I worked deep in the mortgage backed security industry for a decade before the financial crisis and for some years since. I know a lot about it, and some big events firsthand. I find that people are interested in my thoughts on the causes until they hear them: while there were some really bad actors at the margins, the bulk of the crisis was caused by many, many people making good-faith, rational decisions which in hindsight proved foolish.
Of course I could be wrong — consciously or unconsciously I could simply be voicing my own bias. But I think at some level people prefer a simple narrative with a hero and a villain regardless of whether the narrative is true.
many, many people making good-faith, rational decisions which in hindsight proved foolish.
Rational, yes, but rational only in the sense of "the market can stay irrational longer than you can stay liquid".
My experience is many MBS and finance people, during 2003-2008, knew that a ton of debt was garbage, that LTCM's blowup in 1998 showed massive structural weakness that was never repaired, and that a crash was going to come SOMETIME.
But the problem is that the rational decision in such a market is to keep investing and making money on the irrational rise, because no one knows when the crash will come or how bad it will be. It's actually rational to keep buying trash debt when the crash timing is unpredictable.
In the end, the finance people were actually correct to keep buying –– the gov't (that is, me you and every US taxpayer) bailed them out, and most of the traders did come out ahead after a bit of time.
The GFC was not a crisis of credit or trash assets. It was one of liquidity and hidden interconnections. (In America.)
If you look at how those supposedly-toxic CDOs actually paid out, including the CDOs squared and synthetics and whatnot, the ones rated AAA, the ratings agencies were--by and large--on the money [1]. The AAA tranches paid out AAA cash streams.
The problem was market participants took this to mean they'd behave like other AAA assets in all capacities. Including liquidity. That was a bad assumption. When people are scared, they'll trade for Treasuries. Not the thing that by all reason should pay out like a Treasury, and in fact, with the benefit of hindsight, did.
To the extent there was high hooliganery afoot, it was around e.g. CDSs written by non-bank actors, e.g. AIG. Which was a result of the liquidity problem described above.
[1] There is an obvious asterisk here in the endogeneity of the bailouts and these assets' performance. But given the pattern holds across borders and industries, irrespective of bailout intensity, the hypothesis that tranching works carries more weight.
I’m going to disagree, and to some extent I think you prefer the simple narrative with bankers as villains.
I worked on a prop trading desk with some housing bears, who made some significant gains with shorts. While they understood that certain markets were overheated, I don’t think any of them suspected the breadth and depth of the crash that was coming. While their models were better than the other guys, in the end they were really wrong too. Just less wrong then the guys who went long.
I wonder if the same thing will be said about crypto or about current asset prices (e.g. TSLA mkt cap of +$1tn.. in what time horizon are they going to recoup that in actual profits?)
There are a lot of people talking of the problems and reasons behind "investing in Growth" that we have seen the past few decades instead of investing in Value
> the bulk of the crisis was caused by many, many people making good-faith, rational decisions which in hindsight proved foolish
I've been working in investment banking for a very long time now and this is simply not true. The whole trading floor knew exactly what they were packaging and selling and how this would eventually end.
Kitchen conversations prove everyone knew months before the crash.
Can you be precise about what they knew? Knowing a crash is coming isn’t necessarily that interesting - a crash is always coming, it’s just not clear on what time horizon, or what its secondary effects will be.
JumpCrisscross did make the interesting point that the “bankers were selling crap” narrative about the crisis is often overstated - the real reason that the situation was a crisis was the cascading liquidity issues, not so much defaulting debt.
> I find that people are interested in my thoughts on the causes until they hear them: while there were some really bad actors at the margins, the bulk of the crisis was caused by many, many people making good-faith, rational decisions which in hindsight proved foolish.
Would it be correct to say the really bad actors at the margins caused a cascade of events that snowballed and caught the people making good-faith decisions?
The bad actors being the people who did not do proper underwriting and verification (“liar loans” or “stated income loans”), and they did this intentionally under the guise of plausible deniability because they were earning profits on volume rather than quality.
