Big wind from the East blew in on Tuesday quite unexpectedly. Neighbors and dear friends from long ago. Two days of laughs, food and a cocktail or six, hence no blog for two days. Sorry...well, I'm not, really. It was great to see them.
The Leader is off by the pyramids proclaiming the gifts to the world of the Muslim world over the ages. For some of these gifts to have occurred Islam would have had to have had a 3000 year history but no matter, it was a fine speech. Great words and delivery. He'll probably be called Ozymandias throughout the Middle East from here on out.
Meanwhile, back at home a group of Banks and money-runners submitted a proposal to a number of regulatory bodies regarding the future treatment of derivatives no doubt as a response to the very suggestion made on these pages a few days ago. Wise move for the issues are now being framed from both sides which means we may get more intelligent regulation than if it were to come down a one-way street. As I suggested, there is probably going to be a clear division of such things such as credit default swaps and the more bespoke types of derivatives used by global financial institutions. Transparency will be a key buzz-word but one wonders whether this will really improve things a whole lot because given the complexity and context in which many of these products are created the understanding of the true risks will remain extremely difficult for and outsider to grasp. Nevertheless, the exercise when completed will allow all involved, especially the politicians, to proclaim success and wax poetic as to how the future has been fixed...until the next time.
It's a terrible thing to say but if people still believe that Uncle is going to bail them out, bad things will continue to happen. The too big to fail thing has to be put to bed and whatever rules and regulations are put into place will not prevent a recurrence of the catastrophe of last year. More important I think is dealing with the internal controls at institutions of "systemic" size in an attempt to create a system on good practices which will do far more to prevent such a reoccurrence than any series of rules, regulations or reporting mechanisms.
Risk management is far more of an art rather than a science. While dealing with financial products which can be expressed in quantitative form, one must remember that these products are not self-creations; they are created by people and in the end, as my old mentor expressed to me so many years ago, it is always about the people. I see this discussion of risk moving too far back into the world of quants which moves it further and further away from the real control mechanism which is the taking of responsibility by real, live people. In the past few months we have heard a great deal of discussion of "why didn't the product or structure work the way it was supposed to work," as if these products were living beings with the right to choose as to whether they would be successful or not. The confidence that "my algorhythem is flawless" is pervasive throughout the industry and that is correct..until it isn't. You had better know the people...it is always about the people...and knowing them does not mean their academic accomplishments or measurable skills. It is much more subtle and yet much more difficult than that. The oversight function is one of the toughest jobs in any institution, especially a financial institution. I'll try to explain more about this tomorrow. I want to sleep on my thoughts.
Oh, a big shout-out to Ms. Merkel who got it exactly right the other day. Guess she's been reading the blog as well.
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