MistakesAfter the monoline debacle, it seemed to me several clear patterns of failure had occurred.

The cash cow, muni insurance, led to complacency in product development for insuring CDOs.

The wonderful sales success entrenched management, leading to escalation of commitment, rather than raising questions about underpricing.

Risk management became management by numbers only. The rating agencies had a moral hazard and now are accused of heel dragging blindness.

(However, the accountants, auditors and regulators, have now stepped in and now have the opposite moral hazard… to inflate their worth by aggravating and exaggerating the downside).

This may seem a bit long winded and hindsight contrived; yet a similar story could be given for the instigator of the CDO problems and the sub-prime mortgages.

But these modeling problems have not been limited to the sub-prime originators. It has been my experience within the insurance industry that many of the failures follow a similar pattern. Bad modeling seems to follow this course over and over. Many of these cases do not lead to the scale of problems in the financial markets we see now, but on a company basis they often have been as devastating.

Like computer programmers and their anti-patterns, modelers often fall into habits that at first seem beneficial, but in the end are bad habits. Wikipedia has a list of failure pattern traps, including the ones I mentioned here.

I am a runner. To me, losing a race has always been much more motivational and educational than winning one. Losing exposed the weaknesses in my training and habits. Success easily becomes complacency. Losing brings the hunger back.

Lon Evans critiques:

As an avid runner (some 35 years in that game and counting), we are kindred spirits in at least one instance.

I'll mention that you have been a bit slow on the uptake concerning the entire subprime mess, though you're not alone. DailySpec, to my knowledge, has few, if any, posts that attempt to "test" what the financials are now properly suffering. With so much brain power in accumulation, one would assume that at least a handful of posts would be delving into what is shaping up to be a global tsunami. It is interesting to view as a correlation the denial evidenced by the VicBots and that of the cretins who got us into this wretched mess.

Your attempt to decouple the various manifestations of the current malaise is in error. Subprime, CDOs, SIVs, monolines, et al, are simply an indication of the stupidity (duplicity?) of entrusting those incapable of honoring their responsibilities. All that currently ails us is a result of selling houses, and then "creatively" declaring "risk free" investments, which could only fail given their ultimate collateral.

In closing, I don't share your optimistic evaluation of "failure." I imagine the man, who willfully (through ignorance or intent) severs a hand. After cleaning up the resulting mess, he then exclaims, "Well, I now know never to do that again." There will be costs, in bringing this saga to a close, far steeper than you're imagining.

Russ Sears responds:

You have me beat with running experience. I have been racing for only 27 years. Note I said racing, not running. However, as a racer since college, I have found many people that talk a good game. Everybody wants to be associated with taking personal responsiblity, but few really want to put in the mileage. Many are fakes. If I had a dollar for everybody who has claimed to run close to my times! When I qualifed for the US Olympic trials, I was told by the head offical more people tried to fake their qualifications than actually qualified.

If you are so avid, why is your name not appearing in any of the websites that give race results? Surely you have done a fun run or charity run or two in the last 10 years? For an avid runner since the early 1970s, you would know that being an avid fitness runner without any racing was unheard of back then. What made you change?

It is clear to anyone that subprime, CDOs, and monolines issues are closely related. You have not told me anything everyone doesn’t already know. But you expect to make money off it?

Supposing I take your word for your grand analysis, tell me how you came up with the underlying assumptions, rather than how grand they are.

However, your assumption that I have been slow on the whole subprime mess is wrong. The monolines, Alt-a have been on my “avoidance” list since 2005 (when I took my current job which required me to have an opinion) and subprimes always were. However I did miss the SIV connection, so my risk management was not flawless this past year.

Lon Evans retorts:

You might find yourself a bit back on your heels when more fully apprised of my experiences and associations in my 35 years as an "avid" runner. I'm as amenable to good conversation as I am to fighting the good fight. 





Speak your mind

4 Comments so far

  1. Robert on February 21, 2008 12:25 am

    QUOTE Lon Evans: It is interesting to view as a correlation the denial evidenced by the VicBots and that of the cretins who got us into this wretched mess. UNQUOTE

    1. What’s a Vicbot?
    2. Why might these “Vicbots” wish to possibly deny evidence of this mess?
    3. If “Vicbots” know better such that they wish to deny this mess, wouldn’t it be a good idea for Vicbots to figure out a way to make money out of this mess? [Like Goldman Sachs shorting subprime]. I mean this is just economics. If you know it to be true, and you can make money out of it, then it follows that you’d take action to make that money.

    You might think I am asking rhetorical questions. But try answering these questions explicitly, and I’d bet all of us will probably learn something useful….

    [Disclosure: I am short 5.4:1]

  2. Nick L on February 21, 2008 1:08 pm

    Losing does bring the hunger back. Im certain that if the New England Patriots had to replay the New York Giants, the outcome would be much different. The hungry team that so dominated the early to mid-season period in the NFL lost its hunger, desire, anger for losing and was replaced by the super-professional team that did lots of hard work & preparation but lacked the motivation to destroy the opponent. That was evident by the close victories against inferior opponents. Ultimately an inferior opponent with more desire than they had finally took them down.

    Losing stokes that fire in a way that winning never can. Losing is the great motivator in life.

  3. steve leslie on February 22, 2008 5:31 pm

    thoughts from the backbench:

    First and foremost. This is not a blog website. It has never meant to be. It is not a venue to promote a position. In my view blog sites are useless to me. If others find value in them then by all means continue.

    This is a place to share ideas and concepts. Vic and Laurel have consistently stated that this is not a place to get a fish but to learn to fish. “Meals for a lifetime” is a popular phrase.

    It disturbs me when I see a consistent message that demeans and insults those who contribute to this site. There once was a problem some years back with one who albeit very brilliant and knowing was also extremely insulting and cruel. I hope to never go back to this. I also have little use for those who say ” I have the highest regard for so-and-so” and then continue with a scorched earth policy and fire incendiaries in every direction.

    Reminds me of the one who said ” I am not a crook!” Shakespeare:”Thou dost protest too much.”

    I have 30 years of investment experience and everyone has blow-ups and huge failures. there are not as many long term success stories out there as you might expect. Survivors are few and out performers are fewer still.

    Those who hide behind a nom-de-plume or refuse to disclose their profession or background do so because they have something to hide. If one will claim such but can not verify I question the usefulness of such comments and have little regard for the rhetoric in spite of the veracity. Poseurs come to mind.

    Vince Lombardi: “Winning is a habit, unfortunately so is losing.”

    Full disclosure: I am not a Vicbot I don’t think. I prefer to think of myself a Transformer.



  4. Lon Evans on February 28, 2008 5:26 am

    Dear Mr. Leslie, Your quote from Shakespeare's "Hamlet" is in error. The actual words are those spoken by Gertrude, Hamlet's mother. She speaks in reply to Hamlet's query as to how she is enjoying the play he has arranged. The actual quote is, "The lady doth protest to much, methinks." Obviously, you interpretation acts to mutate Shakespeare's intent. While were on the subject of Hamlet . . . : Polonius: "This above all - to thine ownself be true; And it must follow, as the night the day, Thou canst not then be false to any man. ——— Polonius: "What have you read, my lord? Hamlet: "Words, words, words. ——— Hamlet: "There is nothing either good or bad, but thinking makes it so. ——— And among my favorites: Hamlet: "Lady, shall I lay in your lap? Ophelia: "No, my lord. Hamlet: I mean, my head upon your lap? Ophelia: Ay, my lord. Hamlet: Do you think I meant 'country' matters? lon


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