The Coder Behind the Mortgage Meltdown 379
axjms writes "New York Magazine has a confessional/abdication from the man who wrote the software that turns mortgages into bonds and those nasty little things called CMOs. An interesting first-person account from a coder whose work reached far beyond what he or anyone could have anticipated."
Re:This topic is too hot to handle. (Score:5, Insightful)
Yep, you can pretty much say that the financial crises was caused by just about anyone, and you'd probably be right to some extant or another. Homeowners, loan officers, big banks, small banks, the FHA, AIG and companies like them, investors, the media, the non-journalistic media, republicans, democrats, and government regulators just to name a few and I'm sure you can come up with more if you try.
There's plenty of blame to go around, anyone who claims one group is responsible is pushing an agenda or very short sighted.
Buck passing... (Score:5, Insightful)
Of course, it's a geek who is to blame for it all with his immoral software witchery. It couldn't possibly be the result of a large number of greedy, thieving scum, who were regulated by greedy, corrupt scum, and they in turn were regulated by a greedy, corrupt government.
The writing was on the Wall(street) for the subprime meltdown for a very long time before this software was written. It was obvious to anyone with Economics 101, a long time ago.
Re:This topic is too hot to handle. (Score:5, Insightful)
I've argued the issue of the CRA on many occasions, but I guess I have to do it one more time. For starters, I refer you to an earlier Slashdot discussion [slashdot.org] on exactly why the CRA had very little if not nothing to do with it.
The short version: The vast majority of bad loans originated from brokers (e.g. DiTech, Countrywide, Ameriquest) who weren't covered by the CRA. Banks who were under the CRA actually did considerably better than other financial companies. Furthermore, CRA borrowers had to meet identical loan standards as anyone else.
The reasons that various groups have blamed the CRA has a lot to do with hating that regulation since at least 1990 or so, and very little to do with reality.
Re:Red? (Score:3, Insightful)
Requirements? (Score:5, Insightful)
Re:Buck passing... (Score:3, Insightful)
Re:The real reason behind the meltdown (Score:5, Insightful)
Classic case of garbage in garbage out. If you are selling mortgages to people who can not afford them and getting them approved by using phoney income numbers is it any wonder it blew up? What caused the meltdown was not securities or CDS or quaints or a piece of software. It was fraud plain and simple. Fraud on a massive and unprecedented scale; committed by lenders banks and ordinary citizens all trying to cheat the system.
Re:CMO vs. CDO vs. CDS (Score:5, Insightful)
Here here. Its nice that someone is willing to take blame for the collapse of the world mortgage market, but the reality is that he has a ridiculously overinflated ego.
Unless he was also an degreed economist, there's no way he independently came up with the formulas used in order to write the software. He just took the spec from the people who paid him to write the software, and away he went.
Like a gun, its ridiculous to blame the collapse or death on the tool. Its a form of enabling, but certainly not the cause of the problem.
The problem was that the foxes were running the henhouse. and the guard dogs called the regulators were nowhere in sight, or chihuahuas. Instead of the foxes trying to skim off a self-sustaining scam, they let their trading run wild into bankruptcy, and with no regrets.
This is what happens when you let people with poor understanding of risk management, or its mathematical models, set policy (and I don't mean the politicians).
Also sad to see are the comments on this article. People apparently bought this guy's story hook, line and sinker.
Re:This topic is too hot to handle. (Score:3, Insightful)
Sure, once this thing got going, it's difficult to place blame, but it started somewhere, so if we're going to learn from this, we need to be able to cut it off at the beginning.
Oh, jeez, not more CRA-blaming (Score:5, Insightful)
The idea that giving loans to THOSE PEOPLE (implicitly poor, black, and whatever other qualities our society is calling moral failings this week) is behind the collapse of the financial industry and had nothing whatsoever to do with the saintly finance industry's business practices itself is a meme that really needs to bite the dust. Was CRA part of the problem? Maybe, but there's no such thing as a single cause to a collective fuckup/fiscal meltdown of this magnitude. I'd argue that the repeal of Glass-Steagall is an even larger singular driver.
