![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
An odd thing happened on my train journey up to Birmingham. It was a fairly crowded train, and at High Wycombe the chap who had been sitting next to me got up to snaffle a double-seat that he could share with his girlfriend.
A young black woman then got on the train and sat next to me. The train was full.
Gradually, with stops at Banbury, Warwick, Leamington Spa, Coventry, etc, people began to leave the train and the numbers would thin out. I waited for the woman to move to take up an empty block of two seats.
She didn't.
Slowly, blocks of four seats became available. Surely, I thought, she'll take one of these?
She didn't. And it wasn't as if she was a reader. She just stared vaguely ahead. Ah well, obviously she's getting off at the next stop, I thought.
She wasn't.
By the time we approached Birmingham Moor Street, there were only four of us left in the carriage - the original guy and his girlfriend, me, and this woman, who had steadfastly refused to follow the unwritten rules of train travel, that the person sitting on the outside gets up to occupy the empy blocks of seats. If the other two people in the train hadn't known better, they would have had to assume that we were a married couple who had just had a row (or who had merely run out of things to say to each other).
Do these people know nothing? It's the job of the person sitting on the outside to move.
+++++++++
Swiss Re took a 1.2bn Swiss Francs hit this morning after writing some CDOs down to zero. The release from Swiss Re could almost have been scripted by Taleb.
Rule One: Make sure that you emphasize that the event could not have been foreseen.
("The unprecedented and severe ratings downgrades....")
Rule Two: Emphasize the unlikely nature of the event and the solidity of the investment as a whole.
("These investment grade credit default swaps were structured to provide protection against a remote risk of loss")
Rule Three: Make sure people know that the correct procedures were followed:
("The transactions were approved by the relevant internal risk committees")
Rule Four: Suspend someone anyway.
The interesting thing about this for me is that Swiss Re, ostensibly a reinsurer, has, in effect, been writing put options. Since its boss, Jacques Aigrain, is a banker from the days of his youth, this shouldn't be much of a surprise, but it is another interesting example of convergence. The only difference between a put option and what Swiss Re sold was that Swiss Re wanted a guarantee that the buyer of the put option had an underlying interest in the stock (i.e., he actually held some).
Does Swiss Re have any excuse? Well, yes and no. One could say, well, what were they meant to do with all the money that they were making from traditional reinsurance? You could put it into Treasuries, earn a safe 4%, and then, when nothing goes wrong (see 2006) people would say "But, hey, you could have earned 14% if you had done this!" So, the guy gets sacked for underperforming. If he looks at a piece of business that isn't likely to go wrong, but for which the price being asked is a little bit incorrect (i.e., the interest rate is higher, but not high enough for the price), it's very tempting to go down that route instead (and to persuade yourself that 'the price was right'). It's the classsic Taleb example of the fictional politician who pushed through measures to protect against the WTC attacks before they happened. So, the WTC attacks didn't happen, and people asked why on earth they wasted their money.
Already I've had people in the office asking that typical journalistic question "Was it foreseeable?" To which the answer is, yes, of course it was foreseeable. If I offer you evens on a dice roll, and I pay out on the numbers 1 to 5, and you take me up on the offer, and you roll a six, that event was foreseeable, but that doesn't make the decision wrong.
In this case, of course, the event was foreseeable, and the original decision was wrong (if any common sense had been used). For Swiss Re to excuse themselves because the products were "investment grade" (like, the rating agencies are infallible?) and "all procedures were followed" is no excuse at all, except for lazy staff. These guys are paid lots of money and the warning signs had been there for some time. And, this time, the net result might be the right one. They get canned.
______________________
A young black woman then got on the train and sat next to me. The train was full.
Gradually, with stops at Banbury, Warwick, Leamington Spa, Coventry, etc, people began to leave the train and the numbers would thin out. I waited for the woman to move to take up an empty block of two seats.
She didn't.
Slowly, blocks of four seats became available. Surely, I thought, she'll take one of these?
She didn't. And it wasn't as if she was a reader. She just stared vaguely ahead. Ah well, obviously she's getting off at the next stop, I thought.
She wasn't.
By the time we approached Birmingham Moor Street, there were only four of us left in the carriage - the original guy and his girlfriend, me, and this woman, who had steadfastly refused to follow the unwritten rules of train travel, that the person sitting on the outside gets up to occupy the empy blocks of seats. If the other two people in the train hadn't known better, they would have had to assume that we were a married couple who had just had a row (or who had merely run out of things to say to each other).
Do these people know nothing? It's the job of the person sitting on the outside to move.
+++++++++
Swiss Re took a 1.2bn Swiss Francs hit this morning after writing some CDOs down to zero. The release from Swiss Re could almost have been scripted by Taleb.
Rule One: Make sure that you emphasize that the event could not have been foreseen.
("The unprecedented and severe ratings downgrades....")
Rule Two: Emphasize the unlikely nature of the event and the solidity of the investment as a whole.
("These investment grade credit default swaps were structured to provide protection against a remote risk of loss")
Rule Three: Make sure people know that the correct procedures were followed:
("The transactions were approved by the relevant internal risk committees")
Rule Four: Suspend someone anyway.
The interesting thing about this for me is that Swiss Re, ostensibly a reinsurer, has, in effect, been writing put options. Since its boss, Jacques Aigrain, is a banker from the days of his youth, this shouldn't be much of a surprise, but it is another interesting example of convergence. The only difference between a put option and what Swiss Re sold was that Swiss Re wanted a guarantee that the buyer of the put option had an underlying interest in the stock (i.e., he actually held some).
Does Swiss Re have any excuse? Well, yes and no. One could say, well, what were they meant to do with all the money that they were making from traditional reinsurance? You could put it into Treasuries, earn a safe 4%, and then, when nothing goes wrong (see 2006) people would say "But, hey, you could have earned 14% if you had done this!" So, the guy gets sacked for underperforming. If he looks at a piece of business that isn't likely to go wrong, but for which the price being asked is a little bit incorrect (i.e., the interest rate is higher, but not high enough for the price), it's very tempting to go down that route instead (and to persuade yourself that 'the price was right'). It's the classsic Taleb example of the fictional politician who pushed through measures to protect against the WTC attacks before they happened. So, the WTC attacks didn't happen, and people asked why on earth they wasted their money.
Already I've had people in the office asking that typical journalistic question "Was it foreseeable?" To which the answer is, yes, of course it was foreseeable. If I offer you evens on a dice roll, and I pay out on the numbers 1 to 5, and you take me up on the offer, and you roll a six, that event was foreseeable, but that doesn't make the decision wrong.
In this case, of course, the event was foreseeable, and the original decision was wrong (if any common sense had been used). For Swiss Re to excuse themselves because the products were "investment grade" (like, the rating agencies are infallible?) and "all procedures were followed" is no excuse at all, except for lazy staff. These guys are paid lots of money and the warning signs had been there for some time. And, this time, the net result might be the right one. They get canned.
______________________
