The Myth & the Reality of the Present Crisis

Mon, 04 May 2009 00:53:50 +0200

The Serpent and the Rope: The Reality and the Myth of the Current Crisis

Let us get it straight. Current market crisis is the crisis of confidence , the crisis of credibility among the financial market participants . The heart of the crisis is the information failure. This should be pretty obvious. A truism not worth saying, were it not for the fact that very distinguished people are trying to find reasons "otherwhere". For instance, Mr. Christian Noyer, Governor of the Bank of France appears to think that the present problem is a liquidity crisis and a securitization crisis. , and goes on to say that
"During the last few months, at no time have I felt that our organization was deficient or was preventing me from obtaining adequate information needed to make the necessary decisions. "
Not every one, certainly not me, can agree with this description that adequate information was and is always available to the regulators and to the market participants. Indeed , it is to the contrary. In fact, the lack of information and information distortions are at the root of the markets failures everywhere. Let us explain. It is not that the quarterly / monthly disclosures were not happening. Nor that the company boards were not getting their MIS. Of course, tons of numbers were doing rounds. Data were being collected and researched by a large number of people within and outside the financial markets in the US and elsewhere. Financial reengineering by smart guys had been happening on those numbers. Regulators were getting their Basel reports and feeling secure in them and in the the CRAR ratios. Then, where is the problem regarding the information? I hear you ask.

In fact, this perception is the problem. This feeling that we know ,the "information security" is the obfuscator. As Macbeth says, "the security is the mortal's chiefest enemy." We tend to believe that there is good information floating around everywhere. This, in fact, is not the case. Confidence comes from knowing and ignorance breeds fear and the markets now are in the grip of fear!

The anatomy of crisis is on. The “magi “have come up with different reasons. Let us examine some of these myths. Let us ask the real culprit to stand up!
Villain No 1: Poor liquidity?
Poor liquidity in the US and world markets is to blame, say some experts. For sure, the markets showed liquidity problems and this is a worst manifestation of the crisis, more a result than the cause, and more a symptom than the disease. If this were the real culprit, why has not the large-scale pump priming the world over not put the markets back in form?

Villain No 2: Greed ?

Others attribute the current market problem to the greed of the Wall Street. They say ethics should prevail over economics. By implication, this means that it is wrong to have purely economic incentives for performance. Coming from the IT czars of Bangalore, who benefited from the markets, this sounds unreal ! As a principle, no one can quarrel with it. In fact, the Hindu's deified the absence of greed as a way of life and the Rishi's were not supposed to pluck the fruits or grow the corn but live on what was available in nature in the natural form. Like King Dushyantha from the famous Indian play ( Abhijnana Shakunthala ), we can only pay obeisance to this ideal .
Like my Chicago Professor said once, the only workable basis for the modern economic life is to hold that the maximizing wealth is maximization of happiness and that individual self-interest is the basis of all economic activity. Just as it is not possible to say when the competition becomes unhealthy, in actual practice, it is not possible to differentiate "good greed "from
“bad greed". Unless one is an ancient Indian Rishi or an ascetic like Mahatma Gandhi, the wheel of business is moved by the self interest of the individual. While business ethics as compliance with laws is required and enforceable, it cannot work if it is a moral judgment.

Some communist friends have seen the end of capitalism I n this crisis. Let us wish them well in their daydreaming. The world has progressed and been sustained by capitalism and for all its imperfections, there is no alternative to it.

Villain No 3: Quants?
In any severe crisis, people will be desperately looking for some thing to attack. The global meltdown provided an occasion for the people to attack the quantitative approach and risk modeling as ineffective and even responsible for the current crisis. Think about it! Rejecting quants and models tantamount to shooting down the messenger for the bad news. Just because a model did not work, one cannot dismiss the science of modeling itself which is a but a method for abstracting the repeatable elements of the past events for estimating the uncertain future. Sooner than later, we shall have to return to the quants approach.

Villain No 4: Financial Engineering & Derivatives
The crisis is sometimes attributed to the exotic financial products created through securitization. In the context of the collapse of Lehman and the transformation of the investment banking giants like the Goldman Sachs and the Merrill Lynch, it is only natural to blame the crisis on the derivatives and the asset bubbles created by them. The question to ask here is whether the United States could have had the amount of housing stock it has but for the mortgage backed securities.
Therefore, the origins of the crisis lie in the information latency. It is well know that despite the postulate of the efficient market hypothesis EMH, the information asymmetries and uncertainties exist as between the market participants. And are the sources of risk. When these asymmetries are exaggerated, the markets give way. After all, “animal spirits” guide the markets. As such, the remediation for the current market failure should also lie in building better estimates of the uncertainties, better information dissemination mechanism across the markets and better estimates of the uncertainties. In short, what we need is comprehensive risk based information system which would reflect and communicate the reality better.

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New Star in the Horizon of Global Risk

Mon, 08 Sep 2008 11:30:56 +0200

WE have started a new center for risk management called srichidsirvice GLOBAL RISK HUB in Bangalore. Powered by professionals from the risk domain and technology sphere,Global Risk Hub sets out to be the worldwide center for risk research and technology innovations. The current offerings of this Center include the following:

a. XBRL-IFRS solutions

B. ERM , Op risk projects

C. Datamining for risk Management

d.BI implemntation thru Microsoft Technologies,

e. Virtual Chief Risk Officer( Risk Mananagement System)

f. Modelling and analytics for Risk Mgt, Business Intelligence

g. Basel related Solutions development and deployment

h.Highend training in Risk, BI and Anaytics

The offerings in the making are the following:

Life cycle data base for operational risk management

Risk Management Project implementation tool

Operational risk reporting

Risk based information system

Risk based performance measurement tool

Information risk management solution

Data mining models for credit monitoring

We welcome comments, enquiries and interactions.

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Truth in life

Thu, 09 Jun 2005 02:28:42 +0200

Life is great because it makes you do things
which you thought was impossible. The only hing is that we shoud be steadfast in our commitment o what we think is right. Therveriicaion and validation fr this comes frm within.

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