One of the more depressing bits of emerging conventional wisdom is the notion that the financial system took on “too much risk” in recent years. I think it is equally accurate to suggest that the financial system took on too little risk. Consider the risks that were not taken during the recent credit and “investment” […]
Read more...The time has come to announce the formation of the Banana Republic Club. Membership is open, with the sole requirement being that nominees correctly discern behaviors in advanced economies that resemble those of corrupt developing countries, which for sake of convenience are referred to as banana republics. Members are eligible to receive a Carmen Miranda […]
Read more...With the financial system on the exam table, it has been more than a bit troubling, that certain questions are neglected in serious academic/policy debates. The discussion of possible remedies focuses on regulatory solutions, everything from requiring mortgage brokers to be licensed to increasing financial institution capital requirements and having much greater harmonisation, as the […]
Read more...Mohamed El-Erian, co-CEO of Pimco, usually strikes a cool, rational tone in his periodic comment pieces in the Financial Times. Today’s article, “Traversing wild market swings,” is a noteworthy departure. Or maybe it isn’t. El-Erian keeps to his detached, analytical style,but the guts of his message is so blunt that the packaging is secondary: Successful […]
Read more...I’m a bit perplexed at a Gillian Tett piece in the Financial Times in which she is shocked, shocked that managers didn’t heed warnings from subordinates that risk models weren’t all that they were cracked up to be. Her article wouldn’t seem odd, except it focuses on a really basic shortcoming, namely that many models […]
Read more...Roger Ehrenberg has a great post today, “Straight-talk on FAS 157: Blackstone and their Banker Buddies Have it Wrong,” which I suggest you all read. Although I was taken with the entire discussion, the last paragraph caught my attention: So why do risk managers and bank managements’ so consistently make bad decisions? Probably because there […]
Read more...Satyajit Das has a very useful post, “The Credit Default Swap (“CDS”) Market – Will It Unravel?,” in which he describes some of the ways that CDS may fail to perform as expected in real world situations, ie, when companies start getting in trouble. While this work isn’t quite at the Tanta Uber-Nerd level of […]
Read more...Reader Richard Kline is providing a mini-series that was prompted by an anonymous reader who had observed that a complex systems theory view might raise doubts about regulatory policy. Financial overseers believe that liquidity is always and ever good, but that view may be naive: Perhaps a lesson to be learned here is that liquidity […]
Read more...A year ago, I found Gillian Tett, then the Financial Times’ capital markets editor, to be the single most useful financial reporter by a considerable margin. She gave insights into areas that were important but badly neglected elsewhere, such as CDOs, credit default swaps, SIVs, all well before they entered the mainstream lexicon. She was […]
Read more...Reader Richard Kline, who provides regular, sophisticated comments, was keen to continue the discussion provoked by a post last week, “Hoisted From Comments: Greater Liquidity Produces Instability.” An anonymous reader offered a complex systems theory view of our modern financial system. The opening paragraphs: Perhaps a lesson to be learned here is that liquidity acts […]
Read more...Steve Waldman has a typically top notch post at Interfluidity,”Let’s not write the Fed a blank check,” in which he dissects the implications of the Fed’s request to Congress to pay interest on bank reserves. Waldman explains the technical workings and the pros, and gets to the real issue. This represents a change from a […]
Read more...One of our pet interests has been how the use of mathematics and models can unwittingly enable people to fool themselves. We see this regularly when working on deals. The model for the target business’ performance somehow becomes more real than the company. When the numbers don’t work, if you can come up with a […]
Read more...Below is a provocative line of thought from an anonymous reader. It supports a gut feeling that I have been unable to prove, namely, that lowering of boundaries between markets (ranging from the large number of global macro hedge funds to the large number of retail currency speculators in Japan) is destabilizing. I’ve found the […]
Read more...A page one story in the Wall Street Journal, “Merrill Upped Ante as Boom In Mortgage Bonds Fizzled,” tells the sorry tale of how the brokerage giant did so much damage to itself via a pathological disregard for risk at the very time when the mortgage markets were about to sour. The firm is still […]
Read more...Avinash D. Persaud gave a speech to the Committee of European Securities Regulators (posted at Willem Buiter’s blog) that argues that banks’ risk models and regulation based on market based pricing were bound to fail. That’s a very bold claim, yet Persaud appears to have the goods. If any of you have worked with models, […]
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