Monday, October 27, 2008

Being Nassim Nicholas Taleb II

In a recent article in Time Magazine the brilliant Nassim Nicholas Taleb explains the financial crisis, how to begin to correct it, and how to lessen the reoccurence of such a crisis.

"Banks are gambling with society's money," Taleb writes, "funds are gambling with investors' money — it's one layer better. So we should have more risks taken by funds and less risk taken by banks, because banks have a severe agency problem."

"When I trade I don't have an agency problem; I have my neck on the line," Taleb continues. "When a bank or banker trades, it's not his neck on the line. He has an agency problem, and like [former Merrill Lynch CEO] Stanley O'Neal, if you follow the strategy you're going to make $160 million, and keep it, even if you blow up. And you'll do it again."

The article is so clear that a two-year-old could understand it. Well, not quite. But you get the picture. It's a great piece, clearly written. And in such a time, clarity is what we need.

Taleb may not be at all interested, but he would be great in an Obama administration, if nothing more than as an adviser. Anyone out there in the Obama campaign listening?

Change means not adopting the policies of the past. Taleb is most certainly not associated with the past, though he clearly understands it. This is what's needed for change to occur.

2 comments:

John O'Leary said...

Great article, Judith. I'd just add three words...credit default swaps.

judith ellis said...

The CDS seems like a matter of going so far within legal limits without breaking the law. The swap seems like an insurance contract for the investor. The CDS is very legal and trillions of dollars have been made. With such profits many are probably hoping for defaults. It's sort of like all of the selling short that drove the market down. I am no financial expert but perhaps some things need to be looked at anew.