Managing risks in a broken market

IV Jornada de Mercats Financers

At the art nouveau house “Casa Fuster”, alumni of the two FRM courses that take place in Barcelona and a few that managed to study on their own met for a drink. The champagne and designer nibbles helped to cook a formula for future events. The preferred time for meetings amongst the attendees is 19.30 and the format chosen would be a presentation or round table that is conducted for 45 minutes to 1 hour.

The proposed themes were quite diverse and flexible, and generally they proved that the risk management world is willing to go “back to basics” and be able to develop a global vision within a complex financial environment. Among the ideas proposed, I would point to the theme “rethinking risk management”, a humility cure in respect to the events of the past 18 months, and a useful tool for redefining risk policies within financial institutions. In any case, it would be a good reason to meet again.

A l’entorn modernista de la Casa Fuster es van conèixer exalumnes dels dos cursos del FRM que es fan a Barcelona, i més d’un que s’ho ha fet tot sol. Entre copa de cava i pintxo de luxe es va cuinar una fórmula per al futur, siguent l’hora preferida cap a l’escollida aquest cop, les 19.30, i una combinació de presentació o round table de 45 minuts a 1 hora l’acte més demanat.

Les temàtiques comentades eren bastant flexibles, potser conscients tots plegats que el món dels riscos ha de fer un “back to basics” i que la situació financera actual mereix comptar amb una visió global. Entre les propostes que hi hagueren destaca el tema “rethinking risk management” o una cura d’humilitat respecte l’esdevingut els darrers 18 mesos, que pot ser útil en els processos actuals de les entitats per redefinir les polítiques de risc. En qualsevol cas, és una bona raó per veure’ns.

Anant al gra, el dimecres 26, l’únic diari europeu d’economia que parla més d’economia que de política (és a dir, anant al gra però amb algun parèntesi), dedicava mitja plana al dinamisme d’empreses com Tous o Mango, que preveuen unes vendes correctes malgrat els temps que corren (deu ni do amb l’expressió, com si hi hagués temps que no correguessin). Des de Manresa, Tous ha fitxat a la Kylie per a ser la seva imatge al món. Potser no caldrà que canti el “I should be so lucky, lucky lucky lucky” per a treure’ns del pou, perquè els joiers de l’osset ja facturen més de 1.000 milions d’euros. Tots patint per la SEAT i la Nissan quan tenim la solució al davant, només cal aportar-hi un disseny preadult i posar-hi l’etiqueta del regne animal o vegetal.

I had the opportunity to see Nicholas Taleb in Barcelona a few years ago. Temporarily seduced by his eloquence and charm, and the fact that I got his book for free, I immediately read “Fooled by randomness”. It was good to read someone that was not politically correct and that was as tough with the establishment views as the financial markets. “You are as good as your last trade”, he said in his speech, which unfortunately is as true for traders as for society.

Despite recommending his book “The black swan”, the first 180 pages are obsessed with explaining the difference between Mediocristan and Extremistan. For anyone that has read “Fooled by randomness”, it becomes extremely repetitive, but keep going because it is Taleb. In addition, it is interesting to gain some background on the philosophers that would support his views, from Sextus Empiricus to Montaigne.

He finally gets to the point from chapter twelve onwards. There are some great sentences and good citations. I will start with the ones dedicated to financial regulators, valuable as the book was published early in 2007, so they are like a prediction of the regulators’ inability to avoid the current crisis:

“regulators in the banking business are prone to a severe expert problem and they tend to condone reckless but (hidden) risk taking”.

For those that hold anti capitalist views, his next prediction of the Lehman case will prove useful:
“The Achilles’ heel of capitalism is that if you make corporations compete, it is sometimes the one that is most exposed to the negative Black Swan that will appear to be the most fit for survival”.

It is all coherent with his statement “No one in particular is a good predictor of anything. Sorry”.

Apart from the inability to plan, the book stresses, probably unwillingly, the importance of having a qualitative rather than a quantitative view of risk management. This view is perfectly expressed in his strong statement “people that worry for pennies instead of dollars can be dangerous to society.”

As for modeling, he pays his tribute to Benoît Mandelbrot and fractal theory.

While it may seem obvious at this stage that bankers and regulators should have considered Volcker’s remarks when managing financial institutions or setting monetary policies, his 2005 views are still useful for clarifying the reasons that brought us to such a difficult situation.

Here is a link to the article: http://www.washingtonpost.com/wp-dyn/articles/A38725-2005Apr8.html