Tom Keene did two must-listen podcasts this week:
- Fisher Says Consumption Slowdown May Cause Bond Defaults
Peter Fisher, managing director and co-head of fixed income at BlackRock Inc., talks with Bloomberg’s Tom Keene about the Federal Reserve’s relationship with the U.S. Treasury, assumption of the Treasury’s distressed pool of assets onto the Fed’s central bank balance sheet and the potential impact of an economic slowdown on bond default rates.
- Taleb Says Crisis Continues Until Banks’ Management Changes
Nassim Taleb, author of “The Black Swan: The Impact of the Highly Improbable,” talks with Bloomberg’s Tom Keene about the globalization of financial markets, the credit crisis and banks’ risk management.
Five minutes into the tape, Taleb tells Keene that banks should “fire all their quantitative risk managers”. Seven minutes into it, Keene asks him if the debacle was a fault within the mathematics or if it was the greed factor, leveraging up relatively good math, to which Taleb replied, “the math itself is broken”. He went on to announce that he has trouble with students (who, gasp!, want answers!) and that he would never teach again (except at $4,000 Wilmott weekend seminars, of course). Oh, PUH-lease, spare me the hubris!
In contrast, Peter Fisher was a breath of fresh air when Keene asked him a similar question seven minutes into the interview:
We’ve got to think harder about all the embedded leverage. I mean, it’s a little shocking that not more people understood that if you take a 30:1 levered, structured product and you put it on a 30:1 levered balance sheet, you’re not talking about 30:1 leverage. You’re talking about 900:1 leverage and you can magnify gains and losses pretty dramatically when you do that. So the risk management system, the capital rules just haven’t kept up with the instrument innovations–another decade has gone by.
The bottom line? The math is good enough. We know shit happens — best if it doesn’t hit the leverage fan at 900:1.