Over at the Wall Street Journal they have a very interesting article that could explain how some of the biggest firms on Wall St., fell prey to their own computer risk management programs. So how do you fool your risk management program into believing all is well? You lie. You plug in the numbers, but you tell the program to view the results for 2 years, not just the past six months. You also tell the program that the mortgage securities are more sound than they actually are.

Your results? All is well. But in reality the whole mess is a giant lie. According to this Wall St. Journal article:

In fact, most Wall Street computer models radically underestimated the risk of the complex mortgage securities, they said. That is partly because the level of financial distress is “the equivalent of the 100-year flood,” in the words of Leslie Rawl, the president of Capital Market Risk Advisors, a consulting firm.

But she and others say there is more to it: The people who ran the financial firms chose to program their risk-management systems with overly optimistic assumptions and to feed them oversimplified data. This kept them from sounding the alarm early enough.

Top bankers couldn’t simply ignore the computer models, because after the last round of big financial losses, regulators now require them to monitor their risk positions. Indeed, if the models say a firm’s risk has increased, the firm must either reduce its bets or set aside more capital as a cushion in case things go wrong.

So there you have it. Lie to the computer and you get the results you want. So who gets to pay for this mess? You and I do. Seems fair to me. I saw on CNN this morning that Congress is attempting to come up with an economic package that would stem some of the damage done by greedy companies that put themselves first, over the good of the county. I would hope that Congress would also investigate those responsible for this current economic mess.

What do you think? Is it fair that the American taxpayers have to pay for these greedy folks?

Comments welcome.

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