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The problem might be a bit more fundamental than you seem to think.  The insurance claims we're talking about are the current means required by bank regulators -- all over the world now since the Basel II became accepted as the norm -- for banks to make longer term loans of more than a year or so. Banks' deposits and securitized debt is typically short term -- a few months or a year.  This means that if banks want to make longer term loans they have to find either longer term securitized debt or they have to find a way of fixing the interest rate they pay for their capital to be close to the interest rate they charge for the capital they lend. This is done, under the current regulatory regimes, with interest rate swaps and other derivative agreements which have been arranged in large part by AIG's brokers and with their guarantee, much like the Chicago Board of Trade works but with individual customized contracts instead of identical put and call options that can be bought and sold on a market.  It really is a P2P-style system that AIG runs with these customized derivatives contracts.  

You mention that there are large portions of these insurance contracts which are speculative, and this is true.  In fact, exactly 50% of them are, since in a hedge instrument, the insured party has to be joined to a speculative party, such as the billionaire in the Economist article.  The problem, however, isn't that the billionaire might lose his profit.  Rather, it's that banks will be out of regulatory compliance on risky capital if they can't be assured of their rates, they will be forced to curtail long term lending or even call in their longer term business loans, leaving businesses all over the world without capital and credit lines precisely at the time when we all need purchasing power the most.

It is even worse when you consider that many of the banks whose debt is insured through derivatives contracts arranged by AIG are not US banks and not covered by American regulators or American financial guarantees if the US wanted to start covering banks' insurance.  This could cripple many 3rd World banks especially and exacerbate their already precarious lending situation.  

by santiago on Sun Mar 22nd, 2009 at 11:43:05 PM EST
[ Parent ]
santiago:
Rather, it's that banks will be out of regulatory compliance on risky capital if they can't be assured of their rates, they will be forced to curtail long term lending or even call in their longer term business loans, leaving businesses all over the world without capital and credit lines precisely at the time when we all need purchasing power the most.

Which is why nationalisation and a state bank is the answer.

Let the middle men sink. Lend direct to the people who need the money.

Even if 75% of them default, that's still going to give a better return than trying to feed more brains to a zombie bank which will twitch a few times, fart loudly, and then roll over and stop moving regardless of how much it's been stuffed full of gold and decaying body parts.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Mar 23rd, 2009 at 07:56:43 AM EST
[ Parent ]
Even government is a form of a middleman, remember.  What you say might be true, but it also might not be. I haven't seen a reliable estimate yet on the costs and benefits of nationalisation versus bailing out.  I suspect that the benefits of bailing out are dwindling every day, but I'd like to see a good estimate before hiring the contractor for such a big and ambiguous job.
by santiago on Mon Mar 23rd, 2009 at 12:45:57 PM EST
[ Parent ]
The problem is the nature of the speculation.  As I commented in Jerome's diary, they wrote the swaps like insurance policies and then handled them like securities, which just can't work.  It's too late to start handling them like insurance policies, so the banks need to stop booking them like insurance policies.  That these CDSes satisfy the regulatory requirements only shows how weak the Basel II framework is.
by rifek on Mon Mar 23rd, 2009 at 09:04:27 AM EST
[ Parent ]
You stated the problem correctly: Basel II is a weak framework. Unfortunately, it is also the the worldwide framework upon which virtually every country now bases its banking policies.  That's one big reason why there is such a reluctance to nationalise right now, even though I think it will eventually happen.  Doing so without a good analysis of the impact first could very likely put most financial and insurance institutions in the world in violation of their countrys' banking regulations -- making them all outlaw entities and the idea of banking regulation of any kind an absurdity.  

Finally, it's not really the CDSs that are the problem for indirect effects on the rest of the banking system.  It's the interest rate swaps that are the issue. Banks can only lend long term if they can be assured that the interest they pay for money won't be higher in the future than the rate they committed to charge on long term loans.  They obtain that guarantee by a swap where a counterparty takes the other position.  None of these are in danger of default in and of themselves.  What's in danger is the ability of the coordinator of many of these complicated insurance policies -- AIG -- to continue to guarantee them and do the job of collecting and distributing payments from one counterparty to another.  Conceivably the government or other entity could do the job, but no one really knows how hard or costly this job is yet if performed by another party, so just showing up and declaring the Feds are in charge could very well cause more harm than good.  