IMHO at the margins, bad actors did make what was bad worse. But I think the crisis would have happened regardless.
> The bad actors being the people who did not do proper underwriting and verification (“liar loans” or “stated income loans”)
It's funny that somehow people want to hold people who lie on loan applications blameless. Aren't the victims of the bad underwriters the people they sold the loans to?
"You should have known I was lying and not lent me the money."
(I don't deny that predatory lending exists, but I don't think it was a major contributor to the crisis. I think home buyers and underwriters colluded because they were afraid of missing out on a hot housing market. And for many years this had been the right decision. And back to my original point, when it became the wrong decision, people looked for a simple answer, preferably a one in which they were blameless.)
There's a classic cocktail party icebreaker related to this: when you ask the usual awkward intro question about what somebody else does, and they tell you "X", reply with "wow, that sounds really hard!". They'll almost certainly tell you "yes!", explain a bit about why it's hard, and now you have a genuine conversation going.
One of my earliest "ah ha" moments in managing software engineers is asking them to do something and the answers tended to be "that's really really hard" or "that's simple". The realization was they were actually telling me "I don't know how to do that" or "I know how to do that". Once someone figured out how to do the really really hard thing it somehow became "simple". Now when someone tells me something is "hard" I can't seem to shake the bias that they just don't know...
Conversely, non-technical business people are very highly likely to tell me some piece of engineering is "easy" or "simple" when they have no background, or knowledge, at all.
I find it helpful to use a range of descriptors. A "simple" task is easy and can be done quickly. A "straightforward" task is easy but may be larger in scope. A "tricky" task needs study to determine where it falls. A "hard" task has known complexity and is just plain hard.
Telling you “this is hard” is not usually saying “I don’t know how to do this”, it’s usually “I recognize this and it’s more involved than the thing you think you’re asking for”.
I hope a follow-up moment was realizing that sometimes when an engineer says something is "simple" it's that they don't yet know that they don't know how to do that.
And when an engineer says something is hard, sometimes it's because they've done it before, and it really really sucked and burned months of their life and can we please not talk through the details that still make me cringe?
And occasionally there's that one engineer who describes stuff as "simple" after watching an old Rich Hickey talk.
This hits on a subtlety that I see all the time, which is that simple and hard are not opposites.
Some things are simple, some are complicated or complex. The degree of difficulty is basically orthogonal.
Running a marathon in under 2 hours is incredibly simple. All you have to do is pick a point 26 miles away and run in that direction. But it sure isn't easy.
I think that if a non-technical business person says something is not hard, it's "someone else must be able to do this, it can't be too complicated!" Yes, it could be done, but "easy" doesn't imagine costs (time, money) enough. If I am asked that and find that I can't do it, who will then? Trying to find someone to do the "easy" thing could turn out to be more complicated than judging the complexity level of a task.
This has always been my go to and it works like a charm. I ask “and what do you do?” and follow up whatever they say with “that sounds incredible! Tell me more!”
The core point about people systemically underestimating the complexity of any field outside their own is well taken. Joseph Conrad writes: "Men earning their bread in any very specialized occupation will talk shop, not only because it is the most vital interest of their lives but also because they have not much knowledge of other subjects. They have never had the time to get acquainted with them."
However, if I were to decline to speculate on any matter on which I lacked an expert-level understanding, the number of subjects on which I could hold a conversation would dwindle to virtually nothing, and I'd be much more boring to talk to at these cocktail parties. So, I intend to continue to spitball blindly, just for fun.
It's okay to not be well versed in a subject outside of one's area of expertise. You can still carry on a conversation and ask engaging questions to have an intelligent conversation. If one is unable to engage in a meaningful manner outside their area of interest/expertise, then that's an entirely different situation. And probably another interesting subject up for discussion if it can be handle delicately an non-hostile.