I'm sorry if it seems like I'm singling you out or jumping down your throat in particular, I'm just real tired of simplistic finger-pointing at the CRA. (I even vaguely recall seeing numbers that said CRA-driven loans were actually less likely than average to be in foreclosure, but it's been a good while and I can't remember where to dig up the particular citation.)
Re:bomb? (Score:5, Insightful)
Re:Requirements? (Score:5, Insightful)
Ah the trillion dollar question at last.
Coders don't design faulty business logic. Coders code what they are told to code.
Re:Oh, jeez, not more CRA-blaming (Score:3, Insightful)
Gee, I remember that too:
http://www.jchs.harvard.edu/publications/governmentprograms/n08-2_park.pdf [harvard.edu]
Re:This topic is too hot to handle. (Score:3, Insightful)
There's plenty of blame to go around
And yet, no one has gone to jail.
Re:This topic is too hot to handle. (Score:5, Insightful)
Re:This topic is too hot to handle. (Score:5, Insightful)
When it's not your money your lending out.
Say, I'm a loan officer. I see someone being high-risk. Do I loan out to that person? Well, if I'm at risk, I might not, but since the home prices are going up, I give the loan, and then sell the loan to someone else. I'm not stuck with the loan, and I make money on loaning out money. See where my incentive is to loan out money whether the person can pay back or not?
Re:This topic is too hot to handle. (Score:5, Insightful)
> the financial crises was caused by just about anyone
Except for folks who bought within their means and paid their mortgages on time. Sadly, they will now end up paying for everything else.
Re:This topic is too hot to handle. (Score:5, Insightful)
Here here! Too bad I don't have the points to upmod you.
Its Republicans looking for a Democratic scapegoat to pin the world banking meltdown upon. Its a preposterous argument, when you look at the numbers involved. It was flat out deregulation and neutralization of regulators that allowed the mess to come about.
Re:CMO vs. CDO vs. CDS (Score:5, Insightful)
Re:This topic is too hot to handle. (Score:4, Insightful)
And the key thing to realize here, was that the banks thought they had a no lose situation. Even the "disaster" of foreclosure still left the bank with a recoverable asset (the property). Instead of losing 135K on a loan, it was more like a 35K loss. The banks didn't count on a reversal of the housing markets, outright fraudulent lending, and how securitization would only mask the losses, not render the losses moot.
And mortgage securitization only breaks the small banks that specialized in it for their earnings. Investment banks like Lehman and Citigroup got wiped out from their derivatives manufacturing/gambling.
Re:This topic is too hot to handle. (Score:4, Insightful)
Why was the CRA a bad idea? It didn't, after all, say banks had to make loans to people who couldn't afford them. What it said was "We've caught you refusing to give loans to certain groups regardless of their ability to repay. And as a society we don't think locking those groups out completely is in our best interests. So, given your proven track record, if you want to refuse to give loans to people in those groups you're going to need to provide written justification pointing out the exact financial basis for the rejection.". Under the rules, the banks could perfectly well refuse to give loans out to people in those groups whose financial situation would make the loans too risky. All they'd have to do is, for instance, write up a report attaching the guy's credit report and noting "He's defaulted on these loans for these amounts in the past 3 years, and we don't make loans to anybody with that record." (backing it up, of course, by showing they indeed didn't make loans to anybody with that kind of record).
When I hear people talking about how that's so unreasonable, I can't help but recall that the banks were in fact caught refusing to give loans to a black man with a certain credit record but were perfectly happy to give that same loan to a white man with the exact same credit record. When you've been caught with your hand in the cookie jar repeatedly, it's not unreasonable for your Mom to start taking steps. When I hear people saying how if the banks can't loan money willy-nilly to anybody they won't loan at all, I can't help but hear the brat in the playground who if he can't have it all his way throws a tantrum and threatens to take all his toys home. I think the term is "does not play well with others".
