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Greenspan Tells Congress Bad Data Hurt Wall Street

timothy posted about 6 years ago | from the but-all-this-looted-cash-won't-do-much-harm dept.

Supercomputing 496

CWmike writes "Former Reserve Bank chairman Alan Greenspan has long praised technology as a tool to limit risks in financial markets. In 2005, he said better risk scoring by high-performance computing made it possible for lenders to extend credit to subprime borrowers. But today Greenspan told Congress that the data fed into financial systems was often a case of garbage in, garbage out. Christopher Cox, chairman of the Securities and Exchange Commission, told the committee that bad code led the credit rating agencies to give AAA ratings to mortgage-backed securities that didn't deserve them. Explaining in his testimony what failed, Cox noted a 2004 decision to rely on the computer models for assessing risks — a decision that essentially outsourced regulatory duties to Wall Street firms themselves."

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Alan Greenspan (0, Insightful)

Anonymous Coward | about 6 years ago | (#25490071)

The guy's 82 for fuck sakes! Who gives a shit what some senile old fart thinks?! That's the problem with this world, the people running it are all far too god damned OLD.

Re:Alan Greenspan (2, Insightful)

Harmonious Botch (921977) | about 6 years ago | (#25490125)

The problem is all you youngsters who don't realize how much we know that you don't.

Re:Alan Greenspan (-1, Troll)

Anonymous Coward | about 6 years ago | (#25490217)

The problem with some old people is that they don't realize how much they don't know.

Re:Alan Greenspan (5, Insightful)

Anonymous Coward | about 6 years ago | (#25490421)

The problem with some old people is that they don't realize how much they don't know.

The problem with most people is that they don't realize how much they don't know.

Re:Alan Greenspan (2, Funny)

rfernand79 (643913) | about 6 years ago | (#25490453)

We all have problems.

Re:Alan Greenspan (0)

Anonymous Coward | about 6 years ago | (#25490679)

We all have problems. ...that *you* don't know about. I know more about your problems than I do my problems.

Re:Alan Greenspan (1)

sxtxixtxcxh (757736) | about 6 years ago | (#25491113)

... don't i know it.

Re:Alan Greenspan (3, Funny)

Anonymous Coward | about 6 years ago | (#25490577)

The problem with most people is that they don't realize how much they don't know.

Hmmm... I don't know about that.

Re:Alan Greenspan (3, Interesting)

jacobsm (661831) | about 6 years ago | (#25490825)

Whomever thinks self-regulation will ever work for the benefit of the public needs their head examined. Does the phrase "Fox guarding the hen house" ring a bell to anyone?

Re:Alan Greenspan (1)

diamondmagic (877411) | about 6 years ago | (#25491313)

"Fox guarding the hen house"... Like Anarchy? Or Government regulation? Both are remarkable for their efficiency infringing people's freedoms and rights.

Re:Alan Greenspan (0)

Anonymous Coward | about 6 years ago | (#25491161)

The wisest man/woman looks to the youth for answers, not their life experience.

Old men are best for old problems. (0)

NRAdude (166969) | about 6 years ago | (#25490579)

What is better than laughing at him is learning how alleged "old" ways are any different than the alleged "new" ways. I still get notice from people stealing, killing, tagging or affection to monuments of stupidity (idolatry of myspace, goatse, etc), qualifiedly disobey their parents, trespassing upon their neighbors and hating their neighbors for things unworthy of any offense, selling property more than once and concealing it from advertisement or notice of an original sale (federal reserve notes), false witness (Bernanke lying about causing The Denver Mint to press 800 Billion in Amero [slashdot.org] and accompanying its delivery to the China Bank of Reconstruction in China to assure their 2.5 Trillion USdollars don't depreciate), oh and sex/simulated-reproduction with animals like David Gergen at Bohemian Grove [metacafe.com] , and George W. Bush committed adultery with Jeff Gannon [youtube.com] , or how Bill Clinton resolved Madeline Albright certain factions to assist Saudi Arabian slave-traders to continue dipping over the borders of Sudan to pilfer free villages while he was helping install James Hormel the former president of Hormel Foods Corporation defacto Ambassador of Luxembourg.

Yep, there are no new ways, and if there were any new ways then it would be like sh1t on our faces "new."

Outsourcing Their Decisions (5, Insightful)

Herkum01 (592704) | about 6 years ago | (#25490127)

If these people did not know what was going on, they are not professionals, they are just a schmuck who is being paid too much. To say that the computer models did not anticipate their stupidity is just denial.

Re:Outsourcing Their Decisions (5, Funny)

Ethanol-fueled (1125189) | about 6 years ago | (#25490303)

...Bad Data Hurt Wall Street...

So Lore [google.com] is to blame?

Re:Outsourcing Their Decisions (4, Insightful)

mabhatter654 (561290) | about 6 years ago | (#25490511)

bingo! Greenspan did exactly what all the Republicans and Libertarians wanted... lowered the interest rate the Fed charged for money and kept their fingers out of market regulation. Wall Street spent and gambled like drunken sailors.. they deserve to have been shut down, their employees laid off without paychecks like all the manufacturing workers they sold out, but they're so big and tie up so much money it will put the honest people out of business too.

Too big to fail ... (4, Interesting)

khasim (1285) | about 6 years ago | (#25490571)

... but not to big to have their CxO's doing some jail time for supporting that.

If nothing happens then those same people are just going to find ANOTHER dodge to exploit. Just like the Savings and Loan debacle.

There will always be SOMETHING that can exploited. Close the loopholes ... but also jail and fine the people who orchestrated this. And every other exploit.

Re:Too big to fail ... (4, Insightful)

cayenne8 (626475) | about 6 years ago | (#25490849)

"There will always be SOMETHING that can exploited. Close the loopholes ... but also jail and fine the people who orchestrated this. And every other exploit."

Trouble is....if they did all this and were playing within the rules laid forth by the SEC...there is no crime committed. There is nothing to be arrested for...

Actually... (0)

Anonymous Coward | about 6 years ago | (#25490979)

Other stories are pointing out that he also repudiated the free market.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a_IH5AnCyOm4&refer=home [bloomberg.com]

Greenspan Concedes to 'Flaw' in His Market Ideology (Update2)
By Scott Lanman and Steve Matthews

Oct. 23 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said a "once-in-a-century credit tsunami" has engulfed financial markets and conceded that his free-market ideology shunning regulation was flawed.

