That was the moment that I realized that some of these people live in a reality distortion zone where it really wasn't their fault.
The only thing weird about credit agencies is that they're sometimes written into state and local laws as being the sole judge of whether some money can be invested in a certain way. The law shouldn't depend on private companies.
The other thing is that because pensions are managed in aggregate, the individuals investing in them don't have much choice in what to invest in. It's the same problem with Social Security. It's a weaker but still valid concern with 401(k) retirement accounts, since your employer determines what you can invest in. It's just a bad idea to let other people manage your money for you, especially at scale.
Nothing about the credit rating agencies needs to change(by force), but I'd say it's important that people not be forced into trusting them. Once that's in place, it's on you if you blindly trust a credit rating agency. They're just a private company, so it (should be) legally the same as paying my bartender for stock tips.
I don't know - do credit agencies ever issue contracts guaranteeing their ratings? If you get one of those, the bartender analogy doesn't hold.
Here's another one: You're a software developer. Software developers caused Heartbleed. Why do most software developers "live in a reality distortion field where it wasn't their fault"? Probably because they don't work on SSL libraries. Should I blame you for not taking responsibility next time Cloudflare goes down, even though you might have an outside opinion on what caused it?
The user in question works at an online advertising company, not at a credit rating agency. Why do they think it 'was not their fault'? Probably because it wasn't his fault.
> Nobody adjusted the models when they produced incorrect answers because the answers weren't incorrect. They weren't the answers you like in hindsight, but they were correct insofar as the model was vetted & the input was correct.
This is 100% absolving the agencies of any responsibility for the brokenness of their models. According to this person, it's the public's fault for behaving in ways that led to unrealistic ratings, and not at all the agencies' fault for having models that didn't reflect reality.
[1] https://news.ycombinator.com/user?id=rayiner
[2] https://en.wikipedia.org/wiki/Alayne_Fleischmann
[3] https://en.wikipedia.org/wiki/Richard_M._Bowen_III
[4] https://www.nolo.com/legal-encyclopedia/false-affidavits-for...
The idea that there was any single factor that caused the financial crisis is equally delusional.
Rewind back a decade and observe the flurry of "Flip this house!" shows in mainstream pop-culture. There were tons of "the public" who were in on the game, or who indirectly benefited from it.
We, the public, respond to the signals provided by the monetary system. When that system malfunctions - and it is just as capable of being exploited as any other distributed system - the public behaviour is really the effect rather than the cause.
Similar for lending to all students for degrees. You know you don't need a degree to do a regular office job but because everyone else has one you know the recruiter will immediately bin your CV.
Control is counter-intuitive. Most people would restrict credit. The establishment understand you hand it out like confetti. After all it's free.
Like many things, most people would love to restrict it...for others. Of course, they alone would love to have the ability to borrow and lend as they see fit. Being able to extend or accept credit is a freedom, and it's misuse is part of that package.
What's with the down-voting brigade?
Most of the subprime sector evolved from trying to game the 20% requirement, either legislatively (through HUD and other "assistance" programs), financially (interest-only loans) or just plain old dishonesty (no-doc loans) originated by companies like Countrywide.
Remember: if a person's model of the world favors authority over realism, authority is perpetually blameless in their eyes.
Well, they clearly did do something wrong. Unfortunately, no one pays with jail time for defrauding their way into the financial crisis, and when they do get punished it's usually for a small fraction of the sums they gained, much less than the public is let to believe they are paying thanks to various loopholes. All of this also after being saved by taxpayer money (they only paid some of it back, but there were other programs, some secret, in which they got even more money).
To be fair, the public isn't 100% blameless as a large number of people made poor choices to create the situation. Supply without demand is largely useless, after all. Similarly, the public hasn't shutdown the routes after the fact but rather accepted a smokescreen of a solution.
The blame primarily rests on the shoulders of the banks and credit rating agencies because they provided the supply. They also were the best informed side of the transaction and engaged in a certain degree of deception that they should be punished severely for.
