On May 23, 2006, as a jury in Houston deliberated the case against top Enron executives Kenneth Lay and Jeffrey Skilling, a little-known regulatory agency in Washington, the Office of Federal Housing Enterprise Oversight (OFHEO), released a study with the dryly bureaucratic title “Report of the Special Examination of Fannie Mae.” The document received far less attention than the news from Enron, but its conclusions were stunning. In meticulous detail, it outlined a culture of corruption at the Federal National Mortgage Association — better known as Fannie Mae — that rivals the most serious corporate scandals in recent years. In this case, however, the main players are Washington insiders — some of them prominent veterans of the Clinton administration — and the scandal’s effects could ripple through Congress for years.

Read the whole thing, Mr. Drum.

http://article.nationalreview.com/?q=NDA4YTY1N2ZhMDhmNjIwNTk4OTI2MDYxZWU4NDg1Y2Q=

The fact remains that a lot of nominally intelligent people–MBAs from Harvard and the like–got it wrong, perhaps because their professors–economists and financiers–relied on bad assumptions about asset returns. Or perhaps just because of cultural/institutional inertia at the banks. Who knows. But those who followed conventional wisdowm here have egg on their face.

The story is that someone actually did his homework. Nothing else. The loans were bad. Someone understood that the loans were bad. Everything else follows.

How brilliant do your analytical tools have to be to figure out that garbage sliced and diced into tranches can’t be anything but garbage? Only a fool believes that gold can be spun from straw. Wall Street was preaching that gold could be spun from crap.

You are correct when you state that regulators have neither the ability nor the incentive to solve Wall Street’s problems but it is nonetheless incorrect to say that Wall Street had a lot of smart people who could have exploited weaknesses in the “CDO/CDS pyramid game.” Call it whatever you like but Wall Street’s ability to price and manage risk simply has fallen short. You can’t take advantage of that which you cannot accurately assess.

What Wall Street needs is not more or different regulation. What it needs are better tools with which to quantify and manage risk.

GM’s problems stem, in large part, from government meddling, from enabling unions to use “bargaining” methods that should mandate their disbandment and barring from the marketplace to safety and pollution standards that appear to have been pulled out of some congressional staffer’s nether regions.

Adding another bureaucracy to the mix surely can’t help.

M