"Yes, I found a flaw," Greenspan said in response to grilling from the House Committee on Oversight and Government Reform. "That is precisely the reason I was shocked because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well."

Re:Outsourcing Their Decisions (5, Informative)

Anonymous Coward | about 6 years ago | (#25490987)

That comment proves your ignorance of this matter.

Libertarians did not 'want' a lowered interest rate or deregulation of the fundamentally corrupt banking system. Libertarians want NO socialized banking which means NO federal reserve which means NO federal control of interest rates.

This whole mess is a failure of socialist banking policy NOT capitalism or free market ideas. The banking system in America is NOT free market and has not been free market since 1913 (The Federal Reserve Act).

But please continue to let ignorance be your guide...

Re:Outsourcing Their Decisions (2, Informative)

Aragorn DeLunar (311860) | about 6 years ago | (#25491189)

Greenspan did exactly what all the Republicans and Libertarians wanted... lowered the interest rate the Fed charged for money and kept their fingers out of market regulation.

I'm curious as to where you found these Libertarians who support the Federal Reserve.

In a true free market, capital is finite, so high investment leads to higher interest rates (by supply and demand) It is self-regulating, discouraging over-investment.

As you mentioned, the intervention of the Fed caused this boom/bust cycle by keeping interest rates artificially low and supplying endless credit. That's a key reason why most Libertarians and Constitutionalists want to end the Fed.

Re:Outsourcing Their Decisions (1)

homer_s (799572) | about 6 years ago | (#25491297)

In a true free market, capital is finite, so

Capital wouldn't be finite. Productivity drives growth and growth drives investment which in turn drives productivity.

Interest rates send the signal that lets people know what the price of investment is - set it too low and people will invest more than they should (for example, in dot coms or in the housing sector); set it too high and you lose investment, productivity and growth.

Central bankers think that their army of economists and sophisticated computer analysis will tell them exactly what the rate should be.
To see how ridiculous this is, just notice the fact that all their sophisticated analysis always results in numbers that are multiples of .25!

Re:Outsourcing Their Decisions (1)

homer_s (799572) | about 6 years ago | (#25491249)

bingo! Greenspan did exactly what all the .... and Libertarians wanted

And who is it that speaks for all Libertarians?

Re:Outsourcing Their Decisions (0)

Anonymous Coward | about 6 years ago | (#25491409)

Greenspan did exactly what all the Republicans and Libertarians wanted...

Iceland did too. Their government bought into the Hayek/Friedman fairy tale around 1991. The crime was paying well but now Iceland is going bankrupt...

Re:Outsourcing Their Decisions (1, Informative)

Anonymous Coward | about 6 years ago | (#25491443)

Greenspan did exactly what all the Republicans and Libertarians wanted... lowered the interest rate

Er, correct me if I'm wrong, but the libertarians don't believe government should hold a monopoly on currency in the first place, and therefore would have the federal reserve abolished. At least I've never heard of one arguing either way ("raise", "lower") for government control and arbitary manipulation of currency.

Re:Outsourcing Their Decisions (0)

Anonymous Coward | about 6 years ago | (#25491355)

It's not that the computer models were wrong, per se. The problem was that the computer models showed a fundamental misunderstanding of an inherent problem with the data.

All the data they had said that lending to people who could only afford an interest-only loan was safe and that foreclosure rates would be within the tolerances where these loans would still be profitable. And this was consistently true for the time period they studied.

The problem was, they only used data from the previous 5 or so years because they didn't have data from beyond that. But no one understood that 5 years of data on these kinds of mortgages was not enough because that 5 year time span corresponded with steadily-increasing home values. So based on that data, it was safe to lend to these people because those people would just re-finance when their balloon payment came due. But it's only possible to re-finance your house if the principle you owe is less than the value of the house.

And it's when home values started to decline that this fiasco gained momentum. With lower home values, people couldn't afford their balloon payments and couldn't re-finance enough money based on the current value of their home, so they defaulted on their loans at a much higher rate than would have been predicted by the data.

Moral of the story: it's useless to employ a scientific approach to predicting future outcomes based on large data sets if you don't understand why your data is applicable to those future outcomes and where your data is correlated with assumptions that may turn out be incorrect.

700B mistake (1, Interesting)

aaron alderman (1136207) | about 6 years ago | (#25490131)

That will teach ya for outsourcing your code to India!

Re:700B mistake (3, Insightful)

moderatorrater (1095745) | about 6 years ago | (#25491059)

Hmm, I fail to see how that constitutes a troll. True, it's almost certainly untrue that the code was actually outsourced to India. At the same time, we know that the code was outputting the wrong rating from a previous story, and we also know that code from India is often subpar.

I believe the parent wasn't trolling as much as he was making an observation about how faulty code and outsourcing to india ultimately have the same root: that software development isn't given the resources that it so often deserves. When you're running a multi-billion dollar business and you need a program to help you with that business that's going to make decisions that have repercussions reaching towards trillions of dollars, there are methods to make sure that you get correct code. These methods almost certainly were not used, and they're certainly not used in over 90% of the programs released. In other words, software quality is sacrificed for short term profits almost all of the time, which is certainly pertinent to the issue at hand.

Greenspan is the one that hurts Wallstreet (0)

Anonymous Coward | about 6 years ago | (#25490137)

Considering how he influenced the Department of the Treasury and related courners of patent land granted to government, they don't even care about M2 and M3 money supplies anymore. They just keep printing, fractionalizing all contracts that government has an equitable interest greater than the alleged owners intending that bill of exchange between eachother.

"Clearfield Doctrine" provides that when "government" removes its sovereignty and takes upon itself a new character (name in commerce) as a private Citizen when it enters an equitable relationship.

You people should wonder how a plain signature itself is the original banknote that creates all those private credit loans, yet they sell that original instrument to someone else and fake that they still have posession of it in order to slug the court clerks into thinking it is a debt-collection action from the true party in interest.

Get rid of Greenspan, and whip him by the merit of Congressman Louis T. McFadden.

bad code or bad summary? (5, Informative)

Anonymous Coward | about 6 years ago | (#25490139)

The summary says bad 'code' led the credit rating agencies to give incorrect scores. The article doesn't say anything about code. It says bad data was responsible.