The best lies, or distortions of reality, do have a kernel or two of truth.
Banks, credit agencies, and the whole sell side, selling bad debt in bad faith to organizations like pension funds, carry the brunt of the responsibility.
At the same time, the millions of poor and lower middle class people who took out loans way beyond their means -- and then defaulted on them -- aren't blameless victims, either.
Say I'm a shift manager at a grocery story, but I want to buy an $700,000 McMansion. So the bank offers me a Negative Amortization Loan. (Those were fairly common in the few years before 2008.)
The page clearly says that the loan will never be repayed if I make the minimum payment--the principal will grow every month. It clearly states the minimum monthly payment, a bit over half my paycheck.
It's amoral and greedy for the bank to make that offer. At the same time, it's irresponsible and greedy for me to take it.
If you default on your mortgage you will lose the house and suffer long term harm to your credit and your ability to get future loans.
What is evil about the bankers' gamble is that when things go bad, they get bailed out and get to keep everything. They have nothing on the line.
If I default on my mortgage and commit fraud, I don't have the luxury of saying "the fraud sentence is enough, can't I at least keep my house?"
I disagree. Whether following the buy-vs-rent calculator (and opting for a purchase vs renting) or buying in hopes of selling at a higher price later on, everyone made a perfectly rational decision - people still buy real estate today when it makes sense to them, and every day investors buy growth stocks which produce no dividends, so the only plan is to sell them at a higher price later on.
Normally though a risky speculative behavior is constrained by market's readiness to finance it. Most mortgage originators will loan very quickly at 60% LTV, will due their due diligence at 80% LTV, and do a whole lot more for lending at more than 80% LTV, and would want to be compensated by higher interest rate. Same for investment properties - most likely I will have to accept higher interest rate, higher down payment, as lenders are trying to control their own risk.
The only time when lenders' guard is down is when a reputable third party tells them they will underwrite the risk in the event of a default. This reputable third party was known as AIG Financial Products, and if AIG tells the lender they will make them whole in an event of a default, then there's little reason to be diligent.
If AIG FP did not exist, a lot of loans would receive a higher risk rating, which would increase the diligence onus on the lenders and financial burden on the borrowers, thereby removing a lot of those questionable transactions off the market.
So yeah, when the entire industry comes to the government and says "unless you bail us out right now our entire industry will collapse, but you're definitely going to save us because we're too big to fail," then yes, it means it's their fault. The public may have been complicit, but it's not the public's job to keep the financial industry healthy when the profits from that industry are kept privately.
That's an interesting interpretation of the events. In fact, there were institutions that were coerced by the government to participate in the bailout. Much of the derivatives betting was zero-sum, and done amongst the banks. The winners of those bets would have been more than happy to watch their competitors fail (fire sale!).
http://www.economist.com/node/13832261
> April 16, 2009 | THE WORST nightmare of many bankers, natural capitalists, is being under the direct control of the government. So it's no surprise that American banks want to throw off the yoke of government meddling and pay back any accepted TARP money as soon as possible. Predictably, Goldman Sachs is leading the charge.
http://www.economist.com/blogs/freeexchange/2009/04/i_dont_w...
The point is that complicity provides the avenue to allow people to tell themselves a story of how the banks weren't the largest part of the problem.
Is it really a poor choice to buy a house? Should people have known that banks were intentionally misleading them? The banks are the ones that should have been telling potential homebuyers that they weren't qualified, but they weren't doing that. Yes, the banks were also incentivized to make that kind of loan, but creating the derivative products that intentionally obscured the high risk of those loans and reselling those products as "low risk" derivatives is definitely on the banks and ratings agencies.
But what did banks do once they hit the limit? Invent CDO and then synthetic CDO to create "artificial" supply for the bad loans. These derivatives are what really made the crisis very bad.
I'm sorry that wasn't clearer. I was just discussing the art of self deception depends heavily on a kernel or two of truth to hang itself.