a simple financial wmd

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant

Above is a pretty extensive, four page analysis on how wall street managed their risk when giving out loans to home-buyers et al. I'm sure you've heard by now that lenders gave out loans to many people with awful credit, especially home-buyers. With looser regulations thanks to Reagan/Bush/Clinton/Bush, lenders could be looser in their lending and take bigger risks. Another big factor in the recent crash, is the formula in this article. It's relatively simple compared to looking over the history of your potential borrower, and provides an easy way out in determining how risky it is to lend to someone. I don't understand the variables in it that much, but they pretty much involve quantifying the risk of something going wrong. Between the half dozen or so variables, you can rack up tons of error. The article does a really good job of breaking down how limited the accuracy of the formula is in determining risk and how bad the error can be.

Even the creator of the formula (a Chinese guy who since moved back to China, conspiracy? "mwahaha, stupid Americans will destroy themselves with this formula") said that the formula is really limited and shouldn't be used much. However, managers in America loved the idea of it. It easily spat out a number of how risky a loan was, and ALMOST EVERYONE was using it. This formula is behind the explosive growth of derivatives (which amount to hundreds of trillions) and crappy, unwise, idiotic lending in general. Managers and lenders didn't care about the inaccuracy, and used it as the basis for running their businesses that are now being screwed to the wall. Why didn't they care? For one, it's proof that, in their management positions, they know very little about the methods behind their lending, yet are trusted with it. Between the vast bonuses, spending company money on luxury stuff, and not having a damn technical clue of what the hell they're doing, I'd say a whole lot of business managers out there don't deserve the title of their lowliest employee, let alone the millions they reward themselves with. I swear, I could go on a long rant just on this....friggin idiots....

About the formula: it doesn't account for any macro-type factors. The article lists them somewhere near the end, and these factors can contribute, oh, say, around 90% error to the formula. So, a huge portion of the money in the country was used based on a method with a massive error. Hm.......it's too bad someone with half a brain didn't speak up about this.

Don't forget: business is about making money. If it makes them a ton of money, they'll keep using it regardless of the risk...but yea I do agree they are fucking morons.

these shamby loans were known as "sub-prime loans". The reason this happened was because investors wanted more loans given out so they could share the risk....

basically like if i gave out 100 million dollars worth of loans and split it between 20 ppl to share the risk