Comments on: Irresponsible investment: An epidemic of great proportions http://www.riskgroupllc.com/blog/2009/03/25/irresponsible-investment-an-epidemic-of-great-proportions/ Risk Group is an independent, non-partisan, neutral, pro-active and progressive global risk organization addressing the risks, issues, obstacles and challenges facing the nations, its governments, industries, organizations and academia. Wed, 28 Jul 2010 17:00:02 -0600 http://wordpress.org/?v=abc hourly 1 By: drjsr52 http://www.riskgroupllc.com/blog/2009/03/25/irresponsible-investment-an-epidemic-of-great-proportions/comment-page-1/#comment-42 drjsr52 Fri, 17 Apr 2009 16:13:44 +0000 http://www.riskgroupllc.com/blog/?p=176#comment-42 U.S.A. Dr. Pandya, Do you have the article I wrote in 2003 for your risk newsletter, "Expert Judgment_ The NO Risk Proposition?" I see the exact same conditions in the current financial situation. The Houston Chronicle had an editorial by the Dean of the Business School at University of Houston - Downtown that places a large share of the blame on business schools. What's your opinion? U.S.A.
Dr. Pandya,
Do you have the article I wrote in 2003 for your risk newsletter, “Expert Judgment_ The NO Risk Proposition?”
I see the exact same conditions in the current financial situation. The Houston Chronicle had an editorial by the Dean of the Business School at University of Houston – Downtown that places a large share of the blame on business schools. What’s your opinion?

]]> By: raylinds http://www.riskgroupllc.com/blog/2009/03/25/irresponsible-investment-an-epidemic-of-great-proportions/comment-page-1/#comment-40 raylinds Fri, 27 Mar 2009 17:40:28 +0000 http://www.riskgroupllc.com/blog/?p=176#comment-40 I am responding from the U.S.- Question 1: Irresponsible investing played a significant role in this crisis. In addition to eradicating wealth, irresponsible investing allows for the proliferation of inferior and improperly priced investment vehicles. extreme pools of liuidity in government sovereign funds in countries like China and the large global financial institutions were chasing incremental yield gains over treasuries.This led them to purchase huge amounts of collateralized debt obligations, forcing their yield spread over treasuries to become razor thin (thus, they weren't even adequetely compensated for their incremental risk). Although the rating agencies gave most of these securities AAA rating, and CDOs were considered safe investments, the assumptions behind this risk assesments were fallacious. It was believed that: 1. Lenders were performing careful underwriting on their borrowers. 2. The firms issuing the CDOs were performing due diligence on the mortgages. 3. Geographic diversification of the pools of mortgages would mitigate the risk of widespread foreclosures. 4. Home prices would continue to rise. 5. The rating agencies fully understood the products, and had accurate models for assessing their risk. Nothing could be further from the truth. Despite the widespread understanding that the rating agency model has confilcts of interest, too many investors blindly followed their ratings. Agency ratings should never replace a thorough due diligence process. Question 2: I do believe that, in addition to an initial due diligence, Risk Centric Audits should be performed on a regular basis, as global economic conditions change. Question 3: I think there are pockets of understanding of global investment risks in the U.S., but it is not widespread. This situation must change. http://www.FinancialServicesIssues.com I am responding from the U.S.-
Question 1:
Irresponsible investing played a significant role in this crisis. In addition to eradicating wealth, irresponsible investing allows for the proliferation of inferior and improperly priced investment vehicles. extreme pools of liuidity in government sovereign funds in countries like China and the large global financial institutions were chasing incremental yield gains over treasuries.This led them to purchase huge amounts of collateralized debt obligations, forcing their yield spread over treasuries to become razor thin (thus, they weren’t even adequetely compensated for their incremental risk). Although the rating agencies gave most of these securities AAA rating, and CDOs were considered safe investments, the assumptions behind this risk assesments were fallacious. It was believed that:
1. Lenders were performing careful underwriting on their borrowers.
2. The firms issuing the CDOs were performing due diligence on the mortgages.
3. Geographic diversification of the pools of mortgages would mitigate the risk of widespread foreclosures.
4. Home prices would continue to rise.
5. The rating agencies fully understood the products, and had accurate models for assessing their risk.
Nothing could be further from the truth.

Despite the widespread understanding that the rating agency model has confilcts of interest, too many investors blindly followed their ratings. Agency ratings should never replace a thorough due diligence process.

Question 2:
I do believe that, in addition to an initial due diligence, Risk Centric Audits should be performed on a regular basis, as global economic conditions change.

Question 3:
I think there are pockets of understanding of global investment risks in the U.S., but it is not widespread. This situation must change.

http://www.FinancialServicesIssues.com

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