John Thain now admits no one at Merrill had any idea what their CDOs (collateralized debt obligations) were worth. They created them on computer programs. Not only was the global economy rear-ended by a bunch of greedy corporate hacks, it turns out they were too dumb to know what they were doing and too reckless and arrogant to ask. It’s bad enough being scammed by psychopaths. It really hurts to be scammed by morons.

“We think it’s good news that Thain is now emphasizing the knowledge problem when it came to banking–highly paid, well-educated people at the top of their field just didn’t understand the credit derivative products they were buying and selling. This is important as much of our financial reform seems to ignore this problem, focusing instead on fixing incentives in compensation.

It also undermines the idea that the Fed–or any other regulator–will be able to properly assess the risk of these kinds of derivatives.”

My Comment:

I’ve always suspected this, because in graduate school one of my close friends was working on a PhD in finance (where he’d ended up after starting out in mathematics). He was very smart and believed that you could quantify decision- making at all levels. He wanted to turn the social sciences into the hard sciences. We had passionate arguments about this, since I thought the hard sciences were a very faulty (if useful) model for the arts and humanities.  I was flabbergasted to find out one day that he didn’t understand what a mortgage was – he lived in such a rarefied world of theory and had been a student for so long. It wasn’t that he lacked empathy or emotions. He didn’t. What he lacked was any experience of the practical world. [He ended up becoming a trader for JP Morgan and had an office at the World Trade Center. Fortunately he wasn’t in on 9-11].