History repeating

Posted on Wed 17 September 2008 in general

Has anyone seen the rather excellent documentary The Smartest Guys in the Room? It analyses the Enron scandal and the hows and whys it happened. They had been indulging in accounting fraud where they hid losses and inflated assets until the wheels came of and the hole house of cards fell down.

I don't think the current market turmoil caused by the collapse of Leman's and "rescue" of AIG are the result of deliberate fraud but they certainly haven't learnt the lessons of managing your risks. When I got my mortgage I checked I could afford to pay it and also worked out what would happen if rates went up. In fact to this day I run a spreadsheet that lists my monthly and annual costs so I have an idea of how long I could survive while jobless and what I'm paying out for. I know the financial institutions invest millions in their IT systems so they can get an up to the minute statement of their current positions. What I don't understand is why they don't model what-if scenarios if the market does get a bit tighter and people are less likely to lend the money, in short what would they do if there was a credit crunch? It seems the answer is approach the government (and it's taxpayers) to bale you out. As the last few days have shown you can one of two answers which makes the end result about as predictable as flipping a coin.