Röthig goes on to describe what appeared to be a scrupulous and complicated investment strategy but was actually a mindless, rule-based investment strategy. IKB could “price a C.D.O. to the last basis point,” as one admiring observer told Risk in 2004. But this expertise was a kind of madness. “They would be really anal about, say, which subprime originator went into these C.D.O.’s,” says Nicholas Dunbar. “But it didn’t matter. They were arguing about bonds that would collapse from 100 down to 2 or 3. In a sense they were right: they bought the bonds that went to 3, rather than to 2.” As long as the bonds offered up by the Wall Street firms abided by the rules specified by IKB’s experts, they got hoovered into the Rhineland Funding portfolio without further inspection. Yet the bonds were becoming radically more risky because the loans that underpinned them were becoming crazier and crazier.
“It’s The Economy, Dummkopf!” by Michael Lewis in Vanity Fair
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