Re:bad code or bad summary? (3, Insightful)

ardle (523599) | about 6 years ago | (#25490487)

Yes, I checked for this too. Even followed a link about Christopher Cox and risk models [computerworld.com] . At no point was a bug mentioned. The word "code" wasn't used.
Coders would spot that ;-)

Re:bad code or bad summary? (1)

Dun Malg (230075) | about 6 years ago | (#25491255)

Yep, let's hear it for the chimps/editors at slashdot, once again proving that it's a good thing no one's PAYING them to do the job this badly...

Insurance (3, Informative)

shmlco (594907) | about 6 years ago | (#25491097)

That and the fact that many mortgage-backed securities got their AAA ratings by being insured by the commercial insurance companies.

"This security is backed by a pool of actual mortgages AND it's insured by AIG. You CAN'T lose! In fact, they're so bullet-proof you should even leverage yourself to the max to buy as many of them as you can!"

Of course the code was bad. (2, Insightful)

CaptainPatent (1087643) | about 6 years ago | (#25490143)

"Christopher Cox, chairman of the Securities and Exchange Commission, told the committee that bad code led the credit rating agencies to give AAA ratings to mortgage-backed securities that didn't deserve them."

What do they expect? Code can only handle preconceived models. If the programmers overlook something it's not like the code will fix itself.

These models are based off of incomplete information and it's up to us to fill in the gaps. We've never had subprime mortgages en-mass before and the model likewise didn't know how to handle them.

Re:Of course the code was bad. (4, Informative)

jonbryce (703250) | about 6 years ago | (#25490313)

The ratings were based on the idea that house prices only ever go up, and that they could always foreclose and get their money back. The model didn't take into consideration that in places like Detroit, you might find that you can't even sell the foreclosed houses in some of the worst areas for $1.

Re:Of course the code was bad. (1, Insightful)

cayenne8 (626475) | about 6 years ago | (#25490947)

"The ratings were based on the idea that house prices only ever go up, and that they could always foreclose and get their money back. The model didn't take into consideration that in places like Detroit, you might find that you can't even sell the foreclosed houses in some of the worst areas for $1."

The trouble is selling mortgages in those worst areas to begin with!!!

If we hadn't had things like CRA [wikipedia.org] and community activist groups painting banks that didn't paint lots of bad loans into 'underserved' areas as racists, then we might not have had quite so many bad loans.

This wasn't the only cause, but definitely a big factor.

Not making stupid loans to poor risks in the first place would have avoided most all of this mess.

But hey...this might not be all bad. House values that were way overvalued are coming down to more reasonable costs, and fiscally responsible people will buy them. We will hopefully go back to the time where you had to be a good credit risk, AND had to save to buy expensive things like a home or car. I'm sorry, not everyone deserves nice expensive cars and homes or luxury items. You gotta work, save and earn them.

Re:Of course the code was bad. (3, Insightful)

Gat0r30y (957941) | about 6 years ago | (#25490325)

I couldn't agree more.
In a Neural Network Design course I took ~ 3 years ago (which consisted of a number of financial type folk), they were using incomplete training datasets to decide whether or not to give mortgages. They didn't have enough data on failed loans - why? because most home loans in the US up until then had not failed. People bought homes to live in, instead of as a risky investment which they intended to flip before their ARM reset. The model changed in the real world - and the computer models the analysts made didn't. But the models are not to blame here in my view. It is the fact that they depended solely on these models. If they had some consistency checks with the real world and actual people looking at the data, perhaps they wouldn't have just been stamped AAA without any real thought.

Re:Of course the code was bad. (0)

Anonymous Coward | about 6 years ago | (#25490423)

because most home loans in the US up until then had not failed.

[pedantic] In case you didn't know, despite all the recent problems, most home loans in the US still haven't failed [/pedantic]

Re:Of course the code was bad. (0)

Anonymous Coward | about 6 years ago | (#25490627)

Remember, computers are magic.

It's just like anything else to do with computers. It is never the fault of the person sitting in front of it.

On two occasions I have been asked, 'Pray, Mr. Babbage, if you put into the machine wrong figures, will the right answers come out?' I am not able rightly to apprehend the kind of confusion of ideas that could provoke such a question.
--Charles Babbage

Re:Of course the code was bad. (4, Insightful)

recharged95 (782975) | about 6 years ago | (#25491025)

F* these guys. Using tech as a scapegoat.

Blaming computers and code? In this case, don't blame the game, blame the players. If they are truly the smartest guys in the rules, they would have known the practices (not tech) put in place were just plain wrong, or at least high risk involved. They saw tech as something to apply their new theories, without acknowledging the risk. Just because I bent the nail doesn't mean it was the hammer's fault!

If they are not the smartest guys in the room, then the emperor is without his clothes and these guys, along with all of Wall Street, do not deserve the rich payouts they're going to get in the next year, seriously...they are going to ask for more cash to put in their pockets.

This Is NOT News For Nerds (2, Insightful)

Anonymous Coward | about 6 years ago | (#25490145)

What a way to shoehorn a non-tech/nerd story into slashdot (BTW, why is this in politics??!!)

Bottom line, this had nothing to do with bad data. It was Greenspan's blindness to the consequences of easy monetary policy would have that caused much of the problems today.

Greenspan's hubris (5, Insightful)

Mr. Underbridge (666784) | about 6 years ago | (#25490411)

Bottom line, this had nothing to do with bad data. It was Greenspan's blindness to the consequences of easy monetary policy would have that caused much of the problems today.

Absolutely. Wait, rollercoaster interest rates are a bad idea? Really? And it took a genius to figure this out?

It's so easy to understand. Low credit and the push for home ownership at any cost led to insane price increases and speculation that it wasn't hard to see had to come to a crash stop. I had this figured out as of 2004 when I talked to a realtor who told me I needed to buy NOW with nothing down and use the guaranteed 2%/month price increase to refinance in a year. I can recognize a bubble when I see it.

That's why it pisses me off when Greenspan points the fingers elsewhere. He's the one who set the rates. He's the one who jacked them up, then down, waiting too long and overcorrecting to account for it. And he refuses to take the blame.

The funny thing is, this isn't the first time things have gotten sideways thanks to overspeculation. During the (mercifully) brief meltdown in 1998 due to the currency markets, he basically told the banks to do what they do, the government will help out if things go bad. The overcorrection to that mini-crisis and the post-9/11 slowdown sowed the seeds for what we have now. Gee, thanks Alan.

