Tuesday, October 2, 2007

One of Our Best Thinkers

"The American [SEC] is investigating the big banks to determine whether they bribed the rating agencies, in effect, to bias their judgment in order to help the banks peddle a tainted product. ... The ratings agencies pronounced riskless a trillion and a half dollars' worth of derivatives that turned out risky after all. The banks sold it, and the Federal Reserve and other regulators let the world apply vast amounts of leverage to it. That leaves the rest of us waiting to see whether the house of cards will come down. ... But the present crisis ... was executed by corporate types who did little more than cut a few corners and assume that someone else would take responsibility for the problems they were creating. ... China and other emerging economies desperately require investment in infrastucture, and the return on such investments is likely to be very high. That is where Asian savings should be directed. ... What we have witnessed in the financial markets is ... the evil of mediocrity. Most people have no special gifts or insight, no skills or powers that distinguish them from the mass of their fellows about them. ... If Americans have to learn the hard way that they cannot surf the wave of the world's savings forever, it will be a painful but necessary lesson", Spengler, in atimes. com, 1 October.

I could not have said it better. Spengler, who usually writes about religious topics, is one of our best thinkers. Imagine, "Quants" with MIT PhDs and 800 Math GREs, have no more insight into the world than the rest of us. Say it ain't so Joe.

In 1987, a Merrill Lynch (ML) trader, Howard Rubin, lost $377 million trading mortgage-backed securities. I remember thinking at the time, "Didn't anyone at ML understand these products"? I recollect they were "interest only" or "principal only" strips. Apparently not. The IOs and POs were not that complicated. But ML apparently thought Rubin knew what he was doing. Similarly, as we are learning, today's quants don't know what they are doing either. I agree with Spengler, China and India would do better investing in their own economies than US Treasury paper.

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