Why the "blame"? (Score:4, Insightful)
finance = teh fail! (Score:1, Insightful)
So, we all had a great laugh when it transpired that the greedy reckless banks had been caught in a predicament, namely having all those crappy mortgage backed securities on their own books, and we figured, serves them right. I guess we did not see that we would end up paying for them.
Who is really to blame for this:
(i) the guy taking out the large mortgage he knows he cannot afford, but knows he can walk away from it (well, in the US anyway)?
(ii) the mortgage salesweasel, selling products patently unsuitable, for his instant bonus?
(iii) maybe the big banks packaging up these bad mortgages, into bad maths products, sold as investments to people who may have trouble with long division, let alone comprehension of how to drill down into CDO squared?
(iv) the programmers who wrote the software to allow all this to happen?
Yeah, we know who is really to blame...
Re:This topic is too hot to handle. (Score:4, Insightful)
Re:Not One Person's Fault (Score:3, Insightful)
Code reviews aren't as common as you might think, but it is certainly true that the claims don't stand up to scrutiny. Nobody with that little experience is going to be able to write heavy-duty software, for a start. Teams write super-massive projects, not individuals, for another. Enough vodka to total the car is enough vokda to total the specs in your mind, so at best he's flippant as well as economic with the truth.
However, when you dig deeper into the article, you run into other questions. He talks of the software being developed over periods of economic instability. True enough, but the software was presumably not responsible for that instability, and he gives no indication that the causes for said instability were ever removed. So was his software the piledriver that smashed the economic landscape, or merely one straw amongst millions, whose combined weight broke the camel's back?
(If one straw amongst millions, then no straw, not even the last one placed, is any more or less responsible than any other. You'd have to divide his responsibility between each and every straw that factored in.)
But there are some definite bugs. He talks of basic calculus. Ok, that's fair enough, but you need more than basic calculus if you want to factor in the effect of the observer on the system. Once the observer's mass becomes comparable to that of the system as a whole, the numbers become considerably trickier. We see no evidence that he's using anything more than simple numerical methods, first-order calculus and (from his references to offal) the SIMPLEX method. Completely inadequate for an n-body problem in dynamics.
Now, it seems certain that n-body maths were not present in the simulating software, or we wouldn't be in this mess, but it's clear that the software was more advanced than an O-Level project. That gap is not covered by TFA - whether because he's being selective on what he says or because he's just too small a cog to be of importance is unclear - but it's a gap I'd consider more important than anything revealed by TFA.
correlationisnotcausation (Score:5, Insightful)
I wanted desperately to try to argue that perhaps the kind of person who can position himself to make that kind of money is simply the kind of person who would be amenable to literal pissing contests and so on, rather than money itself changing what were previously normal people.
Re:Here's one reason the financial system failed. (Score:3, Insightful)
Now try and have the same understanding if instead of your college education in a numerically-oriented field (e.g. physics, CS, math, and so forth) you're at about the level of education you had at around 9th grade. There are a lot of adults with roughly that level of education running around, and a lot of them are potential subprime borrowers.
I'm not saying the borrowers were saints, but brokers definitely took advantage of their ignorance in general and specifically about mortgages.
Re:This topic is too hot to handle. (Score:5, Insightful)
In fact, renting is even more expensive than owning when you consider that you don't get to keep any of the equity, and the landlord needs to make a profit.
Actually, no. The whole point of the psychological aspect of the bubble was/is that "housing only goes up". Therefore landlords didn't care that the typical rental cost was a fraction of their mortgage payment.
For example, say the cost was $500K. That would imply, at a reasonable rent to cost ratio of 100, a rental cost of $5000 per month. But the going rental rate for a SFR is only $1800. Thus each month a landlord loses $3200 in cashflow.
