CRYPTOCHAOS

According to multiple sources, a trader entered a "b" for billion instead of an "m" for million in a trade possibly involving Procter & Gamble [PG 60.75 -1.41 (-2.27%) ], a component in the Dow. (CNBC's Jim Cramer noted suspicious price movement in P&G stock on air during the height of the market selloff..)

Sources tell CNBC the firm in question that handled the erroneous trade is Citigroup [C 4.04 -0.14 (-3.35%) ]. The bank said it has no evidence of a bad trade but is investigating the situation

As top Federal Reserve officials debated whether there was a housing bubble and what to do about it, then-Chairman Alan Greenspan argued that the dissent should be kept secret so that the Fed wouldn't lose control of the debate to people less well-informed than themselves.

"We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand," Greenspan said, according to the transcripts of a March 2004 meeting.

At the same meeting, a Federal Reserve bank president from Atlanta, Jack Guynn, warned that "a number of folks are expressing growing concern about potential overbuilding and worrisome speculation in the real estate markets,

When processes happen very fast, and there is no way to isolate one part of the system from another, the system is tightly coupled.  Tight coupling allows small incidents to spread into large-scale failures.

In contrast, one senior banker at Bear Stearns Cos. turned down the business. He questioned the propriety of selling deals to investors that a bearish client was involved in putting together, according to people familiar with the matter.

...

In a statement, Goldman said it "never represented to ACA" that Paulson was investing in hopes the values would rise. People close to the firm said officials saw no need to disclose to investors that Mr. Paulson had a hand in creating the portfolio or was taking a bearish position.

In 1988, Joseph Tainter wrote a chilling book called The Collapse of Complex Societies. Tainter looked at several societies that gradually arrived at a level of remarkable sophistication then suddenly collapsed: the Romans, the Lowlands Maya, the inhabitants of Chaco canyon. Every one of those groups had rich traditions, complex social structures, advanced technology, but despite their sophistication, they collapsed, impoverishing and scattering their citizens and leaving little but future archeological sites as evidence of previous greatness. Tainter asked himself whether there was some explanation common to these sudden dissolutions.

Goldman reduced its exposure to mortgages “early,” Viniar said, “before most people had a view that the world was getting worse.” At one point before the magnitude of the problem became crystalline, Viniar thought that Goldman had become too bearish, and insisted that the firm’s traders reverse course somewhat. That decision later cost the firm around $200 million. “They were 100 percent right,” he said. “I was 100 percent wrong.”

Curiously, other firms did not follow Goldman’s lead and, in fact, during the first quarter of 2007 used the perceived weakness in the market for mortgage securities as an opportunity to double-down on their already huge long bets. This was the turning point. If Bear Stearns, Lehman Brothers, Merrill Lynch, Citigroup and AIG had the same perception of risk as did Viniar and his colleagues at Goldman Sachs, there might have been a downturn, but there wouldn’t have been a meltdown.

I never get tired of reading this stuff.... Also, check out Liars Poker . I read the book back before I joined Salomon Brothers' Technology arm to help set up the 7 WTC trading environment. Good read.