The calculus is simple: If it costs less for the government to do it, then nationalisation is the answer.  But if the total costs of nationalisation to society are expected to be higher -- which is what Geitner now believes -- then the facts don't yet support nationalisation regardless of what everyone's gut feelings might be.

by santiago on Mon Mar 23rd, 2009 at 10:14:22 AM EST
[ Parent ]
An interest rate swap is still an insurance policy that is traded like a security and is therefore on a collision course with itself.  Consequently there is no way the coordinators, including AIG, can guarantee them.  Trying to calculate the risk is like trying to bisect a sneeze.  Assets expended trying to continue the guarantees are wasted, and the effort is detracting from the resources available to actually fix the problem.
by rifek on Mon Mar 23rd, 2009 at 03:39:49 PM EST
[ Parent ]
are not insurance - they are a series of simple forward sales - a future, unknown interest rate against a fixed one.

And the interest swap market is not at all organised by AIG - it's a assive multi-participant market, probably the deepest and most liquid in the world. The problems are not coming from interest rate swaps.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Mar 23rd, 2009 at 05:42:44 PM EST
[ Parent ]
AIG is one of the principal coordinators of IRS, but, yes, you are correct that IRS is not at all where the problem is coming from. Rather, IRS contracts are a likely unintended victim of an ill conceived nationalisation of the kinds of entities that are in the business of arranging them, with uncertain consequences throughout the financial system.  The market for IRS has actually largely collapsed along with the market for long term securitized debt because it is also highly dependent upon counterparty confidence which is at an all time low. However there are existing agreements in which major investment banks and insurers such as AIG provide counterparty guarantee services and payment transfers.

(And I disagree -- they certainly are insurance, as are all derivative instruments. They insure fixed rate lenders against the event of rate volatility for refinancing their own capital.)

by santiago on Mon Mar 23rd, 2009 at 06:16:26 PM EST
[ Parent ]
I'm afraid we'll have to disagree on this.  Under the Basel II regime, they are being booked as insurance, even though they are certainly not being handled as insurance, which is my point.  Booking something as more secure than it is is inherently destabilizing and deflating.

I didn't say AIG organized it, just that it's a player, it's a problem, and it's in the spotlight.  And to say that the IRS market is the deepest and most liquid in the world is to damn with faint praise.  Any of these instruments is only as good as the parties along its trade trail, and how many of those parties are good?  That said, I agree that IRSes are not the source of the problem.  I believe that honor (at least in this aspect of a massive, multi-sourced mess) goes to the fact that the Basel II "standards" can be gamed by a drunken chimpanzee.

by rifek on Tue Mar 24th, 2009 at 12:24:05 AM EST
[ Parent ]
I'm taking a very long view on this.  Clearly the global financial system got totally out of kilter with the real economy and produced quantities of debt so vast that they cannot be repaid out of real economic activity any time in the foreseeable future.  Trying to fix that system now would destroy many good banks/businesses and any prospect of global economic recovery any time soon.

The solution is therefor a revolutionary one - but also a classical market one - i.e. let those instiutions which "went mad" fail and focus all state rescue efforts on those businesses which are vital to future economic activity.

DXebt finance as the dominant mode of finance is dead.  The future has to be built around much greater equity, bond, and revenue sharing models linked much more directly to productive enterprises where risks and rewards can be measured in a reasonably transparent way.  

Where I perhaps disagree with Migeru et al is that I don't believe there is a regulatory fix to the current system...  we need a new one... and that effectively requires a revolutionary transformation of how business is done, financed and regulated in the future - with debt being primary a vehicle for financing short term cash-flow requirements and longer term financing done through equity, bond, and revenue sharing covenants.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 23rd, 2009 at 09:51:33 AM EST
[ Parent ]
Frank Schnittger:
The solution is therefor a revolutionary one - but also a classical market one - i.e. let those instiutions which "went mad" fail and focus all state rescue efforts on those businesses which are vital to future economic activity.
The thing is you need to extricate "vital" parts out of faied monstrosities created by the repeal of Glass-Steagall

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Mar 23rd, 2009 at 09:58:26 AM EST
[ Parent ]
You might very well be right, but we should have actual, fact-based estimates of the total costs involved before jumping on the nationalisation bandwagon.

