The saga of dodgy dealings at premier financial houses continues. One wonders what nasties will crawl out of the woodwork next. And how many more of them will be blamed on “computer bugs”?
Moody's, the credit rating agency, yesterday said ... it had incorrectly rated about $1bn of complex debt securities due to a computer error ... Moody's admitted that an external investigation ... had shown that [employees] breached internal codes of conduct over an instrument known as constant proportion debt obligation (CPDOs) ... Investors in some CPDOs have lost up to 60 per cent of their capital. (Financial Times 2nd July)
A mediocracy does not believe in innate ability. It believes that anyone can be a philosopher, mathematician, or central bank chief — provided they have had appropriate training.
as one senior risk manager writes ... “we did express to senior management that we lacked the analytical skills ...” (FT)
A mediocracy does not believe in the value of thinking, or in individuals having innate powers of judgment. It believes in following procedures, making rules, ticking the boxes.
Moody's is moving to re-examine the accuracy of all its computer models and place them under a centralised monitoring system ... Moody's will also introduce a standardised protocol for fixing computer errors in the future (FT)
A mediocracy does not believe that the untrained can assess whether a theory makes sense. If a model looks clever by making sufficient use of technicality, and if trained ‘experts’ assert that the model is a good one, the model shall be relied upon.
the cult of models has become so extreme that banks have believed them even when this collides with common sense. (Gillian Tett)
[In the] dynamic stochastic general equilibrium model (nowadays the main analytical tool of central banks all over the world) ... money and credit play no direct role. Nor does a financial market.This model has significant policy implications. One of them is that central banks can safely ignore monetary aggregates and credit. They should also ignore asset prices and deal only with the economic consequences of an asset price bust. They should also ignore headline inflation. (FT)
A mediocracy does not believe in the principle of truth-telling. Appearance trumps reality in the mediocratic value-hierarchy. Appearance is socially controlled, with the relevant criterion being effect on audience rather than objectivity — since objectivity is considered intellectually unsound, and uncool.
The FT revealed in May ... that Moody's had discovered the error in early 2007. However, Moody's maintained the top-notch ratings on these products until 2008, when they were downgraded amid general market declines. (FT)
In a mediocracy, appearances are required to fit with ideology, but the people actually running things know that the underlying substance is, by necessity, quite different. Whistleblowing is only encouraged where it reinforces the ideology; the other kind is punished. The obvious remaining course is to feed at the trough while the party lasts — after all, everyone else is doing it.
Documents cited in a U.S. Securities and Exchange Commission report this week ... uncovered poor disclosure and conflicts-of-interest practices. The report cited e-mails suggesting that the raters knew that collateralized debt obligations (CDOs) – pools of debt linked to subprime mortgages – were headed for problems ...
One e-mail from an agency analyst said that her firm’s ratings model did not capture “half” of one deal's risk, but that “it could be structured by cows and we would rate it.” In another e-mail, a ratings agency manager called the CDO market a “monster” and said: “Let’s hope we are all wealthy and retired by the time this house of cards falters.” (Reuters)
Pertinent observations about the decline in financial standards, in favour of pseudo-egalitarian ideology and style-over-substance technicality, will however be ignored. The morals which will actually be read into this story are those which will reinforce, rather than question, the dominant ideology.
We will, for example, be reminded of the need for more socialisation, and the desirability of keeping backroom intellectuals (now habitually referred to, even by supposedly serious writers, as ‘nerds’ and ‘geeks’) in their place.
banks have become so dazzled with their powers that they have ignored how they interact with the rest of society ... the industry has slipped, almost unthinkingly, into an assumption that "credit" is a collection of abstract equations, stripped from any human context ... credit [is actually] a social construct (Gillian Tett)We will also, no doubt, hear much about ‘greed’ (or perhaps ‘individualism’) as a culprit. If greed can now be blamed for knife crime, it can surely be invoked as a convenient scapegoat for the shortcomings of a dumbed down banking system.
A somewhat larger crisis than the one involving Moody’s is currently unfolding with regard to Fannie Mae and Freddie Mac, which between them back about half of all US mortgages. Readers may remember an accounting scandal at Fannie a couple of years ago. Are we dealing with another Enron? If so, the shock waves could be considerable.
I wonder how many other dodgy practices are concealed at the heart of the key assumptions on which the global economy rests. Perhaps we will soon hear a report that previous estimates of oil reserves were based on a ‘flawed model’ or a ‘computer bug’ ...
