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tht
24-09-2007, 11:26 PM
this is something referred to by gek-opel several times now- entryism within high capital

has there been enough innovation within banking that things are all that different to the olden days? everything gets more and more leveraged yet the worst of late capitalism has been afflicted on liminal economies - se asia, argentina, russia, by america and its proxies, while the citadel is intact, suggesting that something closer to equilibrium can be engineered AND the hope that nothing at all has happened yet, though when it does nothing will be left

are there any ex hedge fund types who have talked disinterestedly (ha) about how it might be taken down?

3underscore
26-09-2007, 06:47 PM
The thing is that most of the crisis that you mention above, which you could add the EU to in 1992, are actually problems of their own engineering.

If you go about fixing interest rates, people will exploit interest differentials as there is the easiest profit that can ever be made. Eventually, something has to give. And typically that will be the currency fixing you imposed that caused the problem in the first place.

vimothy
27-09-2007, 12:13 PM
Financial crises are not something that America does to other countries, FFS.

Also, risk management is of great importance. If the world of international finance is "taken down", do you have anything else to offer in its place?

borderpolice
27-09-2007, 12:28 PM
Financial crises are not something that America does to other countries, FFS.

Also, risk management is of great importance. If the world of international finance is "taken down", do you have anything else to offer in its place?

There is no reason to believe that "risk management" as done today is optimal. For a start there is not enough transparency. It would probably be beneficial if all participant in financial market had to make public all their positions, i.e. no company secrecy.

vimothy
27-09-2007, 12:33 PM
There is no reason to believe that "risk management" as done today is optimal. For a start there is not enough transparency. It would probably be beneficial if all participant in financial market had to make public all their positions, i.e. no company secrecy.

Of course - trust is very important.

Though it has to be said, it would hardly bring the market to its knees.

gek-opel
27-09-2007, 12:42 PM
Also something which shocked even me about the recent credit crunch situation was the way that investors buying these bundled debt packages (with the sort of pick-n-mix approach to different strata of risky debts) were reported to have little idea what they were actually taking on... This alone means that the gumph about "managing risk" is a little more pass-the-parcel on than anything...

borderpolice
27-09-2007, 12:47 PM
Also something which shocked even me about the recent credit crunch situation was the way that investors buying these bundled debt packages (with the sort of pick-n-mix approach to different strata of risky debts) were reported to have little idea what they were actually taking on... This alone means that the gumph about "managing risk" is a little more pass-the-parcel on than anything...

This is true but at least in parts misleading, because by definition risk is an abbreviation for "something we don't understand (well enough to predict its future behaviour). So a farmer may take out an insurance on the price of grain next season, precisely because s/he doesn't understand the weather well enough to be certain of next season's grain price.

That many of those who trade risk, don't understand the details of the financial instruments leads to additional risk in the risk management process. This additional risk can be (and is being) exploited. given that financial derivatives are now so complicated, it's hard to avoid that non-professionals don't understand them, in the same way that the majority of computer users don't understand computers very well (which is exploided in many ways).

vimothy
27-09-2007, 12:54 PM
Also something which shocked even me about the recent credit crunch situation was the way that investors buying these bundled debt packages (with the sort of pick-n-mix approach to different strata of risky debts) were reported to have little idea what they were actually taking on... This alone means that the gumph about "managing risk" is a little more pass-the-parcel on than anything...

Er, "managing risk", but not personally. Insurers don't underwrite stuff out of the goodness of their own heart, you know.

"Pass-the-parcel" - yeah, but so what? That's all part of the process. Risk is distributed by the market (as we've seen in this last couple of months). And if you're not interested in what you're investing in, expect to get burnt.

vimothy
27-09-2007, 12:59 PM
That many of those who trade risk, don't understand the details of the financial instruments leads to additional risk in the risk management process. This additional risk can be (and is being) exploited. given that financial derivatives are now so complicated, it's hard to avoid that non-professionals don't understand them, in the same way that the majority of computer users don't understand computers very well (which is exploided in many ways).

Indeed, part of the problem in the recent sub-prime fiasco was with the quantitative computer modelling done by firms like Goldman Sachs (who lost a lot of money), where apparently eighty percent of trading is speculative.

It makes me think, post-singularity, what the bloody hell will financial markets look like when computers with AI are being used as quants?

vimothy
27-09-2007, 01:03 PM
Reading a great book at the moment, about the development of probability and risk managing strategies, from ancient Greek mathematicians to the present day:

Against the Gods: the Remarkable Story of Risk (http://www.amazon.co.uk/Against-Gods-Remarkable-Story-Risk/dp/0471295639/ref=pd_bbs_sr_1/202-7093738-2680648?ie=UTF8&s=books&qid=1190894421&sr=8-1), by Peter L. Bernstein - plenty of maths in it as well...

