Wednesday, 1 April 2009

Taleb, 'Black Swan´ Author, Says U.S. Bank Plan Will Tank. We Agree.

Last night I was chatting with an old friend of mine about the U.S. plan for its lousy financial system and he was clear -- sort of felt that he was right: ''Why do people, taxpayers, have to pay for the lousy risk-assesment strategies of these idiots?´´ I agreed with him. Then I stumbled across this story on the Bloomberg News Web iste, and I decided to reproduce it. Nassim Taleb, the author of ''Black Swan,´´says removing toxis assets from balance sheets will do little to kickstart credit and revive the U.S. economy. Sorry to say this, he is right. We expected the Barack Obama administration to be as strict with Wall Street firms as it has been with companies in Main Street (check our posting early this morning about the president's reported remarks over the future of General Motors Corp. and Chrysler Corp.)

Reach your own conclusions -- we have already done that at MM. Click here to read the story (with pictures and all the gadgets.)


Nassim Taleb Says Geithner’s Bank Plan Will Fail (Update1)

By Jeff Kearns and Erik Schatzker

April 1 (Bloomberg) -- U.S. Treasury Secretary Timothy Geithner’s plan to remove toxic assets from bank balance sheets will fail to revitalize the financial system, “Black Swan” author Nassim Nicholas Taleb said.

“We’re heading in exactly the wrong direction,” Taleb said in a Bloomberg television interview. “I want an overhaul, I want something drastic. This is going to fail, this is not it.”

Geithner has proposed to revive banks without resorting to nationalization through the Public-Private Investment Program that will buy difficult-to-value assets. Leaders from the Group of 20 nations meeting in London this week are unprepared to fix the global financial system because they don’t grasp how markets work or the root causes of the credit crisis that has led to $1.2 trillion in losses and asset writedowns, Taleb said.

Rare and unforeseen events are known as “black swans,” after Taleb’s 2007 book, “The Black Swan: The Impact of the Highly Improbable.” Taleb is a professor of risk engineering at New York University and also advises Universa Investments LP, a Santa Monica, California-based firm opened in 2007 by Mark Spitznagel, Taleb’s former trading partner.

The Treasury’s plan is unfair to taxpayers and rewards the failure of banks that didn’t understand the risks they took when using debt to boost returns in the mortgage market, Taleb said.

Subsidize Failure

“I don’t understand why I as a taxpayer need to subsidize those who failed, by giving them options so they can rebuild their balance sheets,” he said. “Taxpayers take the downside and Wall Street as usual is going to take the upside, another classical problem of socializing the losses, privatizing the gains.”

Taleb said it’s “shocking” that the government would allow banks to estimate the value of the toxic assets that remain on their books because there is effectively no market for the securities, making them almost impossible to value.

“I don’t understand letting banks mark to market, after all this incompetence,” he said. “Why don’t we allow people to mark their house at what they think the value of their house is?"

No comments:

Post a Comment