However the whole point of the bubble is to mix up cash flow and balance sheets. So, if that $500K house cost $250K two years ago, it's gonna double in two years, right? Because housing only goes up, right? So, if you expect to gain $500K on the balance sheet in two years, that is simplistically a monthly gain of $20833. A new car each and every month....
So, the bubblehead thinks he gains $1800 a month from rent, lost $3200 a month in expenses, and gains $20833 per month in bubble prices. Sounds highly profitable. Now what happens when real estate no longer goes up? What if it drops by half, thus a balance sheet loss of 10K per month, every month? Ooops. Mail the keys back to the bank and tell the bank, tough luck. Don't worry about the bank, taxpayers will bail them out.
Another way renting can be cheaper is looking at opportunity costs. If the "savings" of ownership are less than the money lost thru peasant work of maintaining the house, then you're better off outsourcing property management to the landlord. People whom get alot of money by working crazy hours are far better off outsourcing toilet plunging and lawnmowing to a landlord. Also some people are willing to pay alot for someone else to handle the hassles for them.
The final way renting can be cheaper, is if you know anything about economics, and see whats going on in the inflation adjusted prices over the long term over the last century, in the ratio of house prices to rent over the last century, in the ratio of median income to median home price, in the ratio of median home price to... heck just about any commodity, in the historical graph of interest rate vs house price with attention given to the current temporarily multi-generationally low interest rate implying a very temporarily multi-generationally high house price, in the trends of median middle class income over the years, in the demographics of baby boomers flaming out with not enough younger folks to move in/up, in the graphs of house construction vs population change (supply vs demand), it's not too hard to see whats going to happen to prices. On one side you've got all the math and graphs that are worth considering, and on the other side, you've got slogans like "real estate only goes up", pretty easy to evaluate what will happen soon. So, pay a small rent to the landlord whom will take a staggering huge capital loss. Some homes in CA have been/are dropping in the high five figures per month, an order of magnitude larger than their rent...
Re:This topic is too hot to handle. (Score:3, Insightful)
Well that's because there wasn't anything, strictly speaking, illegal done.
Nothing illegal done? Let's start with the dishonest loan brokers. Those brokers had people come in with a $40,000/yr salary, but put on the application that the salary was $160,0000/yr. Of course, these were no-doc loans, so no documentation was required. There was a lot of of fraud going on. Let's send a few thousand loan brokers to jail. Anyone with me?
Re:Here's one reason the financial system failed. (Score:3, Insightful)
Re:bomb? (Score:3, Insightful)
Joe Public: Oh, God, not again.
Uncle Sam: Yes that's right, all your base are belong to me.
Wall Street Fat Cat (to Uncle Sam): That's right! and all your base are belong to us!!! Joe Public: NOOOOOOOOOOOOOOOO!!!!!!!!!!!!!!!!
Re:bomb? (Score:5, Insightful)
One can always hope.
But maybe it's time to replace "duke nukem forever" with "slasdot unicode support" in our posts.
Re:This topic is too hot to handle. (Score:5, Insightful)
Well really what happened is the bank gave Joe Foreclosure a loan.. They knew Joe is a bad risk so they bought insurance for that loan from AIG.
Now that loan is 100% guaranteed to pay off so the debt of off my books (balanced by the Insurance policy) repeat over and over again.... Ohh since these loans are fully insured they run out and package bundles of them up as AAA bonds and sell em off to market investors.
This is all fine and dandy, AIG wrote policys out for trillions in mortgages. To bad and they only had the cash to pay on a handful. No big deal they thought.. Home values have only gone up for 30 years..
The the bubble burst.. record numbers of homeowners were defaulting on mortgages. The Banks turned to AIG for the insurance. AIG didn't have the cash..
Now the banks are over leveraged and all those bad loans are wrapped up out there as AAA bonds they are liable for.
