Monday, January 4, 2010

Good Faith Error Caused Financial Mess, Not Fraud

...the essential question is one of knowledge and inevitable ignorance of the future, or knowledge and error, or what we may call the doctrine of plausible mistakes. As the witty observer Don Schackelford said about the savings and loan collapse of the 1980s, “the unintended folly of the reasonably decent was far more costly than the contrived villainy of the corrupted few.”

This is a fine phrase. In the same vein, here is Bagehot, writing in 1873, in one of my favorite passages of Lombard Street:
A manager sometimes committed frauds which were dangerous and still oftener made mistakes that were ruinous … Error is far more formidable than fraud: the mistakes of a sanguine manager are far more to be dreaded than the theft of a dishonest manager … The losses to which an adventurous and plausible manager, in complete good faith, will readily commit a bank, are beyond comparison greater than any which a fraudulent manager would be able to conceal.
How do ex ante credible and intelligent actors come to make such momentous mistakes? Well: “Many things which were considered impossible nevertheless came to pass.” For example, it was generally considered impossible for U.S. national average house prices to fall, let alone to fall by 30 percent, but they did.
From "Error vs. Fraud" by Alex J. Pollock on the American. Pollock is a resident fellow at the American Enterprise Institute. From 1991 to 2004, he was president and CEO of the Federal Home Loan Bank of Chicago.

1 comment :

  1. Fraudulent can be avoid by doing some background check, but if the managers of any bank or money firm is a different story. This the main reason why, I always double check my information. I am planning to get a home loan for the lakefront residences and so far everything is going smooth.