Wall Street proved out this business model with sub-prime mortgages Well. Don't blame wall street. They do this for thie living. Wall street business carries both behavioral and mathematical issues. Behavioral,- They are just immoral, plain and simple. They don't care about their customers, clients,or even their own firms, no one, but their own bonuses. This is systemic. The only solution for this is, holding them to standards that we hold ordinary individuals. Even in CA you have 3 strike law to put folks who are deemed dangerous to socienty away. But there is no real regulation to punish banks when they routinely violate laws. We just collect fine and tell them see ya later.- There are rougue individuals.- Failure of risk controls. Why is this behavioral? The investment banks work on complex products and use leverage. So risk is inherent in this model. But we see the routine, huge losses. So how come these losses are not deducted early and contained? Because there is a systemic failure of risk controls driven by CEO's bonuses.Mathematics- The heavy reliance on standard deviations. When you build complex products like derivatives, which are built on top of multiple products, where a single violation of standard deviation can result in losses multiplying very quickly. The problem is, the traders take 10 yr or 30 year volatily model and often apply them for the next week, month, or year. This is very risky and when you built a product, which is complex, build on top of many such 30 year assumptions and then use leverage, when you go wrong you go wrong big way.It doesn't matter they are correct, successful in 99% of times, the one time they have losses are huge. But from a traders point of view, it is one trade, one quarter or one years bonus at the most. Even in further worst cases, they leave this job and join across the street.This itself would not be a problem but many folks who don't have the skilss to understand, who should not be touching these kind of toxic stuff are buying them. Wall street is knowingly selling this stuff to them. That is immoral. You are putting your middle school kids with NFL Pro's. They will get crushed. They should not be playing that field.But we all are playing without even knowing it. Every time you have a money market account you think it is safe, but the kind of exotic instruments they invest is so risky. That's why I don't have anything on money market. I just leave it on my checking. I would rather earn nothing than for the few pennies risk all my capital.
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