Tag Archives: crisi finanziaria

Black swans and banking regulations

Contrordine Compagni hosts a brilliant post contained in a World Bank blog called Crisistalk, created as a space for the Bank to contribute to the debate about the financial crisis, then in full rage. That blog has since been taken down: I think this post must be preserved, as it conveys the (rather stormy) climate in financial institutions at the time. So I (Alberto) volunteered with Ryan Hahn, blogger-in-chief at the Bank’s Private Sector Development blog, to host it myself. While unable to give me formal permission, Ryan has been quite encouraging: I mean well, after all. Should the author or the World Bank Group have any issues with it, I will take down the post immediately.

The post was published by John Nellis on 2 March 2009. Nellis was a Senior Manager in the World Bank’s Private Sector Development Department. He is now Principal of the consulting/research firm, International Analytics.

On February 24 I attended the first day of a two and half day World Bank conference on Markets and Crises: What Next and How? Two sessions were particularly interesting: the keynote address by Nassim Taleb, author of “The Black Swan: The Impact of the Highly Improbable,” and a panel on “What has the financial crisis taught us about risk management?” with Mark Carey from the Federal Reserve Bank of the US, Stijn Claessens from the IMF, Martha Cummings from Banco Santander and Mark Zandi of Moody’s.

First, Mr. Taleb. He is wildly entertaining and delightfully iconoclastic; he left no one in or outside the room uninsulted. All economists are worthless. Certain central bankers are charlatans and fools. French bankers are the worst of all possible bankers. No professor of finance has ever been right about anything (especially those who for years kept rejecting his submissions to finance journals). No one on the staff of the New York Times knows anything about finance or economics or statistics. Regressions are useless; models are worse. “People who use history as a guide do not understand history.”

The last is the essence of his central thesis — the common and fatal error of those working in and around economics is that they generally assume that what happened yesterday is highly likely to occur again today; they see and model the world in terms of “Gaussian” statistics; that is, the normal distribution. But his study (of forty years of data on things that have been priced) leads him to see that in finance and economics “most of the variance is concentrated in a very small number of events.” (This is measured by “kurtosis,” a term in statistics meaning the extent to which rare extreme deviations from the norm explain more of the variance than frequent smaller movements around the norm. Phew!)

So, convinced that “as risks mount fewer and fewer outsized events are required to bring the whole system down,” he some years back predicted doom and started shorting the market, day after day after day, losing money day after day…..etc. Until last year. Bam. With the market gains (and the loot from two million copies of the book sold so far) he is now invited to World Bank seminars to point out with gusto their (our) ignorance and culpability, and everyone else’s too. I got the distinct impression that he is happy with the money but much more enthralled by the vindication against all those who called him a kook, a cultist, or worse. He is having a grand time. And he was right about the crash.

When it comes to the question “So what should we do now?” he is not helpful. Questions included, “How should we go about reforming the regulatory system?” Answer: Don’t try to reform it; scrap it. “But what should we do?” Answer: Abolish debt. All of the world’s great religions agree; there should be no interest. “Did regulators make the crisis worse by their incompetence?” Not an area of interest to him; he is not concerned with minor tinkering with the system. Good-bye.

As I said, rewarding and fun, but of little value to those trying to work their way out of the present mess.

The afternoon seminar was toute autre chose: four earnest, smart, articulate, wonkish insiders admitting some errors and looking hard for practical solutions to an increasingly frightening debacle. But at the end of the session the practical answers were notable by their absence.

Carey, from the US Federal Reserve Bank, argued that bank regulators such as himself had certainly seen signs of problems but thought they were off-white or grayish swans, not black. Small reform would, they hoped and thought, suffice. He stated that this did not derive from a dependence on misguided models, but rather that avoidance of the dramatic is ingrained in financial regulators; that those in central banks must be absolutely sure they are looking at a bubble before trying to use monetary policy to burst it. Knowing in advance that a problem area is a real bubble is not all that simple. And they must also be sure that calling attention to a possible bubble does not create the very situation they are trying most to prevent — a panic. He concluded that increased regulation by itself will not solve the problem; what has taken place is “not a technical problem, but rather a governance problem.” (The distinction was not made clear.)

Martha Cummings has excellent credentials; as head of Risk Analysis at Banco Santander she advised her board that much of the portfolio was incomprehensible and she recommended getting out of lots of loans whose underlying assets were based on impenetrable securities. Thus, Banco Santander is today not in such a poor position as many other banks. She was tougher than Carey; she says we should have seen it coming. Masses of people were and still are living far beyond their means, in debt up to their eyes and leveraged to the hilt. We did know it was coming; we just didn’t know when. We kept thinking we would somehow get 24 hours notice and get out ahead of everyone else—and we were wrong. We knew banks were doing deals to get market share, regardless of profitability; we depended on ratings agencies and models, not facts and basics. We consistently ignored the signals because “no one wanted to end the party.” We ignored a basic fact: “The market can stay irrational far longer than you can remain solvent.” Her advice is on the ruthless side: let housing prices fall to where the market wants them to be; let the lenders and the borrowers take the hit. Trying to prop it all up will fail and make things worse. Let it rip (at least she has a clear point of view).

