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peterbirksAn 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.
______________________
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no subject
Date: 2007-11-19 01:44 pm (UTC)no subject
Date: 2007-11-19 01:54 pm (UTC)PJ
no subject
Date: 2007-11-19 03:20 pm (UTC)There are no unwritten laws of train travel. Tubes, maybe, as they all run in Freakville. Those people, you shared the carriage with are (much to your consternation) normal.
When I lived in London there were many "London types" that gave me funny looks for not getting up and spreading my 90 kilos on another of the carriage's bogies.
If you are too uptight to sit next to people then you are the one who should have moved. But, being an uptight Londoner, you were frightened of what people may have thought of you, if you had been anti-social enough to move to another seat.
If it were I in that situation I would have piped up with, "Isn't this cosy?" and all my fellow non-Londoners would have chuckled a "yes" and carried on sitting right where we were.
For Londoners, leaving London for a few days, should be a form of regular compulsory education. In that way you won't be so tiresome when we come to visit your habitat.
Now, be a good boy,
JayBee. xxx
Personal Space
Date: 2007-11-19 06:38 pm (UTC)I went to my Aunt Lily's funeral in Stoke today (and naturally walked away with a remembrance gift of lilies. We're kind of literalist in my family), and had to deal with some half-cut Irish git on the train. I am used to this. (Not necessarily the Irish bit, but you get the drift.) When you're my size, you may or may not be the cynosure of all eyes, but you certainly act as a drunken git magnet. (And they say opposites attract ... Phooey!)
First this guy asks me whether or not I'm intelligent. Naturally, my response is "not really." (Go away, you git.) Next, he wants me to read a few pages of the book he's carrying, which is about a true story and not religious at all, honest; just inspiring, and you'll never do drugs again. "No thanks, I'm happy with the sports pages." (Go away, you git.) Finally he moves away to let two old ladies sit next to each other, which I thought was quite sweet. (Thank you, God.) Finally, as I walk past him to get off at New Street, he says "Don't be insulted, but you look exactly like Victor Meldrew."
There's nothing quite like pointless violence to round off a funeral, is there?
Luckily, in this case, there wasn't. But I was tempted.
Anyway, to your main point: "These investment grade credit default swaps were structured to provide protection against a remote risk of loss."
You see a problem with this? I don't. It is brutally honest, and, indeed, self-incriminatory. Protection against a remote risk of loss is exactly what they got. Protection against clear and present danger of 100% forfeiture, no, they didn't get that, but then what would a company in the business of re-insurance be doing with that?
But you're right, Taleb springs instantly to mind. The world is becoming, more and more, a place where cynical bastards can mint it.
Where did I go wrong?
Incidentally, the train neither stops at nor passes through Warwick. That's the Moor St train.
Re: Personal Space
Date: 2007-11-19 07:19 pm (UTC)On your previous point. Let's get it clear who is doing what here.
Unnamed client (let's call it Dresdner, although it probably wasn't) has a portfolio of asset backed securities, some of which are in the form of CDOs. It goes to Swiss Re and says :
"Allo guv, 'ow much ya want as insurance in case all this stuff goes tits up? We'll put the securities up as collateral. At the moment they're worth CHF5bn."
"Hmm", says Swiss Re, "we'll have to think about that".
And so they go away and think about it, and look at the ratings, and decide that there's about a 1% chance of it all going wrong, so, if they charge a 2% 'premium' (i.e., CHF200m) they are on the right side of things.
Now, the question is, was there a 1% chance of it going wrong? Well, we don't know. I think that there was a 10% or more chance of it going wrong in any one year, whereas the guy who wrote the business obviously did not. All that we know was, it happened. That makes it a bit more likely that my estimate was right and his was wrong, but we don't know.
So, they have to say that they structured a product that had a remote risk of loss, which happened to go wrong. In fact, they structured a product that had a high risk of loss, and they mispriced it.
PJ
That is the <i>worst</i>...
Date: 2007-11-19 08:50 pm (UTC)Don't they teach you anything in the grammar schools of Sarf Lunnun?
You're right about the Birmingham trains, btw. This is such a scintilating nexus of exotic travel opportunities that even I, as a card-carrying Brummie, can't keep up with it. (Possibly because we're all thick. Ho ho ho.)
Whilst I agree with your analysis of the perceived risk chain, I might point out that my original comment was directed at your -- I assume -- attack on the ludicrous corporate marketing defence-speak. Not at the judgement of risk, which was obviously insane (and this is only the bit they're admitting to. Potentially worrying, that). I was, in fact, being sarcastic. It might be the lowest form of wit, but it seems to be going out of fashion these days. Perhaps that's for the best.
And I'm dismayed to see that you never even mentioned my auntie Lily. A very nice lady, and loved by all, I'm told.
Which is probably more than you can say for the board of Swiss Re at the moment.
Interesting that this crummy software doesn't even understand HTML in headings, though.