Monday, January 5, 2009

Great Depression 2.0 according to the experts

Michael Lewis, author of "Liars Poker", contributing editor of Vanity Fair and editor of "Panic", a new book I bought tracing booms and busts including the 1987 crash, the death of portfolio insurance, the collapse of Long Term Capital Management (which Joe Nocera also covers in last Sunday's Magazine Section cover story), including the dot-com, housing and now, much more extreme, the credit bust, has written an article with David Einhorn, the president of Greenlight Capital. He bet against mortgage-backed securities in 2008 and cleaned up. The article is called The End of The Financial World as We Know It. It ran in Sunday's Week In Review Op-Ed section.

Off the top of my head: Nocera focused on financial institutions' reliance on a risk management factor called "VaR". VaR was the number that companies looked at to reassure themselves about their portfolio risk, especially when dealing with illiquid structured financial vehicles. Because these vehicles never traded on the open market and no one, including the CEOs of the companies, understood them, the risk measurement had to be based on something else that was similar. One step removed from an assumption. The risk factor was changed day by day, and it supposedly included previous history. But history for how long? Maybe only since the market went up, up, up since 2002. As some asshole said in the article, (I paraphrase), this is a factor for peacetime, not wartime. In other words, the goddamned institutions never factored in the idea that everything would go to hell. Or that anything would go to hell. Nocera threw in Taleb, a former hedge fund manager who is hot right now (I'm suspicious of anyone who is "hot right now"), who wrote the book "The Black Swan" which basically states that the 1% of events not considered is crucial because if that eventuality occurs, everything goes to hell.

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