Title:
Waking up to Risk Redux: Is Nassim Taleb the Regulatory Rock Star?
Site:
Author:
Roger Ehrenberg
Comments:
Ehrenberg, who always has a unique view on the markets and the world of hedge funds and private equity in particular, serves up a post detailing how Taleb's vew of "fat tails" is becoming much more accepted by regulators and people of power in the financial industry. If you have not read Fooled by Randomness or The Black Swan, you should. Ehrenberg includes an excerpt from Anthony Ryan's speech at the Managed Funds Association conference in Chicago.
I find this particularly interesting as this week - before the big investment banks report earnings - the story was about a "new" rule that essentially gives investment banks the opportunity to use more leverage in their prop trading. They say that a new capital requirement rule will allow them to go more on margin and "increase earnings" - however, as we saw with Long Term Capital, when a "black swan" occurs - leverage is not your friend. Good article an
d very timely.
Excerpt
"...he and his colleagues are now internalizing the risks long understood by Mr. Taleb, risk managers and traders at every major financial institution: the risk of long-tail ruin is real and it occurs far more frequently than normally-distributed models would predict. Tails in the financial markets are fat - very fat - and the best we can do is to make sure the system can withstand significant and unpredicted shocks, because they will happen. And we have history as our witness."
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