Monday, September 15, 2008

Smart People Being Stupid

How could so many smart people be so stupid? Let's see, Bear Stearns went up in smoke months ago, now Lehman Brothers is gone, Merril Lynch is selling itself to Bank of America, and insurance giant A.I.G. is on the brink of disaster.

These guys were supposed to be smart. They get paid sums that make my salary look like a rounding error, because they supposedly understand money. And here they are betting their companies on pools of mortgages made to borrowers who couldn't really be expected to pay them back. The wheel's come up on double zero, and I guess they're not bullish on America anymore.

I don't pretend to really understand what's happened. I have my own area of expertise and this isn't it. But I do think that if your annual income has two commas in it, you should be capable of not bankrupting your company.

We went through a crisis in junk bonds in the 1980s. We tried out the idea of putting a lot of high-risk debt into a bigger vehicle on the theory that it would somehow be lower risk. That didn't work out too well. So now we've tried the same thing with mortgage debt -- pooling together bad mortgages on the theory that a sufficient percentage of the high-risk borrowers would be able to pay, so that on the whole the debt vehicle wouldn't be too risky.

Didn't it occur to anyone that if there were an economic downturn a whole bunch of those high-risk debtors might be unable to pay at the same time? Apparently not.

As I say, I don't really understand the crisis (the above is about as close as I get), but somehow I wonder if people were thinking, don't worry, if it gets really bad, the government will have to bail us out, and we'll just pass the bill on to the taxpayers. Moral hazard.

Or maybe they were just smart people being stupid.

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