erik lundegaard

Breaking the Laws of Probability

“Until the spring of 1978, when Salomon Brothers formed Wall Street’s first mortgage security department, the term borrower referred to large corporations and to federal, state, and local governments. It did not include homeowners. A Salomon Brothers partner named Robert Dall thought this strange...

”The problem [with the inability to see big business in home mortgages] was more fundamental than a disdain for Middle America. Mortgages were not tradable pieces of paper; they were not bonds. They were loans made by savings banks that were never supposed to leave the saving banks. A single home mortgage was a messy investment for Wall Street, which was used to dealing in bigger numbers. No trader or investor wanted to poke around suburbs to find out whether the homeowner to whom he had just lent money was creditworthy. For the home mortgage to become a bond, it had to be depersonalized.

“At the very least, a mortgage had to be pooled with other mortgages of other homeowners. Traders and investors would trust statistics and buy into a pool of several thousand mortgage loans made by a savings and loan, of which, by the laws of probability, only a small fraction should default...”

— from Michael Lewis’ “Liar’s Poker,” pp. 83-85


Posted at 07:47 PM on Tue. Jun 16, 2009 in category Quote of the Day, Business  
Tags: ,

COMMENTS

No comments yet

You may bypass the ID fields and security question below if you log in before commenting.


 
 





Receive notification of further comments via e-mail

« Imagine Better   |   Home   |   Review: “Touchez pas au grisbi” (1954) »
 RSS    Facebook

Twitter: @ErikLundegaard

ARCHIVES

All previous entries

LINKS
Movies
Jeffrey Wells
The Film Experience
Roger Ebert
Baseball
Rob Neyer
Joe Posnanski
Cardboard Gods
Politics
Andrew Sullivan
Alex Pareene
Hendrik Hertzberg
Friends
Cloud Five Comics
Copy Curmudgeon
Deb Ellis
Andrew Engelson
Jerry Grillo
Tim Harrison
Eric Hanson
Ben Stocking
Jim Walsh
dative-querulous