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, […]
Read more...People never learn, as John Dizard reminds us via “Forget the past and you make the same mistakes again” in the Financial Times. Quite a few policy makers have talked up plans to use Fannie Mae and Freddie Mac as central agents in salvaging the US housing market, typically by refinancing stressed borrowers. The markets […]
Read more...This is priceless. Being an objectivist means never having to take responsibility for your actions. Greenspan has now decided to pin the financial market crisis on models. Gee, it was your Fed, Mr. Greenspan, that endorsed letting regulated entities decide how to mark and manage their derivative and structured product risks without anyone at the […]
Read more...As I am sure you all know by now, Bear Stearns started coming spectacularly unglued last night, and called JP Morgan, who in turn tapped the Fed, who sent examiners who stayed at the firm all night. In the morning, a plan was announced by which the central bank would assume the risk of lending […]
Read more...The news that Bear had to run to the Fed for help with its rapidly deteriorating cash position, and JP Morgan has been muscled into assisting in the rescue is a sign that Bear was deemed too big to fail. The Fed is lending against Bear’s collateral (I haven’t seen an estimate as to how […]
Read more...No, this isn’t a confessional by Jerome Kerviel. Instead, it’s a few excerpts of a very good paper by the Senior Supervisors Group (regulators from France, Germany, Switzerland, Britain and the United States) who went poking around 11 major financial institutions to find out how they botched their risk management so badly last year. The […]
Read more...It is truly amazing how disconnected credit instruments are from other tradeable financial investments. The Fed released the minutes from its latest Open Market Committee meeting, which lowered the growth forecast and increased the inflation forecast. That shouldn’t be cheery at all; the stagflationary 1970s were a terrible time for equity valuations, but the US […]
Read more...The pain and the costs of the dislocation in the auction rate securities market only continues to rise. In case no one has yet said this clearly enough, this product was a disaster waiting to happen. The idea that one is going to fund long term obligations in a short term funding market is nuts, […]
Read more...Our colleague Susan Webber’s article, “The Dark Side of Optimism” is the cover story in the current issue of The Conference Board Review. It discusses the deep roots of optimism and how it can undermine critical thinking and accurate risk assessment. Her piece is wide-ranging, looking at psychological research, cognitive biases, cultural icons, military history, […]
Read more...Those of us who have an eye for trouble have been nattering about the credit default swaps market from time to time. This $46 trillion unregulated market has suddenly captured the imagination after AIG reported in an 8-K filing that it had certain weaknesses in its internal controls and that the value of its credit […]
Read more...Some have taken notice that investment banks are much more cavalier with other people’s money that they are with their own dough. We’ve gone further in earlier posts, saying that investment banks shouldn’t be public companies (scroll towards the end). A Bloomberg article points out the obvious: the Street has sustained losses unimaginable in the […]
Read more...A Bloomberg story today points out that the snowballing credit market crisis is an indictment of the use of quantitative measures of risk, particularly one of the longer established and still widely used approaches, value at risk. VAR uses historical trading patterns to determine the probability of loss to a certain percentage of certainty. Firms […]
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