Saturday, February 5, 2011

Missing the Obvious

Via Why We Make Mistakes Blog. 
"I’ve already mentioned the biggest mistakes we made," he told the Commission. "In mortgage underwriting, somehow, we just missed that home prices don’t go up forever..."
This admission startled one of the commissioners, who asked Dimon, "Did you do a stress test that showed housing prices falling?"
"No," said Dimon. "I would say that’s probably one of the big misses."
Yes, indeed. Home prices still haven't recovered, as the latest Standard & Poor's/Case-Shiller index makes clear. In many big cities, home prices have sunk to their lowest prices in years.
As the article in the Times goes on to point out, "one striking finding (of the FCIC report) is its portrayal of incompetence."
"It quotes Citigroup executives conceding that they paid little attention to mortgage-related risks. Executives at the American International Group were found to have been blind to its $79 billion exposure to credit-default swaps, a kind of insurance that was sold to investors seeking protection against a drop in the value of securities backed by home loans. At Merrill Lynch, managers were surprised when seemingly secure mortgage investments suddenly suffered huge losses."
Click Here to Read: Missing the Obvious

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