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Comment by SilasX | Hacker News Reader

It had the potential to cascade to the rest of the market because of how they used leverage, and the only reason it didn’t was because of emergency Fed intervention.

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That does not make it a fraud. They took investor money and leveraged it and made bets on basis of their mathematical models. Their models didn't work out.

I don't think their intention was to rob / hide / betray / hoodwink.

I was replying to this:

> A bunch of PhD traders lost their wealth

That is, the only reason the losses were limited to them was because of special intervention. Otherwise, it would have caused losses for many others.

right, but if a counter-party ends up losing money because of incorrect assessment of credit or liquidity risk, isn’t that their own responsibility? It’s like when someone can’t pay the mortgage loan a bank lent them - the borrower isn’t performing under the terms of the contract, but part of the payments that borrowers make to the lender is to account for that credit risk - what matters is if the lender has accurately priced this over their portfolio, taking into account how “independent” (or otherwise…) the individual loan risks really are. The liquidity problem is usually when it turns out that the individual loans credit and liquidity risk are NOT independent at times…

Yes, I understand how financial contracts work. But like I said in my original comment[1], at the top of this subthread, that provides vital context for the point I'm making, this was big enough to have the potential to cascade, i.e. be such a big loss -- against such a formerly-safe capital buffer -- as to spill over to other financial institutions, bankrupt them, then spill over to their counterparties etc, and eventually to the broader markets that are many degrees removed.

The kind of situation they were worrying about and rushed to prevent in 2008, IOW.

You are correct, in a trivial sense, that maybe the entire market should have just not trusted anyone else, except perhaps under extreme constraints, which would have amounted to almost no financial intermediation and thus almost no financial industry whatsoever. But even the most hardcore "you should have vetted your counterparty" finger-waggers aren't willing to go that far.

[1] https://news.ycombinator.com/item?id=33608638

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