Mark Zandi of Moody’s first flagellated himself and then all other supposed supervisors of the system. “Both the architecture and the plumbing of the regulatory system were deeply flawed.” No one in the oversight system had responsibility for saying “this is a bad loan.” The lender wanted a fee and passed the mortgage to someone else. The investment bank securitized the loans, took a percentage, and forgot about it. Rating agencies are paid by the lender, not the investor, and they “keep the ball rolling.” Bank regulators failed to recognize or call attention to the problem. And here we are.

All agree: “We forgot the basics. We took a crisis and made it a panic.” And all agree that while more and more dense regulation is now inevitable, they doubt it will really change the essentials. The Basel regulations had little or nothing to do with the crisis, either in terms of abetting or hindering it. Carey said that his many years of experience fitted him to sense, within minutes, a bad bank, but he had long ago been promoted out of bank examination. And if they sent him back to it he would quit; Bank examination is a lousy job, now handled, worldwide, by very young and inexperienced people. The panel agreed that if corporate boards had members who fully understood risk models they might demand sufficient information, examine it carefully, and instruct management on how to act. An unlikely prospect. They all are, to a varying extent, concerned that a new thicket of regulation will slow or halt a quick recovery, but Zandi (of Moody’s) went on record as saying that the Federal Reserve has the capability and responsibility of forecasting bubbles and being much more aggressive on informing the public of their prognostications.

All this was much more depressing than Mr. Black Swan.

Spiegarsi la crisi, spiegare la crisi

In un godibilissimo articolo, Enzo Rullani si interroga sulla crisi economica, e si smarca dal dibattito in corso tra neostatalismo e neoliberismo, che secondo lui sono entrambe ricette del secolo scorso. A un certo punto si incontra questo passaggio:

Chi può credere che il terremoto a cui stiamo assistendo sia frutto della sbadataggine di chi ha concesso i mutui subprime a debitori che non li avrebbero restituiti o a furbacchioni che – come tanti altri prima di loro – hanno speculato al rialzo sulla finanza facile, vendendo promesse che non erano in grado di mantenere?

La domanda è retorica, ovvio. Secondo Rullani le vere ragioni della crisi stanno sul piano del modello di sviluppo, non su quello delle tecnicalità finanziarie. Però ha una risposta non retorica, che è “parecchia gente”. Da Wired a Daniel Kaufmann, passando per Lavoce.info, sono molti i commentatori che hanno affrontato il tema senza ricorrere a spiegazioni sistemiche. Tutti questi dicono un po’ la stessa cosa, cioè che i derivati finanziari sui mutui subprime erano rischiosi, ma (a) questo rischio era difficile da percepire senza disporre di nozioni non elementari di teoria della probabilità e (b) banche e intermediari stavano facendo troppi soldi per avere veramente voglia di studiarsi il problema. Come ha scritto Taleb in The Black Swan, gli umani non sono cablati per capire la matematica probabilistica: preferiscono il pensiero magico. Esso, unito agli effetti aspettative – cioè a quei meccanismi che fanno sì che l’economia sia così piena di profezie che si autorealizzano – fa un bel po’ di strada nello spiegare la crisi in atto.

I punti di criticità individuati da Rullani mi sembrano molto sensati…  ma non c’è bisogno di invocarli per spiegare questa crisi. Il rasoio di Occam li taglierebbe via: a parità di fattori, la spiegazione più semplice tende a essere quella esatta. Inoltre, se si vuole capire davvero, il terreno delle tecnicalità va accettato: in altre parole – e come sempre – bisogna studiare per farsi un’idea propria. Per questo guardo con simpatia e gratitudine a chi fa uno sforzo per spiegarsi e per spiegare con chiarezza i meccanismi concreti della crisi, anche se noiosi e difficili. Come in questo video:

Mondine and the bailout

The mondine, you see, are the elders of our tribe. It’s not just a matter of learning songs from them, however beautiful and important: it’s a general vision that they have to share, vision wich is deeply rooted in the values that make us, Italians, and Emilians in particular, what we are. So, when Antonio asked me what I think about the financial crisis and the bailout issue, I asked myself, what would mondine say? The answer is surprisingly simple and clear-cut: Silva, Lidia, Diva and the others have fought to take the satisfaction of some basic needs, which they perceive as individual rights, away from the private sector (personified by the landlord, standing on the bank of the rice paddy) and into some public sphere: care for the children, health care, pensions. There is no doubt they would much rather borrow the money to buy their home from the government, however faulty, than from Wall Street.

I do not mean to say technicalities are not important: they are, they make a huge difference, on them the Paulson plan – and its European equivalents – are accepted or rejected. But the mondine point of view gives us a perspective, a goal: the mortgage for your home should be with the government. We choose stability over sexy finance, and if this entails a slight loss of performance, so be it. A decent home is an individual right, and you do not mess around with it. Interestingly, you do not even need to be particularly skilled in finance to call this judgment: it saves a lot of brainpower and debate, and it “feels right”. The full interview became a podcast on Apogeonline (in Italian).