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Revenge of the Black Swan
"The models suggested that the risk was so remote that the fees were almost free money. Just put it on your books and enjoy the money."
--Tom Savage, President, AIG's Financial Products
The second part of the 3 part series is now posted, A Crack in The System. This section gets into the details as to how AIG got so buried in the credit default swaps (CDS) business.
Worst Predictions for 2008
In case you missed it, here are several different collections of the worst predictions of the year:
When Wall Street died...
“Within a week, Wall Street as it was known — loosely regulated, daringly risky and lavishly rewarded — was dead.”
Today’s must read MSM article is a front page WSJ piece, titled, The Weekend That Wall Street Died. Since we have been tossing around blame for various parties in the entire credit/hosuing/securitization debacle, its refreshing to see a major paper actually place blame where it (in large part) belongs: Wall Street bosses:
Bank of England Allowed 'Crazy Borrowing'
"We need to develop some new instruments, which sit somewhere between interest rates, which affect the whole economy... and individual supervision and regulation of individual banks. We need to develop something which bridges that gap and directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand."
This appears to be a theme:
The Bank of England was warned that "crazy borrowing" was taking place during the boom years -- but did nothing about it. Partly due to politicas, partly due to their failure to understand the severity of the problem. They did not understand how much the banks had abdicated lending standards, and how that led to a financial crisis.
RIP Chicago School of Economics: 1976-2008
Some time ago, I asked if "Milton Friedman was the next economist whose once lauded reputation may soon slide ?"
Turns out it happened much quicker than expected. A long Bloomberg piece, Friedman Would Be Roiled as Chicago Disciples Rue Repudiation, discusses the tarnishment of the Chicago school of thought.
Its long overdue. From the efficient-market theories, to the concept
of man as rational profit maximizers, much of the edifice that
is was the Chicago school of economics is based on a foundation that is false, disproven or otherwise questionable.
What Does Regulation Regulate?
Here’s one of the simple truisms that gets lost in the political (i.e., bumper sticker) discussions.
Don’t regulate the free markets! Don’t interfere with innovation! Don’t stifle incentives!
Vast Under-Investment in Due Diligence
With everyone tsk-tsking the Madoff scandal -- the amount lost, the after-the-fact obviousness, the SEC incompetence -- I thought now was as good a time as any to look at the actual research, due diligence and manpower thrown at investigating managers and funds.
Not surprisingly, it is tiny -- at least, when compared with the heavy lifting of equity research. The asset management and brokerage industry is vastly under-invested in due diligence; the resources applied to hedge funds and managers is a comparative pittance.
Note that every major brokerage firm -- from Merrill Lynch to UBS to Morgan Stanley to Credit Suisse and beyond -- offer a platform to these managers. Their managed assets group, private wealth management, (even retail brokerage) have access to these funds and managers.
Clawing Back at Exec Comp (part II)
As regulators and shareholders sift through the rubble of the financial crisis, questions are being asked about what role lavish bonuses played in the debacle. Scrutiny over pay is intensifying as banks like Merrill prepare to dole out bonuses even after they have had to be propped up with billions of dollars of taxpayers’ money. While bonuses are expected to be half of what they were a year ago, some bankers could still collect millions of dollars.
You mean I have to review everything I've written in PDF format?
Holy cow -- does this process ever end?