So now he blames bad data. Really, Alan, you're surprised that people selling certain securities said things about them that was overly rosy? Give me a break. At some point, you have to have some damned sense, and actually look at the securities without the computer models. When things defy common sense to that degree, something's wrong.

The funny thing is, it seems every crisis comes about because risk diversification models fail. Happened in 1929, happened in 1998, happened now. Investing houses have this theory that a lot of big risks can be less risky in totality, because the risks aren't correlated. Problem is, when the shit hits the fan, a lot of things become correlated that didn't use to be. Partly it's because everything's sitting on top of the same increasingly global economy. Part of it is that funds that are overly leveraged have to sell whatever they have to meet margin calls. The people who create the models study the risk correlation and assume things based on it that simply aren't valid in the real world. The book "When Genius Failed" has a good case study on this, where an investment house run by brilliant guys including Nobel Prize winners crashed and burned because they didn't understand that common sense trumps mathematical models.

To disclose, I actually see great value in statistical predictive models - indeed, that's what I do for a living. I design and implement mathematical models. But because of that, I also know what mathematical models can't do. Too much hubris by too many people, and we all suffer.

Re:Greenspan's hubris (1)

ISoldat53 (977164) | about 6 years ago | (#25490473)

This is the definition of bullshytt.

Re:Greenspan's hubris (0)

Anonymous Coward | about 6 years ago | (#25490835)

Absolutely correct on every level.

Re:Greenspan's hubris (1)

smallfries (601545) | about 6 years ago | (#25490859)

Thanks for writing that - it's a really insightful post. It's interesting that Greenspan was still trumpeting the successes of computer modeling for subprime debt in 2005. I think the first mention that I heard from an Actuary friend that a wave of shit was about to hit the fan was roughly 3-4 years ago over a poker game. Back then rumours were starting to circulate that the aaa rating on subprime securities was garbage.

Once of the basic difficulties in modeling markets is that the rules change. The rules get encoded into the simulation as the basis of the model. Over the timescales that investment houses operate on, it looks like these assumptions are static. But when they do move, on a longer 15-20 year timescale everything changes, and the old model just produces garbage.

The point that you make about the interconnectedness of uncorrelated risks is a great example of this. In the boom years those risks were uncorrelated, so the correct model was one that treated them separately. But the inevitable bust is a Black Swan - at any given point it has negligible probability, but we know that it will occur sooner or later. When it does the basic rules of the game change and the effects are huge.

Re:Greenspan's hubris (4, Insightful)

copponex (13876) | about 6 years ago | (#25490933)

It's so easy to understand. Low credit and the push for home ownership at any cost led to insane price increases and speculation that it wasn't hard to see had to come to a crash stop.

That seems to be an oversimplification. The most reasonable thing I've seen is that we deregulated the credit derivatives market, and told the crooks to "regulate themselves." When the government advocates more people to have homes, and ties that to a banks ability to expand, that's not necessarily a bad thing, unless the originating lender can hand off hot potatoes, rake in cash, and not face consequences. If full disclosure was part of that market by law, then we simply wouldn't be where we are today. Originating lenders would be unable to sell bad loans, and when they started suffering the consequences, the game would have ended early and not been nearly as bad.

Exacerbating the situation is the removal of important firewalls between investment houses, banks, and insurance companies that happened at the same time. Companies that had been only banks or only insurance providers are now in deep trouble, though their original departments weren't involved. So, I agree with you about "diversification models." One of the downsides of free markets is the inevitability of boom and bust cycles, which is why every successful economy has a powerful governing authority to regulate a relatively open market. It helps calm the highs and the lows, which restricts growth but also prevents everyone from losing their shirt at the same time.

Accountability is what's missing from capitalism. In my opinion, everyone who was aware of the risks they were handing off to others should be stripped of every penny they made off of those transactions, and if found breaking any laws, should be serving as much time as petty thieves who steal thousands instead of millions. Similarly, any company that intentionally and illegally pollutes should have to pay clean up costs and matching punitive damages that fund land trusts.

The difference in treatment of those two types of criminals is indicative of another problem at the foundations of modern western capitalism: privatized profit and socialized risk.

Re:Greenspan's hubris (5, Interesting)

marco.antonio.costa (937534) | about 6 years ago | (#25491269)

One of the downsides of free markets is the inevitability of boom and bust cycles

That is NOT a downside of free markets. That is a downside of having a central bank issuing fiat currency at essentially arbitrary interest rates that do not necessarily reflect current savings and consumer preferences.

F.A. Hayek won an Economics 'Nobel' on that work [nobelprize.org] , by the way.

People fail and succeed all the time in a free market, that's good and healthy for the economy, but when everyone fails at once, you can be sure there's a central bank and an Alan Greenspan fucking everything from up on his planner's high tower.

What's wrong with your argument is that you're focusing on the symptoms and ignoring the cause. Companies DO have accountability, Lehman Brothers went bankrupt, AIG is broke on Federal life support, everybody who indulged in that binge is now dead or dying. Except the government isn't allowing the failures to fail, and in doing so they're rewarding idiocy and punishing competence. I say it is government that needs accountability.

Re:Greenspan's hubris (2, Insightful)

JoshHeitzman (1122379) | about 6 years ago | (#25491329)

Accountability is what is missing from modern western corporatism. Capitalism is no where to be found in the modern west. You can't have capitalism when the government decrees that money (i.e. the most liquid form of capital) can be created by the flip of the bit by government created entities (i.e. modern western incorporated banks).

Re:Greenspan's hubris (1)

SpaceLifeForm (228190) | about 6 years ago | (#25491009)

Another problem with those types of models is making sure
that the customer data used is representative of the whole.

I've seen a system that used to extract a subset of the whole,
but it unfortunately was not representative of all of the customers.

The reason that happened is that the bank did not want to
dedicate the amount of DASD needed to process all of the
customers.

So, it extracted a subset, which stupidly contained old customers,
and no new customers.

It was not considered a mission-critical system, but that
does not mean that management did not make poor decisions
based upon the output of that system.

So, based upon that experience, I would have to say that
Greenspan is correct, depending upon how much reliance the
bank put into the output of that system.

