In many cases the risk analysts were flatly ignored
Don't I know it. The risk group warned our casino that the models were grossly understating our ABS book's VaR in 2006 because the timeseries we were using were becoming inappropriate - we wanted to change to the hyper-volatile ABX which would have put them way above limit and forced them to cut the position at the top of the market or hedge with ABX CDS. The muppet in charge of the desk argued that the illiquidity of the cash ABS market proved they couldn't lose any money and they were very happy with all the interest they were being paid on those 'risk free' mezz (BBB) ABS and CDOs. He said that the volatility of the ABX said precisely nothing about the cash market, and he took home a huge bonus in February 2007, while mine was cut presumably for rocking the boat. I was told several times by the MD that I was undermining my credibility by putting out stress test numbers every month that showed we could lose $30m in one month on a $400m ABS portfolio. In July 2007 it lost $30m. It did the same again in August. Within 6 months that casino was out of the prop trading business with a $1bn loss (90% at HQ in the ME ... and nearly all of that was lost on AAA a ABS/MBS/CDO portfolio so the Chairman blamed the rating agencies not the muppet traders or the greedy 'look the other way and take the bonus' bosses) and I was the only survivor of all the senior risk people in the London office. I asked to be let go on the same payoff terms as the rest and another six months later that happened.
One last word to the 'personal responsibility' brigade - and I do mean my last word because I'm not into internet flame wars: with all due respect, I think you are missing the point. The mortgage brokers
knowingly encouraged and facilitated fraud. Sure, there were plenty of middle class flipmycondo.com type speculators who weren't stupid, rode the train and knew in advance they were going to walk away from the debts if the bets didn't pay off - certainly in the US & UK anyway, in many other countries (e.g. the Netherlands) that's not so easy to do. But there were also a lot of people at the bottom of the heap, particularly in the US with virtually no education (finanicial or otherwise) who were suckered in by more knowledgeable and greedy 'pushers' for their personal gain, not their dumb clients' gain. What does caveat emptor mean to someone who was a dunce at school? Surely the far greater responsibility is on those who facilitated the fraudulent applications and the casinos who securitised them, not least because
they were also knowingly defrauding their shareholders for personal financial gain. Oh, and BTW they unwittingly destabilised the entire world economy,
not least the airline industry. Given that you're on this board, aren't you negatively affected in any way? Doesn't law enforcement typically target the pusher more than the junkie? - is that wrong also?