Thats why the feds have to keep pumping billions into AIG.. If they fail the policies fail. then the banks fail and the bond market fails..
You know the rest..
Of course... (Score:4, Insightful)
Although, it will still cost them far less than the American Empire they've been supporting for 60 years. And for some reason, I don't suspect the nightly news will mention it. Strange.
America's a wacky place. Spending less than 100 billion saving people who were dumb with mortgages is cause for Panic! Hyperbole about Socialism! Quick, throw a tea party! Fox News anchors weeping on air for their fallen values system!
Spending 1,000 billion on warfare every year is Patriotic! Go team! USA! USA! USA! Post some videos about shock and awe! Let's run some swell pieces on brand new weapons systems designed specifically to "protect freedom," and never mention their price tag...
Re:bomb? (Score:4, Insightful)
There is a reason for the lack of direct entry of Unicode.
http://yro.slashdot.org/comments.pl?sid=32808&cid=3541545 [slashdot.org]
However, I think that there are at least 100 better ways of handling Unicode related issues than the current method.
Re:ghostwriter... liberal arts major .. !programme (Score:4, Insightful)
The oddest thing about Osinski's article is his claim to be "the one" to have written the CDO packaging software that brought down Wall Street-
That statement alone pegged my bogometer [jargondb.org]. Sweeping claims for sole ownership of a *type* of system that developed by many banks - bullshit.
During the 80s and 90s, I worked for several major Wall St. IBs, writing institution-level portfolio risk-valuation software - dealing with billions in net value across markets, trillions in notional face value (whoop-t-do.) And I collaborated with coworkers who wrote and maintained, get this, CDO packaging/securitization systems.
Osinski, wherever he was at the time, wasn't "the one." Many people worked at this, across numerous banks (eventually.) That he has a guilt complex about it is kind of absurd. He might have been an early developer, though certainly not the only one, and he was most definitely not the inventor of mortgage-backed bonds. That alone should clear his conscience.
His guilt is either misplaced, or amplified to a level that runs way, waaay outside his actual responsibilities as a developer.
Also, his claim that the code became "the standard" used by IBs around the world seems utterly bogus. At the firms I was employed by (and consulted for), while we did license code and contract out for systems developed by quant software boutiques for specific needs, things like securitization systems were in-house. Because: a) it was very complex, b) it had to be very specifically tailored to your "inventory" systems (and the retail banks you bought from), and c) at the time, you did not want an outside firm getting into your books or onto your network. (This was in the days before FIX became a standard.)
So, maybe this guy is seeing a second/third career as a writer. Good luck with that.
Re:correlationisnotcausation (Score:3, Insightful)
rather than money itself changing what were previously normal people.
Sort of like taking a collective look in the mirror and not liking what we see, but was this really that surprising? At some point every one of us is corruptible and every man (or woman) has his (or her) price. If you say, "not me" then say that again after tearing up a $2 million dollar bonus check that someone has just placed into your hands.
Re:This topic is too hot to handle. (Score:3, Insightful)
It's strange that you can the US and UK financial systems excellent. There was a time when banks were conservative, the excellence that they sought was to maximise their returns by being very, very picky about who they lent money to. It was quite a good system.
What we are looking at now is the after-effect of a huge credit binge caused by those "excellent financial systems" throwing away risk assessment and throwing money hand over fist at anyone who walked past.
This is not a result of the system being left along (although loose regulation has clearly not helped). This was direct intervention. If interest rates are held artificially low to "stimulate" the economy then the binge on credit will commence. Perhaps one day economics will put the idea in the same bin as printing money to ease public spending.
Re:More than anyone could have predicted? (Score:1, Insightful)
Take a loan you can't pay and loose your house? Tough luck. Give your money to the Maddof and lose all of it? Tough luck.
Anybody who had their money in cash or in a deposit didn't lose a cent. Everybody else was taking a risk and trying to make a profit. Sometimes you win sometimes you lose.
We can't regulate profit.