Re:Greenspan's hubris (3, Insightful)

inviolet (797804) | about 6 years ago | (#25491049)

It's so easy to understand. Low credit and the push for home ownership at any cost led to insane price increases and speculation that it wasn't hard to see had to come to a crash stop. I had this figured out as of 2004 when I talked to a realtor who told me I needed to buy NOW with nothing down and use the guaranteed 2%/month price increase to refinance in a year. I can recognize a bubble when I see it.

That's why it pisses me off when Greenspan points the fingers elsewhere. He's the one who set the rates. He's the one who jacked them up, then down, waiting too long and overcorrecting to account for it. And he refuses to take the blame.

Low rates do not, themselves, motivate banks to write bad paper on behalf of the risky blokes who suddenly think they can afford a house. Banks were pushed. Banks were even sued [mediacircus.com] to extend home ownership to those who, frankly, can't handle it.

Low rates accellerated the process, but cannot indepedently cause this problem. You almost said it yourself in your first sentence, before tripping over your own politics and blaming Greenspan.

Greenspan did oppose CDO regulation [gata.org] , an error which he has since admitted. But the unregulated state of CDOs also could not cause the crisis. CDOs arose to collect the bad mortgages, and the ratings agencies performed whatever evil was necessary to keep the music playing. Whether they too were strongarmed, or simply cashing in on banks' willingness to pay annual "maintenance fees" for AAA ratings, is not yet known.

Re:Greenspan's hubris (4, Informative)

landonf (905751) | about 6 years ago | (#25491397)

Banks were pushed. Banks were even sued [mediacircus.com] to extend home ownership to those who, frankly, can't handle it.

According to the docket in your linked article, the banks were sued for the following reason:

Plaintiffs alleged that the Defendant-bank rejected loan applications of minority applicants while approving loan applications filed by white applicants with similar financial characteristics and credit histories.

Your position appears to be that plaintiffs lied -- that in fact loan applications were denied purely based on the financial and credit characteristics of the applicants. Is there any evidence to support and/or disprove this position? I've read your links but I have not been able to find statistics that provide any confirmation of the claim that "Obama Sued Citibank Under CRA to Force it to Make Bad Loans"

Without evidence that the banks were (or were not) denying loan applications based on ethnic origin, I don't see how I -- or anyone else -- can reasonably assess whether lawsuits like this one had a significant impact on the current banking crises.

I have found The Color of Money [powerreporting.com] , a series of articles on lender's avoidance of middle-income black neighborhoods. The article series won the author, Bill Dedman, the Pulitzer Prize[1]. I'll be adding the articles to my reading queue -- my expectation is that the truth behind these loans is quite a bit more complex than has been presented here.

[1] Bill Dedman's MSNBC bio [msn.com]

Wall Street uses a lot of Perl (5, Funny)

conner_bw (120497) | about 6 years ago | (#25490149)

...I'm just saying.

Re:Wall Street uses a lot of Perl (1)

Average_Joe_Sixpack (534373) | about 6 years ago | (#25490635)

... and Greenspan loves to obfuscate his congressional testimonies.

Re:Wall Street uses a lot of Perl (1)

marco.antonio.costa (937534) | about 6 years ago | (#25491287)

Heh, Milton Friedman said something like "Greenspan has the ability to speak for hours and say absolutely nothing". If anyone has the exact quote that'd be great. :-)

It's all on us?!?!? (1)

gsgriffin (1195771) | about 6 years ago | (#25490165)

Oh great!! /.er, the whole fricken mess the world is in right now is our fault!!!! Should have better tested the program and put in safe guards to make sure idiots couldn't enter data. Then we should have made sure idiots wouldn't read the data.

More than data (3, Insightful)

oldhack (1037484) | about 6 years ago | (#25490169)

Models themselves, and the blind faith in "the market". When the model's wrong, quality of data becomes irrelevant - "not even wrong" (Pauli, I think).

Well, "the market" did sorta work - by eventually bringing down the crash, but gov't softened (and lengthened) it by bailing out the banks. But that's just semantic rubbish, of course.

I blame ACORN! (4, Funny)

StefanJ (88986) | about 6 years ago | (#25490475)

The invisible hand of the market would not let us down like that. Its mighty transparent fingers must have been deflected from its course by some foul socialist sabotage.

I blame whomever is the current political threat to continued deregulation and corporate empowerment.

Re:I blame ACORN! (1)

moderatorrater (1095745) | about 6 years ago | (#25491159)

Agreed.

Re:I blame ACORN! (4, Insightful)

homer_s (799572) | about 6 years ago | (#25491333)

The invisible hand of the market would not let us down like that.

It didn't. It punished everyone who made bad decisions - the people who loaned money, the people who borrowed money to buy a home they could never afford and the people who invested in companies that loaned the money.

Of course, it is not the free-market that is giving 700-billion to the people who made reckless loans. Maybe you can figure who that is...

We seem to be passing the buck on Mortgage crisis. (2, Informative)

zymano (581466) | about 6 years ago | (#25490183)

Wikipedia has excellent articles on subprime and the housing bubble and their cause effect.

I still blame the banks and morgage brokers. Including the Sandlers who SNL made fun of.

-Leverage can be evil. The investment banks were highly leveraged. Caused the stock exchange to crash in 1929.http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929

Greenspan's a muppet. (3, Insightful)

shic (309152) | about 6 years ago | (#25490187)

Greenspan really is scarily inept... It amazes me that he was taken as seriously as he was for so long. The most amazing thing I found in his autobiographical book was that he believed in the 90s that computer systems were going to efficiency gains that accounted for the share price rises during the .com bubble.

http://www.amazon.com/Age-Turbulence-Adventures-New-World/dp/1594201315 [amazon.com]

Re:Greenspan's a muppet. (0, Flamebait)

ericferris (1087061) | about 6 years ago | (#25490427)

I second that. "I was for computing before I was against it". Flip-flopping is the last thing you want from a man that has his position.

Greespan spent years at the Fed happily spouting dictates that affected the world's economy. Then he wrote a book saying he disagrees with everything he did and disapproves Bush -- against which he never uttered a peep while he was at the helm.

This is the kind of guy who would open a restaurant specialized in rare bird meat and then become a member of PETA. Have some decency, man.

Re:Greenspan's a muppet. (1)

jadin (65295) | about 6 years ago | (#25490589)

This is the kind of guy who would open a restaurant specialized in rare bird meat and then become a member of PETA. Have some decency, man.

