Phil Angelides, former California state treasurer and now head of the Financial Crisis Inquiry Commission, says he just doesn’t understand how Wall Street executives can claim they never saw the meltdown coming. In his view, the evidence was sitting in plain view, especially in places like Florida and California where bad home loans were piling up. The big banks must have known full well what was going on because they were buying these loans. Yet, as Angelides stated, “We’ve heard for a year how folks on Wall Street and people in Washington didn’t see it coming.”
This doesn’t sound like a feared “black swan”: the threat nobody had considered and didn’t see coming, as proposed by Nassim Nicholas Taleb in his celebrated 2008 book The Black Swan; The Impact of the Highly Improbable. How did this happen? Why did risk management, and common sense, fail to safeguard against the financial crisis? And where were the control departments—including internal audit—when these issues started bubbling up? Today, it would seem ridiculous to even consider buying a pile of diced up mortgage securities with scant documentation and extreme loan-to-equity values.
