A stupid question for our times...

[Ankesh]

Originally Posted by -TW

Thanks Ankesh.
About that talk on cheating... To those of us who have followed the subprime mess closely, the talk on ted doesn't really relate, because the talk does not take into account that the banks were FORCED (by Wash DC) to make those risky loans. So it was cheating that was forced. In esssence, the banks were forced to break their own rules. Unless, the cheating you're talking about is the home BUYERS, who 'cheated' by taking out loans using FALSE personal info (lying on the application), or just getting loans they KNEW they couldn't pay back.

Thanks TW.

I think you should read:
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

Government did reward the banks that gave away subprime loans. But the government didn't force any bank to deal with the mortgage bond market.

And basically - if banks hadn't played in the derivative market and leveraged themselves by 35-45 times - we wouldn't have seen such a widespread crisis. (All we would have seen is banks facing a small loss.) Leveraging themselves 35 times their worth meant if one loan defaulted - the effect would be equal to 35 loans defaulting.

So how and why did banks leverage themselves 35-45 times their worth?

See the video again keeping that question in mind.

Dan explains that 3 things lead to cheating (and that everyone cheats):
1. morality,
2. distance from reality,
3. and social environment

Point # 2 and # 3 played a big big role in the subprime crisis. Bonds and derivatives distanced the bankers from the real mortgage defaults. And the social environment was: everyone next to them was doing it.

Sandi's point of giving them bonuses or not would not have affected the crisis not happening one bit.