The problem with that is? Maybe he learned a thing or two about the damage he was doing on the way. What would be shameful is a member of PETA later opening the restaurant you describe...

Re:Greenspan's a muppet. (2, Insightful)

darjen (879890) | about 6 years ago | (#25490647)

Flip-flopping? It's worse than that. The Federal Reserve pretty much destroyed our economy by causing the housing bubble, dot com bubble, snl crisis, etc etc. Their actions are more than just a bit criminal if you ask me.

Re:Greenspan's a muppet. (5, Insightful)

Chuck Chunder (21021) | about 6 years ago | (#25490797)

Flip-flopping is the last thing you want from a man that has his position.

Yeah, the last thing you want is someone who changes their mind in the light of new information.

I think the world got dumber the day the term "flip-flopper" began being used in public discourse.

Re:Greenspan's a muppet. (1)

12WTF$ (979066) | about 6 years ago | (#25491275)

I think the world got dumber the day the term "flip-flopper" began being used in public discourse.

Perhaps you'd prefer "thonger"?

Re:Greenspan's a muppet. (1)

Daimanta (1140543) | about 6 years ago | (#25490811)

"This is the kind of guy who would open a restaurant specialized in rare bird meat and then become a member of PETA."

Alan Greenspan, he wants to rescue his bird and eat it too!

Re:Greenspan's a muppet. (4, Insightful)

marco.antonio.costa (937534) | about 6 years ago | (#25491351)

He's not inept, he's actually a pretty bright fella. The thing is: nobody can see _all_ the consequences of, say, arbitrarily changing the interest rates.

The reason the Fed fails is the same reason the U.R.S.S. failed; Central planning _does not work_, socialism _does not work_, price fixing ( including the price of money, i.e. interest rates ) _does not work_.

To paraphrase Mises, if a God would descend from the heavens and take the economy's leash to guide us, then socialism would work under such an omniscient leadership, but since that's not likely to happen anytime soon, the free market is the only rational mechanism we have to direct economic activity.

Hmm.. (0)

Anonymous Coward | about 6 years ago | (#25490191)

It was profitable to give out subprime loans in the short run. So some banks did. They apparently didn't have managers scratching their heads and saying "hmm.. house prices are going faster than wages and jobs are going overseas so it's unlikely wages will rise any time soon" like the others..

It's about data quality (4, Interesting)

plopez (54068) | about 6 years ago | (#25490193)

I keep on harping about this. Who assures data quality? With web 2.0, cloud computing, distributed applications etc. who assures that those actual data are correct?

The article addresses that there were only 20 years of data, but doesn't address this fundamental issue. In the past 20 years we have had wars, terrorist attacks and recessions. Plenty of jolts. Once a data stream becomes polluted, in my experience, determining what is valid and what isn't is *hard*.

Though all-in-all I think Greenspan is in the hot seat and just looking for a scape goat.

As the saying goes (5, Insightful)

EEPROMS (889169) | about 6 years ago | (#25490197)

If all else fails, blame your tools.

Re:As the saying goes (1)

needs2bfree (1256494) | about 6 years ago | (#25490531)

It seems to more and more be the case that if something fails, that its fashionable to blame "the code". I wonder if its a sign of the times that programmers are the fall guys for major fuck ups. As more and more of these stories hit the media, how will it affect the jobs I'm offered and the way I'm treated. Will what I do become the lawyer of the job market? Universally dispised, but still neccesary? In the book im reading, I found a quote if found funny and disturbing at the same time. To put it in context, it's in an accounting book talking about internal controls. "Computer programmers should not operate a company's computers, because they can program the computer to write cheques to themselves." I guess I'll be running eclipse for a shell from now on. I figure though, you have to trust someone.

Re:As the saying goes (0)

Anonymous Coward | about 6 years ago | (#25490951)

If all else fails, blame your tools.

That's what I do. Followed up with a 'I swear, honey, this has never happened to me before.'.

Bottom line: (0)

Anonymous Coward | about 6 years ago | (#25490209)

People fucked up. Ain't it always the case?

Re:Bottom line: (1)

BiggerIsBetter (682164) | about 6 years ago | (#25491411)

People fucked up. Ain't it always the case?

People won't admit they fucked up. Ain't this also always the case? :-)

Keep Changing Assumptions Until the Right Answer (5, Interesting)

wol (10606) | about 6 years ago | (#25490215)

In my experience in these matters, it wasn't the code, it was the fact that management kept disagreeing with the results and changing the assumptions until the answer became something they wanted to hear.

Re:Keep Changing Assumptions Until the Right Answe (4, Insightful)

registrar (1220876) | about 6 years ago | (#25490625)

There are plenty of human-factor reasons why these kinds of models fail: management wants certain results, modellers want to feel they are contributing valuable results, people with big-brother pretensions placing too much faith in fancy computing, geeks lapping up the attention, etc..

But the bottom line is that people were not properly using information about uncertainty: if crap data is all you have, you have to tell the model how crap it is. If you don't do that, then your model is misleading and dishonest. Forecasting the future is tricky business, and you just have to know when it's too hard.

The bottom line is that modellers who don't turn around and say "sorry, boss, the model can't tell you that" and insist on it are largely responsible. Unfortunately, as a rule, it is the person who makes the boldest predictions who gets the most attention, and attention becomes credibility.

Collectively modellers are the /only/ people capable of understanding the output of models. Modellers must have enough influence in an organisation that /their/ interpretation of a model prevails--they don't have to dictate decisions, but the CEO needs to know the modellers' interpreattion of the model, not some intermediate's. If not, then I think negligence or fraud charges should be on the table for someone--maybe the modeller who is oversells their result, maybe someone else.

Yes, I'm a modeller. To the extent that our opinions guide decisions (what is a model if not a collection of opinions?) we need a professional code of ethics, just like engineers, lawyers, doctors, etc..

Blame Technology (0)

Anonymous Coward | about 6 years ago | (#25490249)

This reminds me of a typical real-life instance where the source of the error is a user error, then the user blames the technology...

Training set too small (1)

michaelmalak (91262) | about 6 years ago | (#25490261)

The problem was the computer models based loan risk upon 10 years of data instead of 79 years.

