It Was Not an 'Act of God', Part I

All these are false or incomplete:

• - "One is a failure to recognize the unavoidable uncertainty surrounding estimates deep in the tail of distributions based on limited data."
• -Default likelihoods and correlations were "misestimated", leading to a gross 'mispricing of credit risk'.
• -"Another failure is a lack of structural imagination in assessing the likely consequences of contingent events such as a general fall in housing prices."
• - Housing prices were thought to only go up (even in the United States), by any or all of brokers, speculators, buyers, lenders, and regulators.

Also up for batting practice, "we have just seen a black swan", although that one might be a little more complicated.

Franklin Raines, Chairman of Fannie Mae, 1999-2004:

"The company had significant experience during the 1980s and early 1990s with the impact of falling housing prices on the value of mortgages. In the 1980s, the company experienced significant credit losses as a result of the economic meltdown in the oil patch areas of the Southwest. In the early 1990s, the overheated housing markets in California and New England also caused significant losses.

The company also studied the different credit performance characteristics of mortgages with certain features, such as adjustable rates or negative amortization; mortgages with certain underwriting approaches, such as no documentation of assets or income; and mortgages with certain borrower types, such as those with marginal credit or housing speculators. These features create greater credit risk. Furthermore, the layering of more than one of these characteristics on an individual loan greatly magnifies the risk. In many cases, there is no precedent to rely on to calculate the performance of such risk layering."

Given that there has been relevant experience and data, among the possible implications:

1. Institutional memory is important.
2. It is often wise to analogize risk from similar events, rather than discount it.
   
3. Imagination happens to the prepared mind.
   

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