Big Losses and Big Excuses

I'm kinda annoyed by how many excuses are being made for these people heading up big firms. Particularly the CEOs of Merril and Citi have come under fire. People are asking if they were taking excessive risk in order to get short terms gains. Others are asking if the right risk management controls were in place. Others yet are wondering if they were trying to hard to catch up to Goldman. Fact is, the answer is NONE OF THE ABOVE.

The single reason these staggering losses are coming out is STUPIDITY. Anybody else wonder why Goldman was ranked 13th on CDO distribution? Anybody wonder why they didn't hold any? Same goes for Deutsche. Anyone wonder why they didn't hold any part of the CDOs they originated? The truth of the matter is these folks at Merril, UBS, Citi HAD NO IDEA what they were getting into. You can bet on the fact that Goldman had a conscious decision not to enter into that market aggressively because they decided the tail events were too painful, and we all know they are not a firm to avoid risk. Let's all quit making excuses for these companies and just realize that it was a LACK OF UNDERSTANDING and perhaps more specifically A LACK OF GOOD MODELING that fell them. I had done a little bit of work with CDOs, and it was annoying to see how so many firms were using the same mediocre model. You can be sure Deutsche and Goldman had some development time to create some specific models and then realized they didn't want to be a part of the imminent collapse.

That being said, you can be sure there are some opportunities out there. I'd be willing to bet that Goldman will start accumulating some of this subprime mortgage and CDO stuff. Just like when they collected CDO equity tranches in 2005 during the autos crisis, they'll swoop in to pick up a lot of this stuff cheap too. In fact, they may even buy a whole company to manage the specific operational issues with these products.