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Catching Elephant is a theme by Andy Taylor (slightly modified)

 

Bonuses don’t accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us [into the current financial crisis]. No incentives without disincentives.

Nassim Nicholas Taleb, Beware those Black Swans [via Kottke]

…as regulators adopted Black-Scholes [pricing model] to govern everything from bank risk to executive compensation, the model’s assumptions rode along like stowaways, becoming deeply embedded in economic policy. The world was remade in the model’s image.

Steve Steinberg, on how “wildly unrealistic” assumptions like “zero transaction costs, unlimited borrowing at the riskless interest rate, and unconstrained short-selling” made their way into economic policy, in new developments in AI

Financiers live in small, panicky urban cloisters, severely detached from the rest of mankind. They are living today in rich-guy ghetto cults.

Bruce Sterling, interview with Chris Arkenberg

‘Business as usual’ is the abiding legacy of the Obama administration with regard to the systemic risks posed by this financial system. Treasury and White House let us down repeatedly and completely in the last 18 months on financial sector issues — just as they did (as decision-making bodies and as some of the same individuals) at the end of the 1990s.

Simon Johnson, The Last Hold Out: Senator Blanche Lincoln Against 13 Bankers

In taking all those bribes and signing on to all those swaps, the commissioners in Jefferson County had ­basically started the clock on a financial time bomb that, sooner or later, had to explode. By continually refinancing to keep the county in its giant McMansion, the commission had managed to push into the future that inevitable day when the real bill would arrive in the mail. But that’s where the mortgage analogy ends — because in one key area, a swap deal differs from a home mortgage. Imagine a mortgage that you have to keep on paying even after you sell your house. That’s basically how a swap deal works. And Jefferson County had done 23 of them. At one point, they had more outstanding swaps than New York City.

Matt Taibbi, Looting Main Street: How the nation’s biggest banks are ripping off American cities with the same predatory deals that brought down Greece

Before the market for private mortgage-backed securities took off in the 1990s, subprime lending was constrained by the fact that subprime lenders wanted to be paid back.

Simon Johnson and James Kwak, in 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown [via Kevin Drum]

The finance sector enables wealth creation, but the innovations that make the economy grow over time come from elsewhere. The financial industry really ought to be seen, and treated, as a servant of the real economy. It’s when finance takes the lead and begins to drive economic activity, as it did during the Internet stock bubble of the late 1990s and the mortgage lending craziness of 2003-2007, that we get into big trouble.

Justin Fox, What Business Should Want Out of Financial Reform [via Kevin Drum]

We’re helping save the next generation of college grads that would have gone over to Morgan Stanley.

We’re pulling them back from the dark side.

Chris Dixon and Caterina Fake, quoted in New York Isn’t Silicon Valley, and That’s Why They Like It

This was a systematic and aggressive strategy to replace a culture that was very conservative, an accuracy-and-quality oriented [culture], a getting-the-rating-right kind of culture, with a culture that was supposed to be ‘business-friendly,’ but was consistently less likely to assign a rating that was tougher than our competitors.

Mark Froeba, former senior vice president at Moody’s Investors Service, on what caused the ratings agency to make so many mistakes when rating toxic debt, in How Moody’s sold its ratings — and sold out investors.  One of the things that I think is largely overlooked in reporting on the financial crisis is the role of the ratings agencies. [via Tim Bray]

If Wall Street can shrug off the worst recession of our lifetimes as if it’s a minor fender bender and get the party rolling all over again in less than 12 months, it means the next bubble is already in the works and its collapse will be every bit as bad as this one. That in turn means it will almost certainly happen while today’s politicians are still in office. So maybe news like this will finally spur lawmakers to realize once and for all that the financial industry needs to be cut down to size.

Kevin Drum, Burn it Down and Salt the Earth

One of the changes that I would like to see — and I’m going to be talking about in this in weeks to come — is seeing our best and our brightest commit themselves to making things — engineers, scientists, innovators. For so long, we have placed at the top of our pinnacle folks who can manipulate numbers and engage in complex financial calculations. And — and that’s good. We need some of that. But you know what we can really use is some more scientists and some more engineers who are building and making things that we can export to other countries.

Barack Obama, US President, quoted in Career Advice from Obama and Bernanke [via]