Monday, March 24, 2008

Summarizing the financial crisis

The financial meltdown is massive: losses at banks are inching beyond hundreds of billions of dollars.  I have read quite a bit about the unfolding of the crisis from the day we put up our house in Michigan for sale.  So far I have only seen one home foreclosed in our neighborhood and many folks who live there have been around for decades.  It makes me wonder, where in the hell is all this financial mess centered around mortgages coming from.  Anyways, I am sure, there are many who have gotten into loans they could not afford and are foreclosing.  But, more importantly, the same risk was repackaged and sold so many times that the final financial instrument and its associated behavior with respect to the movement of the underlying asset have become too complex for the famed wall street minds to assess. Hence, the current crisis. 

A very nice article in the times summarizes the role of knowledgeable MBA wall street types -
These are ordinary folks who know a spreadsheet, but they are not steeped in the sophistication of these kind of models," Mr. Wien says. "You put a lot of equations in front of them with little Greek letters on their sides, and they won't know what they're looking at.