The Reckoning – Agency’s ’04 Rule Let Banks Pile Up New Debt, and Risk – Series – NYTimes.com
In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.
I am glad the NYT is talking about this. Why did the SEC rely on the banks’ models? Ideological blindness or simply the complacency of being amongst familiar faces? Or perhaps simply ignorance in the face of complexity leading decision-makers to rely on proxies of sound choice.