When asked why the financial system crashed he said, "because the Berlin Wall fell."
He said that countries in Eastern Europe and China and India started to embrace capitalism and become export-oriented economies (with the U.S. as the main consumer). They began accumulating large savings and injecting a gigantic amount of free-flowing capital in the general direction of the dollar and dollar-denominated instruments.
This allowed the whole financial industry to "deny the laws of gravity". A lot of room for error in which mischief could, and did, occur. With that much cash flowing around seeking any sort of return, the usual rules of risk and reward didn't appear to apply. In addition to crucial mistakes*, bankers greedily escaped the regulation of having "rainy day money" by setting up little holding companies off-book, which ended up being tied to them anyway through reputation.
Smick said that finally we've given the world a reason to hate America - our bankers wrecked the financial system, causing financial misery where none was deserved. Indeed it's been a humbling decade to be either an American or Catholic. First the scandal in the Church (which was not the tiny percentage of weak priests but their shepherds who should've known better), and now our bankers out of greed and deception trigger the financial crisis. It tain't pretty.
And speaking of humbling, will the National League ever win another All-Star game again? Ay-yi-yi!
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* - the formula that sunk Wall Street:
It was a brilliant simplification of an intractable problem. And Li didn't just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. What happens when the number of pool members increases or when you mix negative correlations with positive ones? Never mind all that, he said. The only thing that matters is the final correlation number—one clean, simple, all-sufficient figure that sums up everything.
The effect on the securitization market was electric. Armed with Li's formula, Wall Street's quants saw a new world of possibilities. And the first thing they did was start creating a huge number of brand-new triple-A securities. Using Li's copula approach meant that ratings agencies like Moody's—or anybody wanting to model the risk of a tranche—no longer needed to puzzle over the underlying securities. All they needed was that correlation number, and out would come a rating telling them how safe or risky the tranche was.
As a result, just about anything could be bundled and turned into a triple-A bond—corporate bonds, bank loans, mortgage-backed securities, whatever you liked. The consequent pools were often known as collateralized debt obligations, or CDOs. You could tranche that pool and create a triple-A security even if none of the components were themselves triple-A. You could even take lower-rated tranches of other CDOs, put them in a pool, and tranche them—an instrument known as a CDO-squared, which at that point was so far removed from any actual underlying bond or loan or mortgage that no one really had a clue what it included. But it didn't matter. All you needed was Li's copula function.
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