The programmer who blew up the economy

The man who wrote the mortgage programs that helped enable Wall Street to blow up your pension fund has written a first-person account of his years on Wall Street as a young computer whiz. Now an oyster farmer, Michael Osinski draws a dotted line from the losses his neighbor sustained in the market to the work he did nearly a decade ago. And it doesn’t feel very good. Don’t miss this read in New York Magazine. I share the opening with you:

I have been called the devil by strangers and “the Facilitator” by friends. It’s not uncommon for people, when I tell them what I used to do, to ask if I feel guilty. I do, somewhat, and it nags at me. When I put it out of mind, it inevitably resurfaces, like a shipwreck at low tide. It’s been eight years since I compiled a program, but the last one lived on, becoming the industry standard that seeded itself into every investment bank in the world.

I wrote the software that turned mortgages into bonds.

Because of the news, you probably know more about this than you ever wanted to. The packaging of heterogeneous home mortgages into uniform securities that can be accurately priced and exchanged has been singled out by many critics as one of the root causes of the mess we’re in. I don’t completely disagree. But in my view, and of course I’m inescapably biased, there’s nothing inherently flawed about securitization. Done correctly and conservatively, it increases the efficiency with which banks can loan money and tailor risks to the needs of investors. Once upon a time, this seemed like a very good idea, and it might well again, provided banks don’t resume writing mortgages to people who can’t afford them. Here’s one thing that’s definitely true: The software proved to be more sophisticated than the people who used it, and that has caused the whole world a lot of problems.

via My Manhattan Project.

It would be great to hear next from Lewish Ranieri, inventor of mortgage securities, and a Salomon Brothers graduate credited with coining the term “securitization” (which maybe is the ultimate crime). Time Magazine had listed Ranieri as one of the top 25 facilitators of the current crisis, which strikes me as unfair: It’s like blaming Henry Ford for today’s highway accidents.

I wonder if the New York article by Osinski marks a turning point in the blame game on Wall Street. To heal, everyone who took part in this fiasco needs to speak up — from Cong. Barney Frank — who protected Fannie Mae and Freddie Mac from rigorous oversight — to NY Attorney General Andrew Cuomo, who made it his business as the youngest HUD Secretary to be sure people who couldn’t afford homes got loans. Wall Street couldn’t have managed this alone.


6 thoughts on “The programmer who blew up the economy

  1. Nancy,
    It’s so interesting to go back in time… to see who and what started all this. I especially love the Andrew Cuomo connection, given his public stance these days. Tell more… I’m fascinated!

    • Lewis,
      I also find it extremely interesting to trace the roots of this debacle. So far, I think the history has been told to galvanize support for everything Congress or the White House wants to do. That has meant deflecting attention away from the roles certain policymakers played in changing the financial landscape over the past 10-15 years. Why? They are now key players in the rescue. Andrew Cuomo is just one example. I do hope to write more on this. Thanks.

  2. Another thought: There is lots of blame to go around and certainly government deserves some of it. But, to quote FT Columnist John Kay at conference I recently attended, “Never forget that, despite what [XYZ] would have you believe, [XYZ] failed because of stupid decisions at [XYZ].”

    He referred specifically to Royal Bank of Scotland but the comment works for Lehman, AIG, Fannie, etc. Yes, Barney Frank enabled Fannie and Freddie to take unreasonable risks, but Fannie and Freddie management wanted to take those risks (they thought) enrich their employees and (perhaps even) their shareholders. Who told AIG to sell untold amounts of CDS?

  3. I agree that it is helpful to look back at the history. But, it is silly to blame Henry Ford for auto crashes or the originators of mortgage-backed securities for this financial one.

    And, if you do want to blame them, you’ve got to go back a lot further than Michael Osinski or Lewish (sic) Ranieri. Securitization goes back way beyond even Lew. Even this incarnation of mortgages pre-dates him. If you are looking for the “father” of securitization you should consider John Law of South Sea Bubble fame.

    I think Lew is “godfather” of mortgage securities in the Mario Puzo sense.

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