Tuesday 30 December 2014

Not sure I can keep it much longer

Work is a tricky environment for the naturally outspoken. You need to maintain operating relationships with a lot of people you definitely did not choose. And many of them will tend to say very silly things.
But this can be magnified when you work in an environment where many people depend (or at any rate believe they do) for their income on investment banks.

And so I had a colleague explain (not for the first time) like an indisputable fact that the financial crisis had nothing to do with banks.

OK, if he had meant that shadow banking had been the elephant in the room, then I would maybe accept the "nothing" as a hyperbole. But no, his point was that it was due to banks being put under a lot of political pressure to lend to people who had no chance of repaying. Rrrright. It's all because of political pressure. Huge bonuses giving massive incentives to do so were entirely ignored. I mentioned a few of the recordings showing data being doctored and compliance services being emasculated, but I got "a few extreme examples which made it into the press" - when, despite the difficulty of getting clear data, there have been many, many examples. Actually, he even added as an example of political pressure being the culprit that Cameron apparently made speeches asking banks to lend to businesses to help grow the economy. Given the impact that those speeches appear to be having, one must conclude that banks have by now learnt to resist to pressure...

And it followed the predictable course: the massive increase of credit would never have happened if Fannie Mae had not massively extended loans to people who should not have been lent to. Well, for one it is not clear how Fannie Mae lending really forces another bank to do so (do you seek to maintain your market share in jumping from bridges?), but it is particularly funny when contrasted with data, which shows that:
  • Essentially, the definition of subprime was "loans that Fannie Mae and Freddie Mac would refuse" - and there were a lot of subprime and "ninja" (no income, no job, no assets)
  • The two FMs suffered much lower rates of defaults
Now what do you do when such absolute nonsense is assessed like a professor giving a lecture about a well-established result in, say, basic arithmetic? I have been advised to keep my thoughts to myself (though I can back them with actual data), but somehow absurdities need not be kept silent at all. Well, I suppose that I face the problem that I care for the truth more than for personal ambition. But it still stings to see how incompatible those two are, how the system rewards those who are so totally disconnected from the truth.

He finished by noting (which made more sense) that the risk had then been packaged in CDOs that were bought by people who did not quite understand their payout profile, before adding "and that I cannot understand".
Hello. Finance is in the business of selling you products even if you don't understand them. People buying them did not necessarily do so with their own funds, and had clearly asymmetric incentives (win, you get a big bonus, lose, you don't need to pay back - plus if everyone is buying you have additional incentives to go with the herd). Underlying data was doctored. Agencies were paid to lie about the products. It is entirely unsurprising that there would be a market for it.

Now that is what happen when you look at a situation with an analytical framework that you are not prepared to question even when it violently clashes with reality. You will need to make up your reality, and even then you will be stuck by inconsistencies which you will deem incomprehensible just because they disprove your premise that you will not question.

And I, in the middle of that, am apparently just supposed to nod approvingly. Only truth is asked to keep quiet, nonsense (OK, right wing nonsense) will always get a free pass.

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