a large amount
into something that you couldn't properly value. The dumb ones said
"everyone else is doing it" and didn't seem to really understand that
they didn't understand. The negligent ones knew that they didn't
understand and didn't care because the short term rewards were too
tempting and the quarterly numbers gotta be hit or the shareholders
get pissy.

Judah