Monday, March 30, 2009

The Meat Grinder, and a Few Basis Points of Shame

Today's "must read" is a long piece from Michael Osinski in NY Magazine about developing the software that become the Wall Street standard for modeling CDO's.

“You put chicken into the grinder...and out comes sirloin.”

"Allow me to expand Professor Gesiak’s analogy a bit: For deals with non-agency loans—that is, not Freddie or Fannie—in addition to the sirloin that comes out of the grinder, there is a small percentage of offal. By running that offal through the grinder again, in effect bundling together all the pieces from various deals that absorbed the default risk, we then created some andouille and some real dog food. The rise in price of the sausage over the offal more than compensated for the unsalable leftovers. That junk typically couldn’t be sold and stayed in-house, eventually becoming known as a “toxic asset.”

Mr. Osinski, now an oyster farmer, feels a palpable twang of guilt - not full blame, but what he describes eloquently in the language of The Street as "a few basis points of shame."

"Last month, my neighbor, a retired schoolteacher, offered to deliver my oysters into the city. He had lost half his savings, and his pension had been cut by 30 percent. The chain of events from my computer to this guy’s pension is lengthy and intricate. But it’s there, somewhere. Buried like a keel in the sand. If you dive deep enough, you’ll see it. To know that a dozen years of diligent work somehow soured, and instead of benefiting society unhinged it, is humbling. I was never a player, a big swinger. I was behind the scenes, inside the boxes. My hard work, in its time and place, merited a reward, but it also contributed to what has become a massive, ever-expanding failure. For that, I must make a mea culpa. Not a mea maxima culpa, mind you, but some measure of responsibility, a few basis points of shame. Give my ego a haircut."

The entire piece is well worth the twenty minutes it will take you to read it.


No comments: