Monday, April 6, 2009

Osinski's "Manhattan Project"

The following link is an article by Michael Osinski, one of the main people responsible for developing and implementing the means to repackage mortgages into traditional bonds (so they could be resold), then into CDO's allowing for various levels of risk.

"My Manhattan Project"

Many parties share responsibility for what has happened in our mortgage markets, but I believe this article displays something important in core statistical understanding that contributed to this mess.

First, let me share a related story that refreshingly seems to involve one more step of self-examination. I recently met someone who was primarily responsible for developing and implementing Countrywide's change from selling mortgages through brokers directly to consumers. This growth in mortgage underwriting facilitated enough volume for Mr. Osinski's program to repackage them. This woman expressed her dismay over her respect for Angelo Mozillo, Countrywide's CEO. She seems shocked at what must only be a complete turn of core ethics he espoused while she worked there. She seemed to wish that she had never opened the door that contributed to this mess, even though she never crossed any ethical or moral boundaries in her role.

In contrast, Mr. Osinski expresses a lot of regret, but stops short of wishing he never contributed to the vehicle that "enabled Wall Street to decimate the investments of everyone in my family." Most importantly, his software seems to have missed an important technical point of correlation. The CDO securities were considered diversified by having a lot of mortgages. If one mortgage foreclosed, the others would prop it up. He missed the obvious point that the cause of a mortgage failure, tends to affect more than one mortgage, but many at the same time.

The vastly different conclusions of these two people results from a seemingly insignificant difference of intense inspection of every issue in each person's control. The one person looking for excuses and justification, the other accepting responsibility and wishing they had not contributed. The later has found healing and peace in all this, while I doubt the former will shed his nagging feeling of guilt.