> ask engaging questions to have an intelligent conversation
Read a book once which outlined 30--40 occupational areas and two or three interesting questions in each of these areas -- to serve as reliable conversation starters.
It’s not surprising to me that people underestimate the complexity of fields not their own - I do it all the time myself.
What I think would be more interesting is the question: when are outsider critiques or suggestions likely to be valid? To stay with the construction example, it is clear that construction in the US is more expensive than it needs to be in many cases - railroad construction costs are famously many times higher in the US than in other industrialized countries. Is there insider knowledge I don’t have that would make this observation fallacious?
And what about cases where one isn’t simply pointing to a counter example? Are there cases where outsiders have made arguments from first principles that were correct, despite their lack of expertise in the field?
When I hear about something being much more expensive in the states, I assume it has to do with our litigious nature and everyone is afraid of taking on liability. But this is outside my expertise ;)
This reminds me of what Socrates said in his defense at his trial. He told the court that he was wise becase he knew the boundries of his own wisdom; and that when he would speak to experts in the city he found them only to be wise in their own fields, yet suffering with the falicy that they were wise in the fields of others.
"At last I went to the artisans, for I was conscious that I knew nothing at all, as I may say, and I was sure that they knew many fine things; and in this I was not mistaken, for they did know many things of which I was ignorant, and in this they certainly were wiser than I was. But I observed that even the good artisans fell into the same error as the poets; because they were good workmen they thought that they also knew all sorts of high matters, and this defect in them overshadowed their wisdom"
What kind of lame parties does this guy go to? I expected an article about dope things to make a cocktail party more awesome. Like fireworks, or a poker table.
I was at a party with Dan once. We talked for a couple hours, getting pretty deep into several topics. I don't remember what we talked about, but I enjoyed the conversation a lot.
> People often discuss the standard trendy topics (some recent ones I've observed at multiple parties are how to build a competitor to Google search and how to solve the problem of high transit construction costs) and explain why people working in the field today are doing it wrong and then explain how they would do it instead.
This is exactly why I moved away from SF. Can't stand these alpha nerds trying to one-up each other at parties.
Readit News
Of course I could be wrong — consciously or unconsciously I could simply be voicing my own bias. But I think at some level people prefer a simple narrative with a hero and a villain regardless of whether the narrative is true.
Rational, yes, but rational only in the sense of "the market can stay irrational longer than you can stay liquid".
My experience is many MBS and finance people, during 2003-2008, knew that a ton of debt was garbage, that LTCM's blowup in 1998 showed massive structural weakness that was never repaired, and that a crash was going to come SOMETIME.
But the problem is that the rational decision in such a market is to keep investing and making money on the irrational rise, because no one knows when the crash will come or how bad it will be. It's actually rational to keep buying trash debt when the crash timing is unpredictable.
In the end, the finance people were actually correct to keep buying –– the gov't (that is, me you and every US taxpayer) bailed them out, and most of the traders did come out ahead after a bit of time.
The GFC was not a crisis of credit or trash assets. It was one of liquidity and hidden interconnections. (In America.)
If you look at how those supposedly-toxic CDOs actually paid out, including the CDOs squared and synthetics and whatnot, the ones rated AAA, the ratings agencies were--by and large--on the money [1]. The AAA tranches paid out AAA cash streams.
The problem was market participants took this to mean they'd behave like other AAA assets in all capacities. Including liquidity. That was a bad assumption. When people are scared, they'll trade for Treasuries. Not the thing that by all reason should pay out like a Treasury, and in fact, with the benefit of hindsight, did.
To the extent there was high hooliganery afoot, it was around e.g. CDSs written by non-bank actors, e.g. AIG. Which was a result of the liquidity problem described above.
[1] There is an obvious asterisk here in the endogeneity of the bailouts and these assets' performance. But given the pattern holds across borders and industries, irrespective of bailout intensity, the hypothesis that tranching works carries more weight.