The computer is broken, not my fault! (0)

Anonymous Coward | about 6 years ago | (#25490269)

You would think they would run case studies to make sure the output was correct. I would suspect that a seasoned loan officer should have noticed these kinds of issues and raised red flag instead of blindly obeying the almighty computer.

It's another case of "the computer is broken, not my fault" mentality. Ultimately, people have to issue the loans. They are to blame, not the computers and not the data.

Of course! (2, Funny)

Ungulate (146381) | about 6 years ago | (#25490279)

Yes, if only we'd had a computer to tell us that creating money out of thin air has negative economic consequences.

Two different issues - (5, Insightful)

Artifakt (700173) | about 6 years ago | (#25490331)

The data being flawed is very different than the code being flawed. In fact, what Greenspan is talking about has almost no connection to what Cox is talking about, and there's no real reason to put them both in the same article. Starting with bad data will abundantly suffice to explain the meltdown before any problems with the algorithms used have to be assumed.
Most of the bias that did the real damage is political. For example, the most recent figures on the economy show that in the months before the mortgage crash began, 68% of all spending was driven by individual consumers buying retail. If the last tax rebate had been aimed at 68% of the total going back to individual consumers, or the '700 billion bailout' had put 68% of the 200+ Billion actually committed so far into reducing the impact to non-institutional borrowers, those would be appropriately neutral positions - but in the current climate, those would both be classified as terribly liberal.
        But that figure wasn't trumpeted about until after the bailout was passed. The same goes for the corrected inflation rates, which are still not accurate but are a bit better, and which again weren't corrected in releases to the general public until after the bailout was final.

The Great Pretenders (5, Insightful)

Mactrac (1392661) | about 6 years ago | (#25490337)

Those bankster knew exactly what will eventually happen. But their modus operandi is to privatize profits and socialize losses. It's as simple as that. So why would they bother?

S&P internal IM (1)

Average_Joe_Sixpack (534373) | about 6 years ago | (#25490537)

Thursday, April 05, 2007 3:58:42 pm EDT Shah, Rahul Dilip (Structured Finance - New York): btw that deal is ridiculous

Thursday, April 05, 2007 3:59:05 pm EDT Mooney, Shannon: i know rightâ¦model def does not capture half of the risk

Thursday, April 05, 2007 3:59:09 pm EDT Shah, Rahul Dilip (Structured Finance - New York): we should not be rating it

Thursday, April 05, 2007 3:59:17 pm EDT Mooney, Shannon: we rate every deal

Thursday, April 05, 2007 3:59:30 pm EDT Mooney, Shannon: it could be structured by cows and we would rate it

Thursday, April 05, 2007 3:59:54 pm EDT Shah, Rahul Dilip (Structured Finance - New York): but there's a lot of risk associated with it - I personally don't feel comfy signing off as a committee member

GIGO (5, Interesting)

domanova (729385) | about 6 years ago | (#25490365)

I did a gig at M*rg*n St*nl*y in London for a couple of months, on the options floor.
I got that via a connection to Standford theoretical physicist who'd found loadsa money that way (I used to be a CERN experimentalist).
They were all fascinated with the Black-Scholes pde; but no-one - I mean NO-ONE - had any clue what the model was about.
They just hired geeks to make up a number.
One of the in-house coders (and they are good coders, and paid) had to stick a random-number generator onto the back of a calculator for a set of exotics.
He presented the available information. It wasn't 'accurate' enough. So - quit, or stick in spurions. He did the latter.
It is NOT rubbish data in. It's a complete inability to understand what to do with the data.

Re:GIGO (1)

maxume (22995) | about 6 years ago | (#25490615)

Why did you put stars in Morgan Stanley?

Computers cannot replace common sense (5, Insightful)

MobyDisk (75490) | about 6 years ago | (#25490435)

From what I understand, they were giving loans to people who had no collateral and no income. If your computer model says that loan is a safe loan, then you have a bug.

Reality vs Greed (0)

Anonymous Coward | about 6 years ago | (#25490727)

From what I understand, they were giving loans to people who had no collateral and no income. If your computer model says that loan is a safe loan, then you have a bug.

Except that when reality and greed collide, greed wins any day, and twice on Sunday. The blind worship of market economy ensured that greed win out.

Re:Computers cannot replace common sense (1)

Neon Aardvark (967388) | about 6 years ago | (#25490861)

Did the the computer models actually say that? And even if they did, there were no bugs from the POV of those with power in these companies - those at the top made a fortune from bonuses.

It doesn't matter... (1)

thisisreallymyname (1392621) | about 6 years ago | (#25490631)

...if your code is bad or your techinolgy is faulty if you are operating off false information. The market set its self up for this. Failure is bound to happen if you incentivize the formation of a marketplace where people can get sub-prime loans. Loans were being issued in circumstances where they should have. that creates failure

Ask Alan Greenspan and HAL 9000 (3, Insightful)

PolygamousRanchKid (1290638) | about 6 years ago | (#25490633)

Alan Greenspan: "The economy is in the shitter because of computer error.

HAL 9000: "I'm sorry, Alan, this could only be the result of human error."

I'll tend to break ranks, and side with HAL on this one.

Fooled me once, fuck you (1)

earlymon (1116185) | about 6 years ago | (#25490641)

I seem to recall that part of dot-com roller-coaster included a day where bad computer mojo triggered a shitload of evil resulting in something to do with automatic trading run amok after market close. Something like that.

We all bought it. And woopie-doopie, dumb Financial Sector, at least they got shit right, post-trauma.

Our top story today: in the housing roller-coaster, it includes a day where bad computer mojo is responsible for a shitload of evil in the Financial Sector that...

Fooled me once. Fuck 'em - fuck 'em all. Not worth one iota more of my brainpower on this issue.

I call .... WAIT! (1)

davidsyes (765062) | about 6 years ago | (#25490643)

From what I've heard a few weeks ago, Greenspan -- along with FMAC/FMAE and a whole slew of others -- IS part of the problem.

See, he had power to FORCE realtors and banks to NOT underwrite or process/make loans to people who could not in their wildest dreams sustain a mortgage. But, to keep the economic wheels turning, the Republicans in power (8 out of the last 12 or so years) outweighed the Democratic majority (face) and deferred to the forces or interests of banks, wall street, and construction.

