MONEYBALL AND THE FINANCIAL CRISIS.

MONEYBALL AND THE FINANCIAL CRISIS. What does MONEYBALL have to do with the financial crisis? The connection is that Michael Lewis, the author of MONEYBALL (which describes how sabermatricians brought statistical analysis to baseball) has written a long, amusing, and scary article about some of the few people in the financial world who foresaw what would happen (link via TwoBlowhards). They not only foresaw what would happen, they made great efforts to publicize what they foresaw. And they made lots of money selling short. But, as the article explains, the short selling only fed the mania. One scary item: the process that got us here depended on the rating agencies giving certain mortgage-based securities a rating of AAA (the highest rating). To quote from the article: “[One of the short sellers called a rating agency] and asked what would happen to default rates if real estate prices fell. The man at [the rating agency] couldn’t say; its model for home prices had no ability to accept a negative number.” In other words, because their model was based on history, and prices had always gone up, there was no possibility they could go down.