New Century and the delusion of being better than the rest

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This, from a comment Thursday by one Peter Varhol, deserves its own post:

I’ve lived through a couple of real estate downturns now, and the cause always seems the same – lenders loosen standards (inflated appraisals, mortgages at 105% of selling price, inflating income, etc.) to chase more business. Will they never learn from the past?

According to WSJ a week ago, New Century billed itself as “a new kind of blue chip.” Yet there was nothing new or unique about their business practices to indicate that they were in any way better than what others were doing or had done. If there is no new business model or unique differentiator, why do companies persist in believing that they will be significantly more successful than others?

I think the answer is that there are such great rewards to pretending that you’ve found a great new business model–big bonuses, a rising stock price–that it’s worth whatever risks you take. Also, some people are just disposed to overconfidence and overoptimism. And as long as they’re not out of control, these traits are actually conducive to entrepreneurial success. If everybody assessed their odds of success realistically, nobody would start businesses.

That said, financial businesses are unique in that it’s possible to give the appearance of being successful for years on end merely by taking what turn out later to be really dumb risks. Which is where the New Century people seem to have fit in.