IdleRich
27-09-2007, 01:39 PM
"Also something which shocked even me about the recent credit crunch situation was the way that investors buying these bundled debt packages (with the sort of pick-n-mix approach to different strata of risky debts) were reported to have little idea what they were actually taking on... This alone means that the gumph about "managing risk" is a little more pass-the-parcel on than anything..."
As far as I can work out companies tend to trust the credit-rating agencies and they gave ratings that were too high assuming that everything would probably be fine. There is of course absolutely no comeback for anyone who bought an overrated security ("Standard and Poor's does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. Ratings are statement of opinion not fact or recommendations to buy, hold or sell any securities"). I get the impression that some companies feel that they've ticked the risk box if S&P have said it's ok.
(Audits are similar. With Enron it seems that Arthur Andersen weren't auditing the company, they were just saying they had so that Enron could tick the audit box and agreeing to pay for it if something went wrong. Kind of like insurance I guess.)


"..where apparently eighty percent of trading is speculative."
What do you mean by this? What kind of trading is not speculative? Arbitrage I suppose but what else?

vimothy
27-09-2007, 02:22 PM
What do you mean by this? What kind of trading is not speculative? Arbitrage I suppose but what else?

Sorry, poor turn of phrase - I was searching for the right word, and "speculative" is clearly not it. I mean that most quant trading is model based, computer executed, very rapid trades of anomalies in asset pricing. Hence the problems arising with Goldman Sachs failing to forsee what it described as a "twenty-five standard deviation event" - they built their computer models based on past data, but couldn't predict the looming "black swan" (of course). I think it's a structural problem with such methods.

gek-opel
28-09-2007, 12:01 PM
This is true but at least in parts misleading, because by definition risk is an abbreviation for "something we don't understand (well enough to predict its future behaviour). So a farmer may take out an insurance on the price of grain next season, precisely because s/he doesn't understand the weather well enough to be certain of next season's grain price.

That many of those who trade risk, don't understand the details of the financial instruments leads to additional risk in the risk management process. This additional risk can be (and is being) exploited. given that financial derivatives are now so complicated, it's hard to avoid that non-professionals don't understand them, in the same way that the majority of computer users don't understand computers very well (which is exploided in many ways).

Yeh yeh yeh... however even major investment banks are having to spend months actually working out what their exposure to risk really was. This isn't risk management, its don't ask don't tell finance-style. To a certain extent (and talking to my contacts in the industry) people deliberately didn't even WANT to know. "Risk Management" is a rhetorical gesture here, I'm sick of hearing how derivative products are "just like taking out insurance"-- of course they CAN be used as such, but if so why all the problems? Because when a genuine fault occurs like sub-prime mortgages investment organisations large and small panic because they don't actually know their own exposure to the risk! Equally what ought to function as "insurance" is frequently used as a tool to achieve massive amounts of leverage.

Also whilst we might not know the outcome of a risky investment, in CDOs and the like the statistical riskiness of a class of debt ought to be verifiable, if of course not entirely predictable.

Also @ Vim: part of the issue surrounding computer modelling (at least initially, dunno if this is still the case) that if everyone uses the same or very similar modelling techniques then at key points all major investment organisations will operate in the same way. Bad news if so, how diverse are the models now?

IdleRich
28-09-2007, 12:12 PM
"I'm sick of hearing how derivative products are "just like taking out insurance"-- of course they CAN be used as such, but if so why all the problems?"
If buying a put option can be viewed as insuring against the stock falling then the guy selling the put is analagous to the insurer. If the stock crashes the seller will suffer just like an insurer does when the houses it's insured burn down - unless he's hedged by selling the stock or a future on the stock or whatever. My point is that if the seller has to get it right just like the insurer does.


"Also @ Vim: part of the issue surrounding computer modelling (at least initially, dunno if this is still the case) that if everyone uses the same or very similar modelling techniques then at key points all major investment organisations will operate in the same way. Bad news if so, how diverse are the models now?"
True. Hard to know how diverse the models are because companies keep them secret (hence "Black Box"). You can only judge on the results by which time it might be too late.

nomadologist
24-10-2007, 09:14 PM
Also something which shocked even me about the recent credit crunch situation was the way that investors buying these bundled debt packages (with the sort of pick-n-mix approach to different strata of risky debts) were reported to have little idea what they were actually taking on... This alone means that the gumph about "managing risk" is a little more pass-the-parcel on than anything...

I heard that Northern Rock had too much bound up in securities. A bad idea.