> The message here is very clear: It's a cycle thing again:
>
> 1. Become very friendly with those who can save you.
> 2. Make lots of money.
> 3. Call in the favours when it goes wrong.
This sounds like the current Fortis / ABN Amro stuff going on... They bought ABN for 24 billion, now sell it for 10, get 4 billion support from dutch government (and 7 from belgium&luxemburg).
Just a reminder: every year for the last few years, the NET profit of ABN was >4 billion... Somehow there is something fishy going on...
Hi Ian
Interesting times.
Re the limits of statistics, the ET site has this
http://www.eurotrib.com/?op=displaystory;sid=2008/9/24/1456/73379
regards,
Chris
Posted by ET: on the limits of statistics at September 29, 2008 07:06 AMI used to manage the risk system for XXX when it went bust in mid 1990s - the figures were pure fantasy - no one understood them - as long as they were roughly the same - no one really bothered. If they changed drastically, it was usually a feed failure - it some piece of data went awry - so once that was fixed, as long as the figures returned to around the same level - all is well. In reality, traders were exchanging data and models on floppy disks - no one knew the risk.
Then one day - the three heads of risk were fired - and the bank collapsed. YYY bought them out and it became known as ZZZ - then as peoples memories faded - it morphed to AAA ZZZ - then AAA, now one of the national champions. Of course - it could never happen again...
Posted by Highly Anonimised at September 29, 2008 09:18 AMsomewhat long winded post repeated a few places ... archived flavors:
http://www.garlic.com/~lynn/2008n.html#52
http://www.garlic.com/~lynn/2008n.html#53
http://www.garlic.com/~lynn/2008n.html#56
http://www.garlic.com/~lynn/2008n.html#65
------
so on one side now there is:
Risk Management Failings Spur Big Financial IT Investments
http://www.informationweek.com/news/services/business/showArticle.jhtml?articleID=210603899
and on the other side there is:
How Wall Street Lied to Its Computers
http://bits.blogs.nytimes.com/2008/09/18/how-wall-streets-quants-lied-to-their-computers/
(postings to the above blog have added some number of examples)
I've sporadically drawn the parallel between CDOs and obfuscating "observation" in OODA-loops
http://www.garlic.com/~lynn/2008g.html#4 CDOs subverting Boyd's OODA-loop
... CDOs were used two decades ago in the S&L crisis to obfuscate underlying values and unload the properties.
This is long-winded, decade-old post about many of the current problems, including the need for visibility into CDO-like instruments:
http://www.garlic.com/~lynn/aepay3.htm#riskm
There is possibility that one of the people responsible for the analysis that resulted in citibank getting out of the home mortgage business (in the troubles two decades ago, mentioned in the above post) ... was involved with increasingly sophisticated analytics:
How Conventional CDO Analytics Missed the Mark
http://www.bobsguide.com/guide/news/2007/Dec/20/Kamakura_Releases_Study:_How_Conventional_CDO_Analytics_Missed_the_Mark.html
from (20Dec2007) above:
"Two years ago the Wall Street Journal in a page 1 story pointed out the dangers in relying on the copula approach for CDO valuation, but investors were slow to realize the magnitude of their model risk"
... snip ...
the above isn't inconsistent with claims that computerized risk was manipulated.
however, somewhat the other side (although again not necessarily inconsistent)
Subprime = Triple-A ratings? or 'How to Lie with Statistics'
http://www.bloggingstocks.com/2007/07/25/subprime-triple-a-ratings-or-how-to-lie-with-statistics/
disclaimer, in the past we've visited these guys' offices (nice location); misc. past posts mentioning Kamakura:
http://www.garlic.com/~lynn/2007v.html#25 Newsweek article--baby boomers and computers
http://www.garlic.com/~lynn/2008.html#66 As Expected, Ford Falls From 2nd Place in U.S. Sales
http://www.garlic.com/~lynn/2008.html#70 As Expected, Ford Falls From 2nd Place in U.S. Sales
http://www.garlic.com/~lynn/2008b.html#12 Computer Science Education: Where Are the Software Engineers of Tomorrow?
http://www.garlic.com/~lynn/2008c.html#21 Toyota Sales for 2007 May Surpass GM
http://www.garlic.com/~lynn/2008c.html#87 Toyota Sales for 2007 May Surpass GM
http://www.garlic.com/~lynn/2008g.html#64 independent appraisers
http://www.garlic.com/~lynn/2008j.html#29 dollar coins
Then there is (from last march) the following which includes mention that wall street took $137B out in bonuses during the period (reward for creating the current situation?, the proposed $700B would in part be used to replenish the amount taken out of the system by those bonuses):
The Fed's Too Easy on Wall Street
http://www.businessweek.com/investor/content/mar2008/pi20080318_697440.htm?chan=top+news_top+news+index_businessweek+exclusive
The GAO has started a database of the increasing numbers of financial restatements (despite SOX). Basically financial statements are inflated ... and bonuses for top executives taken based on the inflated statements. Later the numbers are restated, but the bonuses not forfeited. An example, Freddie was fined $400m in 2004 for $10B inflation in statements and the CEO replaced ... however, the CEO kept tens of (hundred?) millions.
Part of inflating the bottom line, as method of boosting bonuses, included enormous leveraging ... despite it creating enormous long term risk. It could be considered consistent with the theme that such extremely risky behavior is rewarded and there being no corresponding downside risk (and therefor promotes
moral hazard)
There was a business school article from last spring that estimated approx. 1000 executives are responsible for 80percent of the current crisis and that it would go a long way to correcting the situation if the gov. figured out a way for them to loose their job.
Long Tailed events are not Black Swans. It's a nice attempt to introduce the unlearned into the concept, but there's plenty of useful priors for long tailed events (or else they wouldn't be represented in the distribution).
Posted by Nigel Mellish at September 29, 2008 10:52 AM