Wednesday, October 1, 2008


Equity markets and banks' shares are up - expecting the US Senate to vote for TARP 2 - expecting the US House of Representatives to follow suit on Thursday. There is Ireland leading the way (guaranteeing all bank deposits and bondholders) putting pressure on the UK and others, and may also have influenced the US Senate in TARP 2 to increase all US retail depositor savings protection up to $250,000. The FT also report a global gold rush. Meanwhile the BBC morning news had Prof. Talib of NYU risk engineering on to say that the TARP bailout is wrong because it socialises the losses and privatises the gains, which I thoroughly disagree with. But, Talib has a particular perspective in part coming from having been a derivatives (proprietary and arbitrage) trader. He argues that our risk systems and analyses fail to understand chance, and worse that risk regulation created more systemic risk and basic risk diversification was discounted, and further, he simply castigates the generality of risk management and regulation as rubbish, worse than useless, in fact dangerous for being misleading and creating a false sense of security.
Prof. Talib is a self-promoter in the media and his books, and his populist views - TARP is wrong and all of banks' risk practises are rubbish - have political weight of some influence. He is saying that banks rationalise chance events ex-post and actually have no valid ex-ante explanations (or predicters) for extreme risk events?
I think his perspective may be mired in maths engineering culture of trading room, inter-day risks (not in that of cyclical financial economics), and it is too easy to cite the scale of the 2007-09 credit crunch (and earlier systemic crises as recent as in the 1980s and '90s) to totally condemn financial risk theories and regulatory systems.

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