WMDs and the Housing Crash of ‘08

In chapter two of Weapons of Math Destruction, author Cathy O’Neil describes her journey into the financial industry. First, she begins talking about what her day-to-day job was at D. E. Shaw, and elaborates on the company as a whole to give an understanding of what a hedge fund is and their goal as a company. Then she explains the housing crash of 2008. After giving a brief, yet detailed, explanation as to how banks work and how the housing market operates, she describes the downfall of the U.S. economy. She says the securities that were being sold were bought under false assumptions. The first assumption was that the risk of buying these securities was heavily analyzed by mathematicians to ensure that their ratings were accurate. She states this was not the case as “the math was directed against the consumer as a smoke screen. Its purpose was only to optimize short-term profits for the sellers.” The people putting together these securities knew they would fail, but they didn’t care as they would be able to line their pockets better if they were able to say they were low risk. The second assumption was that not everybody would default on their loans at the same time. This would soon turn out to be a plausible outcome.

How does this fit into the Weapons of Math Destruction story line? Is there some algorithm working as a bad actor in this story? The answer to that question is yes. The risk that was attached to mortgage-backed securities was a WMD. Although there was an algorithm that was to be used to calculate the risk, this algorithm was flawed and was used to make the risk levels look better than they truly were so that higher ups, once again, could pad their pockets.