If Greenspan USED the power he HAD at his disposal on the mortgage/real estate industry, he could have kept a tighter lid on things to prevent or delay out-of-control growth. Sure, fewer new construction homes might mean tens of thousands fewer DirecTV and others' set top boxes, furniture, and autos financed by bullshit/fake-ass "appreciation" but SO WHAT??!! If it would have helped stabilize the economy and prevent illegitimate growth....

Yeh, he MADE all kinds of warnings about problems and such, but how could he NOT? If he's watching embers burn, he'd better be the first or among the first to admit there's not just smoke but REAL fire.

http://money.cnn.com/2008/01/30/real_estate/congress_subprime.fortune/ [cnn.com]

http://en.wikipedia.org/wiki/Alan_Greenspan [wikipedia.org]

it's not the programmers' fault (1)

penguinbroker (1000903) | about 6 years ago | (#25490725)

'bad code' is exactly the type of term thrown out there that scapegoats the engineers. the code is fine, the administrative decisions built into the code are bs.

It also helps to have a working model (1)

Bombula (670389) | about 6 years ago | (#25490757)

Greenspan just confessed before Congress to being shocked to discover that after 40 years of blind devotion, he's lost his faith in free markets here [nytimes.com]

When all of your thinking and all of your models are based on false assumptions, ALL your data is going to be spurious.

Complete and Utter Covering Their Asses Bullshit (1, Offtopic)

erroneus (253617) | about 6 years ago | (#25490773)

As soon as the elections are complete, there will be criminal investigations into the fraud and illegal practices that lead to the financial crisis. There are reportedly a multitude of rules and laws that were broken in the course of this "gold rush" of bad-mortgage-backed-securities selling.

Every step of the way, each person involved knew that fundamentally, it was a bad risk. Everyone from the mortgage sellers, to the lenders, to the securities sellers. It's far from rocket science to know that adjustable rate mortgages being sold to people who won't be able to afford it once the adjustment comes is a bad idea. It was believed that somehow the practice of selling and re-selling bad debt would somehow spread the losses around so much that no one would notice... which is reasonable when it's one, one hundred or even one thousand bad loans... but not one million or more.

And for these clowns to try to blame the computer is simply insane. "We are going to lie to you and bet that you won't be willing to prove it."

The next thing we will hear is that the tubes of the internet were installed badly by Joe the plumber.

they should let the market do it's work. (1)

timmarhy (659436) | about 6 years ago | (#25490813)

if i was a US tax payer i'd be outraged right now, that my money is bailing out billion dollar companies so it's millionare board members can continue on. no doubt wall st won't swollow it's pride though, and 12 months down the track when regulation is forced on them again they will be crying in a bucket about their free markets.

i say let the greedy pricks who caused this problem either fail naturally, or bail out the company and make them do highway road side clean ups (or some other public duty)for the rest of thier lives.

Bullshit. total televised shitting (5, Insightful)

unity100 (970058) | about 6 years ago | (#25490969)

Computers and programs do what they are built to do, exactly like they are programmed by programmers. and programmers code what they are TOLD to program.

this senile old bastard is trying to drop the blame ball on someone else than himself. he was the person who ushered the 'let everyone run around lawless' era in finance. he was praising it and saying that 'free market' was this and that. now he comes up saying he is 'shocked' to see the market not regulating ITSELF.

i have news for you, bastard, what you call market is comprised of PEOPLE, and its a social activity. just like life doesnt 'regulate' itself so that you still need laws and justice system, the social activity you call 'market' also is comprised of people and full of opportunists, schemers, bastards, exploiters, criminals and crooks. if you just let everything be, IT BREAKS. and IT DID.

any person with only a few decade of life experience under his/her belt would be able to realize this.

but you and your fellows in the church of holistic economists were SO zealots in your belief that, you were unable to realize this simple fact of social existence despite your 5-6 decades on the face of this world.

shame on you old man. shame on you for preparing the grounds for breakdown of ENTIRE global economy with your zealotry and foolishness, and your attempt to blame others for it.

blame the data !! after all, noone can do anything against it right ?! its not live, its nobody, and even if you hate its guts, you wont be able to remove it from business, so problem solved.

bad data is everywhere (0)

Anonymous Coward | about 6 years ago | (#25491239)

In my dealings with MAJOR US financial institutions, I can attest to the very low quality of data. First, despite there being standardised data formats (Fannie Mae & MISMO), the big lenders don't use them. This becomes a big problem whenever data needs to be sent out, eg for auditing or when selling loans.

Second, the data they keep is in many cases worthless for proper risk analysis. They will calculate important values related to the risk presented by a loan and borrower (such as borrower's debt to income ratio), but then not store the data used in the calculations. This makes it impossible to verify if the calculations were correct without resorting to digging in their paper files, something which they will not do of course.

Third, there is no set standard scoring system for risk analysis, meaning it is impossible for a lender buying another lender's loans to be able to determine the risk of those loans, except for an "these are good loans" line from the selling lender.

Fourth, and most important : there wasn't any kind of government requirement for lenders to have their loans audited by an independent third party during any part of the loan's life-cycle. Of course there are regulations to follow, but these were not very strictly enforced. We just trusted the brokers and lenders to act in a responsible way, and not tweak numbers around for their own benefit.
Thankfully, this last bit is set to change in Congress soon, but at this point is too little too late for the current crisis.

As far as the other points, I think the current crisis will at least force major lenders move in the right direction. I want to say they have learned their lesson, but sadly I know it isn't so. The only way of not repeating this mess is by stricter government regulation using a standardised risk analysis system.

Noooooo (0)

Anonymous Coward | about 6 years ago | (#25491263)

Ugg, the banks were caught in the act, selling worthless mortgages to others, but it's not THEIR fault for making them to begin with, but some programmer's for not creating a model that told their company not to buy worthless mortgages?

Of course, exactly HOW worthless they are is still a question. They're not really liquid at the moment, but the holder gets all the payments until the person defaults, PLUS the house, so they aren't COMPLETELY hosed.

In the government buyout, what happens to the houses? Auctions? Section 8? Donated back to the financial company gets paid for the loan?

If auctions, who is eligible for them?

Noticing a trend... (1)

Metasquares (555685) | about 6 years ago | (#25491421)

Blaming your computer systems for your poor decisions seems to be the new fad of late - it's the second time in a month I've heard this excuse bandied about (was it the state of California that argued it the first time? I forget, but I definitely remember hearing it...)

I wonder whether this will help or hurt IT?

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