The debt explosion has caused more social claims against real resources than there are real resources available.  This problem is actually not uncommon and there are always two ways to solve it:

  1. Redististribute society's resources by giving priority to some claims over others. (Which leads to a stampede to get the highest priority claim on resources possible -- US treasuries.) or,

  2. Grow the amount of real resources so that the claims can be transferred to the future and made good then.

Right now, people have recognized that many of their claims on resources are unlikely to be honored, now or in the future, given more realistic expected rates of economic growth, so redistribution is now almost universally accepted as the right answer.  Problem is, redistribution is necessarily a highly contested policy because there are always lots of losers -- some people will be forced to give up their claims on resources -- their wealth.  And those people know who they are, and they are fighting like mad to hold on to as much as they can, and they're not all rich and not all poor who are in falling in the loser category here, whether it's nationalisation or not.
by santiago on Mon Mar 23rd, 2009 at 10:29:05 AM EST
[ Parent ]
santiago:
  1. Redistribute society's resources by giving priority to some claims over others. (Which leads to a stampede to get the highest priority claim on resources possible -- US treasuries.) or,

  2. Grow the amount of real resources so that the claims can be transferred to the future and made good then.

Or in fact


3/ Change the nature of the claim

In this case from a dated debt obligation issued by a credit middleman, aka a bank, to an open undated credit obligation issued by a producer of "money's worth" in value.


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Mar 23rd, 2009 at 11:48:17 AM EST
[ Parent ]
Changing the nature of an existing claim is just another form of politically coerced redistribution.
by santiago on Mon Mar 23rd, 2009 at 12:38:53 PM EST
[ Parent ]
Not if it's something people agree to do without reference to the government.

That's what a partnership approach entails. Two way agreement.

To replace dated secured debt with undated Units of revenues leads to a better outcome both for the financier and for the user of the finance.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Mar 23rd, 2009 at 01:19:53 PM EST
[ Parent ]
Government is just one of many possible forms of collective action.  It's not an agent by itself -- it's a result of the agency of people.  If two people engage in a two-way agreement, they have, themselves, formed a form of their own "government" for their own narrow purpose, just like a marriage, or a contract to buy a home in expectation of future payments. In all of these examples, power  -- the imposition of one party's interests over those of another's -- is still an important factor. So the word "government" is a red herring here.  

Doesn't replacing dated secured debt with undated units of revenues lead to a better outcome for the financier only if the value to the financier of having a more certain payment sooner is lower than the value of having a less certain payment in the future? All sorts of things can modify the magnitude and certainty of either form of reward for taking risk, but what determines whether or not someone is injured or benefited by the change is their own personal preferences, not the structure of payments themselves.  So anything that changes how people are rewarded for the risks they take when engaging in partnerships for profit necessarily results in losers as well as winners.  The only question is the number in each category, and that's still pretty ambiguous.

by santiago on Mon Mar 23rd, 2009 at 03:24:47 PM EST
[ Parent ]
santiago:
Doesn't replacing dated secured debt with undated units of revenues lead to a better outcome for the financier only if the value to the financier of having a more certain payment sooner is lower than the value of having a less certain payment in the future?

What it does is transform the risk of non-payment to the risk of not finding a buyer. If a Unit is redeemable for production, rather than revenue, then there is the option of actually using the production.

IMHO Units redeemable in energy or land rental value score highly in terms of their use value to the owner/investor.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Mar 23rd, 2009 at 03:40:38 PM EST
[ Parent ]
What you're proposing to do is to allow remuneration for risk even when a market does not exist for a commodity, and you're right that it does provide a lot of benefits to some people who would be most susceptible to deprivation if a market for a commodity failed or didn't exist.  In Amartya Sen's terms, you're providing an exchange entitlement to something that is not as dependent upon markets, so you can smooth people's consumption patterns during periods of uncertainty or market volatility.

