My husband, my friend Bala, and I have edited two books on Enron. We edited the first one as a way of figuring out what had happened at Enron so that people could avoid making those mistakes again. We did the second book after realizing that no one seemed to have learned from Enron, and we wanted to figure out why smart people don't learn from their mistakes. (I'm talking with the publisher soon about a third edition, meant for both law schools and business schools.)
Two different articles this week made me realize that the willingness to learn from mistakes is a rare quality. The first one, in the Wall Street Journal, involved a CEO who allegedly wanted his subordinates to lie about the company's financials (shades of, among other things, WorldCom). The second one (here) has to do with Fannie and Freddie being willing to finance mortgages that have very low downpayments. A three percent downpayment leaves the buyer with very little skin in the game.
So why don't we learn from others' experiences? There's a whole slew of possible explanations, but the one that appeals most to me is the idea that humans will find a number of ways to fool themselves--maybe not consciously, but subconsciously. After all, "we're" not manipulating financials; we're "adjusting" them to comport with the predictions that "must" be correct. "We're" not encouraging people to lower their emotional and financial connections to their homes; we're "enabling people who wouldn't otherwise be able to afford a home to get one." It's a frustrating business, this refusal to extrapolate from past financial disasters. But it's a stubborn problem.
Sunday, December 21, 2014
Saturday, November 8, 2014
Here. My favorite paragraph in the interview?
The ethical subversions which have cost banks and their shareholders so much, the collusion and self-dealing, were genuinely frowned on in my parts of the financial world. However, the wide gap between our practices and our clients’ true interests was so inherent in our business proposition that I can easily imagine how such behaviour seemed perfectly appropriate to practitioners elsewhere in the firms.
Friday, October 24, 2014
Over at Credit Slips, there's an Adam Levitin post on the new QM/QRM mortgage rules (here). Couldn't have said it better myself, and his post is worth reading.
Saturday, May 31, 2014
Friday, March 7, 2014
Here's one. The other one is the use of RICO to include lawyers in conspiracies (here). It will be interesting to see if the two intersect.