Comments on: The Rules, Part II http://alephblog.com/2010/03/06/the-rules-part-ii/ Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control Sun, 27 May 2012 06:47:45 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Guillermo Roditihttp://alephblog.com/2010/03/06/the-rules-part-ii/comment-page-1/#comment-24856 Guillermo Roditi Wed, 10 Mar 2010 16:58:46 +0000 http://alephblog.com/?p=2400#comment-24856 The best way, in my opinion to describe complexity and it's effect on probability-adjusted returns is the law of conservation of energy and the laws of thermodynamics, because at the end, mathematically, this is all deeply rooted in the law of conservation of probability. Here's a cutsey thing I wrote that I think you might find explains my point quite concisely: http://blog.morallybankrupt.org/tagged/laws_of_financial_dynamics The best way, in my opinion to describe complexity and it’s effect on probability-adjusted returns is the law of conservation of energy and the laws of thermodynamics, because at the end, mathematically, this is all deeply rooted in the law of conservation of probability. Here’s a cutsey thing I wrote that I think you might find explains my point quite concisely:

http://blog.morallybankrupt.org/tagged/laws_of_financial_dynamics

]]> By: dlrhttp://alephblog.com/2010/03/06/the-rules-part-ii/comment-page-1/#comment-24848 dlr Wed, 10 Mar 2010 15:06:31 +0000 http://alephblog.com/?p=2400#comment-24848 "someone must speculate to a degree to allow you to hedge. If the speculator is undercapitalized, risks to the financial system rise." You are so right. The thing that leaves me just dumbfounded is that banks LEND MONEY TO HEDGE FUNDS. It is incomprehensible to me why banks are allowed by regulators to make such risky loans. The bank managers must know that the hedge fund is planning to leverage up with that money and speculate, not open some business. And the bank manager must also know, that if the speculation FAILS, the hedge fund will go bankrupt and the bank will lose their money. This wouldn't be any of my business, but they are making those loans with money guaranteed by the federal government, one way or another. Banks backed by the federal government shouldn't be allowed to lend money to gamblers. “someone must speculate to a degree to allow you to hedge. If the speculator is undercapitalized, risks to the financial system rise.”

You are so right. The thing that leaves me just dumbfounded is that banks LEND MONEY TO HEDGE FUNDS. It is incomprehensible to me why banks are allowed by regulators to make such risky loans. The bank managers must know that the hedge fund is planning to leverage up with that money and speculate, not open some business. And the bank manager must also know, that if the speculation FAILS, the hedge fund will go bankrupt and the bank will lose their money.

This wouldn’t be any of my business, but they are making those loans with money guaranteed by the federal government, one way or another. Banks backed by the federal government shouldn’t be allowed to lend money to gamblers.

]]> By: dlrhttp://alephblog.com/2010/03/06/the-rules-part-ii/comment-page-1/#comment-24834 dlr Wed, 10 Mar 2010 05:18:51 +0000 http://alephblog.com/?p=2400#comment-24834 The problem is that that "seeming certainty" is deliberately manufactured by the bankers that designed the instruments, by 'complexifying' the instrument to the point where the buyer can't understand the risks, and by deliberately misleading the buyers about the degree and kinds of risks inherent in the products. "Let the buyer beware" is all very well, but surely that's different than deliberately selling defective merchandise. The bankers don't seem to have any concern at all about the inevitable reputational damage they are doing to their companies by selling these defective products. Just more proof, if any was needed, that the bankers and managers do not have the long term interests of their companies at heart. They are carelessly destroying the massively valuable brand names and reputations for short term personal gains (aka, this years bonus). The problem is that that “seeming certainty” is deliberately manufactured by the bankers that designed the instruments, by ‘complexifying’ the instrument to the point where the buyer can’t understand the risks, and by deliberately misleading the buyers about the degree and kinds of risks inherent in the products. “Let the buyer beware” is all very well, but surely that’s different than deliberately selling defective merchandise. The bankers don’t seem to have any concern at all about the inevitable reputational damage they are doing to their companies by selling these defective products. Just more proof, if any was needed, that the bankers and managers do not have the long term interests of their companies at heart. They are carelessly destroying the massively valuable brand names and reputations for short term personal gains (aka, this years bonus).

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