However, you still can't escape the issue of differing personal preferences for risk just by changing how risk is compensated.  Some people will always be more averse to risk and some will be less so, so just changing how risk is compensated necessarily rewards some and injures others.  One of the limits of your system appears to be that fragmented lending is done away with -- people can't go around anymore with the same claim on the same resource, both of them independently believing it will be there for them whenever they need it.  In a time like now such a limit seems like a really good idea because there were obviously too many claims upon the limited resources available.  However, although the risk of a period like now occurring always exists, the truth is that most of the time it's perfectly alright -- indeed, much more efficient -- to allow two or more people to walk around believing they each have entitlement to the same thing while they are not using it.  If this is the case, then societies which allow such higher risk but usually more efficient ways of organizing resources to occur can be expected to outperfom, economically, and thus politically, those societies which choose to limit themselves to a more conservative, albeit more stable, way of determining who has access to what resources, like your innovative idea does, right?  It's the ever reappearing revenge of the dismal, it seems to me.

by santiago on Mon Mar 23rd, 2009 at 04:27:23 PM EST
[ Parent ]
One of the interesting qualities about what I like to call "Open" Capital ("nth's") and Credit (redeemable Units) is that the securing of supply may be entirely distinguished from the securing of price. So you can make a supply contract, and then pay for it either conventionally or by redeeming a Unit the supplier had issued previously, and which you had bought on the open market to secure price.

Another aspect is that ownership and control may also be distinguished in new ways. Unlike in a Corporation, where it's typically one share, one vote.

"Property" is not in fact, as most people think, an object. It is the relationship between the subject (individual, or collective of them) and the object (eg land). ie land is the object of a man's property, or something which is proper to the man.

This property relationship consists of a bundle of rights and obligations, and I believe that by packaging the whole relationship up within the legal concept of an open "Corporate" we may actually then share out these rights and obligations optimally in an extremely simple but effective "co-ownership" framework agreement.

Limited Liability is a red herring.

Indeed, if you bring all the stakeholders "inside the box" - as I did with a film - then there is really no need to limit your liability at all since the people you would be protecting yourself against are now all your partners....


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Mar 23rd, 2009 at 05:00:41 PM EST
[ Parent ]
Property is not a relationship between an object and and person.  Rather, it is a relationship between people.  The object in question is proper to some and not to others -- this is the relationship that rights to property establishes.  

But more generally still, is it really possible to bring ALL the stakeholders inside the corporate box?  Even in a film, for example, the collective can be sued or otherwise attacked by an outside party who feels materially offended by the film.  Or did you find a way to include that possibility too?  It would seem that in any collective action, particularly a commercial, political, or artistic one, there will always be stakeholders who you want to exclude precisely because they have a stake in the outcome that is contrary to your own.  How do you allow for that?

by santiago on Mon Mar 23rd, 2009 at 06:02:33 PM EST
[ Parent ]
santiago:
The object in question is proper to some and not to others -- this is the relationship that rights to property establishes.  

I give you that property rights necessarily involve relationships between people individually and collectively, but the legal protocols set out the relationship between object and person, and I am surprised you think otherwise.

In fact, when you say "proper to some" you are recognising that a relationship exists.

santiago:

But more generally still, is it really possible to bring ALL the stakeholders inside the corporate box?  Even in a film, for example, the collective can be sued or otherwise attacked by an outside party who feels materially offended by the film.

The logical conclusion is for the viewer to join a "viewers club", and contract out of such nonsense by participating on the basis of alternative dispute resolution. But as it was a ten minute black and white comedy, we never got that far.

My point is that there is no reason why a consensual protocol cannot transcend all others.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Mar 23rd, 2009 at 06:31:08 PM EST
[ Parent ]
I don't agree on the property question.  Laws and other social norms pertain to human interactions and do not define a relationship with an object but rather a relationship between people regarding exclusive use of an object.  Without such a law or social norm, people could still use the object like it is, but just not exclusively, so it's the social relationship that is specified by the social rules not the relationship between person and thing.

On your main point, I think that it could be entirely possible that a consensual protocol like you are describing could transcend all others, but in order to do that it would have to provide benefits to a certain class or classes of powerful people who have an interest in seeing it happen, just like every other historical change in the way society has been ordered.  That's the part I don't quite see yet, although even without that, I do see the possibility of it becoming an additional organizational tool in the capitalist toolbox such as limited liability and traditional cooperatives.

