The title of this post is taken from a Sicilian proverb. I think it partly describes the corporate culture that helped create the current banking catastrophe. I also think that it helps explain a phenomena endemic to a lot of bubbles throughout history: the corresponding madness of crowds, or suspension of common sense, which leads to their creation.
Risk models that didn’t account for crisis conditions have proven worthless in the midst of a seemingly impossible crisis. When supposedly riskless mortgage-backed securities seemed too good to be true, the prevailing wisdom provided that they were too complicated for most people to understand. The financial products at the root of this crisis are often described in the popular media as highly complex, esoteric, and arcane. The first descriptor is at best an excuse for ignorance, but the second and third imply something vaguely supernatural. Perhaps in this case, as with alchemy or voodoo, skepticism is easily exchanged for a good return on investment.
Amidst the cutthroat culture of the now mostly bygone investment banking industry, few were willing to confess they didn’t understand how such large returns were possible with such little risk. The profit prophets spoke in tongues, but the message was insidious. As told in this now infamous account, heretics, though few in number, were persecuted.
Now it is clear that so much financial Latin hid not just the shortsightedness of experts. It also hid risk, only in plain sight.
