Not everything in a business can be captured in financial data. The market sets a values on these things through equity prices, and along with that is an implied cost of equity to the firm.
In accordance with traditional practices, we work to increase shareholder wealth, and the sooner the better.
Essentially that is what happened to the nations sub-prime mortgage market. Originators of these garbage loans such as Countrywide, GM (DiTech), Golden West, WaMu, all had worked in the interest of their shareholders, right.
Through packaging sub-prime loans with bond insurance, they could literally increase shareholder value beyond three times as they could before.
If management would have seen the true risks associatied with the project, i.e. Simultaneous national drop in housing prices, lack of capacity for insurance companies to cover that loss, true credit rating on the ability to pay on these collaterals.
I'm willing to bet we as a nation aren't that stupid. I believe that management was well aware of these risks. If they had workers smart enough to bundle them up, they had someone there smart enough to know the risks associated.
The cause of this crisis is one of corporate governance. There is an agency problem in firms to satisfy two needs at the same time: maximize shareholder wealth and maximize personal interests.
I am willing to bet that in a couple of years some of these executives will be indicted. Will this set precedent for a new age of risk awareness and management? Will management be held accountable for recordkeeping of available risk information, just as they do their accounting?
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