A key benefit of limited liability, however, is that there are still lots of reasons for people to want to be excluded from risks but still participate in a collective enterprise, including many non-economic reasons, which means that it still might be more efficient do so even if there is an ongoing externality problem, which is what your system goes a long way toward solving.

by santiago on Mon Mar 23rd, 2009 at 11:54:34 PM EST
[ Parent ]
santiago:
Laws and other social norms pertain to human interactions and do not define a relationship with an object but rather a relationship between people regarding exclusive use of an object.

I think my only difference with you is semantic.

For me, a protocol defining a relationship with an object and a protocol defining a relationship between people regarding exclusive use of an object both necessarily include reference to both the subject individual(s) and the objects(s).

ie

<subject><relationship><object>

And it is the potential of consensual protocols for defining the property relationship that interests me.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Mar 24th, 2009 at 01:14:14 PM EST
[ Parent ]
I can't agree with that:


DXebt finance as the dominant mode of finance is dead.  The future has to be built around much greater equity, bond, and revenue sharing models linked much more directly to productive enterprises where risks and rewards can be measured in a reasonably transparent way.  

We are in a crisis to a arge extent because no riks analysis was performed on underlying assets, and one of the reasons this happened is that those that structured the financial instruments did not hold them - and did not really care if they were sound: they only cared if they were marketable, which is not the same thing.

Bank debt, held for the long term, based on thorough analysis of the borrower by the bank, which keeps the asset on its books, is a lot safer. Less profitable, boring, but certainly safer.

Peer-to-peer finance does not work because nobody can do the requisite risk analysis.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Mar 23rd, 2009 at 05:46:33 PM EST
[ Parent ]
Jerome a Paris:
eer-to-peer finance does not work because nobody can do the requisite risk analysis.

Peer to Peer finance strictly refers to direct investment in a productive asset by an investor without a bank as middleman, and if it works with a bank as middleman it is also capable of working directly. But clearly whether the business model is or is not intermediated is not your point.

So lets forget "Peer to Peer". It's the concept of what I refer to as unitisation which is the issue here, I think.

Are you thinking of financing development of productive assets?

Or are you thinking of long term financing of developed productive assets?

Or are you thinking of a hybrid where long term finance is raised to finance development and stays in place?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Mar 23rd, 2009 at 06:52:52 PM EST
[ Parent ]
is that you can't break down an investment into a thousand small bits that can be financed separately. You have to have the whole package in one go. The coordination role of putting that package in place is what banks do.

Whether they keep the risk to themselves, share it with a few similar banks on the syndication market (ie a bank loan), or sell it widely via a securitisation (ie a captial market instrument) is largely irrelevant.

What matters is that critical role of putting all the money on the table in one go at one single time. That's the value of banks. Nothing else.

Your unitisation is a fine way to share out financial assets, but it cannot help to create them. That's the job of bankers. One which will never disappear.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Mar 24th, 2009 at 12:57:49 PM EST
[ Parent ]
I have always said that banking as a service is necessary and creates value. It is credit intermediation that is IMHO not only sub-optimal but also redundant.

Jerome a Paris:

What matters is that critical role of putting all the money on the table in one go at one single time. That's the value of banks. Nothing else.

I agree: but money is a means to an end.

It's not the money churning out electricity and getting it to Joe Sixpack, it's the turbine and infrastructure - and everything which went into it - for which fiat credit = money was created and exchanged over the period of construction and implementation.

If the land is leased for a share of production, then no fiat money is needed - ever - for land purchase or use.

If the turbine is leased for a share of production, then you don't need money to buy the turbine either, and maybe the investors in the turbine-maker might be more interested (the way things are going) in streams of energy rather than streams of fiat money?

ie the turbime maker evolves to a service provider as well.

If - as I believe is possible - we are able to "monetise" energy then your valuable role as an investment banker will still remain the same, except that you will not be looking at projects in terms of the "cost of money" in quite the same way, since the input cost of renewable energy and energy efficiency savings is zero.

You will instead be looking at viability directly in terms of energy invested against energy produced; the likely exchange value of the production over time; and the risks that the project will be concluded on time within its budget, and so on.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Mar 24th, 2009 at 01:46:01 PM EST
[ Parent ]
If banks can do risk analysis, so can non-banks.

