Put a Cataloger in Charge of Wall Street!

OK, What Happened?
Quite simply, the London branch of AIG got started insuring collateralized debt obligations (CDOs)--"pools of loans sliced into tranches and sold to investors based on the credit quality of the underlying securities," is how The New York Times' Gretchen Morgenson described them.

Of all people, President George W. Bush clarified the problem in a speech to the Fredericksburg, Va., Rotary Club on Dec. 17, 2005:

And the issue -- the housing issue has changed. I can remember the first home I bought in Midland, Texas. I remember going down to the savings and loan and sitting down with the savings and loan officer and negotiating with the savings and loan officer. Well, this day and age you're going to use -- mortgages have been bundled, so the savings and loan doesn't own the mortgage anymore, or the bank doesn't loan [sic] the mortgage anymore, the local lending institute doesn't loan [sic] the mortgage anymore: it's owned by some international group, perhaps, or it's been bundled into an asset. And so there's hardly anybody to negotiate with. And so some lenders [sic] aren't sure where to turn. They have credit-worthiness, they may get pinched as their interest rates reset.

These mortgages were collateralized and resold around the world before anyone knew how the individual customers would perform. As it stands now, nobody knows what's out there.

Why a Cataloger Should Have Been in Charge
The idea that bankers/lenders are so greedy that they would bundle a big bunch of mortgage loans together--with no sense of how each homebuyer behaved--and sell this polyglot collection to other bankers who are too stupid to understand what they're buying, and who in turn sell this junk to their clients, is appalling.

Obviously some of these homebuyers will pay their monthly mortgages and perform just fine. Others will find themselves in a financial bind and either walk away or suffer foreclosure. Any CEO presiding over a business model that treats all customers as equals is--in the words of my late, inelegant, Texas mother--"sucking around for a bloody nose."

The youngest cub in the catalog business knows that customers must be segregated based on performance. The simplest formula in the world of cataloging is R-F-M, or recency-frequency-monetary value. A frequent buyer who bought within the last 30 days and has spent a bunch of money with you is far more valuable than the person who bought one item two years ago and nothing since.