Re: financial spiral of death

On Dec 3, 7:46 pm, Straydog <a...@xxxxxxxxx> wrote:
On Mon, 3 Dec 2007, Russell wrote:
On Dec 3, 4:44 pm, Straydog <a...@xxxxxxxxx> wrote:
On Mon, 3 Dec 2007, Russell wrote:
On Dec 3, 10:31 am, Straydog <a...@xxxxxxxxx> wrote:
On Mon, 3 Dec 2007, Russell wrote:
On Dec 3, 3:20 am, morrisjc...@xxxxxxxxx wrote:
A derivatives insider chuckling.

http://articles.moneycentral.msn.com/Investing/SuperModels/AreWeHeade...

"he points a finger at three parties: regulators who stood by as U.S.
banks developed ingenious but dangerous ways of shifting trillions of
dollars of credit risk off their balance sheets and into the hands of
unsophisticated foreign investors; hedge and pension fund managers who
gorged on high-yield debt instruments they didn't understand; and
financial engineers who built towers of "securitized" debt with math
models that were fundamentally flawed."

The last point shouldn't surprise anyone since the meltdown
of Long-Term Capital Management. In the past I've mentioned
a book here about that, as well as _The Crisis of Global
Capitalism_ by Soros, and even _Fooled by Randomness_
and _The Black Swan_ by Taleb touch on the subject. If
I were teaching a course and a student turned in a project
based on such flawed assumptions, they'd get a D at best.
I suppose a few people have had the sense to take the
other side of the market against these modelers, and are
now making a killing. Taleb (or his firm, since the last I
heard he's gotten out of the active side of the business to
devote himself to his real passions) is probably one of them.
Too bad the idiots

^^^^^^

I'd like to propose that we seriously consider changing the way we make
reference to these people. All along for many years I have lumped all
these people into the category that I use the label _crooks_ for. Since
reading that biography on the Napoleon family (and surmizing from that
biography that Napoleon was responsible for causing far more trouble for
a lot of people than any benefit for people other than members of his
immediate family), I used the word _dangerous_ to describe them. The term
_parasite_ even seems tame since _pathogens_ exist that don't actually do
"large" amounts of damage other than some form of "sickness."

I don't think they all are crooks. Maybe some of them, but
I think some are simply people who got turned loose with
on the world with quantitative skills and tools but without
the needed background in real scientific research to have
internalized that every model has assumptions and
approximations, and those limit models' applicability.

At some point in time some people might consider that an executive who
controls, for example, $ 1/2 bill in payroll and comes up with the bright
idea that moving that payroll to India without looking at who gets
economically hurt in the process and that those who are hurt are hurt
permanenetly may or may not be challengeable on ethical/moral grounds but
certainly not on legal grounds. You said above that _maybe_ some are
crooks but the criminology books say that for sure, based on court cases,
some fraction _definitely_ are.

I was talking mostly about quants, not CEOs.

Well, since quants work (also or moreso) behind opacity, what can you
offer as explanations that what they do is more legal, more ethical,
more moral than CEOs?

Legal - scientists create subpar work, models, etc. all the
time without being arrested unless downright fraud is involved.
And in fact in many respects the work per se is probably
good to brilliant. The Black-Scholes model got a Nobel Prize.
Granted I don't think it deserved it (and I'm not the only one),
but that's the fact nonetheless.

Moral - N/A, unless you want to take the position that any
intellectual innovation that makes money from money is subject
to explicitly and strictly moral considerations. That would
include the concept of interest on loans, which would put you
in good standing with the Muslim portion of society but quite
out of step with mainstream of Western thinking.

Ethical - it depends on their personal actions and culpability
with regards to what they told their bosses about the validity
of the models, what they knew about how the models were being
used or misused, what they could forecast about the global
interaction of the use of these models and associated financial
instruments and tools, and what they could have done about it.
I suspect that there are so many more deserving people to dump
on ethically, like the Administration that thinks governmental
oversight of financial institutions is a silly idea.


You're

getting carried away preaching an Easter sermon to the
choir without listening to the fact it is singing
Christmas hymns.

Might be pre-recorded program material and fake choir members, too.







Of

course, some of these people have PhDs in physics, but I
think some of them have just got caught up in making big
bucks and maybe believed their corporate bosses
understood the problems when they either didn't or didn't
care. Or maybe they didn't realize the extent to which the
pieces they provided would interact and spread throughout
the world of finance.

One WSJ article some months ago made it pretty clear that greed and
selfishness was behind the whole engineering of the sub-prime business.
The whole hedge/private business became inflated for the main reason that
they could escape from scrutiny, regulation, and visibility and all for
the goals of possible higher ROI. I don't care if those guys get big
rafts of money, but if they lose big rafts of money, how does it play out
on people who have zero control over the negative fallout?

Let's not be too quick to crimilalize short sighted behavior,

It is rhetorically invalid to insert a point between the two
clauses of my sentence which are clearly link in expressing a
single thought which has no relation to your response below.
And bringing up Hitler is totally bogus in this case anyway.
Preaching to the choir is one thing, screaming at it is poor
form.

Lets re-read the material above: i) a paragraph whereby a small number of
people organized some "business" that, in the short run, benefitted
greatly that small number of people and _appeared to_ benefit a large
number of people who got homes/houses that might not have otherwise, but
in the long run is having a major negative impact on society (viz. the
media), and ii) a short phrase about not being too quick to criminalize
something, and then iii) my interjection about why this clearly described
_scheme_ was bad (but nobody can be put in jail since the process was not
illegal but the "badguys" really knew this and went ahead with the scam,
anyway).

Take some Nyquil and rest your cold, Art. I think you're
overreacting to my musings.


Or, perhaps I should convey my mood in a context I thought you should
appreciate: i.e. the NSF "screaming" at the world about the vast shortage
of S&Es? Or, would you want to be "lets not be hasty to criminalize" what
the NSF is doing in this case, too?

I suspect the NSF is covered by the same laws that protect
Weather Service employees from being sued for a bad forecast.

Cheers,
Russell


===== no change to below, included for reference and context =====



So, you would prefer to try to stop Hitler after he started wars instead
of before? And, I don't know what your definition is for "short sighted
behavior" but I would prefer to put emphasis on "anything that benefits
everyone" instead of "something that benefits a few at the expense of
everyone else." I'm fine with western capitalism in principle as long as
it grows out of the former (and standards of living generally rise) and
not the latter (eg. Enron, Worldcom, Tyco, etc., and many more including
tax cheating by those same guys that get a lot of money.)

Art, or we might be arrested for the majors we chose or
going to grad school. ;-)

This will never happen.

Cheers,
Russell- Hide quoted text -

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