The difference isn't between analysis and no analysis, it's between being on the hook for the risk directly, which is likely to concentrate the mind somewhat, and attempting to palm it off on to some third party - either by direct insurance, or by spreading out that the risk so thinly that it stops appearing risky.

The irony is that to some extent this is what's been happening already. Wall St has almost been acting in a peer to peer kind of a way, but with the - valid - assumption that risk can always be shared with the government, making it almost risk free.

But there's no certain reason why peer to peer has to be this irresponsible - any more than there's a certain reason why banking can only be done in a boring and safe way.

Obviously it can be done in other ways too, as everyone has discovered.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Mar 23rd, 2009 at 06:56:39 PM EST
[ Parent ]
The banks' primary role is first to create the asset, and then only to seel it or keep it.

Of course, if the model is that they don't keep it (and note that unitisation falls into that category), then they may be incentivised to structure worse assets.

And contrary to what you think, doing proper risk analysis is actually pretty damn expensive and difficult. Bankers' pay (as highly qualified professionals) is justified, to that extent.


In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Mar 24th, 2009 at 01:00:48 PM EST
[ Parent ]
Jerome a Paris:
Of course, if the model is that they don't keep it (and note that unitisation falls into that category), then they may be incentivised to structure worse assets.

In the model I advocate, there is in fact no transaction or "sale" of an asset. The asset is created in custody, and stays in custody.

Stakeholders will participate only on the basis that any agreed profit margin is invested. It's then up to them what they do with their entitlement to Units once the development is complete.

But I suggest that they will see that their interests lie in doing a good job - whether or not they are capable of doing a good job is another issue.

Jerome a Paris:

Bankers' pay (as highly qualified professionals) is justified, to that extent.

I have no difficulty with that, albeit relative valuations are not easy.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Mar 24th, 2009 at 01:58:32 PM EST
[ Parent ]
You're the banker, so you will know a lot more about this, but it appears to the layman that part of the point of developing all these derivative products is partly to spread the risk, but also to render it so complex and opaque that risk analysis becomes virtually impossible.  Bank stopped analysing the actual assets and traded on each others reputations (and credit ratings) instead, in much the same way as people buy brands because they have a good reputation (carefully crafted by the marketing people) but which may actually consist of very crappy product.

It is this dislocation between high finance and the actual productive economy which needs to be addressed because otherwise good businesses fail for lack of finance and bad business which are well marketed to financiers get all the capital.

Risk analysis is a skilled and expensive business and requires an understanding of the real world - if banks have a value, it is that they are good at allocating capital to worthwhile projects.  When they stop doing this they become no better than casino operators.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 23rd, 2009 at 07:54:27 PM EST
[ Parent ]
the point of developing all these derivative products is partly to spread the risk, but also to render it so complex and opaque that risk analysis becomes virtually impossible.

So on the one hand blame would be placed with people who designed the system this way. on the other it could be placed on people who misused the system in this way.

Surely this would be visible and provable by looking at either the amount of risk analysis staff, or the ammount of risk analysis paperwork produced in the derivative departments.  If the apropriate risk analysis wasn't built into the derivative departments as they started then it would show intent.

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Mon Mar 23rd, 2009 at 08:11:19 PM EST
[ Parent ]
Jerome a Paris:
We are in a crisis to a arge extent because no riks analysis was performed on underlying assets, and one of the reasons this happened is that those that structured the financial instruments did not hold them - and did not really care if they were sound: they only cared if they were marketable, which is not the same thing.

Well Jerome is the banker here - if not a derivatives trader - and so I am taking his word for it - though to be honest, this is exactly what I would expect to have happened.  As I noted above, risk analysis if expensive and skilled, and if a bank wants to cut costs...

Also there is a more general trend in all businesses - the emergent dominance of the marketing department over production/engineering and even R&D.  Business now - and the larger and more complex it is - the more so - is all about managing perceptions - consumer, regulator, investors, bankers - and the actual reality of what is happening on the ground in terms of product quality is almost an irrelevance.  I would be surprised if banking were any different - and particularly the more exotic hedge fund and derivatives end of the business.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Mar 24th, 2009 at 08:14:18 AM EST
[ Parent ]

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