I worked on a prop trading desk with some housing bears, who made some significant gains with shorts. While they understood that certain markets were overheated, I don’t think any of them suspected the breadth and depth of the crash that was coming. While their models were better than the other guys, in the end they were really wrong too. Just less wrong then the guys who went long.
There are a lot of people talking of the problems and reasons behind "investing in Growth" that we have seen the past few decades instead of investing in Value
I've been working in investment banking for a very long time now and this is simply not true. The whole trading floor knew exactly what they were packaging and selling and how this would eventually end.
Kitchen conversations prove everyone knew months before the crash.
JumpCrisscross did make the interesting point that the “bankers were selling crap” narrative about the crisis is often overstated - the real reason that the situation was a crisis was the cascading liquidity issues, not so much defaulting debt.
Would it be correct to say the really bad actors at the margins caused a cascade of events that snowballed and caught the people making good-faith decisions?
The bad actors being the people who did not do proper underwriting and verification (“liar loans” or “stated income loans”), and they did this intentionally under the guise of plausible deniability because they were earning profits on volume rather than quality.
> The bad actors being the people who did not do proper underwriting and verification (“liar loans” or “stated income loans”)
It's funny that somehow people want to hold people who lie on loan applications blameless. Aren't the victims of the bad underwriters the people they sold the loans to?
"You should have known I was lying and not lent me the money."
(I don't deny that predatory lending exists, but I don't think it was a major contributor to the crisis. I think home buyers and underwriters colluded because they were afraid of missing out on a hot housing market. And for many years this had been the right decision. And back to my original point, when it became the wrong decision, people looked for a simple answer, preferably a one in which they were blameless.)
Conversely, non-technical business people are very highly likely to tell me some piece of engineering is "easy" or "simple" when they have no background, or knowledge, at all.
And when an engineer says something is hard, sometimes it's because they've done it before, and it really really sucked and burned months of their life and can we please not talk through the details that still make me cringe?
And occasionally there's that one engineer who describes stuff as "simple" after watching an old Rich Hickey talk.
Some things are simple, some are complicated or complex. The degree of difficulty is basically orthogonal.
Running a marathon in under 2 hours is incredibly simple. All you have to do is pick a point 26 miles away and run in that direction. But it sure isn't easy.
"I'm retired."
"Wow, that sounds really hard!"
However, if I were to decline to speculate on any matter on which I lacked an expert-level understanding, the number of subjects on which I could hold a conversation would dwindle to virtually nothing, and I'd be much more boring to talk to at these cocktail parties. So, I intend to continue to spitball blindly, just for fun.
Read a book once which outlined 30--40 occupational areas and two or three interesting questions in each of these areas -- to serve as reliable conversation starters.
I know very little about the makings of a movie. There is a long list of job titles after a movie and I know not what they do.
But I can tell you I think a movie is shit.
I can't meaningfully tell you how the movie process should have gone to make it a good one.
What I think would be more interesting is the question: when are outsider critiques or suggestions likely to be valid? To stay with the construction example, it is clear that construction in the US is more expensive than it needs to be in many cases - railroad construction costs are famously many times higher in the US than in other industrialized countries. Is there insider knowledge I don’t have that would make this observation fallacious?
And what about cases where one isn’t simply pointing to a counter example? Are there cases where outsiders have made arguments from first principles that were correct, despite their lack of expertise in the field?
"At last I went to the artisans, for I was conscious that I knew nothing at all, as I may say, and I was sure that they knew many fine things; and in this I was not mistaken, for they did know many things of which I was ignorant, and in this they certainly were wiser than I was. But I observed that even the good artisans fell into the same error as the poets; because they were good workmen they thought that they also knew all sorts of high matters, and this defect in them overshadowed their wisdom"
https://www.sparknotes.com/philosophy/apology/full-text/apol...
If you want to be informal about it, it’s just hanging out.
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This is exactly why I moved away from SF. Can't stand these alpha nerds trying to one-up each other at parties.