It’s Winter 2008. Names like Lehman Brothers and Bear Stearns are old news, but still fresh wounds that pundits in expensive suits are still nursing on the public’s behalf.
Almost in between breaths, you catch an interesting set of words: Collateralized Debt Obligation, or “CDO.” In January, Bank of America made the decision to merge with a company named “Countrywide” based primarily upon Countrywide’s ability to originate new mortgage debt. In essence, Bank of America made the decision at issue here: they thought the party of returns on mortgage debt was just getting started. Spoiler alert: they were wrong.
Context is Everything
Kahneman’s analysis would ask us to put ourselves in Bank of America CEO Ken Lewis’s shoes. Rather than the more convoluted question of Dewey posed in this blog’s first post, this question, at least on its face, seems more obvious: this is purely a System 2 question. We’re asking about the future valuations of homes at the core of mortgage debt. Simple. Sort of.
System 2 does not simply say “use numbers,” but recognizes numbers as a convoluted language, every bit as imperfect as everyday speech. Rather than pontificating truth from a mountaintop, quantitative data presents us with perspective that runs only as deep as the narratives that produced it. In short, Kahneman would explicitly direct us to choose the right numbers. In essence, this question asks for the best data source to serve system 2’s needs.
Conclusions and Recommendations
First, Bank of America should have analyzed the data for itself. Prior to 2008, experts like Alan Greenspan professed confidence in the housing market’s numbers, but few actually ripped open the CDOs. They might have made a fortune if they had.
Second, once you have that data, keep your own counsel. Even though Moody’s and S&P claimed to have analyzed the same data and found that all signs read “growth,” have the courage to challenge the experts. Again, courage pays.
All in all, when you read analyst reports, Kahneman would probably agree with a famous phrase from a certain ex-president: “Trust, but verify.”